MidCap Financial Investment Corp - Quarter Report: 2005 December (Form 10-Q)

Form 10-Q

FORM 10-Q

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 December 31, 2005

¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

9 West 57^th Street, 41st 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 x No ¨

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

Indicate by check mark whether the registrant is a shell company (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 December 31, 2005 was 63,547,969.

APOLLO INVESTMENT CORPORATION

FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2005

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS (unaudited)	3

	Statements of Assets and Liabilities as of December 31, 2005 and March 31, 2005	3

	Statements of Operations for the three and nine months ended December 31, 2005 and 2004	4

	Statements of Changes in Net Assets for the nine months ended December 31, 2005 and the fiscal year ending March 31, 2005	5

	Statements of Cash Flows for the nine months ended December 31, 2005 and 2004	6

	Schedule of Investments as of December 31, 2005	7

	Notes to Financial Statements	11

	Report of Independent Registered Public Accounting Firm	18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	23

Item 3.	Defaults upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits and Reports on Form 8-K	24

	Signatures	25

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

APOLLO INVESTMENT CORPORATION

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except per share amounts)


	December 31, 2005 (unaudited)			March 31, 2005#
Assets
Investments, at fair value (cost - $1,336,073 and $821,232, respectively) (1)	$	1,350,229		$	838,482
Cash equivalents, at fair value (cost - $449,298 and $873,061, respectively)		449,298			873,056
Cash		4,897			5,208
Foreign currency, at value*		240			—
Interest receivable, at value*		21,670			14,805
Dividends receivable		58			—
Unrealized appreciation on forward foreign currency contract		—			978
Receivable from investments		387			—
Prepaid expenses and other assets		3,920			855

Total assets	$	1,830,699		$	1,733,384
Liabilities
Payable for investments and cash equivalents purchased	$	487,110		$	834,891
Credit facility payable, at value*		413,237			—
Unrealized depreciation on forward foreign currency contract (see note 7)		117			—
Management and performance-based incentive fees payable (see note 3)		11,559			4,492
Interest payable		1,791			—
Directors’ fees payable		—			125
Accrued administrative expenses		316			42
Other accrued expenses		1,105			948

Total liabilities	$	915,235		$	840,498
Net Assets
Common stock, par value $.001 per share, 400,000 and 100,000 common shares authorized, respectively, and 63,548 and 62,555 issued and outstanding, respectively	$	64		$	63
Paid-in capital in excess of par		897,438			878,838
Accumulated under (over) distributed net investment income (see note 2g)		(11,715	)		(4,067	)
Accumulated net realized gains (losses)		10,747			(145	)
Net unrealized appreciation		18,930			18,197

Total Net Assets	$	915,464		$	892,886

Total liabilities and net assets	$	1,830,699		$	1,733,384

Net Asset Value Per Share	$	14.41		$	14.27

(1)	None of our portfolio companies are controlled by or affiliated to the Company as defined by the Investment Company Act of 1940.

Foreign currency at value includes net unrealized depreciation at December 31, 2005 and March 31, 2005 totaling $1 and $0 (in 000’s), respectively. Interest receivable at value includes net unrealized depreciation at December 31, 2005 and March 31, 2005 totaling $34 and $26 (in 000’s), respectively. Credit facility payable at value includes net unrealized appreciation at December 31, 2005 and March 31, 2005 totaling $4,972 and $0 (in 000’s), respectively (see note 7).

#	Certain amounts have been reclassified to conform to the current period’s presentation.

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except per share amounts)

For the Three Months Ended
December 31,

For the Nine Months Ended
December 31,

2005

2004#

2005

2004*#

INVESTMENT INCOME:

Interest

37,425

14,816

97,753

26,512

Dividends

—

3,542

—

Other Income

—

9,079

—

Total Investment Income

37,567

14,816

110,374

26,512

EXPENSES:

Management fees

6,421

4,475

16,222

12,886

Performance-based incentive fees

5,138

—

16,622

—

Interest and other credit facility expenses

4,205

—

6,980

—

Administrative services expense

359

112

1,074

560

Insurance expense

213

404

636

1,178

General and administrative expenses

707

717

2,379

1,994

Total expenses

17,043

5,708

43,913

16,618

Expense offset arrangement

(30

)

(30

)

Net expenses

17,013

5,708

43,883

16,618

Net investment income

20,554

9,108

66,491

9,894

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, CASH EQUIVALENTS AND FOREIGN CURRENCIES:

Net realized gain (loss):

Investments

2,058

—

5,568

)

Foreign currency transactions

2,638

—

5,361

—

Cash equivalents

(35

)

(120

)

(37

)

(120

)

Net realized gains (losses)

4,661

(120

)

10,892

(121

)

Net change in unrealized gain (loss):

Investments

7,500

16,499

(3,093

)

22,440

Cash equivalents

—

(13

)

Foreign currency translations

831

(380

)

3,821

(380

)

Net change in unrealized gain (loss)

8,331

16,183

733

22,047

Net realized and unrealized gain (loss) on investments, cash equivalents and foreign currencies

12,992

16,063

11,625

21,926

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

33,546

25,171

78,116

31,820

EARNINGS PER COMMON SHARE (see note 5)

0.53

0.41

1.25

0.51

*	Commencement of operations on April 8, 2004

#	Certain amounts have been reclassified to conform to the current period’s presentation.

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(in thousands, except shares)


	Nine Months Ended December 31, 2005			April 8, 2004* through March 31, 2005
Increase in net assets from operations:
Net investment income	$	66,491		$	25,453
Net realized gains		10,892			495
Net change in unrealized gain		733			18,197

Net increase in net assets resulting from operations		78,116			44,145

Dividends and distributions to shareholders:		(74,139	)		(30,160	)

Capital share transactions:
Proceeds from shares sold		—			871,875
Less offering costs of initial public offering		—			(1,722	)
Reinvestment of dividends		18,601			8,747

Net increase in net assets from capital share transactions		18,601			878,900

Total increase in net assets:		22,578			892,885

Net assets at beginning of period		892,886			1

Net assets at end of period	$	915,464		$	892,886

Capital share activity
Shares sold		—			62,000,100
Shares issued from reinvestment of dividends		992,993			554,876

Net increase in capital share activity		992,993			62,554,976

*	Commencement of operations

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Nine months ended December 31, 2005			April 8, 2004* through December 31, 2004#
Cash Flows from Operating Activities:
Net Increase in Net Assets Resulting from Operations	$	78,116		$	31,820
Adjustments to reconcile net increase:
Purchase of investment securities		(866,187	)		(728,725	)
Proceeds from disposition of investment securities		356,886			25,222
Increase from forward foreign currency contracts		5,321			—
Increase in interest and dividends receivable		(6,930	)		(6,586	)
Increase in prepaid expenses and other assets		(3,065	)		(381	)
Increase in management and performance-based incentive fee payable		7,067			4,475
Increase in interest payable		1,791			—
Increase in accrued expenses		306			910
(Decrease) increase in payable for investments and cash equivalents purchased		(347,790	)		649,304
Increase in receivables for securities sold		(388	)		—
Net change in unrealized (appreciation)/depreciation on investments, cash equivalents, foreign currency translations and other assets and liabilities		(733	)		(22,047	)
Net realized (gain) loss on investments and cash equivalents		(10,892	)		121

Net Cash (Used) Provided by Operating Activities	$	(786,498	)	$	(45,887	)

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		(55,538	)		(9,698	)
Borrowings under credit facility		571,908			—
Repayments under credit facility		(153,700	)		—

Net Cash Provided by Financing Activities	$	362,670		$	860,455

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$	(423,828	)	$	814,568

Effect of exchange rates on cash balances		(1	)		—

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		878,264			1

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	454,435		$	814,569

Non-cash financing activities consist of the reinvestment of dividends totaling $18,601 and $4,267, respectively (in thousands).

*	Commencement of operations

#	Certain amounts have been reclassified to conform to the current period’s presentation.

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited)

December 31, 2005

(in thousands, except shares)


Portfolio Company (1)	Industry	Par Amount*		Cost		Fair Value (2)
Subordinated Debt/Corporate Notes – 88.4%
ALM Media Holdings, Inc., 13.00%, 3/15/13 ¨	Publishing	$	17,649	$	17,499	$	17,649
AMH Holdings II, Inc., 13.625%, 12/1/14 ¨	Building Products		45,992		45,034		44,843
Anthony, Inc., 13.50%, 9/01/12 ¨	Manufacturing		9,670		9,544		9,670
API Heat Transfer, Inc., 13.75%, 12/31/12	Manufacturing		19,134		18,816		19,134
Brenntag Holding GmbH & Co. KG, E+900, 1/20/16	Chemicals	€	15,000		17,766		17,901
Collect America, Ltd., 13.50%, 8/5/2012 ¨	Financial Services		36,320		35,619		36,320
Eurofresh, Inc., 0% / 14.50%, 1/15/14 ¨	Agriculture		26,504		15,074		15,000
Eurofresh, Inc., 11.50%, 1/15/13 ¨	Agriculture		50,000		50,000		50,250
European Directories (DH5) B.V., 15.735%, 7/1/16	Publishing	€	1,857		2,228		2,249
European Directories (DH7) B.V., E+950, 7/1/15	Publishing	€	14,179		17,297		17,321
Hanley Wood LLC, 12.25%, 8/1/2013 ¨	Media		60,000		59,419		60,000
Invista, 9.25%, 5/1/12 ¨	Chemicals		11,500		11,500		12,334
Language Line Holdings, Inc., 0% / 14.125%, 6/15/13	Business Services		27,678		17,815		13,424
Language Line Inc., 11.125%, 6/15/12	Business Services		27,081		26,765		25,185
Latham Manufacturing Corp., 14.00%, 6/30/11	Leisure Equipment		43,651		42,857		43,651
Lexicon Marketing (USA), Inc., 13.75%, 1/2/12	Direct Marketing		27,526		27,036		27,526
LVI Services, Inc., 13.25%, 11/16/12	Environmental		43,000		42,149		43,000
N.E.W. Customer Service Companies Inc., 14.00%, Convertible, 8/17/13	Consumer Services		8,320		8,320		9,761
NSP Holdings LLC, 11.75%, 1/1/2012 ¨	Manufacturing		25,589		25,069		25,845
Playpower Holdings Inc., 15.50%, 11/30/12 ¨	Leisure Equipment		70,560		70,560		70,560
Pro Mach Merger Sub, Inc., 13.75%, 6/15/12	Machinery		19,275		18,928		19,275
SCI Holdings, Inc., 13.00%, 11/15/13	Consumer Services		28,465		28,465		28,465
Sigmakalon Holdco B.V., E+1000, 12/31/2015	Chemicals	€	45,000		54,664		53,881
Sirona Dental Services GmbH, E+950, 7/1/12	Healthcare	€	21,824		26,152		26,660
Source Media Holdings Inc., 13.00%, 11/30/12 ¨	Publishing		18,240		17,893		18,240
T/Y Merger Corp., 14.75%, 2/26/10	Logistics		18,565		18,316		18,565
Travelex Global, GBP L+950, 10/30/2015	Financial Services	£	13,172		24,223		23,292
Tumi Holdings, Inc., L+1100, 12/31/14	Consumer Products		13,011		13,011		13,271
WDAC Intermediate Corp., 13.75%, 6/1/15	Publishing	€	37,613		49,992		45,492

Total Subordinated Debt/Corporate Notes				$	812,011	$	808,764

See notes to financial statements.

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

December 31, 2005

(in thousands, except shares)


Equity/Partnership Interests – 9.3%	Industry	Shares		Cost		Fair Value (2)
CA Holding, Inc.	Financial Services		25,000	$	2,500	$	2,617
DTPI Holdings, Inc.	Infrastructure		200,000		2,000		677
FSC Holdings Inc.	Media		10,000		10,000		10,000
Garden Fresh Restaurant Holding, LLC	Retail		50,000		5,000		5,000
GS Prysmian Co-Invest L.P. (4,5)	Industrial				24,928		36,748
Latham Acquisition Corp.**	Leisure Equipment		33,091		3,309		3,509
LM Acquisition Ltd. **	Direct Marketing		10,000		10,000		14,692
LVI Acquisition Corp.	Environmental		6,250		625		625
LVI Acquisition Corp, 14.00% Preferred	Environmental		1,875		1,875		1,875
N.E.W. Customer Service Companies, Inc.	Consumer Services		1,105,961		3,415		5,298
Pro Mach Co-investment, LLC**	Machinery		150,000		1,500		1,500
Sorenson Communications Holdings, LLC Class A	Consumer Services		570,120		57		57
Sorenson Communications Holdings, LLC Class B, 10.00% Preferred	Consumer Services		1,943		1,943		1,943
T/Y Merger Corp.**	Logistics		250,000		2,500		780

Total Equity and Partnership Interests				$	69,652	$	85,321


Bank Debt/Senior Secured Loans (3) – 49.8%		Par Amount*
1^st Lien Bank Debt/Senior Secured Loans – 7.1 %
Alliance Mortgage Investments, Inc., 6/1/10	Consumer Finance	$	36,562	$	36,564	$	36,562
Cygnus Business Media, Inc., 7/13/09	Media		13,450		13,401		13,383
Healthy Directions, LLC, 8/31/10	Vitamins, Supplements		14,963		14,893		14,963

Total 1st Lien Bank Debt/Senior Secured Loans				$	64,858	$	64,908


2nd Lien Bank Debt/Senior Secured Loans – 42.7%
ALM Media Holdings, Inc., 3/7/11	Publishing	$	27,750	$	27,750	$	27,750
American Asphalt & Grading Co., 7/1/11	Infrastructure		26,500		26,500		26,367
American Safety Razor, 9/21/12	Consumer Products		13,500		13,500		13,601
Anthony International, 9/1/11	Manufacturing		13,000		12,890		13,000
Brenntag Holding GmbH & Co. KG, 1/20/16	Chemicals		20,000		20,000		20,525
C.H.I. Overhead Doors, Inc., 10/22/11	Building Products		10,000		9,956		10,113

See notes to financial statements

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

December 31, 2005

(in thousands, except shares)


	Industry	Par Amount*		Cost		Fair Value (2)
2nd Lien Bank Debt/Senior Secured Loans – cont’d.
Clean Earth, Inc., 10/14/11	Environmental	$	25,000	$	24,969	$	25,312
Cygnus Business Media, Inc., 1/13/10	Media		10,000		9,924		9,950
Diam International, 7/1/12	Consumer Products		20,000		20,000		18,200
Dr. Leonard’s Healthcare Corp., 7/31/12	Direct Marketing		22,000		22,000		22,055
Garden Fresh Restaurant Corp., 12/22/11	Retail		25,000		24,751		25,000
Healthy Directions, LLC, 8/31/11	Vitamins, Supplements		14,963		14,963		15,037
Natural Products Group LLC, 8/16/2012	Direct Marketing		25,000		24,734		25,063
NES Rentals Holdings Inc., 8/17/10	Equipment Rental		24,688		24,688		25,120
N.E.W. Customer Service Companies, 7/1/12	Consumer Services		50,000		50,000		50,875
Sigmakalon Holdco B.V., 6/30/2015	Chemicals	€	10,000		12,148		11,667
Sorenson Communications, Inc., 11/15/12	Consumer Services		17,000		17,000		17,398
Survey Sampling International, LLC, 5/7/12	Market Research		7,500		7,482		7,561
Tumi Holdings, Inc., 6/30/14	Consumer Products		3,000		3,000		3,030
United Site Services, Inc., 6/30/10	Environmental		13,462		13,297		13,462
Wyle Laboratories, Inc., 7/28/11	Aerospace/Defense		10,000		10,000		10,150

Total 2nd Lien Bank Debt/Senior Secured Loans				$	389,552	$	391,236

Total Bank Debt/Senior Secured Loans				$	454,410	$	456,144

Total Investments				$	1,336,073	$	1,350,229

Cash Equivalents – 49.1%
U.S. Cash Management Bill, 4.16%, 1/17/06	Government		450,000	$	449,298	$	449,298

Total Investments & Cash Equivalents —196.6%				$	1,785,371	$	1,799,527

Liabilities in excess of other assets – (96.6%)							(884,063	)

Net Assets – 100.0%						$	915,464

(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 Inter-bank Offer Rate), EURIBOR (Euro Inter-bank Offered Rate), GBP Libor (London Interbank Offer Rate for British Pounds), or the Prime Rate.

(4)	Denominated in Euro (€)

(5)	The Company is the sole Limited Partner in GS Prysmian Co-Invest L.P.

¨	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.

*	Denominated in USD unless otherwise noted

**	Non-income producing security.

See notes to financial statements

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (unaudited) (continued)

December 31, 2005


Industry Classification	Percentage
Publishing	9.5	%
Leisure Equipment	8.7	%
Chemicals	8.6	%
Consumer Services	8.4	%
Media	6.9	%
Direct Marketing	6.6	%
Environmental	6.3	%
Manufacturing	5.0	%
Agriculture	4.8	%
Financial Services	4.6	%
Building Products	4.1	%
Consumer Products	3.6	%
Business Services	2.9	%
Industrial	2.7	%
Consumer Finance	2.7	%
Retail	2.2	%
Vitamins, Supplements	2.2	%
Infrastructure	2.0	%
Healthcare	2.0	%
Equipment Rental	1.9	%
Machinery	1.5	%
Logistics	1.4	%
Aerospace/Defense	0.8	%
Market Research	0.6	%

Total	100.0	%

See notes to financial statements

Apollo Investment Corporation

Notes To Financial Statements (unaudited)

(in thousands except share and per share amounts)

Note 1. Organization

Apollo Investment Corporation (“Apollo Investment” or the “Company”), a Maryland corporation organized on February 2, 2004, is a 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 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 8, 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 $870.15 million in total net proceeds from the offering.

Note 2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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.

Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X, as appropriate. Accordingly, certain disclosures accompanying financial statements prepared in accordance with GAAP are omitted. In accordance with Article 6-09 of Regulation S-X under the Exchange Act, we are providing a Statement of Changes in Net Assets in lieu of a Statement of Changes in Stockholders' Equity. In addition, certain prior period amounts have been reclassified to conform with the current period presentation. 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 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. Subordinated 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 certain 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 of Directors 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.

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)

Independent valuation firms engaged by our board of directors conduct independent appraisals and review management’s preliminary valuations and their own independent assessment;

(4)

The audit committee of our board of directors reviews the preliminary valuation of our investment adviser and that of the independent valuation firms and responds and supplements the valuation recommendation of the independent valuation firm to reflect any comments; and

(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, the respective independent valuation firms and the 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. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income;

(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 dividends and 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 as of 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)

The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company’s investments in foreign securities may involve certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.

(j)

The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.

(k)	The Company records origination expenses related to its multi-currency credit facility as prepaid assets. These expenses are deferred and amortized using the straight-line method over the stated life of the facility and in accordance with FAS 91.

(l)	The Company records registration expenses related to Shelf filings as prepaid assets. These expenses will be charged as a reduction of capital upon utilization, in accordance with Section 8.24 of the AICPA Audit and Accounting Guide for Investment Companies.

Apollo Investment Corporation

Notes to Financial Statements (unaudited) (continued)

(in thousands except share and per share amounts)

Note 3. Agreements

Apollo Investment has 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. 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 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 is 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 cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the advisor.

For the three and nine month periods ended December 31, 2005, the Investment Adviser received $6,421 and $16,222, respectively, in base investment advisory and management fees and $5,138 and $16,622, respectively, in performance-based net investment income incentive fees from Apollo Investment.

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 three and nine month periods ended December 31, 2005, the Administrator was reimbursed $298 and $757, respectively, from Apollo Investment on the $359 and $1,074, respectively, of expenses accrued under the Administration Agreement.

On April 14, 2005, Apollo Investment entered into an $800 million Senior Secured Revolving Credit Agreement (the “Credit Agreement”), among Apollo Investment, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent for the lenders. On December 29, 2005, the Credit Agreement was expanded to $900 million of commitments. From time to time, certain of the lenders provide customary commercial and investment banking services to affiliates of Apollo Investment. JPMorgan also serves as custodian and fund accounting agent for Apollo Investment.

Apollo Investment Corporation

Notes To Financial Statements (unaudited) (continued)

(in thousands except share and per share amounts)

Note 4. Net Asset Value Per Share

At December 31, 2005, the Company's total net assets and net asset value per share were $915,464 and $14.41, respectively.

Note 5. Earnings Per Share

The following information sets forth the computation of basic and diluted per share net investment income and net increase in net assets resulting from operations for the three and nine month periods ended December 31, 2005 and 2004, respectively:


	Three months ended December 31, 2005		Three months ended December 31, 2004		Nine months ended December 31, 2005		April 8, 2004* through December 31, 2004
Numerator for net investment income per share:	$	20,554	$	9,108	$	66,491	$	9,894
Numerator for increase in net assets per share:	$	33,546	$	25,171	$	78,116	$	31,820
Denominator for basic and diluted weighted average shares:		63,093,222		62,082,041		62,809,381		62,028,229
Basic and diluted net investment income per share:	$	0.33	$	0.15	$	1.06	$	0.16
Basic and diluted net increase in net assets per share resulting from operations:	$	0.53	$	0.41	$	1.25	$	0.51

*	Commencement of Operations

Note 6. Investments

As of December 31, 2005 and December 31, 2004, respectively, investments and cash equivalents consisted of the following:


	December 31, 2005				December 31, 2004
	Cost		Fair Value		Cost		Fair Value
Subordinated Debt/Corporate Notes	$	812,011	$	808,764	$	397,268	$	415,829
Equity/Partnership Interests		69,652		85,321		20,404		20,695
Bank Debt/Senior Secured Debt		454,410		456,144		285,831		289,419
Cash Equivalents		449,298		449,298		810,757		810,744

Totals	$	1,785,371	$	1,799,527	$	1,514,260	$	1,536,687

Note 7. Foreign Currency Transactions and Translations

At December 31, 2005, the Company had an open foreign currency contract to sell euro forward and bears the market risk that arises from changes in foreign currency exchange rates. Unrealized depreciation on the contract is reflected in the accompanying financial statements as follows:


Foreign Currency	Local Currency		Cost		Market Value		Settlement Date	Unrealized Depreciation
To Sell: Euro	€	38,250	$	45,304	$	45,421	03/08/06	$	117

Apollo Investment Corporation

Notes To Financial Statements (unaudited) (continued)

(in thousands except share and per share amounts)

At December 31, 2005, the Company had outstanding non-US borrowings on its $900 million multicurrency revolving credit facility denominated in both euro and pounds sterling. Unrealized appreciation on these outstanding borrowings is indicated in the table below:


Foreign Currency	Currency		Cost		Value		Date	Appreciation
Euro	€	10,090	$	12,489	$	11,981	1/11/2006	$	508
Euro	€	25,061		30,246		29,760	1/23/2006		486
Euro	€	20,022		24,888		23,775	3/6/2006		1,113
Pounds Sterling	£	13,000		23,917		22,318	3/7/2006		1,599
Euro	€	55,525		67,167		65,934	3/20/2006		1,233
Euro	€	2,500		3,001		2,968	6/16/2006		33

			$	161,708	$	156,736		$	4,972

Note 8. Expense Offset Arrangement

The company benefits from an expense offset arrangement with JPMorgan Chase Bank, N.A. (“custodian bank”) whereby the company earns credits on any uninvested US dollar cash balances held by the custodian bank. These credits are applied by the custodian bank as a reduction of the monthly custody fees charged to the company. The total amount of credits earned during the nine months ended December 31, 2005 is $30.

Note 9. Cash Equivalents

Pending investment in longer-term portfolio holdings, Apollo Investment makes temporary investments in U.S. Treasury bills (of varying maturities) and repurchase agreements as outlined in our prospectus. These temporary investments are deemed cash equivalents by us and are included in our Schedule of Investments. At the end of each fiscal quarter, the Company typically takes proactive steps to prospectively preserve investment flexibility in the next quarter which is assessed against the Company’s total assets at its most recent quarter end. The Company can accomplish this in many ways including its current practice of purchasing U.S. Treasury bills and closing out its position on a net cash basis subsequent to quarter end. The Company may also utilize repurchase agreements or other balance sheet transactions as it deems appropriate for this purpose and these amounts are excluded from total assets for purposes of computing the asset base upon which the management fee is determined. U.S. Treasury bills with maturities of greater than 60 days from the time of purchase are marked-to-market as per our valuation policy. U.S. Treasury bills settle “regular way” on trade date plus one.

Note 10. Repurchase Agreements

The Company enters into repurchase agreements as part of its investment program. The Company's custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default of the obligor to repurchase, the Company has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. There were no repurchase agreements outstanding at December 31, 2005.

Apollo Investment Corporation

Notes To Financial Statements (unaudited) (continued)

(in thousands except share and per share amounts)

Note 11. Financial Highlights

The following is a schedule of financial highlights for the nine months ended December 31, 2005 and the period April 8, 2004 (commencement of operations) through March 31, 2005:


	Nine Months Ended December 31, 2005			April 8, 2004* through March 31, 2005
Per Share Data:
Net asset value, beginning of period	$	14.27		$	14.06

Net investment income		1.06			0.41
Net realized and unrealized gain		0.19			0.31

Net increase in net assets resulting from operations		1.25			0.72
Dividends to shareholders (1)		(1.18	)		(0.48	)
Effect of anti-dilution		0.07			—
Costs related to the initial public offering		—			(0.03	)

Net asset value at end of period	$	14.41		$	14.27

Per share market value at end of period	$	17.93		$	16.78
Total return (2)		13.70	%		15.32	%
Shares outstanding at end of period		63,547,969			62,554,976

Ratio/Supplemental Data:
Net assets at end of period (in millions)	$	915.5		$	892.9

Ratio of net investment income to average net assets		7.43	%		2.96	%(3)

Ratio of operating expenses to average net assets**		4.13	%		2.60	%(3)
Ratio of credit facility related expenses to average net assets		0.78	%		—

Ratio of total expenses to average net assets		4.91	%		2.60	%(3)

Average debt outstanding***	$	261,754		$	0
Average debt per share***	$	4.16		$	0
Portfolio turnover ratio		34.1	%		14.7	%

(1)	Dividends and distributions are determined in accordance with income tax regulations which may differ from amounts determined under accounting principles generally accepted in the United States of America.

(2)	Total return is based on the change in market price per share during the respective periods. It also takes into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan. Total return is not annualized.

(3)	Annualized for the period April 8, 2004 through March 31, 2005.

*	Commencement of operations

**	The ratio of net operating expenses to average net assets and the ratio of total net expenses to average net assets is 4.12% and 4.90%, respectively, inclusive of the expense offset arrangement (see Note 8).

***

Average debt outstanding and per share is calculated from July 8, 2005 (the date of the Company’s first borrowing from its revolving credit facility) through December 31, 2005, and average debt per share is calculated as average debt outstanding divided by the average shares outstanding during the period (in 000’s).

Apollo Investment Corporation

Notes To Financial Statements (unaudited) (continued)

(in thousands except share and per share/unit amounts)

Information about our senior securities is shown in the following table as of each fiscal year ended March 31 since the Company commenced operations, unless otherwise noted. The "—" indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.


Class and Year	Total Amount Outstanding (1)		Asset Coverage Per Unit (2)		Involuntary Liquidating Preference Per Unit(3)		Average Market Value Per Unit(4)
Revolving Credit Facility
Fiscal 2006 (as of December 31, 2005)	$	413,237	$	3,215	$	—	N/A
Fiscal 2005	$	0	$	0	$	—	N/A

(1)	Total amount of each class of senior securities outstanding at the end of the period presented (in 000’s).

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.

(3)	The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.

(4)	Not applicable, as senior securities are not registered for public trading.

Note 12. Credit Agreement and Borrowings

At December 31, 2005 and under the terms of the Credit Agreement, the lenders agree to extend credit to Apollo Investment in an aggregate principal or face amount not exceeding $900 million at any one time outstanding. The Credit Agreement is a five-year revolving facility (with a stated maturity date of April 14, 2010) and is secured by substantially all of the assets in Apollo Investment’s portfolio, including cash and cash equivalents. Pricing is set at 100 basis points over LIBOR. The Credit Agreement contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining minimum shareholders’ equity of the greater of (i) 40% of the total assets of Apollo Investment and its subsidiaries as at the last day of any fiscal quarter and (ii) the sum of (A) $300 million plus (B) 25% of the net proceeds from the sale of equity interests in Apollo Investment after the closing date of the Credit Agreement, (c) maintaining a ratio of total assets (less total liabilities) to total indebtedness, in each case of Apollo Investment and its subsidiaries, of not less than 2.0:1.0, (d) maintaining minimum liquidity, (e) limitations on the incurrence of additional indebtedness, (f) limitations on liens, (g) limitations on investments (other than in the ordinary course of Apollo Investment’s business), (h) limitations on mergers and disposition of assets (other than in the normal course of Apollo Investment’s business activities) and (i) limitations on the creation or existence of agreements that prohibit liens on properties of Apollo Investment’s subsidiaries. In addition to the asset coverage ratio described in clause (c) of the preceding sentence, borrowings under the Credit Agreement (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in Apollo Investment’s portfolio. The Credit Agreement currently provides for the ability of Apollo Investment to seek additional commitments from lenders in an aggregate amount of up to $300 million. The Credit Agreement is used to supplement Apollo Investment’s equity capital to make additional portfolio investments and for other general corporate purposes.

At December 31, 2005, the Company had $413,237 (at value) drawn on its $900,000 revolving credit facility. The weighted average annual interest cost for the nine months ended December 31, 2005 was 4.35%, exclusive of 0.20% for commitment fees and for other prepaid expenses related to establishing the credit facility.

The average debt outstanding on the credit facility was $261,754 for the period that borrowings were outstanding from July 8, 2005 through December 31, 2005. The maximum amount borrowed during this period was $413,237. The remaining amount available under the facility was $486,763 at December 31, 2005.

At December 31, 2005, the Company was in compliance with all financial and operational covenants required by the Credit Agreement.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Apollo Investment Corporation

We have reviewed the accompanying statement of assets and liabilities of Apollo Investment Corporation (the “Company”) as of December 31, 2005, including the schedule of investments, the related statements of operations for each of the three-month and nine-month periods ended December 31, 2005, the three-month period ended December 31, 2004 and for the period April 8, 2004 through December 31, 2004 and the statements of cash flows and of changes in net assets for the nine-month period ended December 31, 2005 and for the period April 8, 2004 through December 31, 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our review 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.

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of assets and liabilities of the Company as of March 31, 2005, including the schedule of investments and the related statements of operations, of cash flows and of changes in net assets for the period from April 8, 2004 through March 31, 2005 and in our report dated June 14, 2005, we expressed an unqualified opinion on those financial statements.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 6, 2006

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

After two active investment quarters, we entered our third fiscal quarter well positioned with a quality portfolio and significant debt capital available for investment. Due to our robust deal sourcing network and our consistent and credible capital, we are pleased to report that we found significant opportunities to invest in larger middle market companies with strong management teams generating high free cash flow. Accordingly, and during the quarter ended December 31, 2005, we invested $257.3 million across five new and two existing portfolio companies. All investments were in our targeted asset classes with $161.0 million invested in subordinated debt, $86.8 million invested in second lien bank debt and $9.5 million invested in private equity. For the fiscal year-to-date period April 1, 2005 through December 31, 2005, we invested $840.9 million across 20 new and 9 existing portfolio companies.

Also during the quarter we were able to further rationalize our portfolio by selectively exiting $26.7 million of our positions in lower-yielding senior bank debt and corporate notes. We also saw well-performing portfolio companies pre-pay $75.9 million of their debt. For the quarter and nine months ended December 31, 2005, we had proceeds from exits and prepayments totaling $102.6 million and $361.3 million, respectively. Of the $361.3 million of total fiscal year exits and prepayments, $216.7 million were planned exits of senior loans and lower yielding corporate notes. The remaining $144.6 million were pre-payments by eight successful companies.

We continued utilizing our $900 million, multi-currency credit facility this quarter and had $413 million drawn and outstanding at December 31 with $487 million available. Our net portfolio reached $1.35 billion and was invested 59.9% in subordinated debt, 6.3% in private equity and 33.8% in senior secured loans. A year earlier at December 31, 2004, our net portfolio of $887.2 million was invested 46.9% in subordinated debt, 32.6% senior secured loans, 2.3% in private equity and 18.2% in cash equivalents.

At December 31, 2005, the weighted average yield on our debt portfolio was up to 12.6% versus 12.2% at September 30, 2005 and 10.9% at December 31, 2004. The weighted average yield on our subordinated debt was 13.4% at December 31, 2005 versus 13.4% at September 30, 2005 and 13.8% at December 31, 2004. Our total bank debt/senior secured loan portfolio yielded 11.3% at December 31, 2005 versus 10.4% at September 30, 2005 and 7.6% at December 31, 2004. Yields are computed using interest rates as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount, weighted by their respective costs when averaged.

Bank debt/senior secured debt and European mezzanine loans typically accrue interest at variable rates determined on the basis of a benchmark LIBOR, EURIBOR or prime rate with stated maturities at origination that range from 5 to 10 years. While subordinated debt issued within the United States 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. At December 31, 2005, 52% or $656.4 million of our debt portfolio is fixed rate debt and 48% or $608.5 million is floating rate debt.

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. While we understand the SEC is considering these issues, we do not believe the SEC or the Staff has made any determinations with respect to the 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.

In August 2004, our board of directors approved an amendment to our investment policy to eliminate the 5% limitation on investments on foreign securities. As such, these investments are included in our 30% "non-qualifying assets" bucket.

Results of Operations

Results comparisons are for the three and nine months ended December 2005 and 2004.

Investment Income

Gross investment income totaled $37.6 million and $110.4 million, respectively, for the three and nine months ended December 31, 2005 compared to $14.8 million and $26.5 million, respectively, for the three and nine months ended December 31, 2004. The increases in gross investment income were primarily due to the growth of our investment portfolio compared to the December 2004 comparative periods.

Expenses

Expenses totaled $17.0 million and $43.9 million, respectively, for the three and nine months ended December 31, 2005 of which $5.1 million and $16.6 million, respectively, were performance-based incentive fees and $4.2 million and $7.0 million, respectively, were interest and other credit facility expenses. Expenses net of performance-based incentive fees and interest and other credit facility expenses for the three and nine months ended December 31, 2005 were $7.7 million and $20.3 million, respectively, versus the $5.7 million and $16.6 million, respectively, for the three and nine months ended December 31, 2004. Expenses consist of base investment advisory and management fees, insurance expenses, administrative services fees, professional fees, directors’ fees, audit and tax services expenses, and other general and administrative expenses. The increase in expenses was primarily due to the increase in base management fees related to the growth of our investment portfolio as compared to the December 2004 comparative periods.

Net Investment Income

The Company’s net investment income totaled $20.6 million and $66.5 million or $0.33 per share and $1.06 per share, respectively, for the three and nine months ended December 31, 2005 versus $9.1 million and $9.9 million or $0.15 per share and $0.16 per share, respectively, for the three and nine months ended December 31, 2004.

Net Realized Gains/Losses

The Company had exits and prepayments totaling $102.6 million and $361.3 million, respectively, for the three and nine months ended December 31, 2005 versus $25.3 million and $25.8 million, respectively, for the three and nine months ended December 31, 2004. Net realized gains on investments totaled $2.1 million and $5.6 million, respectively, for the three and nine months ended December 31, 2005, versus $0.0 million for the three and nine months ended December 31, 2004. The Company also had net realized gains on its foreign currency transactions of $2.6 million and $5.4 million, respectively, during the three and nine months ended December 31, 2005 versus $0.0 million for both the three and nine month periods ended December 31, 2004. Total net realized gains for the three and nine months ended December 31, 2005 were $4.7 million and $10.9 million, respectively, versus a loss of $0.1 million for both the three and nine months ended December 31, 2004.

Net Unrealized Appreciation on Investments and Foreign Currency Contracts and Translations

For the three and nine months ended December 31, 2005, the Company’s investments, foreign currencies and other assets and liabilities had a net increase in appreciation of $8.3 million and $0.7 million, respectively. This compared to an increase in net appreciation of $16.2 million and $22.0 million, respectively, on the portfolio for the three and nine months ended December 31, 2004. At December 31, 2005, net unrealized appreciation totaled $18.9 million of which $2.0 million was attributable to net unrealized appreciation on our bank debt/senior secured debt and $16.9 million was attributable to net unrealized appreciation on our subordinated debt and private equity (after considering the effects of foreign currency hedging for our non-U.S. investments).

Net Increase in Net Assets From Operations

For the three and nine months ended December 31, 2005, the Company had a net increase in net assets resulting from operations of $33.5 million and $78.1 million, respectively, versus $25.2 million and $31.8 million, respectively, for the three and nine months ended December 31, 2004. The net change in net assets from operations per share was $0.53 and $1.25, respectively, for the three and nine months ended December 31, 2005 versus $0.41 and $0.51 per share for the three and nine months ended December 31, 2004.

Financial Condition, Liquidity and Capital Resources

The Company’s liquidity and capital resources are generated primarily through its senior secured, multi-currency, $900 million, five-year credit facility as well as from cash flows from operations, including exits and prepayments of senior and subordinated loans and income earned from investments and cash equivalents (which normally comprise of U.S. government securities and other high-quality debt investments that mature in one year or less). At December 31, 2005, the Company has $413 million in borrowings outstanding and $487 million available for its use. In the future, the Company may raise additional equity capital through the filing of its shelf registration or may securitize a portion of its investments. It may also further access $300 million of additional credit commitments available under the terms of its credit facility as the Company’s equity capital base grows. The primary use of funds will be investments in portfolio companies and cash distributions to holders of common stock.

Dividends

Dividends paid to stockholders for the quarter totaled $27.8 million or $0.44 per share versus $11.2 million or $0.18 per share for the quarter ended December 31, 2004. For the period April 1, 2005 through December 31, 2005, dividends paid to stockholders totaled $74.1 million or $1.18 per share. Tax characteristics of all dividends will be reported to shareholders on Form 1099 after the end of the calendar year.

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 taxable net 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.

With respect to the dividends paid to shareholders, income from origination, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to shareholders. For the period from April 1, 2005 through December 31, 2005 these fees totaled $3.4 million. For the fiscal year ended March 31, 2005, these fees totaled $4.5 million.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. Many of the investments in our debt portfolio have floating rates. We also have a significant portion of our investments with fixed rates. At December 31, 2005, 52% or $656.4 million of our debt portfolio is fixed rate debt and 48% or $608.5 million is floating rate debt.

As appropriate, 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 three and nine month periods ended December 31, 2005, we did not engage in interest rate hedging activities.

On December 8, 2005, we entered into a forward foreign currency contract to hedge our exposure to the currency risk associated with our investment in WDAC Intermediate Corp. Accordingly, we sold 38,250,000 euro forward at a rate of 1.184 dollars per euro for settlement on March 8, 2006. Unrealized depreciation on this contract is represented on our statement of assets and liabilities as of December 31, 2005 and described further in footnote 7 to the financial statements.

Additionally, we currently have and may continue to have outstanding borrowings denominated in foreign currencies. These borrowings are primarily used to fund foreign investments. As a result of borrowing and subsequently investing in the same foreign currency denominated investments, we are able to effectively hedge our exposure to currency risk resulting from these foreign investments. Unrealized appreciation on these borrowings is reflected in the value of the outstanding liability for credit facility payable on our statement of assets and liabilities as of December 31, 2005 and described further in footnote 7 to the financial statements.

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 October 1, 2005 through December 31, 2005 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

We intend to use the net proceeds from selling securities pursuant to our registration statement filed on Form N-2 effective June 24, 2005 for general corporate purposes, which includes investing in portfolio companies in accordance with our investment objective and strategies and, pending such investments, reducing our debt outstanding and/or investing in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment and other general corporate purposes. Supplements to the registration statement that relate to an offering will more fully identify the use of the proceeds from such offering.

We anticipate that substantially all of the net proceeds of an offering of securities will be used for the above purposes depending on our level of outstanding debt and the availability of appropriate investment opportunities consistent with our investment objective and market conditions. Our portfolio currently consists primarily of mezzanine and senior loans and equity securities. Pending our investments, we may invest a portion of the net proceeds in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment and other general corporate purposes.

We did not repurchase any shares of our common stock during the quarter ended December 31, 2005.

Item 3. Defaults Upon Senior Securities

Not Applicable

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

On October 12, 2005, Apollo Investment Corporation held its 2005 Annual Meeting of Stockholders in New York, N.Y. for the purpose of considering and voting upon the election of Directors. Votes were cast as follows:


Nominee	For	Withheld
Martin E. Franklin	51,294,625	4,911,124
Carl Spielvogel	54,227,375	1,978,374

Item 5. Other Information

The Company’s 2006 Annual Meeting of Stockholders will be August 3, 2006. If a stockholder desires to have a stockholder proposal (including Director nominations) included in the Company's proxy materials and form of proxy, or otherwise have a proposal considered at the meeting, written notice of the proposal must be received by the Company's Secretary at the principal executive office of the Company no earlier than March 6, 2006 and no later than 5 p.m., Eastern time on April 5, 2006. Stockholder proposals must comply with applicable requirements of the SEC and the Company's bylaws and Nominating and Corporate Governance Committee charter (as filed by the Company with the SEC and available to the public at www.sec.gov). Stockholder proposals not timely received and not complying with applicable requirements will be excluded from the proxy materials and consideration at the meeting.

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
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

(b) Reports on Form 8-K

On April 14, 2005, we filed a current report on Form 8-K, pursuant to Item 1.01 and 9.01 reporting the entry into a senior secured revolving credit agreement in the amount of $800,000,000.

On May 13, 2005, we filed a current report on Form 8-K, pursuant to Item 8.01 reporting the issuance of a press release announcing the scheduling of fourth quarter and fiscal year 2005 results.

On May 24, 2005, we filed a current report on Form 8-K, pursuant to Item 9.01 reporting the issuance of a press release announcing fiscal year ended March 31, 2005 financial results.

On June 16, 2005, we filed a current report on Form 8-K, pursuant to Item 7.01 reporting the issuance of a press release announcing a first fiscal quarter dividend of $0.31 per share.

On July 21, 2005, we filed a current report on Form 8-K, pursuant to Item 8.01 reporting the issuance of a press release announcing the scheduling of the release of earnings for the first quarter of fiscal year 2006.

On August 3, 2005, we filed a current report on Form 8-K, pursuant to Item 9.01 reporting the issuance of a press release announcing financial results for the first quarter of fiscal year 2006.

On September 12, 2005, we filed a current report on Form 8-K, pursuant to Item 7.01 reporting the issuance of a press release announcing a second fiscal quarter dividend of $0.43 per share.

On October 12, 2005, we filed a current report on Form 8-K, pursuant to Item 8.01 reporting the issuance of a press release announcing the scheduling of the release of financial results for the second quarter of fiscal year 2006.

On November 3, 2005, we filed a current report on Form 8-K, pursuant to Item 9.01 reporting the issuance of a press release announcing the financial results for the second quarter of fiscal year 2006.

On December 12, 2005, we filed a current report on Form 8-K, pursuant to Item 7.01 reporting the issuance of a press release announcing a third fiscal quarter dividend of $0.44 per share.

On December 30, 2005, we filed a current report on Form 8-K, pursuant to Item 1.01 reporting the expansion of the senior secured credit agreement entered into on April 14, 2005 from $800 million to $900 million.

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 February 7, 2006.


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

MidCap Financial Investment Corp - Quarter Report: 2005 December (Form 10-Q)

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