Back to GetFilings.com



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


For the Quarter Ended June 30, 2004

|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


Commission File Number: 333-112591

APOLLO INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)

Maryland 52-2439556
------------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

9 West 57th Street,
43rd floor,
New York, N.Y. 10019
(Address of principal executive office) (Zip Code)

(212) 515-3200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |_| No |X|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of June 30, 2004 was 62,000,100.





APOLLO INVESTMENT CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS



PART I FINANCIAL INFORMATION PAGE

Item 1. FINANCIAL STATEMENTS (unaudited)

Balance Sheet as of June 30, 2004 3

Statement of Operations for the period ended
June 30, 2004 4

Statement of Stockholders' Equity for the period
ended June 30, 2004 5

Statement of Cash Flows for the period ended
June 30, 2004 6

Schedule of Investments as of June 30, 2004 7

Notes to Financial Statements 8

Report of Independent Registered Public Accounting Firm 13

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures About Market Risk 16

Item 4. Controls and Procedures 16

PART II OTHER INFORMATION

Item 1. Legal Proceedings 17

Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 17

Item 3. Defaults upon Senior Securities 17

Item 4. Submission of Matters to a Vote of Security Holders 17

Item 5. Other Information 17

Item 6. Exhibits and Reports on Form 8-K 18

Signatures 19

2





PART I. FINANCIAL INFORMATION

In this Quarterly Report, "Company", "AIC", "Fund", "we", "us" and "our"
refer to Apollo Investment Corporation unless the context otherwise states.

Item 1. Financial Statements (unaudited)

Apollo Investment Corporation
Balance Sheet (unaudited)
(in thousands, except per share amounts)

June 30, 2004
(unaudited)
Assets

Cash $ 374

Cash equivalents, at fair value (cost - $649,033) 648,758

Investments, at fair value (cost - $242,806) 245,421

Interest receivable 1,953

Other assets 1,377
-----------

Total assets $ 897,883

Liabilities

Payable for investments purchased $ 25,000

Management fee payable 1,446

Accrued expenses 420
-----------
Total liabilities $ 26,866

Stockholders' Equity

Common stock, par value $.001 per share, 100,000,000 $ 62
common shares authorized, 62,000,100
issued and outstanding
870,092
Paid-in capital in excess of par

Accumulated net investment loss (1,477)
2,340
Net unrealized appreciation
-----------
$ 871,017
Total stockholders' equity

Total liabilities and stockholders' equity $ 897,883




See notes to financial statements.

3




Apollo Investment Corporation
Statement of Operations (unaudited)
(in thousands, except per share amounts)


For the period April 8, 2004*
through June 30, 2004
-----------------------------
Operating Income

Interest income $3,805

Other income 2

----------

Total operating income 3,807
----------
Operating Expenses

Management fees $4,013

Insurance expenses 369

General and administrative expenses 902

----------

Total operating expenses 5,284
----------



Net operating loss before investment gains and losses ($1,477)
----------

Net unrealized appreciation 2,340
----------

Net increase in stockholders' equity resulting from $863
operations

Earnings per common share (see note 6) 0.014

* Commencement of operations




See notes to financial statements.

4


Apollo Investment Corporation
Statement of Stockholders' Equity (unaudited)
For the period April 8, 2004* through June 30, 2004
(in thousands, except shares)




Common Stock
Paid-in Capital Total
in Excess Accumulated Stockholders'
Shares Amount of Par Earnings Equity

Balance at April 8, 2004* 100 $0 $1 $0 $1

Issuance of common stock from
public offering (net of
underwriting costs) 62,000,000 62 871,813 871,875

Offering costs (1,722) (1,722)
------------ -----------
$870,154

Net increase in stockholders'
equity resulting from operations 0 0 863 863
------------ ------------ ------------ ------------

Balance at June 30, 2004 62,000,100 $62 $870,092 $863 $871,017


* Commencement of operations



See notes to financial statements.

5




Apollo Investment Corporation
Statement of Cash Flows (unaudited)
(in thousands)


For the period
April 8, 2004* through
June 30, 2004


Cash Flows from Operating and Investing Activities:

Net Increase in Stockholders' Equity Resulting from Operations $863

Adjustments to reconcile net increase:

Increase in interest receivable (1,953)

Increase in pre-paid and other assets (1,377)

Increase in management fee payables and accrued expenses 1,866

Investments, funded and at value (220,421)
--------------

Net Cash Used by Operating and Investing Activities ($221,022)

Cash Flows from Financing Activities

Net proceeds from the issuance of common stock $871,875

Offering costs from the issuance of common stock (1,722)
--------------

Net Cash Provided by Financing Activities $870,153

NET INCREASE IN CASH AND CASH EQUIVALENTS $649,131

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1
--------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $649,132

* Commencement of operations



See notes to financial statements.

6



Apollo Investment Corporation
Schedule of Investments (unaudited)
June 30, 2004
(in thousands)


Principal
Portfolio Company (1) Industry Amount Cost Fair Value (2)
Bank Debt/Senior Secured Debt (3) - 21.0%

Amerco Corp., due 02/27/09 Transportation $14,963 $15,183 $15,355
Charter Communications, due 04/21/11 Cable 25,000 25,000 24,906
Cygnus Business Media, Inc., due 7/12/09 Media 15,000 15,000 15,000
Cygnus Business Media, Inc., due 1/12/10 Media 10,000 10,000 10,000
Directed Electronics, due 6/17/10 Electronics 5,000 5,000 5,044
EuroFresh, due 05/14/10 Agriculture 25,000 24,656 24,813
Language Line Inc. due 6/11/11 Business Services 7,000 6,982 7,079
Mueller Group Inc. due 11/01/11* Industrial 17,000 17,000 17,595
Prestige Brands Inc., due 10/06/11 Consumer 20,000 20,000 20,125
RanPak Corporation, due 03/31/10 Packaging 4,938 4,938 4,944
RanPak Corporation, due 11/26/10 Packaging 18,000 17,822 17,910
Sealy Mattress Co., due 04/06/13 Consumer 10,000 10,000 10,137
United Industries Corporation, due 04/30/11 Chemicals 14,962 14,962 15,178
----------- ------------
Total Bank Debt/Senior Secured Debt $186,543 $188,086

Corporate Notes/Subordinated Debt - 6.4%
Invista Corporation, 9.25% due 05/01/12* Chemicals $35,000 $35,000 $35,262
Language Line Holdings, Inc., 0% / 14.125%,
due 06/15/13* Business Services 13,872 7,082 7,283
Language Line Inc., 11.125% due 06/15/12* Business Services 14,500 14,181 14,790
----------- --------------
Total Corporate Notes/Subordinated Debt $56,263 $57,335
----------- ------------
Total Investments $242,806 $245,421
----------- ------------
Cash Equivalents - 72.6%
U.S. Treasury Bill, 0.93% due 07/01/04 Government $300,000 $300,000 $300,000
U.S. Treasury Bill, 1.015% due 10/07/04 Government 350,000 349,033 348,758
------------ ------------
Total Cash Equivalents $649,033 $648,758
------------ ------------

Total Investments & Cash Equivalents - 100% $891,839 $894,179
------------ ------------


(1) None of our portfolio companies is controlled or affiliated as defined by
the Investment Company Act of 1940.
(2) Fair value is determined by or under the direction of the Board of Directors
of the Company (see Note 2).
(3) Represent floating rate instruments that accrue interest at a predetermined
spread relative to an index, typically the LIBOR (London Interbank Offer Rate)
or the Prime Rate.

* This security is exempt from registration under Rule 144A of the Securities
Act of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.

See notes to financial statements.
7



Apollo Investment Corporation
Notes To Financial Statements (unaudited)
(in thousands except share and per share amounts)


Note 1. Organization and Interim Financial Statements

Apollo Investment Corporation ("Apollo Investment"), a Maryland corporation
organized on February 2, 2004, is a newly organized closed-end, non-diversified
management investment company that has filed an election to be treated as a
business development company ("BDC") under the Investment Company Act of 1940.
In addition, for tax purposes we have elected to be treated as a regulated
investment company, or RIC, under the Internal Revenue Code of 1986, as amended.
Our investment objective is to generate both current income and capital
appreciation through debt and equity investments. We intend to invest primarily
in middle-market companies in the form of mezzanine and senior secured loans,
each of which may include an equity component, and, to a lesser extent, by
making direct equity investments in such companies.

On April 5, 2004, Apollo Investment closed its initial public offering and sold
62,000,000 shares of its common stock at a price of $15.00 per share, less an
underwriting discount and commissions totaling $0.9375 per share. We commenced
operations on April 8, 2004 as we received $870.2 million in total net proceeds
from the offering.

Interim financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and pursuant to
the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying financial statements prepared in
accordance with GAAP are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring accruals, considered necessary for the
fair presentation of financial statements for the interim period, have been
included. The current period's results of operations will not necessarily be
indicative of results that ultimately may be achieved for the fiscal year ended
March 31, 2005.

Note 2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reported period. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.

The significant accounting policies consistently followed by Apollo Investment
are:
(a) Security transactions are accounted for on trade date;
(b) Investments for which market quotations are readily available will be
valued at such market quotations; debt and equity securities that are
not publicly traded or whose market prices are not readily available
will be valued at fair value as determined in good faith by or under
the direction of our Board of Directors. Bank debt, senior secured
debt and other debt securities with maturities greater than 60 days
will be valued by an independent pricing service or at the mean
between the bid and ask prices from at least two brokers or dealers
(if available, otherwise by a principal market maker or a primary
market dealer). With respect to private equity securities, each
investment will be valued using comparisons of financial ratios of the
portfolio companies that issued such private equity securities to peer
companies that are public. The value will then be discounted to
reflect the illiquid nature of the investment. When an external event
such as a purchase transaction, public offering or subsequent equity
sale occurs, we will use the pricing indicated by the external event
to corroborate our private equity valuation. Because we expect that
there will not be a readily available market value for most of the
investments in our portfolio, we expect to value substantially all of
our portfolio investments at fair value as determined in good faith by
or under the direction of our Board using a documented valuation
policy and a consistently applied valuation process. Due to the
inherent uncertainty of determining the fair value of investments that
do not have a readily available market value, the fair value of our
investments may differ significantly from the values that would have
been used had a ready market existed for such investments, and the
differences could be material.

8



Apollo Investment Corporation
Notes To Financial Statements (unaudited) (continued)
(in thousands except share and per share amounts)


With respect to our investments for which market quotations are not readily
available, our Board of Directors will undertake a multi-step valuation
process each quarter, as described below:

(1) Our quarterly valuation process begins with each portfolio
company or investment being initially valued by the investment
professionals responsible for the portfolio investment.
(2) Preliminary valuation conclusions will then be documented and
discussed with our senior management.
(3) An independent valuation firm engaged by our Board of Directors
will review these preliminary valuations.
(4) The audit committee of our Board of Directors will comment on the
preliminary valuation and our investment adviser and independent
valuation firm will respond and supplement the preliminary
valuation based upon those comments.
(5) The Board of Directors will discuss valuations and will determine
the fair value of each investment in our portfolio in good faith
based on the input of our investment adviser, independent
valuation firm and audit committee.

The types of factors that we may take into account in fair value pricing
our investments include, as relevant, the nature and realizable value of
any collateral, the portfolio company's ability to make payments and its
earnings and discounted cash flow, the markets in which the portfolio
company does business, comparison to publicly traded securities and other
relevant factors.

Determination of fair values involves subjective judgments and estimates.
Accordingly, these notes to our financial statements express the
uncertainty with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.

(c) Investments maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates value;
(d) Gains or losses on the sale of investments are calculated by using the
specific identification method;
(e) Interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis;
(f) The Company intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes;
(g) In accordance with Statement of Position 93-2 Determination, Disclosure,
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies, book and tax basis
differences relating to stockholder distributions and other permanent book
and tax differences are reclassified to paid-in capital. In addition, the
character of income and gains to be distributed is determined in accordance
with income tax regulations that may differ from accounting principles
generally accepted in the United States of America;
(h) Dividends and distributions to common stockholders are recorded on the
record date. The amount to be paid out as a dividend is determined by the
Board of Directors each quarter and is generally based upon the earnings
estimated by management. Net realized capital gains, if any, are
distributed at least annually.
(i) Origination, facility, commitment, consent and other upfront fees
received by the Company on loan agreements or other investments are
typically accreted over the remaining term of the loan.

9


Apollo Investment Corporation
Notes To Financial Statements (unaudited) (continued)
(in thousands except share and per share amounts)


Note 3. Agreements

Apollo Investment has entered into an Investment Advisory and Management
Agreement with the Investment Adviser, Apollo Investment Management, L.P., under
which the Investment Adviser, subject to the overall supervision of Apollo
Investment's Board of Directors, will manage the day-to-day operations of, and
provide investment advisory services to, Apollo Investment. For providing these
services, the Investment Adviser receives a fee from Apollo Investment,
consisting of two components--a base management fee and an incentive fee. The
base management fee is calculated at an annual rate of 2.00% of Apollo
Investment's gross assets. For services rendered under the Investment Advisory
and Management Agreement during the period commencing from the closing of Apollo
Investment's initial offering through and including the first six months of
operations, the base management fee is payable monthly in arrears. For services
rendered under the Investment Advisory and Management Agreement after that time,
the base management fee is payable quarterly in arrears. For the first quarter
of our operations, the base management fee is calculated based on the initial
value of Apollo Investment's gross assets. Subsequently, the base management fee
will be calculated based on the average value of Apollo Investment's gross
assets at the end of the two most recently completed calendar quarters (we
consider the date we commenced operations as a quarter end), and appropriately
adjusted for any share issuances or repurchases during the current calendar
quarter. Base management fees for any partial month or quarter are appropriately
pro rated.

The incentive fee has two parts, as follows: one part is calculated and payable
quarterly in arrears based on Apollo Investment's pre-incentive fee net
investment income for the immediately preceding calendar quarter. For this
purpose, pre-incentive fee net investment income means interest income, dividend
income and any other income (including any other fees (other than fees for
providing managerial assistance), such as commitment, origination, structuring,
diligence and consulting fees or other fees that we receive from portfolio
companies) accrued during the calendar quarter, minus Apollo Investment's
operating expenses for the quarter (including the base management fee, any
expenses payable under the Administration Agreement, and any interest expense
and dividends paid on any issued and outstanding preferred stock, but excluding
the incentive fee). Pre-incentive fee net investment income does not include any
realized capital gains computed net of all realized capital losses and
unrealized capital depreciation. Pre-incentive fee net investment income,
expressed as a rate of return on the value of Apollo Investment's net assets at
the end of the immediately preceding calendar quarter, is compared to the hurdle
rate of 1.75% per quarter (7% annualized). Our net investment income used to
calculate this part of the incentive fee is also included in the amount of our
gross assets used to calculate the 2% base management fee. Apollo Investment
pays the Investment Adviser an incentive fee with respect to the Apollo
Investment's pre-incentive fee net investment income in each calendar quarter as
follows: (1) no incentive fee in any calendar quarter in which Apollo
Investment's pre-incentive fee net investment income does not exceed the hurdle
rate; (2) 100% of Apollo Investment's pre-incentive fee net investment income
with respect to that portion of such pre-incentive fee net investment income, if
any, that exceeds the hurdle rate but is less than 2.1875% in any calendar
quarter; and (3) 20% of the amount of Apollo Investment's pre-incentive fee net
investment income, if any, that exceeds 2.1875% in any calendar quarter. These
calculations are appropriately pro rated for any period of less than three
months and adjusted for any share issuances or repurchases during the relevant
quarter.

The second part of the incentive fee will be determined and payable in arrears
as of the end of each calendar year (or upon termination of the Investment
Advisory and Management Agreement, as of the termination date), commencing on
December 31, 2004, and will equal 20.0% of Apollo Investment's realized capital
gains for the calendar year computed net of all realized capital losses and
unrealized capital depreciation at the end of such year. The incentive fee
determined as of December 31, 2004 will be calculated for a period of shorter
than twelve calendar months to take into account any realized capital gains
computed net of all realized capital losses and unrealized capital depreciation
for the period ending December 31, 2004.

For the period April 8, 2004 (commencement of operations) through June 30, 2004,
the Investment Adviser received $4,013,021 in base investment advisory and
management fees from Apollo Investment.




10




Apollo Investment Corporation
Notes To Financial Statements (unaudited) (continued)
(in thousands except share and per share amounts)

Apollo Investment has also entered into an Administration Agreement with Apollo
Investment Administration, LLC (the "Administrator") under which the
Administrator provides administrative services for Apollo Investment. For
providing these services, facilities and personnel, Apollo Investment reimburses
the Administrator for Apollo Investment's allocable portion of overhead and
other expenses incurred by Apollo Administration in performing its obligations
under the Administration Agreement, including rent and Apollo Investment's
allocable portion of its chief compliance officer and chief financial officer
and their respective staffs. The Administrator will also provide on Apollo
Investment's behalf managerial assistance to these portfolio companies to which
Apollo Investment is required to provide such assistance.

For the period April 8, 2004 (commencement of operations) through June 30, 2004,
the Administrator was reimbursed $132,750 in administrative services fees from
Apollo Investment.

Note 4. Organizational and Offering Expenses

A portion of the net proceeds of our initial public offering of 62,000,000
shares of common stock was used for organizational and offering expenses of
approximately $252,000 and $1,722,000, respectively. Organizational expenses are
expensed as incurred. Offering expenses have been charged against paid-in
capital in excess of par. All organizational and offering expenses were borne by
Apollo Investment.

Note 5. Net Asset Value Per Share

At June 30, 2004, the Company's total net assets and net asset value per share
were $871,017,054 and $14.05, respectively.

Note 6. Earnings Per Share

The following information sets forth the computation of basic and diluted net
increase (decrease) in stockholders' equity per share resulting from operations
for the period April 8, 2004 (commencement of operations) through June 30, 2004:

Numerator for basic and diluted gain per share: $862,839
Denominator for basic and diluted weighted average shares: 62,000,100

Basic and diluted net increase in stockholders' equity per share resulting from
operations: $0.014

Note 7. Investments

As of June 30, 2004, investments and cash equivalents consisted of the
following:
June 30, 2004
(in thousands)
-----------------------------------------

Cost Fair Value
---- ----------

Bank Debt/Senior Secured Debt $186,543 $188,086

Corporate Notes/Subordinated Debt 56,263 57,335

Cash Equivalents 649,033 648,758
------------ ------------

Totals $891,839 $894,179


11


Apollo Investment Corporation
Notes To Financial Statements (unaudited) (concluded)
(in thousands except share and per share amounts)


Note 8. Cash Equivalents

Pending investment in longer-term portfolio holdings, Apollo Investment will
make temporary investments in U.S. Treasury bills (of varying maturities) and
repurchase agreements as outlined in our prospectus. These temporary investments
will be deemed cash equivalents by us and are included in our Schedule of
Investments. U.S. Treasury bills with maturities of greater than 60 days from
the time of purchase will be marked-to-market as per our valuation policy.

Note 9. Financial Highlights

The following is a schedule of financial highlights for the period April 8, 2004
(commencement of operations) through June 30, 2004:

Per Share Data:

Net asset value, beginning of period $ 14.06
-----------------

Net investment loss (0.02)
Net unrealized appreciation on investments 0.04
-----------------

Net increase in stockholders' equity resulting from operations 0.02

Costs related to the initial public offering (0.03)
-----------------

Net asset value at end of period $ 14.05
-----------------

Per share market value at end of period $ 13.77

Total return (1) (8.20%)

Shares outstanding at end of period 62,000,100

Ratio/Supplemental Data:

Net assets at end of period (in millions) $ 871.0

Ratio of operating expenses to average net assets (2,3) 2.63%

Ratio of net operating loss to average net assets (2,3) 0.74%

(1) Total return is based on the change in market price per share assuming an
investment at the initial offering price of $15.00 per share. Total return also
takes into account dividends and distributions, if any, reinvested in accordance
with the Company's dividend reinvestment plan. Interim periods are not
annualized.
(2) Annualized
(3) Ratios include non-recurring organizational expenses of approximately
$252,000 that were expensed as incurred. If such expenses were amortized over
the fiscal year, the ratio of operating expenses and ratio of net investment
loss would have been 2.54% and 0.64%, respectively.

12


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Apollo Investment Corporation

We have reviewed the accompanying balance sheet of Apollo Investment Corporation
(the "Company") as of June 30, 2004, including the schedule of investments, and
the related statements of operations, stockholders' equity, and cash flows for
the period April 8, 2004 (commencement of operations) through June 30, 2004.
These interim financial statements are the responsibility of the Company's
management.

We conducted our reviews in accordance with standards established by the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.

/s/ PricewaterhouseCoopers LLP

New York, New York
July 23, 2004


13


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Certain statements in this report that relate to estimates or expectations of
our future performance or financial condition may constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties, including,
but not limited to, statements as to:

>> our future operating results;

>> our business prospects and the prospects of our portfolio companies;

>> the impact of investments that we expect to make;

>> the dependence of our future success on the general economy and its impact on
the industries in which we invest;

>> the ability of our portfolio companies to achieve their objectives;

>> our expected financings and investments;

>> the adequacy of our cash resources and working capital; and

>> the timing of cash flows, if any, from the operations of our portfolio
companies.

We may use words such as "anticipates," "believes," "expects," "intends",
"will", "should," "may" and similar expressions to identify forward-looking
statements. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and
uncertainties that could cause actual results to differ materially from our
historical experience and our present expectations. Undue reliance should not be
placed on such forward-looking statements, as such statements speak only as of
the date on which they are made. Additional information regarding these and
other risks and uncertainties is contained in our periodic filings with the
Securities and Exchange Commission.

Overview

Apollo Investment was incorporated under the Maryland General Corporation Law in
February 2004. We have elected to be treated as a business development company
under the 1940 Act. As such, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our
total assets in "qualifying assets," including securities of private or thinly
traded public U.S. companies, cash, cash equivalents, U.S. government securities
and high-quality debt investments that mature in one year or less.

On April 5, 2004, we completed our initial public offering and became an
externally managed, non-diversified, closed-end investment company that elected
to be treated as a business development company under the Investment Company Act
of 1940. In addition, for tax purposes we have elected to be treated as a
regulated investment company, or RIC, under the Internal Revenue Code of 1986,
as amended. Pursuant to these elections, we generally will not have to pay
corporate-level taxes on any income we distribute to our stockholders.


14



Portfolio and Investment Activity

We completed our first quarter of operations on June 30, 2004 with our portfolio
invested 21.0% in bank debt/senior secured debt, 6.4% in corporate
notes/subordinated debt and 72.6% in cash equivalents. Bank debt/senior secured
debt typically accrues interest at variable rates determined on the basis of a
benchmark LIBOR or prime rate with stated maturities at origination that range
from 5 to 10 years. While corporate notes will typically accrue interest at
fixed rates, we may also invest in zero coupon or step bonds that accrue income
on a constant yield to call or maturity basis. At June 30, 2004, the weighted
average yield of our investments (excluding cash equivalents) was 7.35%. The
weighted average yield on our bank debt/senior secured debt was 6.3% as our
first lien debt averaged 5.0% and our second lien debt averaged 8.4%. The
weighted average yield of our corporate notes/subordinated debt was 10.6%. We
compute yields using interest rates as of the balance sheet date and include
amortization of loan origination fees, original issue discount and market
premium or discount, weighted by their respective costs when averaged.

Our board of directors has approved an amendment to our investment policy to
eliminate the 5% limitation on investments on foreign securities. Any such
investments will be included in our 30% "non-qualifying assets" bucket. This
change will be implemented effective as of August 14, 2004.

As a business development company, we must not acquire any assets other than
"qualifying assets" specified in the 1940 Act unless, at the time the
acquisition is made, at least 70% of our total assets are qualifying assets
(with certain limited exceptions). If we invest in an issuer that, at the time
we make the investment, has outstanding securities as to which a broker or
dealer may extend or maintain margin credit or "marginable securities," these
acquired assets cannot normally be treated as qualifying assets. This results
from the definition of "eligible portfolio company" under the 1940 Act, which in
part looks to whether a company has outstanding securities that are eligible for
margin credit. Amendments promulgated in 1998 by the Board of Governors of the
Federal Reserve System to Regulation T under the Securities Exchange Act of
1934, as amended, or the Exchange Act, expanded the definition of marginable
security to include any non-equity security. These amendments have raised
questions as to whether a private company that has outstanding debt securities
would qualify as an eligible portfolio company. We note that under applicable
self-regulatory organization rules that govern the ability of brokers and
dealers to extend margin credit, many non-equity securities issued by private
companies may not be effectively marginable.

To date, we do not believe that either the SEC or its staff has taken any public
position with respect to the issues discussed above. We continue to monitor this
issue closely and intend to adjust our investment focus as needed to comply with
and/or take advantage of any future administrative position, judicial decision
or legislative action.

Results of Operations

We commenced operations on April 8, 2004 and therefore have no period which to
compare results for the quarter ended June 30, 2004.

Operating Income

Investment income was modest during our initial quarter of operations as it
largely reflects income generated from invested cash and cash equivalents.
Investment income totaled $3.81 million for the period April 8, 2004
(commencement of operations) through June 30, 2004. Approximately $1.63 million
of income was attributable to invested cash and cash equivalents and $2.18
million was attributable to investments in bank debt/senior secured and
corporate notes/subordinated debt. Non-recurring other fee income of $180,000,
representing closing and/or commitment fees associated with investments in
portfolio companies, will be accreted into operating income over the term of the
specific loan. For the period ended June 30, 2004, approximately $2,000 was
recognized as other income. As we continue investing the net proceeds from the
initial offering, we expect that we will generate additional income at rates
greater than the rates we received on cash and cash equivalents during this
initial period.

Operating Expenses

Operating expenses for the period April 8, 2004 (commencement of operations)
through June 30, 2004 were approximately $5.28 million. This amount consisted of
investment advisory and management fees, insurance expenses, administrative
services fees, professional fees, directors' fees and other general and
administrative expenses. It also included a non-recurring charge of
approximately $252,000 in expenses related to the organization of the Company.

15



The investment advisory fee for the quarter was approximately $4.01 million
representing the base fee as provided for in the investment advisory and
management agreement. Administrative services fees accrued under the
Administrative Services Agreement were approximately $175,000.

Net Operating Loss

The Company's net operating loss was approximately $1.477 million for the period
April 8, 2004 (commencement of operations) through June 30, 2004.

Net Unrealized Appreciation on Investments and Cash Equivalents

As of June 30, 2004, the Company's investments had net unrealized appreciation
of $2.34 million. Net unrealized appreciation on our bank debt/senior secured
debt and corporate notes/subordinated debt totaled $1.54 million and $1.07
million, respectively. Our Company also had unrealized depreciation of $0.27
million on U.S. Treasury Bills that were marked-to-market.

Net Increase in Stockholders' Equity From Operations

The Company had a net increase in stockholders' equity resulting from operations
of $0.863 million for the period April 8, 2004 (commencement of operations)
through June 30, 2004. Based on a weighted-average of 62,000,100 shares
outstanding, our net change in stockholders' equity from operations per share
was $0.014.

Financial Condition, Liquidity and Capital Resources

We generated cash primarily from the net proceeds of our initial offering as
well as cash flows from operations, including income earned from the temporary
investment of cash in U.S. government securities and other high-quality debt
investments that mature in one year or less. In the future, we may also fund a
portion of our investments through borrowings from banks and issuances of senior
securities. We do not expect to incur such indebtedness until the proceeds of
our initial public offering have been substantially invested. In the future, we
may also securitize a portion of our investments in mezzanine or senior secured
loans or other assets. Our primary use of funds will be investments in portfolio
companies and cash distributions to holders of our common stock.

We anticipate that substantially all of the net proceeds of our initial public
offering will be invested by the end of our first fiscal year. At that time, we
expect that our portfolio will primarily consist of senior secured loans as we
anticipate that we will be able to invest in such loans more rapidly than we can
invest in mezzanine loans. We can offer no assurances that we will be able to
invest all of our net proceeds within this time frame, as our investment outlook
will depend on the availability of appropriate investment opportunities
consistent with our investment objective and other market conditions.

Dividends

We have elected to be taxed as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986. In order to maintain our status as a
regulated investment company, we are required to (1) distribute at least 90% of
our investment company taxable income and (2) distribute at least 98% of our
income (both ordinary income and net capital gains) to avoid an excise tax. We
intend to make distributions to our stockholders on a quarterly basis of
substantially all of our net operating income. We also intend to make
distributions of net realized capital gains, if any, at least annually.

We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings when
applicable to us as a business development company under the Investment Company
Act of 1940 and due to provisions in our credit facilities. If we do not
distribute a certain percentage of our income annually, we will suffer adverse
tax consequences, including possible loss of our status as a regulated
investment company. We cannot assure stockholders that they will receive any
distributions or distributions at a particular level.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates.
We expect that many of the loans in our portfolio will have floating rates. To
date, a significant percentage of our assets is invested in short-term U.S.
Treasury bills. We may hedge against interest rate fluctuations by using
standard hedging instruments such as futures, options and forward contracts
subject to the requirements of the 1940 Act. While hedging activities may
insulate us against adverse changes in interest rates, they may also limit our
Ability to participate in the benefits of lower interest rates with respect to
our portfolio of investments. During the period April 8, 2004 (commencement of
operations) through June 30, 2004, we did not engage in hedging activities.

16



Item 4. Controls and Procedures

As of the end of the period covered by this report, Apollo Investment carried
out an evaluation, under the supervision and with the participation of AIC's
management, including AIC's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of AIC's disclosure controls
and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of
1934). Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that AIC's current disclosure controls and
procedures are effective in timely alerting them of material information
relating to AIC that is required to be disclosed by AIC in the reports it files
or submits under the Securities Exchange Act of 1934.

There have been no changes in AIC's internal control over financial reporting
that occurred during the period April 8, 2004 (commencement of operations)
through June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, AIC's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a defendant in any material pending legal proceeding, and no such
material proceedings are known to be contemplated.

Item 2. Changes in Securities and Use of Proceeds

On April 5, 2004, our registration statement on Form N-2 (SEC File No.
333-112591), for the initial public offering of 62,000,000 shares of our common
stock became effective. All 62,000,000 shares were sold upon completion of the
initial public offering at an aggregate offering price of $930.0 million,
reflecting an initial offering price of $15.00 per share. UBS Investment Bank,
Citigroup and JPMorgan acted as Joint Book-Running Managers. Wachovia
Securities, Banc of America Securities LLC, Legg Mason Wood Walker and RBC
Capital Markets also acted as underwriters for the initial public offering.

In connection with the initial public offering, we registered and offered the
underwriters an option to purchase an additional 9.3 million shares of common
stock at the $15 per share offering price. The underwriters did not exercise
this option.

Underwriting discounts and commissions for the shares sold in the initial public
offering totaled $58.1 million. In connection with the initial public offering,
we incurred expenses of approximately $1.7 million. None of these expenses were
paid directly or indirectly to our directors, officers or associates, or to
persons owning 10% or more of our common stock or that of other affiliates.
After deducting underwriting discounts and commissions and other expenses, we
received net proceeds of $870.2 million from the initial public offering.

The primary purposes of the initial public offering was to obtain capital with
which to invest primarily in mezzanine loans and senior secured loans of U.S.
middle-market companies. (These companies typically have annual revenues between
$50 million and $1 billion.) We have invested the net proceeds from the initial
public offering primarily in short-term U.S. Treasury securities while we
execute the investment strategy as outlined in our Registration Statement on
Form N-2. As of June 30, 2004, we had invested approximately $243 million in
bank debt and corporate notes/subordinated debt as disclosed within our
consolidated Schedule of Investments included in this report under Item 1 of
Part 1.

We did not repurchase any shares of our common stock during the period April 8,
2004 (commencement of operations) through June 30, 2004.

Item 3. Defaults Upon Senior Securities

Not Applicable

17



Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Listed below are the exhibits that are filed as part of this report (according
to the number assigned to them in Item 601 of Regulation S-K):

Exhibit
Number Description of Document
-------- -----------------------------------------------------------------

3.1 Articles of Amendment and Restatement (Incorporated by reference
to Pre-Effective Amendment No. 3 to the Registrant's Registration
Statement on Form N-2 (File No. 333-112591) filed on April 1,
2004).

3.2 Amended and Restated Bylaws (Incorporated by reference to
Pre-Effective Amendment No. 3 to the Registrant's Registration
Statement on Form N-2 (File No. 333-112591) filed on April 1,
2004).

4.1 Form of Stock Certificate (Incorporated by reference to
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on form N-2 (File No. 333-112591) filed on March 12,
2004.

10.1 Investment Advisory and Management Agreement between Registrant
and Apollo Investment Management, L.P. (Incorporated by reference
to Pre-Effective Amendment No. 3 to the Registrant's Registration
Statement on Form N-2 (File No. 333-112591) filed on April 1,
2004).

10.2 Custodian Agreement between Registrant and JPMorgan Chase Bank
(Incorporated by reference to Pre-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-2 (File No.
333-112591) filed on April 1, 2004).

10.3 Administration Agreement between Registrant and Apollo Investment
Administration, LLC (Incorporated by reference to Pre-Effective
Amendment No. 3 to the Registrant's Registration Statement on
Form N-2 (File No. 333-112591) filed on April 1, 2004).

10.4 Form of Transfer Agency and Service Agreement between Registrant
and American Stock Transfer & Trust Company (Incorporated by
reference to Pre-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-2 (File No. 333-112591) filed on
April 1, 2004).

10.5* License Agreement between Registrant and Apollo Management, L.P.

11.1 Computation of Per Share Earnings (included in notes to the
financial statements included in this report).

14.1* Code of Conduct

31.1* Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.


18


31.2* Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.

32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C.
1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.

32.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C.
1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.

* Submitted herewith




(b) Reports on Form 8-K

On April 6, 2004, we filed a current report on Form 8-K, pursuant to Item
9 reporting the issuance of a press release, announcing our initial public
offering.

On May 5, 2004, we filed a current report on Form 8-K, pursuant to Item 9
reporting the issuance of a press release, announcing that the Board of
Directors has elected Bradley J. Wechsler to serve as a Director of the Company.

On June 1, 2004, we filed a current report on Form 8-K, pursuant to Item 9
reporting the issuance of a press release, announcing that Richard L. Peteka has
joined the Company to serve as its Chief Financial Officer.

19




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on August 11, 2004.





APOLLO INVESTMENT CORPORATION



By: /s/ MICHAEL S. GROSS
-------------------------------

Michael S. Gross
President, Chief Executive Officer
and Chairman of the Board



By: /s/ RICHARD L. PETEKA
-------------------------------

Richard L. Peteka
Chief Financial Officer and Treasurer





20