| APOLLO INVESTMENT CORP Item 1A Risk Factors Before you invest in our shares, you should be aware of various risks, including those described below |
| You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in our securities |
| The risks set out below are not the only risks we face |
| If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected |
| In such case, our net asset value and the trading price of our common stock could decline or the value of our preferred stock, debt securities or warrants, if issued, may decline, and you may lose all or part of your investment |
| RISKS RELATING TO OUR BUSINESS AND STRUCTURE We are a relatively new company with limited operating history |
| We were incorporated in February 2004 and have conducted limited operations to date |
| We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we may not achieve our investment objective and that the value of your investment could decline substantially |
| We anticipated that it would take us up to two years to invest the majority of the net proceeds of our initial public offering in April 2004 in mezzanine debt and senior secured loans |
| Immediately following our initial public offering, we invested a portion of the proceeds largely in temporary investments, such as cash equivalents, which earn yields substantially lower than the interest income that we anticipated receiving in respect of investments in mezzanine and senior secured loans |
| Our investment adviser and its senior management have limited experience managing a business development company |
| The 1940 Act imposes numerous constraints on the operations of business development companies |
| For example, business development companies are required to invest at least 70prca of their total assets primarily in securities of private or thinly traded US public companies, cash equivalents, US government securities and other high quality debt investments that mature in one year or less |
| Our investment adviser’s and its senior management’s limited experience in managing a portfolio of assets under such constraints may hinder their ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective |
| In addition, even though Apollo Investment Management is led by senior investment professionals of Apollo who apply the value-oriented philosophy and techniques used by the Apollo investment professionals in their private fund investing, our investment strategies differ from those of other private funds that are or have been managed by the Apollo investment professionals |
| Further, while Apollo Investment may consider potential co-investment participation in portfolio investments with other Apollo funds, any such investment activity is subject to, among other things, independent board member approvals, the receipt of which cannot be assured, and compliance with existing regulatory guidance and applicable allocation procedures |
| Accordingly, we can offer no assurance that Apollo Investment will replicate Apollo’s historical success, and we caution you that our investment returns could be substantially lower than the returns achieved by those private funds |
| We are dependent upon Apollo Investment Management’s key personnel for our future success and upon their access to Apollo’s investment professionals and partners |
| We depend on the diligence, skill and network of business contacts of the senior management of Apollo Investment Management |
| Members of our senior management are not subject to employment agreements and may depart at any time |
| For a description of the senior management team, see “Management |
| ” We also depend, to a significant extent, on Apollo Investment Management’s access to the investment professionals and partners of Apollo and the information and deal flow generated by the Apollo investment professionals in the course of their investment and portfolio management activities |
| The senior management of Apollo Investment Management evaluates, negotiates, structures, closes and monitors our investments |
| Our future success depends on the continued 12 ______________________________________________________________________ service of the senior management team of Apollo Investment Management |
| The departure of any of our directors or the senior managers of Apollo Investment Management, or of a significant number of the investment professionals or partners of Apollo, could have a material adverse effect on our ability to achieve our investment objective |
| In addition, we can offer no assurance that Apollo Investment Management will remain our investment adviser or that we will continue to have access to Apollo’s partners and investment professionals or its information and deal flow |
| Our financial condition and results of operation depend on our ability to manage future growth effectively |
| Our ability to achieve our investment objective depends, in part, on our ability to grow, which depends, in turn, on Apollo Investment Management’s ability to identify, invest in and monitor companies that meet our investment criteria |
| Accomplishing this result on a cost-effective basis is largely a function of Apollo Investment Management’s structuring of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms |
| The senior management team of Apollo Investment Management has substantial responsibilities under the investment advisory and management agreement, as well as in connection with their roles as officers of other Apollo funds |
| They may also be called upon to provide managerial assistance to our portfolio companies as principals of our administrator |
| These demands on their time may distract them or slow the rate of investment |
| In order to grow, we and Apollo Investment Management need to hire, train, supervise and manage new employees |
| Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations |
| We operate in a highly competitive market for investment opportunities |
| A number of entities compete with us to make the types of investments that we make in middle-market companies |
| We compete with public and private funds, commercial and investment banks, commercial financing companies, and, to the extent they provide an alternative form of financing, private equity funds |
| Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including investments in middle-market companies |
| As a result of these new entrants, competition for investment opportunities at middle-market companies has intensified and we expect that trend to continue |
| Many of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do |
| For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us |
| In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us |
| Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company |
| We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations |
| Also, as a result of this existing and increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective |
| We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors make loans with interest rates that are comparable to or lower than the rates we offer |
| We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure |
| If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss |
| We will be subject to corporate-level income tax if we are unable to qualify as a RIC To qualify as a RIC under the Code, we must meet certain source-of-income, asset diversification and annual distribution requirements |
| The annual distribution requirement for a RIC is satisfied if we distribute 13 ______________________________________________________________________ at least 90prca of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis |
| Because we expect to use debt financing in the future, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax |
| To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter |
| Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status |
| Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses |
| If we fail to qualify as a RIC for any reason and become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions |
| Such a failure would have a material adverse effect on us and our stockholders |
| We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income |
| For federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term |
| Such original issue discount, which could be significant relative to Apollo Investment’s overall investment activities, or increases in loan balances as a result of payment-in-kind arrangements are included in income before we receive any corresponding cash payments |
| We also may be required to include in income certain other amounts that we do not receive in cash |
| That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash |
| If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible |
| Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute at least 90prca of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to maintain our status as a RIC Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements |
| See “Material US Federal Income Tax Considerations—Taxation as a RIC” Regulations governing our operation as a business development company affect our ability to, and the way in which we, raise additional capital |
| We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act |
| Under the provisions of the 1940 Act, we are permitted, as a business development company, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200prca after each issuance of senior securities |
| If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous |
| We are not generally able to issue and sell our common stock at a price below net asset value per share |
| We may, however, sell our common stock at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock at a price below the current net asset value of the stock, if our board of directors determines that such sale is in the best interests of Apollo Investment and its 14 ______________________________________________________________________ stockholders, and our stockholders approve Apollo Investment’s policy and practice of making such sales |
| In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount) |
| In addition to issuing securities to raise capital as described above, we may in the future seek to securitize our loans to generate cash for funding new investments |
| This could include the sale of interests in the subsidiary on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools, and we would retain a portion of the equity in the securitized pool of loans |
| An inability to successfully securitize our loan portfolio could limit our ability to grow our business and fully execute our business strategy, and could decrease our earnings, if any |
| Moreover, the successful securitization of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests may tend to be those that are riskier and more apt to generate losses |
| We currently use debt to make investments and are exposed to the typical risks associated with leverage |
| • We are exposed to increased risk of loss due to our use of debt to make investments |
| A decrease in the value of our investments will have a greater negative impact on the value of our common stock than if we did not use debt |
| • Our ability to pay dividends will be restricted if our asset coverage ratio falls below at least 200prca and any amounts that we use to service our indebtedness are not available for dividends to our common stockholders |
| • Our current and future debt securities are and may be governed by an indenture or other instrument containing covenants restricting our operating flexibility |
| • We, and indirectly our stockholders, bear the cost of issuing and servicing such securities |
| • Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock |
| We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us |
| Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities |
| We entered into a credit agreement in April 2005 with institutional banks and other lenders to facilitate such borrowing |
| Our lenders have fixed dollar claims on our consolidated assets that are superior to the claims of our common shareholders |
| If the value of our consolidated assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged |
| Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged |
| Similarly, any increase in our consolidated income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net income to decline more sharply than it would have had we not borrowed |
| Such a decline could negatively affect our ability to make common stock dividend payments |
| Leverage is generally considered a speculative investment technique |
| Changes in interest rates may affect our cost of capital and net investment income |
| Because we borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest these funds |
| As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income |
| In periods of rising interest rates, our cost of funds would increase, which could 15 ______________________________________________________________________ reduce our net investment income |
| Our long-term fixed-rate investments are financed primarily with equity and long-term debt |
| We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations |
| Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act |
| We have analyzed the potential impact of changes in interest rates on interest income net of interest expense |
| Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1prca change in interest rates would not have a material impact on our net income over a one-year horizon |
| Although management believes that this estimated measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income |
| Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate |
| You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments |
| Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to our investment adviser with respect to pre-incentive fee net investment income |
| We need to raise additional capital to grow because we must distribute most of our income |
| We may need additional capital to fund growth in our investments |
| We have issued equity securities and borrow from financial institutions |
| A reduction in the availability of new capital could limit our ability to grow |
| We must distribute at least 90prca of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our shareholders to maintain our regulated investment company status |
| As a result, such earnings are not available to fund investment originations |
| We expect to continue to borrow from financial institutions and issue additional debt and equity securities |
| If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which may have an adverse effect on the value of our securities |
| In addition, as a business development company, we are generally required to maintain a ratio of at least 200prca of total assets to total borrowings, which may restrict our ability to borrow in certain circumstances |
| Many of our portfolio investments are recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty as to the value of our portfolio investments |
| A large percentage of our portfolio investments are in the form of securities that are not publicly traded |
| The fair value of securities and other investments that are not publicly traded may not be readily determinable |
| We value these securities quarterly at fair value as determined in good faith by our board of directors |
| However, we may be required to value our securities at fair value as determined in good faith by our board of directors to the extent necessary to reflect significant events affecting the value of our securities |
| Our board of directors utilizes the services of three independent valuation firms to aid it in determining the fair value of these securities |
| The types of factors that may be considered in fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors |
| Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed |
| Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities |
| The lack of liquidity in our investments may adversely affect our business |
| We generally make investments in private companies |
| Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities |
| The illiquidity of 16 ______________________________________________________________________ our investments may make it difficult for us to sell such investments if the need arises |
| In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments |
| In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or an affiliated manager of Apollo has material non-public information regarding such portfolio company |
| We may experience fluctuations in our quarterly results |
| We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions |
| As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods |
| There are significant potential conflicts of interest which could impact our investment returns |
| Our executive officers and directors, and the partners of our investment adviser, Apollo Investment Management, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates |
| Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders |
| Moreover, we note that, notwithstanding the difference in principal investment objectives between Apollo Investment and other Apollo funds, such other Apollo sponsored funds, including new affiliated potential pooled investment vehicles or managed accounts not yet established, have and may from time to time have overlapping investment objectives with those of Apollo Investment and, accordingly, invest in, whether principally or secondarily, asset classes similar to those targeted by Apollo Investment |
| As a result, the partners of Apollo Investment Management face conflicts in the allocation of investment opportunities to other Apollo funds |
| In addition, in the event such investment opportunities are allocated among Apollo Investment and other investment vehicles affiliated with Apollo Investment Management, our desired investment portfolio may be adversely affected |
| Although Apollo Investment Management endeavors to allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with Apollo Investment Management |
| When the partners of Apollo Investment Management identify an investment, they will be forced to choose which investment fund should make the investment |
| We do not invest in any portfolio company in which Apollo or any affiliates has a pre-existing investment |
| We have in the past and expect in the future to co-invest on a concurrent basis with other affiliates of Apollo Investment, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures |
| In the course of our investing activities, we pay management and incentive fees to Apollo Investment Management, and reimburse Apollo Investment Management for certain expenses it incurs |
| As a result, investors in our common stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments |
| As a result of this arrangement, there may be times when the management team of Apollo Investment Management has interests that differ from those of our stockholders, giving rise to a conflict |
| Apollo Investment Management receives a quarterly incentive fee based, in part, on our pre-incentive fee income, if any, for the immediately preceding calendar quarter |
| This incentive fee is subject to a quarterly hurdle rate before providing an incentive fee return to the investment adviser |
| To the extent we or Apollo Investment Management are able to exert influence over our portfolio companies, the quarterly pre-incentive fee may provide Apollo Investment Management with an incentive to induce our portfolio companies to accelerate or defer interest or other obligations owed to us from one calendar quarter to another |
| 17 ______________________________________________________________________ We have entered into a royalty-free license agreement with Apollo, pursuant to which Apollo has agreed to grant us a non-exclusive license to use the name “Apollo |
| ” Under the license agreement, we have the right to use the “Apollo” name for so long as Apollo Investment Management or one of its affiliates remains our investment adviser |
| In addition, we rent office space from Apollo Administration, an affiliate of Apollo Investment Management, and pay Apollo Administration our allocable portion of overhead and other expenses incurred by Apollo Administration in performing its obligations under the administration agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs, which can create conflicts of interest that our board of directors must monitor |
| Changes in laws or regulations governing our operations may adversely affect our business |
| These laws and regulations, as well as their interpretation, may be changed from time to time |
| Accordingly, any change in these laws or regulations could have a material adverse affect on our business |
| RISKS RELATED TO OUR INVESTMENTS We may not realize gains from our equity investments |
| When we invest in mezzanine or senior secured loans, we have and may continue to acquire warrants or other equity securities as well |
| In addition, we may invest directly in the equity securities of portfolio companies |
| Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests |
| Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience |
| Our portfolio is concentrated in a limited number of portfolio companies, which subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities |
| As of March 31, 2006, we have investments in 46 companies |
| A consequence of this limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment |
| Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies |
| Our investments in prospective portfolio companies may be risky, and you could lose all or part of your investment |
| Investment in middle-market companies involves a number of significant risks, including: • these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment; • they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; • they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; and • they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, 18 ______________________________________________________________________ and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position |
| In addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies |
| Economic recessions or downturns could impair our portfolio companies and harm our operating results |
| Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods |
| Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods |
| Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments |
| Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets |
| Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us |
| These events could prevent us from increasing investments and harm our operating results |
| A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold |
| We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company |
| In addition, if one of our portfolio companies were to go bankrupt, even though we or one of our affiliates may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors |
| An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns |
| We have invested and will continue to invest primarily in privately-held companies |
| Generally, little public information exists about these companies, and we are required to rely on the ability of the members of Apollo Investment Management’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies |
| If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments |
| Also, privately-held companies frequently have less diverse product lines and smaller market presence than larger competitors |
| These factors could affect our investment returns |
| Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies |
| We have invested and intend to invest primarily in mezzanine and senior debt securities issued by our portfolio companies |
| The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest |
| By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest |
| Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment |
| After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us |
| In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, 19 ______________________________________________________________________ dissolution, reorganization or bankruptcy of the relevant portfolio company |
| In addition, we may not be in a position to control any portfolio company by investing in its debt securities |
| As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors |
| Our incentive fee may induce Apollo Investment Management to make certain investments, including speculative investments |
| The incentive fee payable by us to Apollo Investment Management may create an incentive for Apollo Investment Management to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement |
| The way in which the incentive fee payable to our investment adviser is determined, which is calculated as a percentage of the return on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments |
| Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in offerings of common stock, securities convertible into our common stock or warrants representing rights to purchase our common stock or securities convertible into our common stock pursuant to this prospectus |
| In addition, the investment adviser receives the incentive fee based, in part, upon net capital gains realized on our investments |
| Unlike the portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains |
| As a result, the investment adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities |
| Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns |
| The incentive fee payable by us to Apollo Investment Management also may create an incentive for Apollo Investment Management to invest on our behalf in instruments that have a deferred interest feature |
| Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the term |
| Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest |
| We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees |
| We will also remain obligated to pay management and incentive fees to Apollo Investment Management with respect to the assets invested in the securities and instruments of other investment companies |
| With respect to each of these investments, each stockholder of Apollo Investment will bear his or her share of the management and incentive fee of Apollo Investment Management as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which Apollo Investment invests |
| Our investments in foreign securities may involve significant risks in addition to the risks inherent in US investments |
| Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies |
| Investing in foreign companies may expose us to additional risks not typically associated with investing in US companies |
| These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility |
| 20 ______________________________________________________________________ Although most of our investments are denominated in US dollars, our investments that are denominated in a foreign currency are subject to the risk that the value of a particular currency may change in relation to one or more other currencies |
| Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments |
| We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk or, that if we do, such strategies will be effective |
| If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions |
| We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates |
| Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline |
| However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions |
| Such hedging transaction may also limit the opportunity for gain if the values of the underlying portfolio positions should increase |
| Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price |
| While we may enter into transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions |
| In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary |
| Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged |
| Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss |
| In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-US currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations |
| Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock |
| The Maryland General Corporation Law, our charter and our bylaws contain provisions that may discourage, delay or make more difficult a change in control of Apollo Investment or the removal of our directors |
| We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act |
| Our board of directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board of directors, including approval by a majority of our disinterested directors |
| If the resolution exempting business combinations is repealed or our board of directors does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer |
| Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our common stock by any person |
| If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such an offer |
| We have also adopted other measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our board of directors in three classes serving staggered three-year terms, and provisions of our charter authorizing our board of directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter, without stockholder approval, to increase or decrease the number of shares of stock that we have authority to issue |
| These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders |
| The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal |
| Our investments in portfolio companies may be highly speculative and aggressive, therefore, an investment in our securities may not be suitable for someone with a low risk tolerance |
| There is a risk that investors in our equity securities may not receive dividends or that our dividends may not grow over time and that investors in our debt securities may not receive all of the interest income to which they are entitled |
| We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution |
| We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions |
| In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions |
| The market price of our securities may fluctuate significantly |
| The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance |
| These factors include: • significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies; • changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies; • loss of RIC status; • changes in earnings or variations in operating results; • changes in the value of our portfolio of investments; • any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; • departure of Apollo Investment Management’s key personnel; • operating performance of companies comparable to us; • general economic trends and other external factors; and • loss of a major funding source |
| We may allocate the net proceeds from future offerings in ways with which you may not agree |
| We have significant flexibility in investing the net proceeds of offerings and may use the net proceeds from offerings in ways with which you may not agree or for purposes other than those contemplated at the time of the offering |
| Sales of substantial amounts of our securities, or the availability of such securities for sale, could adversely affect the prevailing market prices for our securities |
| If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so |