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FORM 10-Q
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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 September 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
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
(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 September 30, 2004 was 62,079,760.
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APOLLO INVESTMENT CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. FINANCIAL STATEMENTS (unaudited) 3
Balance Sheet as of September 30, 2004 3
Statement of Operations for the quarter ended September 30, 2004
and for the period April 8, 2004* through September 30, 2004 4
Statement of Stockholders' Equity for the period April 8, 2004*
through September 30, 2004 5
Statement of Cash Flows for the period April 8, 2004* through
September 30, 2004 6
Schedule of Investments as of September 30, 2004 7
Notes to Financial Statements 9
Report of Independent Registered Public Accounting Firm 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
* Commencement of operations
2
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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)
September 30,
2004
(unaudited)
Assets
Cash $ 644
Cash equivalents, at fair value (cost - $1,141,697) 1,141,620
Investments, at fair value (cost - $403,152) 409,093
Interest receivable 4,950
Other assets 799
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Total assets $ 1,557,106
Liabilities
Payable for investments purchased $ 679,595
Management fee payable 1,434
Accrued expenses 945
-----------
Total liabilities $ 681,974
Stockholders' Equity
Common stock, par value $.001 per share, 100,000,000
common shares authorized, 62,079,760 issued and
outstanding $ 62
Paid-in capital in excess of par 871,211
Accumulated net investment income 786
Dividends paid to stockholders (2,790)
Accumulated net realized losses (1)
Net unrealized appreciation 5,864
-----------
875,132
Total stockholders' equity $
-----------
Total liabilities and stockholders' equity $ 1,557,106
See notes to financial statements.
3
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Apollo Investment Corporation
Statement of Operations (unaudited)
(in thousands, except per share amounts)
Quarter April 8, 2004*
Ended through
September 30, 2004 September 30, 2004
------------------ ------------------
Operating Income
Interest income $7,865 $11,670
Other income 24 26
-------- ----------
Total operating income 7,889 11,696
Operating Expenses
Management fees $4,398 $8,411
Insurance expenses 404 773
General and administrative expenses 824 1,726
-------- ----------
Total operating expenses 5,626 10,910
-------- ----------
Net operating income before investment
gains and losses $2,263 $786
Net realized loss on investments (1) (1)
Net change in unrealized appreciation 3,524 5,864
-------- ----------
Net increase in stockholders' equity
resulting from operations $5,786 $6,649
Earnings per common share (see note 6) $0.093 $0.107
* Commencement of operations
See notes to financial statements.
4
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Apollo Investment Corporation
Statement of Stockholders' Equity (unaudited)
For the period April 8, 2004* through September 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)
Net increase in stockholders' equity
resulting from operations 6,649 6,649
Shares issued in
connection with
dividend reinvestment
plan 79,660 0 1,119 1,119
Dividends declared (2,790) (2,790)
------------ --------- ----------- ----------- ----------
Balance at September 30, 2004 62,079,760 $62 $871,211 $3,859 $875,132
* Commencement of operations
See notes to financial statements.
5
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Apollo Investment Corporation
Statement of Cash Flows (unaudited)
(in thousands)
For the period
April 8, 2004* through
September 30, 2004
Cash Flows from Operating and Investing Activities:
Net Increase in Stockholders' Equity
Resulting from Operations $6,649
Adjustments to reconcile net increase:
Increase in interest receivable (4,950)
Increase in pre-paid assets (799)
Increase in management fee payable 1,434
Increase in accrued expenses 945
Payable for cash equivalents purchased 649,595
Payable for investments purchased 30,000
Purchase of investment securities (403,152)
Unrealized appreciation on investments (5,941)
Net realized loss on investments 1
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Net Cash Used by Operating and Investing Activities $273,782
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)
Dividends paid in cash (1,672)
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Net Cash Provided by Financing Activities $868,481
NET INCREASE IN CASH AND CASH EQUIVALENTS $1,142,263
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,142,264
* Commencement of operations
See notes to financial statements.
6
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Apollo Investment Corporation
Schedule of Investments (unaudited)
September 30, 2004
(in thousands, except warrants/shares)
Principal
Portfolio Company (1) Industry Amount Cost Fair Value (2)
--------------------- -------- ------ ---- --------------
Subordinated Debt/Corporate Notes - 13.7%
- ------------------------------------------
Anthony International, 13.50%, due 09/01/12 Manufacturing $9,500 $9,359 $9,500
Invista Corporation, 9.25%, due 05/01/12 Chemicals 35,000 35,000 37,450
Language Line Holdings, Inc., 0% / 14.125%,
due 06/15/13 Business Services 16,867 8,954 9,108
Language Line Inc., 11.125%, due 06/15/12 Business Services 14,500 14,187 14,935
N.E.W. Customer Service Companies Inc., 12.50%,
due 08/17/11 Consumer Services 26,680 23,309 23,276
N.E.W. Customer Service Companies Inc., 14.00%
Convertible, due 08/17/13 Consumer Services 8,320 8,320 8,320
TDS Logistics, Inc., 14.75%, due 02/26/10 Logistics 17,500 17,199 17,500
----------- --------------
Total Subordinated Debt/Corporate Notes $116,328 $120,089
----------- --------------
Common Stock/Warrants- .7% Warrants/Shares
N.E.W. Customer Service Companies Inc. Consumer Services 1,105,961 wts. $3,404 $3,404
TDS Logistics Inc. Logistics 250,000 shs. 2,500 2,500
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$5,904 $5,904
Principal
Amount
Bank Debt/Senior Secured Debt (3) - 32.3%
Amerco Corp., due 02/27/09 Transportation $14,925 $15,145 $15,270
Anthony International, due 09/01/11 Manufacturing 13,000 12,871 13,000
Charter Communications, due 04/21/11 Cable TV 24,937 24,937 24,776
Cygnus Business Media, Inc., due 07/12/09 Media 15,000 14,929 14,962
Cygnus Business Media, Inc., due 01/12/10 Media 10,000 9,905 9,975
Directed Electronics, due 06/17/10 Electronics 4,988 4,987 5,025
EuroFresh, due 05/14/10 Agriculture 25,000 24,668 24,875
Grand Vehicle Works Holding Corp., due 07/23/11 Manufacturing 10,000 10,000 9,950
Language Line Inc., due 06/11/11 Business Services 6,908 6,891 6,990
Mueller Group Inc., due 11/01/11 [diamond symbol] Industrial 17,000 17,000 17,425
NES Rentals Holdings Inc., due 08/17/10 Equipment Rental 25,000 25,000 25,094
Vitamins,
Phillips Health, LLC, due 08/23/10 Supplements 15,000 15,000 15,000
Vitamins,
Phillips Health, LLC, due 08/20/11 Supplements 15,000 15,000 15,000
Prestige Brands Inc., due 10/06/11 Consumer Products 20,000 20,000 20,467
RanPak Corporation, due 03/31/10 Packaging 4,875 4,875 4,881
RanPak Corporation, due 11/26/10 Packaging 18,000 17,830 17,910
Ripplewood Phosphorus, LLC, due 07/20/11 Chemicals 6,982 6,982 7,052
Sealy Mattress Co., due 04/06/13 Consumer Products 10,000 10,000 10,163
United Industries Corporation, due 04/30/11 Consumer Products 14,925 14,925 15,135
United Industries Corporation, due 10/31/11 Consumer Products 9,975 9,975 10,150
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Total Bank Debt/Senior Secured Debt $280,920 $283,100
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Total Investments $403,152 $409,093
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See notes to financial statements.
7
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Apollo Investment Corporation
Schedule of Investments (unaudited) (continued)
September 30, 2004
(in thousands, except shares)
Cash Equivalents - 130.5%
U.S. Treasury Bill, 1.03%, due 10/07/04 Government $204,000 $203,966 $203,945
U.S. Treasury Bill, 1.62%, due 10/15/04 Government 650,000 649,595 649,595
U.S. Treasury Bill, 1.50%, due 11/26/04 Government 140,000 139,679 139,650
U.S. Treasury Bill, 1.61%, due 12/23/04 Government 149,000 148,457 148,430
------------ --------------
Total Cash Equivalents $1,141,697 $1,141,620
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Total Investments & Cash Equivalents - 177.2% $1,544,849 $1,550,713
Liabilities in excess of other assets - (77.2%) (675,581)
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Net Assets - 100% $875,132
(1) None of our portfolio companies are 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.
[diamond symbol] These securities are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold in transactions
that are exempt from registration, normally to qualified institutional buyers.
See notes to financial statements.
8
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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 the trade date;
(b) Investments for which market quotations are readily available are
valued at such market quotations; debt and equity securities that are
not publicly traded or whose market prices are not readily available
are 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 are 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 is valued using
comparisons of financial ratios of the portfolio companies that issued
such private equity securities to peer companies that are public. The
value is then 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 readily available market
value existed for such investments, and the differences could be
material.
9
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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 undertakes 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 are then documented and discussed
with our senior management.
(3) An independent valuation firm engaged by our Board of Directors
reviews these preliminary valuations.
(4) The audit committee of our Board of Directors comments on the
preliminary valuation and our investment adviser and independent
valuation firm responds and supplements the preliminary valuation
based upon those comments.
(5) The Board of Directors discusses valuations and determines 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 purchased within 60 days of maturity 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.
10
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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 will be
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 September 30,
2004, the Investment Adviser received $8,410,772 in base investment advisory and
management fees from Apollo Investment.
11
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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 September 30,
2004, the Administrator was reimbursed $187,160 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
$252,311 and $1,722,565, respectively. Organizational expenses were 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 September 30, 2004, the Company's total net assets and net asset value per
share were $875,131,731 and $14.10, 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 September 30,
2004:
Numerator for basic and diluted gain per share: $6,648,589
Denominator for basic and diluted weighted average shares: 62,000,100
Basic and diluted net increase in stockholders' equity per share resulting from
operations: $0.107
Note 7. Investments
As of September 30, 2004, investments and cash equivalents consisted of the
following:
September 30, 2004
(in thousands)
---------------------------------
Cost Fair Value
Subordinated Debt/Corporate Notes $116,328 $120,089
Common Stock/Warrants 5,904 5,904
Bank Debt/Senior Secured Debt 280,920 283,100
Cash Equivalents 1,141,697 1,141,620
------------ ------------
Totals $1,544,849 $1,550,713
12
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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 September 30, 2004:
Per Share Data:
Net asset value, beginning of period $ 14.06
----------
Net investment income 0.01
Net unrealized appreciation on investments 0.10
----------
Net increase in stockholders' equity resulting from operations 0.11
Dividends to shareholders (0.04)
Costs related to the initial public offering (0.03)
----------
Net asset value at end of period $ 14.10
==========
Per share market value at end of period $ 14.15
Total return (1) (5.36%)
Shares outstanding at end of period 62,079,760
Ratio/Supplemental Data:
Net assets at end of period (in millions) $ 875.1
Ratio of operating expenses to average net assets (2) 2.60%
Ratio of net operating income to average net assets (2) 0.19%
(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
13
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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 September 30, 2004, including the schedule of investments,
and the related statements of operations for the three-month period ended
September 30, 2004, and for the period April 8, 2004 (commencement of
operations) through September 30, 2004, and of stockholders' equity, and the
statement of cash flows for the period April 8, 2004 (commencement of
operations) through September 30, 2004. These interim financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of 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 for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PricewaterhouseCoopers LLP
New York, New York
November 8, 2004
14
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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.
Portfolio and Investment Activity
September 30, 2004 marks the completion of our second fiscal quarter of
operations. During the three months, we invested approximately $161 million in
the aggregate across seven new portfolio companies and increased our investment
in two others. More specifically, we invested $65 million in the aggregate in
the mezzanine debt of Anthony International and the mezzanine debt and equity of
N.E.W. Customer Service Companies and TDS Logistics. Anthony International is a
leading manufacturer of glass refrigerator and freezer doors and related
accessories. N.E.W. Customer Service Companies is the nation's leading
independent provider of extended service warranties for retailers, utilities,
manufacturers, credit card issuers, and other service providers. TDS Logistics
is a diversified automotive logistics company. The weighted average yield on
these mezzanine debt investments is 14.9%. Our subordinated debt/corporate note
investments yielded 10.6% at June 30, 2004. We also invested $95 million in the
aggregate in the senior
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secured debt of Grand Vehicle Works Holding Corp., NES Rentals Holdings, Inc.,
Anthony International, Phillips Health, LLC, Ripplewood Phosphorus, LLC and
added to our investment in United Industries Corporation. These senior secured
debt investments had a weighted average yield of 7.6%. Our senior secured debt
investments yielded 6.3% at June 30, 2004.
The weighted average yield on all our debt investments (excluding cash
equivalents) was 8.78% at September 30, 2004 versus 7.35% at June 30, 2004. The
weighted average yield on our bank debt/senior secured debt was 6.9% at
September 30, 2004 versus 6.3% at June 30, 2004. Our subordinated debt/corporate
notes yielded 12.8% at September 30, 2004 versus 10.6% at June 30, 2004. Yields
are computed 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.
Through September 30, 2004, we invested approximately $404 million of the net
proceeds from our initial public offering. Net proceeds were invested 13.5% in
subordinated debt/corporate notes, 0.5% in common stock/warrants and 32.4% in
bank debt/senior secured debt. The remaining initial capital was invested 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 subordinated
debt/corporate notes will typically accrue interest at fixed rates, some of
these investments may include zero coupon, PIK and/or step bonds that accrue
income on a constant yield to call or maturity basis.
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.
Our board of directors approved an amendment to our investment policy to
eliminate the 5% limitation on investments on foreign securities. Any such
investments are included in our 30% "non-qualifying assets" bucket. This change
was implemented as of August 14, 2004.
Results of Operations
Operating Income
Investment income totaled $7.9 million for the quarter versus $3.8 million for
the quarter ended June 30, 2004. For the period April 8, 2004 (commencement of
operations) through September 30, 2004, gross investment income totaled $11.7
million. Non-recurring other fee income of $933,750, representing closing and/or
commitment fees associated with investments in portfolio companies, is accreted
into operating income over the respective terms of the applicable loans. For the
period April 8, 2004 (commencement of operations) through September 30, 2004,
$25,837 of the $933,750 received was recognized as other income. As we continue
investing the net proceeds from the initial offering, we expect to continue
generating additional income at rates greater than the rates we receive on cash
and cash equivalents.
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Operating Expenses
Operating expenses totaled $5.6 million for the quarter ended September 30, 2004
versus $5.3 million for the quarter ended June 30, 2004. For the period April 8,
2004 (commencement of operations) through September 30, 2004, operating expenses
totaled $10.9 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 $252,311 in expenses related to the
organization of the Company. The investment advisory fee for the quarter was
$4.4 million versus $4.0 million for the quarter ended June 30, 2004 and
represented the base fee as provided for in the investment advisory and
management agreement. Administrative services fees accrued for the quarter were
$273,000 versus $175,000 for the quarter ended June 30, 2004.
Net Operating Income
The Company's net operating income was $2.26 million for the quarter ended
September 30, 2004 versus a net operating loss of $1.48 million for the quarter
ended June 30, 2004. For the period April 8, 2004 (commencement of operations)
through September 30, 2004, net operating income was $785,968.
Net Unrealized Appreciation on Investments and Cash Equivalents
For the quarter ended September 30, 2004, the Company's investments had an
increase in net unrealized appreciation of $3.52 million versus $2.34 million
for the quarter ended June 30, 2004. At September 30, 2004, net unrealized
appreciation totaled $5.86 million of which $2.18 million was attributable to
net unrealized appreciation on our bank debt/senior secured debt and $3.76
million was attributable to our subordinated debt/corporate notes. The Company's
cash equivalents had net unrealized depreciation of approximately $77,000.
Net Realized Losses on Repayments
The Company had partial principal repayments of $347,011 for the quarter ended
September 30, 2004 versus $125,000 for the quarter ended June 30, 2004. Net
losses for the quarter totaled $322 versus $368 for the quarter ended June 30,
2004. For the period April 8, 2004 (commencement of operations) through
September 30, 2004, the Company had total principal repayments of $472,011 and
net realized losses of $690.
Net Increase in Stockholders' Equity From Operations
For the quarter ended September 30, 2004, the Company had a net increase in
stockholders' equity resulting from operations of $5.79 million versus $863,000
for the quarter ended June 30, 2004. For the period April 8, 2004 (commencement
of operations) through September 30, 2004, the Company had a total net increase
in stockholders' equity resulting from operations of $6.65 million. Based on a
weighted-average shares outstanding of 62,000,100, our net change in
stockholders' equity from operations per share was $0.093 for the quarter ended
September 30, 2004 versus $0.014 for the quarter ended June 30, 2004. Our net
change in stockholders' equity from operations was $0.107 per share for the
period April 8, 2004 (commencement of operations) through September 30, 2004.
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. We may also fund a portion of our
investments through borrowings from banks and issuances of senior securities. 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.
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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 September 30, 2004, we did not engage in hedging activities.
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 September 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.
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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 purpose 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 September 30, 2004, we had invested approximately $404 million
in bank debt, subordinated debt/ corporate notes, equity and warrants as
disclosed within our Schedule of Investments included in this report under Item
1 of Part 1 and our Notes to Financial Statements.
We did not repurchase any shares of our common stock during the period April 8,
2004 (commencement of operations) through September 30, 2004.
Item 3. Defaults Upon Senior Securities
Not Applicable
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. (Incorporated by reference to the Registrant's Quarterly
Report filed on Form 10-Q (File No. 814-00646) filed on
August 11, 2004).
11.1 Computation of Per Share Earnings (included in notes to the
financial statements included in this report).
31.1* Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2* Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1* Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.1350).
32.2* Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.1350).
* Submitted herewith
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(b) Reports on Form 8-K
On July 29, 2004, we filed a current report on Form 8-K, pursuant to Item
9 reporting the issuance of a press release, announcing a scheduled earnings
release on August 10, 2004.
On August 10, 2004, we filed a current report on Form 8-K, pursuant to
Item 12 reporting financial results for the period ended June 30, 2004.
On September 10, 2004, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing the declaration
of a stockholder dividend of $0.045 per share.
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 November 8, 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
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