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 quarterly period ended June 30, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33294
Fortress Investment Group LLC
(Exact name of registrant as specified in its charter)
Delaware |
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20-5837959 |
(State or other jurisdiction of incorporation |
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(I.R.S. Employer Identification No.) |
1345 Avenue of the Americas, New York, NY |
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10105 |
(Address of principal executive offices) |
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(Zip Code) |
(212) 798-6100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the last practicable date.
Class A Shares: 184,439,525 outstanding as of August 1, 2011.
Class B Shares: 305,857,751 outstanding as of August 1, 2011.
FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
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108 | ||
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108 | ||
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110 | ||
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112 |
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:
Management Fee Paying Assets Under Management, or AUM, refers to the management fee paying assets we manage, including, as applicable, capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:
(i) the capital commitments or invested capital (or NAV, if lower) of our private equity funds and credit PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with private equity funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,
(ii) the contributed capital of our publicly traded alternative investment vehicles, which we refer to as our Castles,
(iii) the net asset value, or NAV, of our hedge funds, including the Value Recovery Funds and certain advisory engagements which pay fees based on realizations (and on certain managed assets and, in some cases, a fixed fee); and
(iv) the NAV or fair value of our managed accounts, to the extent management fees are charged.
For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our principal investments in funds as well as investments in funds by our principals, directors and employees.
Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements.
Fortress, we, us, our, and the company refer, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries.
Fortress Funds and our funds refers to the private investment funds, alternative asset companies and related managed accounts that are managed by the Fortress Operating Group. The Fortress Macro Fund is our flagship liquid hedge fund and the Drawbridge Special Opportunities Fund is our flagship credit hedge fund.
Fortress Operating Group refers to the combined entities, which were wholly-owned by the principals prior to January 2007, and in each of which Fortress Investment Group LLC acquired an indirect controlling interest in January 2007.
principals or Principals refers to Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone and Michael Novogratz, collectively, who prior to the completion of our initial public offering and related transactions directly owned 100% of the Fortress Operating Group units and following completion of our initial public offering and related transactions own a majority of the Fortress Operating Group units and of the Class B shares, representing a majority of the total combined voting power of all of our outstanding Class A and Class B shares. The principals ownership percentage is subject to change based on, among other things, equity offerings and grants by Fortress and dispositions by the principals.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Part II, Item 1A, Risk Factors, Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk and elsewhere in this Quarterly Report on Form 10-Q may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Readers can identify these forward-looking statements by the use of forward-looking words such as outlook, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. Accordingly, you should not place undue reliance on any forward-looking statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
· should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
· have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
· may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
· were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Companys other public filings, which are available without charge through the SECs website at http://www.sec.gov.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
FORTRESS INVESTMENT GROUP LLC
(dollars in thousands)
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June 30, |
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2011 |
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December 31, |
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(Unaudited) |
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2010 |
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Assets |
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Cash and cash equivalents |
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$ |
227,894 |
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$ |
210,632 |
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Due from affiliates |
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174,686 |
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303,043 |
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Investments |
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1,114,367 |
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1,012,883 |
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Deferred tax asset |
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407,192 |
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415,990 |
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Other assets |
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116,682 |
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134,147 |
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$ |
2,040,821 |
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$ |
2,076,695 |
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Liabilities and Equity |
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Liabilities |
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Accrued compensation and benefits |
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$ |
138,593 |
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$ |
260,790 |
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Due to affiliates |
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288,416 |
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342,397 |
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Deferred incentive income |
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254,145 |
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198,363 |
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Debt obligations payable |
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272,500 |
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277,500 |
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Other liabilities |
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64,207 |
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68,230 |
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1,017,861 |
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1,147,280 |
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Commitments and Contingencies |
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Equity |
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Class A shares, no par value, 1,000,000,000 shares authorized, 184,439,525 and 169,536,968 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively |
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Class B shares, no par value, 750,000,000 shares authorized, 305,857,751 and 300,273,852 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively |
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Paid-in capital |
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1,703,243 |
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1,465,358 |
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Retained earnings (accumulated deficit) |
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(1,250,573 |
) |
(1,052,605 |
) | ||
Accumulated other comprehensive income (loss) |
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(1,228 |
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(1,289 |
) | ||
Total Fortress shareholders equity |
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451,442 |
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411,464 |
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Principals and others interests in equity of consolidated subsidiaries |
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571,518 |
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517,951 |
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Total equity |
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1,022,960 |
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929,415 |
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$ |
2,040,821 |
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$ |
2,076,695 |
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See notes to consolidated financial statements
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands)
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Three Months Ended |
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Six Months Ended |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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Management fees: affiliates |
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$ |
116,048 |
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$ |
112,894 |
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$ |
234,916 |
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$ |
219,430 |
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Management fees: non-affiliates |
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14,375 |
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6,284 |
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28,776 |
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8,885 |
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Incentive income: affiliates |
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14,531 |
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28,849 |
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29,607 |
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46,405 |
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Incentive income: non-affiliates |
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7 |
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233 |
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985 |
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5,387 |
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Expense reimbursements from affiliates |
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43,645 |
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40,794 |
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87,987 |
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63,861 |
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Other revenues (affiliate portion disclosed in Note 6) |
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1,210 |
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2,276 |
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4,362 |
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7,550 |
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189,816 |
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191,330 |
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386,633 |
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351,518 |
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Expenses |
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Interest expense |
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4,640 |
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3,698 |
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9,300 |
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7,494 |
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Compensation and benefits |
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161,398 |
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159,529 |
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376,833 |
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338,922 |
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Principals agreement compensation |
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237,367 |
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237,367 |
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472,126 |
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472,126 |
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General, administrative and other |
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35,198 |
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24,242 |
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75,380 |
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45,350 |
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Depreciation and amortization |
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3,267 |
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3,294 |
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6,347 |
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5,976 |
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441,870 |
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428,130 |
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939,986 |
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869,868 |
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Other Income (Loss) |
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Gains (losses) (affiliate portion disclosed in Note 3) |
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(6,759 |
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(12,957 |
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(11,522 |
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(12,385 |
) | ||||
Tax receivable agreement liability adjustment |
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(116 |
) |
1,317 |
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Earnings (losses) from equity method investees |
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18,497 |
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6,150 |
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90,900 |
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26,031 |
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11,738 |
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(6,807 |
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79,262 |
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14,963 |
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Income (Loss) Before Income Taxes |
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(240,316 |
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(243,607 |
) |
(474,091 |
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(503,387 |
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Income tax benefit (expense) |
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(5,786 |
) |
(7,634 |
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(27,205 |
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(9,186 |
) | ||||
Net Income (Loss) |
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$ |
(246,102 |
) |
$ |
(251,241 |
) |
$ |
(501,296 |
) |
$ |
(512,573 |
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Principals and Others Interests in Income (Loss) of Consolidated Subsidiaries |
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$ |
(151,566 |
) |
$ |
(158,857 |
) |
$ |
(303,328 |
) |
$ |
(336,038 |
) |
Net Income (Loss) Attributable to Class A Shareholders |
|
$ |
(94,536 |
) |
$ |
(92,384 |
) |
$ |
(197,968 |
) |
$ |
(176,535 |
) |
Dividends declared per Class A share |
|
$ |
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$ |
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$ |
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$ |
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Earnings Per Class A share |
|
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Net income (loss) per Class A share, basic |
|
$ |
(0.52 |
) |
$ |
(0.57 |
) |
$ |
(1.10 |
) |
$ |
(1.14 |
) |
Net income (loss) per Class A share, diluted |
|
$ |
(0.56 |
) |
$ |
(0.57 |
) |
$ |
(1.11 |
) |
$ |
(1.16 |
) |
Weighted average number of Class A shares outstanding, basic |
|
184,952,566 |
|
165,246,781 |
|
183,018,516 |
|
161,385,135 |
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Weighted average number of Class A shares outstanding, diluted |
|
490,810,317 |
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165,246,781 |
|
490,634,345 |
|
465,388,269 |
|
See notes to consolidated financial statements
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(dollars in thousands)
|
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Class A Shares |
|
Class B Shares |
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Paid-In Capital |
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Retained |
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Accumulated |
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Total Fortress |
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Principals and |
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Total Equity |
| ||||||
Equity - December 31, 2010 |
|
169,536,968 |
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300,273,852 |
|
$ |
1,465,358 |
|
$ |
(1,052,605 |
) |
$ |
(1,289 |
) |
$ |
411,464 |
|
$ |
517,951 |
|
$ |
929,415 |
|
Contributions from principals and others interests in equity |
|
|
|
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|
|
|
|
|
|
|
56,214 |
|
56,214 |
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Distributions to principals and others interests in equity |
|
|
|
|
|
(266 |
) |
|
|
|
|
(266 |
) |
(64,693 |
) |
(64,959 |
) | ||||||
Conversion of Class B shares to Class A shares |
|
4,749,434 |
|
(4,749,434 |
) |
3,878 |
|
|
|
(33 |
) |
3,845 |
|
(3,845 |
) |
|
| ||||||
Net deferred tax effects resulting from acquisition and exchange of Fortress Operating Group units |
|
|
|
|
|
7,693 |
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|
|
|
|
7,693 |
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|
|
7,693 |
| ||||||
Director restricted share grant |
|
143,624 |
|
|
|
384 |
|
|
|
|
|
384 |
|
658 |
|
1,042 |
| ||||||
Capital increase related to equity-based compensation, net |
|
10,009,499 |
|
10,333,333 |
|
218,274 |
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|
|
|
|
218,274 |
|
375,637 |
|
593,911 |
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Dilution impact of Class A share issuance |
|
|
|
|
|
7,922 |
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(60 |
) |
7,862 |
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(7,862 |
) |
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Comprehensive income (loss) (net of tax) |
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|
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|
|
|
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Net income (loss) |
|
|
|
|
|
|
|
(197,968 |
) |
|
|
(197,968 |
) |
(303,328 |
) |
(501,296 |
) | ||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(47 |
) |
(47 |
) |
149 |
|
102 |
| ||||||
Comprehensive income (loss) from equity method investees |
|
|
|
|
|
|
|
|
|
201 |
|
201 |
|
637 |
|
838 |
| ||||||
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500,356 |
) | ||||||
Equity - June 30, 2011 |
|
184,439,525 |
|
305,857,751 |
|
$ |
1,703,243 |
|
$ |
(1,250,573 |
) |
$ |
(1,228 |
) |
$ |
451,442 |
|
$ |
571,518 |
|
$ |
1,022,960 |
|
See notes to consolidated financial statements
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
|
|
Six Months Ended June 30, |
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|
|
2011 |
|
2010 |
| ||
Cash Flows From Operating Activities |
|
|
|
|
| ||
Net income (loss) |
|
$ |
(501,296 |
) |
$ |
(512,573 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
|
|
|
|
| ||
Depreciation and amortization |
|
6,347 |
|
5,976 |
| ||
Other amortization and accretion |
|
756 |
|
1,678 |
| ||
(Earnings) losses from equity method investees |
|
(90,900 |
) |
(26,031 |
) | ||
Distributions of earnings from equity method investees |
|
14,944 |
|
4,076 |
| ||
(Gains) losses |
|
11,522 |
|
12,385 |
| ||
Deferred incentive income |
|
(25,399 |
) |
(46,677 |
) | ||
Deferred tax (benefit) expense |
|
15,601 |
|
2,440 |
| ||
Options received from affiliates |
|
(7,021 |
) |
|
| ||
Tax receivable agreement liability adjustment |
|
116 |
|
(1,317 |
) | ||
Equity-based compensation, including Principals Agreement |
|
594,195 |
|
584,155 |
| ||
Allowance for doubtful accounts |
|
4,958 |
|
(2,447 |
) | ||
Other |
|
|
|
1,005 |
| ||
Cash flows due to changes in |
|
|
|
|
| ||
Due from affiliates |
|
(14,601 |
) |
(67,975 |
) | ||
Other assets |
|
25,279 |
|
838 |
| ||
Accrued compensation and benefits |
|
(79,189 |
) |
21,640 |
| ||
Due to affiliates |
|
(11,236 |
) |
(9,346 |
) | ||
Deferred incentive income |
|
78,537 |
|
131,546 |
| ||
Other liabilities |
|
(8,122 |
) |
(1,397 |
) | ||
Net cash provided by (used in) operating activities |
|
14,491 |
|
97,976 |
| ||
Cash Flows From Investing Activities |
|
|
|
|
| ||
Contributions to equity method investees |
|
(57,776 |
) |
(31,694 |
) | ||
Distributions of capital from equity method investees |
|
168,381 |
|
46,124 |
| ||
Purchase of fixed assets |
|
(7,797 |
) |
(1,522 |
) | ||
Acquisitions, net of cash received |
|
|
|
(13,474 |
) | ||
Net cash provided by (used in) investing activities |
|
102,808 |
|
(566 |
) | ||
Cash Flows From Financing Activities |
|
|
|
|
| ||
Repayments of debt obligations |
|
(5,000 |
) |
(41,925 |
) | ||
Principals and others interests in equity of consolidated subsidiaries - contributions |
|
12,856 |
|
56 |
| ||
Principals and others interests in equity of consolidated subsidiaries - distributions |
|
(107,893 |
) |
(85,113 |
) | ||
Net cash provided by (used in) financing activities |
|
(100,037 |
) |
(126,982 |
) | ||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
17,262 |
|
(29,572 |
) | ||
Cash and Cash Equivalents, Beginning of Period |
|
210,632 |
|
197,099 |
| ||
Cash and Cash Equivalents, End of Period |
|
$ |
227,894 |
|
$ |
167,527 |
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for interest |
|
$ |
8,025 |
|
$ |
6,583 |
|
Cash paid during the period for income taxes |
|
$ |
6,657 |
|
$ |
6,006 |
|
Supplemental Schedule of Non-cash Investing and Financing Activities |
|
|
|
|
| ||
Employee compensation invested directly in subsidiaries |
|
$ |
43,007 |
|
$ |
64,021 |
|
Investments of receivable amounts into Fortress Funds |
|
$ |
143,397 |
|
$ |
8,092 |
|
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid |
|
$ |
|
|
$ |
4,337 |
|
Distributions declared but not yet paid on other non-controlling interests |
|
$ |
|
|
$ |
23,614 |
|
Contingent consideration in purchase of Logan Circle Partners L.P. |
|
$ |
|
|
$ |
4,000 |
|
See notes to consolidated financial statements
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
Fortress Investment Group LLC (the Registrant, or, together with its subsidiaries, Fortress) is a leading, highly diversified global investment management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for, various investment funds and companies, including related managed accounts (collectively, the Fortress Funds). Fortress generally makes principal investments in these funds.
Fortress has three primary sources of income from the Fortress Funds: management fees, incentive income, and investment income on its principal investments in the funds. The Fortress Funds fall into the following business segments in which Fortress operates:
1) Private equity:
a) Private equity funds, which make significant, control-oriented investments in debt and equity securities of public or privately held entities in North America and Western Europe, with a focus on acquiring and building asset-based businesses with significant cash flows; and
b) Publicly traded alternative investment vehicles, which Fortress refers to as Castles, which are companies that invest primarily in real estate and real estate related debt investments.
2) Liquid hedge funds, which invest globally in fixed income, currency, equity and commodity markets, and related derivatives to capitalize on imbalances in the financial markets. In addition, this segment includes a fund-of-funds business, which invests in Fortress Funds, funds managed by external managers, and direct investments.
3) Credit funds:
a) Credit hedge funds, which make highly diversified investments globally in assets, opportunistic lending situations and securities throughout the capital structure, with a value orientation, as well as non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and
b) Credit private equity (PE) funds which are comprised of a family of credit opportunities funds focused on investing in distressed and undervalued assets, a family of long dated value funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of real assets funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), and two Asia funds, a Japan real estate fund and an Asian investor based global opportunities fund.
4) Principal investments in the above described funds.
Financial Statement Guide
Selected Financial Statement |
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Note Reference |
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Explanation |
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|
|
Balance Sheet |
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Due from Affiliates |
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6 |
|
Generally, management fees, expense reimbursements and incentive income due from Fortress Funds. |
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|
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Investments |
|
3 |
|
Primarily the carrying value of Fortresss principal investments in the Fortress Funds. |
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Deferred Tax Asset |
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5 |
|
Relates to potential future tax benefits. |
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|
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Due to Affiliates |
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6 |
|
Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement. |
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|
|
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Deferred Incentive Income |
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2 |
|
Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance. |
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
Selected Financial Statement |
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Note Reference |
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Explanation |
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|
|
|
Debt Obligations Payable |
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4 |
|
The balance outstanding on the credit agreement. |
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Principals and Others Interests in Equity of Consolidated Subsidiaries |
|
6 |
|
The GAAP basis of the Principals and one senior employees ownership interests in Fortress Operating Group as well as employees ownership interests in certain subsidiaries. |
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Statement of Operations |
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Management Fees: Affiliates |
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2 |
|
Fees earned for managing Fortress Funds, generally determined based on the size of such funds. |
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|
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Management Fees: Non-Affiliates |
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2 |
|
Fees earned from managed accounts and our traditional fixed income asset management business, generally determined based on the amount managed. |
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|
|
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Incentive Income: Affiliates |
|
2 |
|
Income earned from Fortress Funds, based on the performance of such funds. |
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|
|
|
Incentive Income: Non- Affiliates |
|
2 |
|
Income earned from managed accounts, based on the performance of such accounts. |
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|
|
|
|
Compensation and Benefits |
|
7 |
|
Includes equity-based, profit-sharing and other compensation to employees. |
|
|
|
|
|
Principals Agreement Compensation |
|
N/A |
|
As a result of the principals agreement, the January 2007 value of a significant portion of the Principals equity in Fortress is being recorded as an expense over a five year period. Fortress is not a party to this agreement. It is an agreement between the Principals to further incentivize them to remain with Fortress. This GAAP expense has no economic effect on Fortress or its shareholders. |
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|
|
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Gains (Losses) |
|
3 |
|
The result of asset dispositions or changes in the fair value of investments or other financial instruments which are marked to market (including the Castles and GAGFAH). |
|
|
|
|
|
Tax Receivable Agreement Liability Adjustment |
|
5 |
|
Represents a change in the amount due to the Principals under the tax receivable agreement. |
|
|
|
|
|
Earnings (Losses) from Equity Method Investees |
|
3 |
|
Fortresss share of the net earnings (losses) of the Fortress Funds resulting from its principal investments. |
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|
|
|
|
Income Tax Benefit (Expense) |
|
5 |
|
The net tax result related to the current period. Certain of Fortresss revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings. |
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
Selected Financial Statement |
|
Note Reference |
|
Explanation |
|
|
|
|
|
Principals and Others Interests in (Income) Loss of Consolidated Subsidiaries |
|
6 |
|
Primarily the Principals and employees share of Fortresss earnings based on their ownership interests in subsidiaries, including Fortress Operating Group. |
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|
|
|
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Earnings Per Share |
|
8 |
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GAAP earnings per Class A share based on Fortresss capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortresss earnings, at both the Fortress and subsidiary levels. |
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Other |
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Distributions |
|
8 |
|
A summary of dividends and distributions, and the related outstanding shares and units, is provided. |
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|
|
|
Distributable Earnings |
|
10 |
|
A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortresss management committee. |
In May 2011, the FASB issued new guidance regarding the measurement and disclosure of fair value, which will become effective for Fortress on January 1, 2012. Fortress does not expect this guidance to have a material direct impact on its financial position, results of operations or liquidity. Fortress has not yet completed its assessment of the potential impact of this guidance on the fair values reported by its funds.
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, the definition of an investment company, financial statement presentation, revenue recognition, leases, financial instruments, hedging, and contingencies. Some of the proposed changes are significant and could have a material impact on Fortresss reporting. Fortress has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.
The accompanying consolidated financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortresss financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortresss consolidated and combined financial statements for the year ended December 31, 2010 and notes thereto included in Fortresss Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2011. Capitalized terms used herein, and not otherwise defined, are defined in Fortresss consolidated financial statements for the year ended December 31, 2010.
Certain prior period amounts have been reclassified to conform to the current periods presentation.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS
Fortress has two principal sources of income from its agreements with the Fortress Funds: contractual management fees, which are generally based on a percentage of fee paying assets under management, and related incentive income, which is generally based on a percentage of profits subject to the achievement of performance criteria. Substantially all of Fortresss net assets, after deducting the portion attributable to principals and others interests, are a result of principal investments in, or receivables from, these funds. The terms of agreements between Fortress and the Fortress Funds are generally determined in connection with third party fund investors.
The Fortress Funds are divided into segments and Fortresss agreements with each are detailed below.
Management Fees, Incentive Income and Related Profit Sharing Expense
Fortress recognized management fees and incentive income as follows:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Private Equity |
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|
|
|
|
|
|
|
| ||||
Private Equity Funds |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
$ |
35,821 |
|
$ |
33,507 |
|
$ |
71,110 |
|
$ |
66,972 |
|
Incentive income - affil. |
|
248 |
|
27,426 |
|
3,466 |
|
27,426 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Castles |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
12,420 |
|
11,074 |
|
24,035 |
|
22,854 |
| ||||
Management fees, options - affil. |
|
|
|
|
|
7,021 |
|
|
| ||||
Management fees - non-affil. |
|
1,278 |
|
490 |
|
1,938 |
|
1,374 |
| ||||
Incentive income - affil. |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
24,395 |
|
22,683 |
|
46,547 |
|
44,936 |
| ||||
Management fees - non-affil. |
|
4,586 |
|
1,668 |
|
9,375 |
|
3,004 |
| ||||
Incentive income - affil. |
|
60 |
|
116 |
|
2,060 |
|
(272 |
) | ||||
Incentive income - non-affil. |
|
7 |
|
|
|
985 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Credit Funds |
|
|
|
|
|
|
|
|
| ||||
Credit Hedge Funds |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
26,830 |
|
34,473 |
|
53,633 |
|
63,354 |
| ||||
Management fees - non-affil. |
|
3,514 |
|
431 |
|
7,570 |
|
812 |
| ||||
Incentive income - affil. |
|
342 |
|
|
|
2,148 |
|
|
| ||||
Incentive income - non-affil. |
|
|
|
233 |
|
|
|
5,387 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Credit PE Funds |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
16,582 |
|
11,157 |
|
32,570 |
|
21,314 |
| ||||
Management fees - non-affil. |
|
33 |
|
|
|
66 |
|
|
| ||||
Incentive income - affil. |
|
13,881 |
|
1,307 |
|
21,933 |
|
19,251 |
| ||||
Other (A) |
|
|
|
|
|
|
|
|
| ||||
Management fees - non-affil. |
|
4,964 |
|
3,695 |
|
9,827 |
|
3,695 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
|
|
|
|
| ||||
Management fees - affil. |
|
$ |
116,048 |
|
$ |
112,894 |
|
$ |
234,916 |
|
$ |
219,430 |
|
Management fees - non-affil. |
|
$ |
14,375 |
|
$ |
6,284 |
|
$ |
28,776 |
|
$ |
8,885 |
|
Incentive income - affil. (B) |
|
$ |
14,531 |
|
$ |
28,849 |
|
$ |
29,607 |
|
$ |
46,405 |
|
Incentive income - non-affil. |
|
$ |
7 |
|
$ |
233 |
|
$ |
985 |
|
$ |
5,387 |
|
(A) Related to Logan Circle.
(B) See Deferred Incentive Income below.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
Deferred Incentive Income
Incentive income from certain Fortress Funds, primarily private equity funds and credit PE funds, is received when such funds realize profits, based on the related agreements. However, this incentive income is subject to contingent repayment by Fortress to the funds until certain overall fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income as revenue until the related contingencies are resolved. Until such time, this incentive income is recorded on the balance sheet as deferred incentive income and is included as distributed-unrecognized deferred incentive income in the table below. Incentive income from such funds, based on their net asset value, which has not yet been received is not recorded on the balance sheet and is included as undistributed deferred incentive income in the table below.
Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the six months ended June 30, 2011 and 2010. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $49.3 million and $9.7 million of additional incentive income from affiliates would have been recognized during the six months ended June 30, 2011 and 2010, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as undistributed deferred incentive income in the table below.
During the six months ended June 30, 2011 and 2010, Fortress recognized $21.9 million and $19.3 million, respectively, of incentive income distributions from its credit PE funds which represented tax distributions. These tax distributions are not subject to clawback and reflect a cash amount approximately equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.
Deferred incentive income from the Fortress Funds was comprised of the following, on an inception to date basis. This does not include any amounts related to third party funds, receipts from which are reflected as Other Liabilities until all contingencies are resolved.
|
|
Distributed- |
|
Distributed- |
|
Distributed- |
|
Undistributed |
| ||||
Deferred incentive income as of December 31, 2010 |
|
$ |
702,709 |
|
$ |
(504,346 |
) |
$ |
198,363 |
|
$ |
200,066 |
|
Share of income (loss) of Fortress Funds |
|
|
|
|
|
|
|
148,195 |
| ||||
Distribution of incentive income |
|
81,181 |
|
|
|
81,181 |
|
(81,181 |
) | ||||
Recognition of previously deferred incentive income |
|
|
|
(25,399 |
) |
(25,399 |
) |
|
| ||||
Deferred incentive income as of June 30, 2011 |
|
$ |
783,890 |
|
$ |
(529,745 |
) |
$ |
254,145 |
|
$ |
267,080 |
|
(A) All related contingencies have been resolved.
(B) Reflected on the balance sheet.
(C) At June 30, 2011, the net undistributed incentive income is comprised of $364.6 million of gross undistributed incentive income, net of $97.5 million of intrinsic clawback (see next page). The net undistributed incentive income amount represents the amount that would be received by Fortress from the related funds if such funds were liquidated on June 30, 2011 at their net asset values.
(D) From inception to June 30, 2011, Fortress has paid $323.0 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $27.9 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related individuals. If the $364.6 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $140.5 million of compensation expense.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
The following tables summarize information with respect to the Fortress Funds, other than the Castles, and their related incentive income thresholds as of June 30, 2011:
|
|
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|
|
|
|
|
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|
|
Current |
|
Gain to |
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|
|
|
|
Distributed |
|
Gross |
|
Net |
| |||||||||||
|
|
|
|
Inception |
|
Inception |
|
Net |
|
NAV |
|
Preferred |
|
Cross Incentive |
|
Undistributed |
|
Distributed |
|
Incentive |
|
Intrinsic |
|
Intrinsic |
| |||||||||||
|
|
Maturity |
|
to Date |
|
to Date |
|
Asset Value |
|
Surplus |
|
Return |
|
Income |
|
Incentive |
|
Incentive |
|
Income Subject |
|
Clawback |
|
Clawback |
| |||||||||||
Fund (Vintage) (A) |
|
Date (B) |
|
Capital Invested |
|
Distributions |
|
(NAV) |
|
(Deficit) (C) |
|
Threshold (D) |
|
Threshold (E) |
|
Income (F) |
|
Income (G) |
|
to Clawback (H) |
|
(I) |
|
(I) |
| |||||||||||
Private Equity Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
NIH (1998) |
|
Indefinite |
|
$ |
415,574 |
|
$ |
(801,926 |
) |
$ |
16,057 |
|
$ |
N/A |
|
$ |
N/A |
|
$ |
N/A |
|
$ |
|
|
$ |
94,513 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Fund I (1999) (J) |
|
Apr-10 |
|
1,027,871 |
|
(2,759,045 |
) |
118,851 |
|
1,850,025 |
|
|
|
N/A |
|
22,411 |
|
325,931 |
|
|
|
|
|
|
| |||||||||||
Fund II (2002) |
|
Feb-13 |
|
1,974,296 |
|
(3,245,088 |
) |
115,785 |
|
1,386,577 |
|
|
|
N/A |
|
|
|
287,024 |
|
46,164 |
|
14,189 |
|
9,085 |
| |||||||||||
Fund III (2004) |
|
Jan-15 |
|
2,762,993 |
|
(1,307,382 |
) |
1,627,830 |
|
172,219 |
|
1,079,970 |
|
907,751 |
|
|
|
66,903 |
|
66,903 |
|
66,903 |
|
45,108 |
| |||||||||||
Fund III Coinvestment (2004) |
|
Jan-15 |
|
273,648 |
|
(115,936 |
) |
177,977 |
|
20,265 |
|
139,318 |
|
119,053 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Fund IV (2006) |
|
Jan-17 |
|
3,639,561 |
|
(119,445 |
) |
3,177,039 |
|
(343,077 |
) |
1,340,191 |
|
1,683,268 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Fund IV Coinvestment (2006) |
|
Jan-17 |
|
762,696 |
|
(12,651 |
) |
656,273 |
|
(93,772 |
) |
289,400 |
|
383,172 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Fund V (2007) |
|
Feb-18 |
|
4,103,714 |
|
(884 |
) |
3,604,583 |
|
(498,247 |
) |
970,983 |
|
1,469,230 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Fund V Coinvestment (2007) |
|
Feb-18 |
|
990,477 |
|
(135 |
) |
586,067 |
|
(404,275 |
) |
270,255 |
|
674,530 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
GAGACQ Fund (2004) |
|
Nov-09 |
|
545,663 |
|
(595,401 |
) |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
51,476 |
|
N/A |
|
N/A |
|
N/A |
| |||||||||||
FRID (2005) |
|
Apr-15 |
|
1,220,228 |
|
(505,612 |
) |
367,914 |
|
(346,702 |
) |
519,494 |
|
866,196 |
|
|
|
16,447 |
|
16,447 |
|
16,447 |
|
10,041 |
| |||||||||||
FRIC (2006) |
|
May-16 |
|
328,754 |
|
(17,460 |
) |
215,058 |
|
(96,236 |
) |
147,927 |
|
244,163 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
FICO (2006) |
|
Jan-17 |
|
724,525 |
|
(5 |
) |
(23,553 |
) |
(748,073 |
) |
306,173 |
|
1,054,246 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
FHIF (2006) |
|
Jan-17 |
|
1,508,484 |
|
(63,169 |
) |
1,948,484 |
|
503,169 |
|
556,280 |
|
53,111 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
FECI (2007) |
|
Feb-18 |
|
982,779 |
|
(146 |
) |
832,158 |
|
(150,475 |
) |
341,435 |
|
491,910 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,411 |
|
$ |
842,294 |
|
$ |
129,514 |
|
$ |
97,539 |
|
$ |
64,234 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Credit PE Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Long Dated Value Fund I (2005) |
|
Apr-30 |
|
$ |
267,325 |
|
$ |
(45,656 |
) |
$ |
268,266 |
|
$ |
46,597 |
|
$ |
81,346 |
|
$ |
34,749 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Long Dated Value Fund II (2005) |
|
Nov-30 |
|
271,554 |
|
(99,820 |
) |
212,077 |
|
40,343 |
|
65,946 |
|
25,603 |
|
|
|
412 |
|
|
|
|
|
|
| |||||||||||
Long Dated Value Fund III (2007) |
|
Feb-32 |
|
340,740 |
|
(130,977 |
) |
307,040 |
|
97,277 |
|
|
|
N/A |
|
16,219 |
|
1,983 |
|
|
|
|
|
|
| |||||||||||
LDVF Patent Fund (2007) |
|
Nov-27 |
|
41,795 |
|
(10,244 |
) |
54,127 |
|
22,576 |
|
|
|
N/A |
|
1,568 |
|
461 |
|
|
|
|
|
|
| |||||||||||
Real Assets Fund (2007) |
|
Jun-17 |
|
355,857 |
|
(205,486 |
) |
221,698 |
|
71,327 |
|
|
|
N/A |
|
9,815 |
|
1,316 |
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,602 |
|
$ |
4,172 |
|
$ |
|
|
$ |
|
|
$ |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Credit PE Funds in Investment Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Credit Opportunities Fund (2008) |
|
Oct-20 |
|
$ |
4,573,738 |
|
$ |
(4,596,156 |
) |
$ |
1,592,147 |
|
$ |
1,614,565 |
|
$ |
|
|
$ |
N/A |
|
$ |
117,958 |
|
$ |
201,700 |
|
$ |
96,067 |
|
$ |
|
|
$ |
|
|
Credit Opportunities Fund II (2009) |
|
Jul-22 |
|
1,275,822 |
|
(337,445 |
) |
1,188,886 |
|
250,509 |
|
|
|
N/A |
|
50,582 |
|
|
|
|
|
|
|
|
| |||||||||||
FTS SIP L.P. (2008) |
|
Oct-18 |
|
1,024,373 |
|
(901,001 |
) |
456,371 |
|
332,999 |
|
|
|
N/A |
|
22,958 |
|
44,550 |
|
27,047 |
|
|
|
|
| |||||||||||
SIP Managed Account (2010) |
|
Sep-20 |
|
11,000 |
|
(7,937 |
) |
13,662 |
|
10,599 |
|
|
|
N/A |
|
2,650 |
|
|
|
|
|
|
|
|
| |||||||||||
FCO MA LSS (2010) |
|
Jun-24 |
|
118,093 |
|
(14,762 |
) |
114,017 |
|
10,686 |
|
|
|
N/A |
|
2,215 |
|
|
|
|
|
|
|
|
| |||||||||||
FCO MA II (2010) |
|
Jun-22 |
|
224,479 |
|
(36,152 |
) |
234,609 |
|
46,282 |
|
|
|
N/A |
|
8,790 |
|
|
|
|
|
|
|
|
| |||||||||||
FCO MA Maple Leaf (2010) |
|
Oct-20 |
|
126,478 |
|
(3,903 |
) |
123,595 |
|
1,020 |
|
3,957 |
|
2,937 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Assets Overflow Fund (2008) |
|
May-18 |
|
90,500 |
|
(112,344 |
) |
1 |
|
21,845 |
|
|
|
N/A |
|
|
|
2,180 |
|
1,517 |
|
|
|
|
| |||||||||||
Japan Opportunity Fund (2009) |
|
Jun-19 |
|
807,279 |
|
(272,372 |
) |
692,463 |
|
157,556 |
|
|
|
N/A |
|
22,610 |
|
8,100 |
|
|
|
|
|
|
| |||||||||||
Net Lease Fund I (2010) |
|
Feb-20 |
|
53,958 |
|
(5,642 |
) |
54,622 |
|
6,306 |
|
|
|
N/A |
|
820 |
|
|
|
|
|
|
|
|
| |||||||||||
Global Opportunities Fund (2010) |
|
Sep-20 |
|
74,933 |
|
|
|
73,001 |
|
(1,932 |
) |
2,770 |
|
4,702 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Life Settlements Fund (2010) |
|
Dec-22 |
|
285,441 |
|
|
|
274,546 |
|
(10,895 |
) |
10,813 |
|
21,708 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Life Settlements Fund MA (2010) |
|
Dec-22 |
|
23,394 |
|
|
|
22,468 |
|
(926 |
) |
886 |
|
1,812 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
228,583 |
|
$ |
256,530 |
|
$ |
124,631 |
|
$ |
|
|
$ |
|
|
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
Percentage of |
|
|
|
|
| ||||
|
|
|
|
|
|
Incentive Income |
|
Undistributed |
|
Year to date |
| ||||
|
|
|
|
Gain to Cross |
|
Eligible NAV Above |
|
Incentive |
|
Incentive |
| ||||
|
|
Incentive Income |
|
Incentive Income |
|
Incentive Income |
|
Income |
|
Income |
| ||||
|
|
Eligible NAV (K) |
|
Threshold (L) |
|
Threshold (M) |
|
(N) |
|
Crystallized (O) |
| ||||
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
|
|
| ||||
Macro Funds (P) (S) |
|
|
|
|
|
|
|
|
|
|
| ||||
Main fund investments |
|
$ |
2,587,218 |
|
$ |
95,126 |
|
2.2 |
% |
$ |
254 |
|
$ |
720 |
|
Sidepocket investments (Q) |
|
51,060 |
|
28,483 |
|
N/A |
|
664 |
|
|
| ||||
Sidepocket investments - redeemers (R) |
|
273,497 |
|
138,357 |
|
N/A |
|
3,691 |
|
|
| ||||
Managed accounts |
|
694,744 |
|
39,829 |
|
0.0 |
% |
|
|
8 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fortress Commodities Funds |
|
|
|
|
|
|
|
|
|
|
| ||||
Main fund investments |
|
1,036,433 |
|
50,864 |
|
0.0 |
% |
|
|
1,026 |
| ||||
Managed accounts |
|
150,000 |
|
10,817 |
|
0.0 |
% |
|
|
889 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fortress Partners Funds (S) |
|
|
|
|
|
|
|
|
|
|
| ||||
Main fund investments |
|
147,858 |
|
36,236 |
|
0.0 |
% |
1 |
|
|
| ||||
Sidepocket investments (Q) |
|
94,720 |
|
30,214 |
|
N/A |
|
726 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Hedge Funds |
|
|
|
|
|
|
|
|
|
|
| ||||
Special Opportunities Funds (S) |
|
|
|
|
|
|
|
|
|
|
| ||||
Main fund investments |
|
$ |
2,954,031 |
|
$ |
|
|
100.0 |
% |
$ |
46,002 |
|
$ |
|
|
Sidepocket investments (Q) |
|
131,401 |
|
2,310 |
|
N/A |
|
3,885 |
|
|
| ||||
Sidepocket investments - redeemers (R) |
|
213,239 |
|
82,360 |
|
N/A |
|
1,585 |
|
|
| ||||
Main fund investments (liquidating) (T) |
|
1,548,128 |
|
161,127 |
|
88.2 |
% |
37,486 |
|
1,847 |
| ||||
Managed accounts |
|
27,964 |
|
20,781 |
|
0.0 |
% |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Worden Funds |
|
|
|
|
|
|
|
|
|
|
| ||||
Main fund investments |
|
211,612 |
|
|
|
99.8 |
% |
3,168 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Value Recovery Funds (U) |
|
|
|
|
|
|
|
|
|
|
| ||||
Managed accounts |
|
89,122 |
|
4,573 |
|
82.5 |
% |
444 |
|
|
|
(A) Vintage represents the year in which the fund was formed.
(B) Represents the contractual maturity date including the assumed exercise of all extension options, which in some cases may require the approval of the applicable fund advisory board. Private equity funds that have reached their maturity date are included in the table to the extent they have generated incentive income.
(C) A NAV deficit represents the gain needed to cross the incentive income threshold (as described in (E) below), excluding the impact of any relevant performance (i.e. preferred return) thresholds (as described in (D) below). As of period end, there is an aggregate NAV surplus within both the private equity funds and credit PE funds.
(D) Represents the gain needed to achieve the current relevant performance thresholds, assuming the gain described in (C) above is already achieved.
(E) Represents the immediate increase in NAV needed for Fortress to begin earning incentive income, including the achievement of any relevant performance thresholds. It does not include the amount needed to earn back intrinsic clawback (see (I) below), if any. Incentive income is not recorded as revenue until it is received and any related contingencies are resolved (see (H) below).
(F) Represents the amount of additional incentive income Fortress would receive if the fund were liquidated at the end of the period at its NAV.
(G) Represents the amount of incentive income previously received from the fund since inception.
(H) Represents the amount of incentive income previously received from the fund which is still subject to contingencies and is therefore recorded on the consolidated balance sheet as Deferred Incentive Income. This amount will either be recorded as revenue when all related contingencies are resolved, or, if the fund does not meet certain performance thresholds, will be returned by Fortress to the fund (i.e., clawed back).
(I) Represents the amount of incentive income previously received from the fund that would be clawed back (i.e., returned by Fortress to the fund) if the fund were liquidated at the end of the period at its NAV, excluding the effect of any tax adjustments. Employees, former employees and affiliates of Fortress would be required to return a portion of this incentive income that was paid to them under profit sharing arrangements. Gross and Net refer to amounts that are gross and net, respectively, of this employee/affiliate portion of the intrinsic clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees/affiliates. Fortress withheld a portion of the amounts due to employees under these profit sharing arrangements as a reserve against future clawback; as of June 30, 2011, Fortress held $45.1 million of such amounts on behalf of employees related to all of the private equity funds.
(J) Fund I undistributed and distributed incentive income amounts are presented for the total fund, of which Fortress is entitled to approximately 50%. Distributed incentive income subject to clawback for Fund I is presented with respect to Fortresss portion only.
(K) Represents the portion of a funds NAV or trading level that is eligible to earn incentive income.
(L) Represents, for those fund investors whose NAV is below the performance threshold Fortress needs to obtain before it can earn incentive income
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
from such investors (their incentive income threshold or high water mark), the amount by which their aggregate incentive income thresholds exceed their aggregate NAVs. The amount by which the NAV of each investor within this category is below their respective incentive income threshold varies and, therefore, Fortress may begin earning incentive income from certain investors before this entire amount is earned back. Fortress earns incentive income whenever the assets of new investors, as well as of investors whose NAV exceeds their incentive income threshold, increase in value.
(M) Represents the percentage which is computed by dividing (i) the aggregate NAV of all investors who are at or above their respective incentive income thresholds, by (ii) the total incentive income eligible NAV of the fund. The amount by which the NAV of each fund investor who is not in this category is below their respective incentive income threshold may vary, and may vary significantly. This percentage represents the performance of only the main fund investments and managed accounts relative to their respective incentive income thresholds. It does not incorporate the impact of unrealized losses on sidepocket investments that can reduce the amount of incentive income earned from certain funds. See footnote Q below.
(N) Represents the amount of additional incentive income Fortress would earn from the fund if it were liquidated at the end of the period at its NAV. This amount is currently subject to performance contingencies generally until the end of the year or, in the case of sidepocket investments, until such investments are realized. For the Value Recovery Fund managed accounts, Fortress can earn incentive income if aggregate realizations exceed an agreed threshold. Main Fund Investments (Liquidating) pay incentive income only after all capital is returned.
(O) Represents the amount of incentive income Fortress has earned in the current period from the fund which is no longer subject to contingencies.
(P) Represents the Drawbridge Global Macro Funds, Fortress Macro Funds and Fortress Asia Macro Fund. The Drawbridge Global Macro SPV (the SPV), which was established in February 2009 to liquidate illiquid investments and distribute the proceeds to then existing investors, is not subject to incentive income and is therefore not presented in the table. However, realized gains or losses within the SPV can decrease or increase, respectively, the gain needed to cross the incentive income threshold for investors with a corresponding investment in the main fund. The impact of the unrealized gains and losses within the SPV at June 30, 2011, as if they became realized, was immaterial to the amounts presented in the table for the Macro main fund.
(Q) Represents investments held in sidepockets (also known as special investment accounts), which generally have investment profiles similar to private equity funds. The performance of these investments may impact Fortresss ability to earn incentive income from main fund investments. For the credit hedge funds and Fortress Partners Funds, realized and unrealized losses from individual sidepockets below original cost may reduce the incentive income earned from main fund investments. For the Macro Funds, only realized losses from individual sidepockets reduce the incentive income earned from main fund investments. Based on current unrealized losses in Macro Fund sidepockets, if all of the Macro Fund sidepockets were liquidated at their NAV at June 30, 2011, the undistributed incentive income from the Macro main fund would be decreased by less than $0.1 million.
(R) Represents investments held in sidepockets for investors with no corresponding investment in the related main fund investments. In the case of the Macro Funds, such investors may have investments in the SPV (see (P) above).
(S) Includes onshore and offshore funds.
(T) Relates to accounts where investors have provided return of capital notices and are subject to payout as underlying fund investments are realized.
(U) Excludes the Value Recovery Funds which had a NAV of $746.1million at June 30, 2011. Fortress began managing the third party originated Value Recovery Funds in June 2009 and does not expect to earn any incentive income from the fund investments.
Private Equity Funds and Credit PE Funds
During the six months ended June 30, 2011, the capital commitment period of Fund V, Fund V Coinvestment and FECI expired. At such time, the AUM for these funds were reduced in aggregate by approximately $2.0 billion and, beginning in July 2011, these funds generate lower management fees.
Liquid Hedge Funds and Credit Hedge Funds
During the six months ended June 30, 2011, Fortress formed, or became the manager of, hedge funds with net asset values as follows as of June 30, 2011:
|
|
Liquid |
|
Credit |
| ||
Fortress |
|
$ |
20,302 |
|
$ |
|
|
Fortresss affiliates |
|
10,151 |
|
|
| ||
Third party investors |
|
107,892 |
|
|
| ||
Total NAV (A) |
|
$ |
138,345 |
|
$ |
|
|
(A) Or other fee paying basis, as applicable.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2011
(dollars in tables in thousands, except share data)
Redemption notices received, and redemption payments which are made in periods after notices are received, including affiliates, have been as follows:
|
|
Liquid Hedge Funds |
|
Credit Hedge Funds |
| ||||||||
Six Months |
|
Redemption |
|
Redemptions Paid |
|
Redemption |
|
Redemptions Paid |
| ||||
2011 |
|