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, 2009
or
¨ | 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 | 20-5837959 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1345 Avenue of the Americas, New York, NY | 10105 | |
(Address of principal executive offices) | (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 ¨
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). ¨ Yes No ¨
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 ¨ |
Accelerated filer x | Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ 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: 140,651,044 outstanding as of August 4, 2009.
Class B Shares: 312,071,550 outstanding as of August 4, 2009.
FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
PAGE | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements |
|||
Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008 |
1 | |||
2 | ||||
Consolidated Statement of Equity (unaudited) for the six months ended June 30, 2009 |
3 | |||
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and 2008 |
4 | |||
5 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
33 | ||
Item 3. |
60 | |||
Item 4. |
63 | |||
PART II. OTHER INFORMATION | ||||
Item 1. |
63 | |||
Item 1A. |
64 | |||
Item 2. |
94 | |||
Item 3. |
94 | |||
Item 4. |
94 | |||
Item 5. |
94 | |||
Item 6. |
95 | |||
96 |
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 hybrid PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with 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 which pay fees based on realizations (and on certain managed assets); and |
(iv) | the NAV 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 and alternative asset companies that are managed by the Fortress Operating Group.
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.
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, 2009 |
December 31, 2008 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 90,506 | $ | 263,337 | ||||
Due from affiliates |
70,709 | 38,504 | ||||||
Investments |
||||||||
Equity method investees |
818,147 | 774,382 | ||||||
Options in affiliates |
116 | 39 | ||||||
Deferred tax asset |
429,794 | 408,066 | ||||||
Other assets |
86,028 | 93,407 | ||||||
$ | 1,495,300 | $ | 1,577,735 | |||||
Liabilities and Shareholders Equity |
||||||||
Liabilities |
||||||||
Accrued compensation and benefits |
$ | 63,268 | $ | 158,033 | ||||
Due to affiliates |
330,194 | 346,265 | ||||||
Deferred incentive income |
163,635 | 163,635 | ||||||
Debt obligations payable |
439,750 | 729,041 | ||||||
Other liabilities |
23,484 | 26,741 | ||||||
1,020,331 | 1,423,715 | |||||||
Commitments and Contingencies |
||||||||
Equity |
||||||||
Class A shares, no par value, 1,000,000,000 shares authorized, 140,651,044 and 94,609,525 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively. |
| | ||||||
Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding |
| | ||||||
Paid-in capital |
830,447 | 596,803 | ||||||
Retained earnings (accumulated deficit) |
(625,130 | ) | (513,379 | ) | ||||
Accumulated other comprehensive income (loss) |
(1,135 | ) | (866 | ) | ||||
Total Fortress shareholders equity |
204,182 | 82,558 | ||||||
Principals and others interests in equity of consolidated subsidiaries - Note 6 |
270,787 | 71,462 | ||||||
Total equity |
474,969 | 154,020 | ||||||
$ | 1,495,300 | $ | 1,577,735 | |||||
See notes to consolidated financial statements
1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
||||||||||||||||
Management fees from affiliates |
$ | 108,425 | $ | 149,605 | $ | 214,077 | $ | 293,662 | ||||||||
Incentive income from affiliates |
6,958 | 18,300 | 6,958 | 55,444 | ||||||||||||
Expense reimbursements from affiliates |
20,661 | 15,950 | 33,708 | 30,221 | ||||||||||||
Other revenues (affiliate portion disclosed in Note 6) |
3,043 | 4,241 | 6,640 | 9,649 | ||||||||||||
139,087 | 188,096 | 261,383 | 388,976 | |||||||||||||
Expenses |
||||||||||||||||
Interest expense |
7,605 | 9,888 | 15,791 | 20,224 | ||||||||||||
Compensation and benefits |
113,456 | 137,460 | 222,692 | 264,479 | ||||||||||||
Principals agreement compensation |
237,367 | 237,367 | 472,126 | 474,734 | ||||||||||||
General, administrative and other |
21,034 | 19,746 | 38,219 | 36,316 | ||||||||||||
Depreciation and amortization |
2,761 | 2,436 | 5,402 | 4,872 | ||||||||||||
382,223 | 406,897 | 754,230 | 800,625 | |||||||||||||
Other Income (Loss) |
||||||||||||||||
Gains (losses) from investments |
||||||||||||||||
Net realized gains (losses) |
(376 | ) | 61 | (772 | ) | 1,674 | ||||||||||
Net realized gains (losses) from affiliate investments |
234 | (92 | ) | (14 | ) | 155 | ||||||||||
Net unrealized gains (losses) |
| | | | ||||||||||||
Net unrealized gains (losses) from affiliate investments |
19,583 | (6,584 | ) | 17,754 | (36,401 | ) | ||||||||||
Tax receivable agreement liability reduction |
| | (55 | ) | | |||||||||||
Earnings (losses) from equity method investees |
51,057 | (26,500 | ) | 16,208 | (75,629 | ) | ||||||||||
70,498 | (33,115 | ) | 33,121 | (110,201 | ) | |||||||||||
Income (Loss) Before Income Taxes |
(172,638 | ) | (251,916 | ) | (459,726 | ) | (521,850 | ) | ||||||||
Income tax benefit (expense) |
1,308 | 1,949 | 1,715 | (5,303 | ) | |||||||||||
Net Income (Loss) |
$ | (171,330 | ) | $ | (249,967 | ) | $ | (458,011 | ) | $ | (527,153 | ) | ||||
Principals and Others Interests in Income (Loss) of Consolidated Subsidiaries |
$ | (126,738 | ) | $ | (194,411 | ) | $ | (346,260 | ) | $ | (402,680 | ) | ||||
Net Income (Loss) Attributable to Class A Shareholders - Note 6 |
$ | (44,592 | ) | $ | (55,556 | ) | $ | (111,751 | ) | $ | (124,473 | ) | ||||
Dividends declared per Class A share |
$ | | $ | 0.225 | $ | | $ | 0.450 | ||||||||
Earnings Per Class A share - Fortress Investment Group |
||||||||||||||||
Net income (loss) per Class A share, basic |
$ | (0.40 | ) | $ | (0.62 | ) | $ | (1.10 | ) | $ | (1.36 | ) | ||||
Net income (loss) per Class A share, diluted |
$ | (0.41 | ) | $ | (0.67 | ) | $ | (1.10 | ) | $ | (1.37 | ) | ||||
Weighted average number of Class A shares outstanding, basic |
115,547,744 | 94,913,677 | 105,447,324 | 94,904,157 | ||||||||||||
Weighted average number of Class A shares outstanding, diluted |
427,619,294 | 406,985,227 | 417,518,874 | 406,975,707 | ||||||||||||
See notes to consolidated financial statements
2
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2009
(dollars in thousands)
Class A Shares | Class B Shares | Paid-In Capital |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Total Fortress Shareholders Equity |
Principals and Others Interests in Equity of Consolidated Subsidiaries |
Total Equity |
|||||||||||||||||||||
Equity - December 31, 2008 |
94,609,525 | 312,071,550 | $ | 596,803 | $ | (513,379 | ) | $ | (866 | ) | $ | 82,558 | $ | 71,462 | $ | 154,020 | ||||||||||||
Contributions from principals and others interests in equity |
| | | | | | 3,590 | 3,590 | ||||||||||||||||||||
Distributions to principals and others interests in equity (net of tax) |
| | (446 | ) | | | (446 | ) | (34,659 | ) | (35,105 | ) | ||||||||||||||||
Public offering of Class A shares, net of offering costs |
46,000,000 | | 219,500 | | | 219,500 | | 219,500 | ||||||||||||||||||||
Dilution impact of public offering |
| | (144,572 | ) | | | (144,572 | ) | 144,572 | | ||||||||||||||||||
Net deferred tax effects resulting from acquisition of Fortress |
||||||||||||||||||||||||||||
Operating Group units |
| | 14,549 | | | 14,549 | | 14,549 | ||||||||||||||||||||
Director restricted share grant |
41,519 | | 169 | | | 169 | 222 | 391 | ||||||||||||||||||||
Capital increase related to equity-based compensation |
| | 144,444 | | | 144,444 | 433,208 | 577,652 | ||||||||||||||||||||
Comprehensive income (loss) (net of tax) |
||||||||||||||||||||||||||||
Net income (loss) |
| | | (111,751 | ) | | (111,751 | ) | (346,260 | ) | (458,011 | ) | ||||||||||||||||
Foreign currency translation |
| | | | 172 | 172 | 584 | 756 | ||||||||||||||||||||
Comprehensive income (loss) from equity method investees |
| | | | (441 | ) | (441 | ) | (1,932 | ) | (2,373 | ) | ||||||||||||||||
Total comprehensive income (loss) |
(459,628 | ) | ||||||||||||||||||||||||||
Equity - June 30, 2009 |
140,651,044 | 312,071,550 | $ | 830,447 | $ | (625,130 | ) | $ | (1,135 | ) | $ | 204,182 | $ | 270,787 | $ | 474,969 | ||||||||||||
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
Six Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
Cash Flows From Operating Activities |
||||||||
Net income (loss) |
$ | (458,011 | ) | $ | (527,153 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
||||||||
Depreciation and amortization |
5,402 | 4,872 | ||||||
Other amortization and accretion |
6,887 | 1,420 | ||||||
(Earnings) losses from equity method investees |
(16,208 | ) | 75,629 | |||||
Distributions of earnings from equity method investees |
771 | 2,792 | ||||||
(Gains) losses from investments |
(16,968 | ) | 34,572 | |||||
Deferred incentive income |
| (35,494 | ) | |||||
Deferred tax (benefit) expense |
(7,160 | ) | (3,434 | ) | ||||
Tax receivable agreement liability reduction |
55 | | ||||||
Equity-based compensation |
577,949 | 556,131 | ||||||
Cash flows due to changes in |
||||||||
Due from affiliates |
(32,219 | ) | 14,841 | |||||
Other assets |
1,551 | 902 | ||||||
Accrued compensation and benefits |
(92,918 | ) | (124,550 | ) | ||||
Due to affiliates |
(16,126 | ) | (1,066 | ) | ||||
Deferred incentive income |
| 26,077 | ||||||
Other liabilities |
(3,166 | ) | 7,634 | |||||
Net cash provided by (used in) operating activities |
(50,161 | ) | 33,173 | |||||
Cash Flows From Investing Activities |
||||||||
Contributions to equity method investees |
(39,261 | ) | (82,343 | ) | ||||
Distributions of capital from equity method investees |
27,548 | 182,072 | ||||||
Purchase of fixed assets |
(1,670 | ) | (3,906 | ) | ||||
Proceeds from disposal of fixed assets |
6 | 53 | ||||||
Net cash provided by (used in) investing activities |
(13,377 | ) | 95,876 | |||||
Cash Flows From Financing Activities |
||||||||
Borrowings under debt obligations |
| 450,000 | ||||||
Repayments of debt obligations |
(289,291 | ) | (185,000 | ) | ||||
Payment of deferred financing costs |
(4,162 | ) | (5,060 | ) | ||||
Proceeds from public offering |
230,000 | | ||||||
Costs related to public offering |
(10,500 | ) | | |||||
Dividends and dividend equivalents paid |
| (52,821 | ) | |||||
Principals and others interests in equity of consolidated subsidiaries - contributions |
67 | 145 | ||||||
Principals and others interests in equity of consolidated subsidiaries - distributions |
(35,407 | ) | (181,567 | ) | ||||
Net cash provided by (used in) financing activities |
(109,293 | ) | 25,697 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
(172,831 | ) | 154,746 | |||||
Cash and Cash Equivalents, Beginning of Period |
263,337 | 100,409 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 90,506 | $ | 255,155 | ||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash paid during the period for interest |
$ | 8,095 | $ | 16,790 | ||||
Cash paid during the period for income taxes |
$ | 5,952 | $ | 5,637 | ||||
Supplemental Schedule of Non-cash Investing and Financing Activities |
||||||||
Employee compensation invested directly in subsidiaries |
$ | 1,847 | $ | 24,716 | ||||
Investments of receivable amounts into Fortress Funds |
$ | | $ | 43,355 | ||||
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid |
$ | | $ | 103,776 | ||||
See notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(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 global alternative asset 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 (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 assets-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. |
3) | Hybrid funds: |
a) | Hybrid 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 in investment funds managed by external managers, and which include non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and |
b) | Hybrid 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 an Asian fund. |
4) | Principal investments in the above described funds. |
2007 Reorganization of Fortress Operating Group and Recent Offering
Fortress Investment Group LLC was formed on November 6, 2006 for the purpose of becoming the general partner of Fortress Operating Group, completing the Nomura Transaction (described below), and effecting a public offering of shares and related transactions (the Transactions) in order to carry on the business of its predecessor, Fortress Operating Group, as a publicly traded entity. The Registrant is a limited liability company and its members are not responsible for any of its liabilities beyond the equity they have invested. Fortresss formation documents allow for an indefinite life.
On January 17, 2007, Nomura Investment Managers U.S.A Inc. (Nomura) completed a transaction (the Nomura Transaction) whereby it purchased 55,071,450 Class A shares of the Registrant and the Registrant, in turn, purchased 55,071,450 Fortress Operating Group units, which then represented 15% of Fortress Operating Groups economic interests, from the Principals. On February 8, 2007, the Registrant completed an initial public offering (IPO) of 39,428,900 of its Class A shares.
In May 2009, Fortress sold 46 million Class A shares in a public offering at a price to the public of $5.00 per share, for net proceeds of approximately $219.5 million after deducting the underwriters discount and other offering expenses. The Principals purchased an aggregate of 3.6 million of these shares, a senior employee purchased 0.4 million of these shares, and Nomura purchased 5.4 million of these shares, at the public offering price. A portion of the proceeds were used to pay down amounts outstanding under the credit agreement (Note 4).
Financial Statement Guide
Selected Financial Statement Captions |
Note Reference |
Explanation | ||
Balance Sheet |
||||
Due from Affiliates |
6 | Generally, management fees, expense reimbursements and incentive income earned from Fortress Funds. |
5
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Selected Financial Statement Captions |
Note Reference |
Explanation | ||
Investments in Equity Method Investees |
3 | The carrying value of Fortresss principal investments in the Fortress Funds. | ||
Options in Affiliates |
3 | The fair value of common stock options received from the Castles. | ||
Due to Affiliates |
6 | Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement. | ||
Deferred Incentive Income |
2 | Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance. | ||
Debt Obligations Payable |
4 | The balance outstanding on the credit agreement. | ||
Principals and Others Interests in Equity of Consolidated Subsidiaries |
6 | The GAAP basis of the Principals ownership interests in Fortress Operating Group as well as employees ownership interests in certain subsidiaries. | ||
Income Statement |
||||
Management Fees from Affiliates |
2 | Fees earned for managing Fortress Funds, generally determined based on the size of such funds. | ||
Incentive Income from Affiliates |
2 | Income earned from Fortress Funds, based on the performance of such funds. | ||
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 value of a significant portion of the Principals equity in Fortress prior to the Nomura Transaction 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. | ||
Gains (Losses) from Other Investments |
N/A | Subsequent to the IPO, the result of asset dispositions or changes in the fair value of assets which are marked to market (primarily the Castles and GAGFAH). | ||
Tax Receivable Agreement Liability Reduction |
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 Fortress Funds resulting from its principal investments. |
6
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Selected Financial Statement Captions |
Note Reference |
Explanation | ||
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. | ||
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. This amount is disclosed in order to provide a net income (loss) which relates only to Fortresss Class A shareholders. | ||
Earnings Per Share |
8 | 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. | ||
Other |
||||
Distributions |
8 | A summary of dividends and distributions, and the related outstanding shares and units, is provided. | ||
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. |
The accompanying consolidated and combined 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, 2008 and notes thereto included in Fortresss current report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2009. Capitalized terms used herein, and not otherwise defined, are defined in Fortresss consolidated and combined financial statements for the year ended December 31, 2008.
7
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS
Management Fees, Incentive Income and Related Profit Sharing Expense
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 Fortress Funds are divided into segments and Fortresss agreements with each are detailed below.
Fortress recognized management fees and incentive income as follows:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Private Equity |
||||||||||||
Private Equity Funds |
||||||||||||
Management fees - affil. |
$ | 38,921 | $ | 40,410 | $ | 76,590 | $ | 80,218 | ||||
Incentive income - affil. |
| 3,535 | | 38,175 | ||||||||
Castles |
||||||||||||
Management fees - affil. |
11,950 | 13,136 | 23,340 | 26,073 | ||||||||
Incentive income - affil. |
| | | 12 | ||||||||
Management fees - non-affil. (A) |
694 | 950 | 1,340 | 1,832 | ||||||||
Liquid Hedge Funds |
||||||||||||
Management fees - affil. |
19,893 | 57,542 | 42,497 | 110,189 | ||||||||
Incentive income - affil. |
144 | 14,346 | 144 | 16,838 | ||||||||
Management fees - non-affil. (A) |
| 63 | 25 | 135 | ||||||||
Incentive income - non-affil. (A) |
| | | 203 | ||||||||
Hybrid Funds |
||||||||||||
Hybrid Hedge Funds |
||||||||||||
Management fees - affil. |
29,307 | 36,339 | 57,215 | 72,995 | ||||||||
Incentive income - affil. |
| 419 | | 419 | ||||||||
Management fees - non-affil. (A) |
194 | 272 | 408 | 461 | ||||||||
Incentive income - non-affil. (A) |
163 | | 985 | | ||||||||
Hybrid PE Funds |
||||||||||||
Management fees - affil. |
8,354 | 2,178 | 14,435 | 4,187 | ||||||||
Incentive income - affil. |
6,814 | | 6,814 | | ||||||||
Total |
||||||||||||
Management fees - affil. |
$ | 108,425 | $ | 149,605 | $ | 214,077 | $ | 293,662 | ||||
Incentive income - affil. (B) |
$ | 6,958 | $ | 18,300 | $ | 6,958 | $ | 55,444 | ||||
Management fees - non-affil. (A) |
$ | 888 | $ | 1,285 | $ | 1,773 | $ | 2,428 | ||||
Incentive income - non-affil. (A) |
$ | 163 | $ | | $ | 985 | $ | 203 |
(A) | Included in Other Revenues on the statement of operations. |
(B) | See Deferred Incentive Income below. |
Deferred Incentive Income
Incentive income from certain Fortress Funds, primarily private equity funds and hybrid 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.
8
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Incentive income from certain Fortress Funds, primarily hybrid hedge funds, as well as certain liquid hedge funds beginning in the second quarter of 2009, 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, 2009 and 2008. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $0.1 million and $0.0 million of additional incentive income from affiliates would have been recognized during the six months ended June 30, 2009 and 2008, 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.
Deferred incentive income from the Fortress Funds, subject to contingent repayment, was comprised of the following, on an inception to date basis:
Distributed- Gross |
Distributed- Recognized (A) |
Distributed- Unrecognized (B) |
Undistributed net of intrinsic clawback (C)(D) |
|||||||||||
Deferred incentive income as of December 31, 2008 |
$ | 470,798 | $ | (307,163 | ) | $ | 163,635 | $ | (89,085 | ) | ||||
Share of income (loss) of Fortress Funds |
| | | 37,731 | ||||||||||
Recognition of previously deferred incentive income |
| | | | ||||||||||
Deferred incentive income as of June 30, 2009 |
$ | 470,798 | $ | (307,163 | ) | $ | 163,635 | $ | (51,354 | ) | ||||
(A) | All related contingencies have been resolved. |
(B) | Reflected on the balance sheet. |
(C) | At June 30, 2009, the undistributed incentive income is comprised of $46.6 million of gross undistributed incentive income, net of $97.9 million of previously distributed incentive income that would be returned by Fortress to the related funds if such funds were liquidated on June 30, 2009 at their net asset values. |
(D) | From inception to June 30, 2009, Fortress has paid $137.7 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $19.5 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 employees. If the $46.6 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $21.1 million of compensation expense. |
Private Equity Funds and Hybrid PE Funds
During the six months ended June 30, 2009, Fortress formed new private equity funds or hybrid PE funds which had capital commitments as follows as of June 30, 2009 (based on June 30, 2009 foreign exchange rates):
Fortresss commitments |
$ | 1,384 | |
Fortresss affiliates commitments |
| ||
Third party investors commitments |
136,983 | ||
Total capital commitments |
$ | 138,367 | |
Unrealized losses in a significant portion of Fortresss private equity funds and certain hybrid PE funds have resulted in higher future returns being required before Fortress earns incentive income from such funds.
In February 2009, one of the private equity Fortress Funds issued notes in the amount of $80 million. These notes bear interest at 20% per annum, payable at maturity, and mature in January 2014. The notes were offered to existing investors in proportion to their ownership of the funds equity and Fortress consequently subscribed to and received $0.5 million of these notes, which are recorded as part of Fortresss investment in such fund. In addition, the Principals concurrently acquired $4.7 million of these notes.
In March 2009, one of the private equity Fortress Funds which was formed as a coinvestment fund to invest solely in GAGFAH (XETRA: GFJ), was liquidated and distributed all of its shares in GAGFAH to its investors, including Fortress. As a result, Fortress received 5.7 million shares of GAGFAH. Fortress elected to account for these shares at fair value pursuant to SFAS 159 (Note 3).
In June 2009, one of the private equity Fortress Fund portfolio companies, Eurocastle, issued convertible securities in the amount of 75 million ($105 million). These securities bear interest at 20% per annum, payable annually (but deferrable), have no stated maturity, and are convertible into common shares of Eurocastle at an initial conversion price of 0.30 per share (subject to adjustment based on the occurrence of certain capital events within Eurocastle, including the payment of dividends). The Fortress Fund which had an equity investment in Eurocastle acquired 15.4 million ($21.6 million) of these securities. Fortress acquired 1.2 million ($1.7 million) of these securities, which were recorded as part of Fortresss investment in such portfolio company. In addition, the Principals and certain employees of Fortress acquired 8.8 million ($12.3 million) and 0.2 million ($0.2 million) of these securities, respectively.
9
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Liquid Hedge Funds and Hybrid Hedge Funds
During the six months ended June 30, 2009, Fortress formed, or became the manager of, hedge funds with net asset values as follows as of June 30, 2009:
Liquid | Hybrid | |||||
Fortress |
$ | | $ | | ||
Fortresss affiliates |
| | ||||
Third party investors |
| 3,140,000 | ||||
Total NAV (A) |
$ | | $ | 3,140,000 | ||
(A) | Or other fee paying basis, as applicable. |
In the second quarter of 2009, Fortress launched its new flagship liquid hedge fund, Fortress Macro Fund. Fortress will receive management fees of between 1.5% and 2% of NAV and incentive income of between 15% and 20% of profits, based on elections made by investors in Fortress Macro Fund. Investors in Fortresss prior flagship liquid hedge, Drawbridge Global Macro Fund (DBGM), may transfer the liquid portion of their investment in that fund to Fortress Macro Fund and retain their highwater mark with respect to incentive income (no incentive income will be earned from these investors capital until losses incurred through DBGM are recovered). This fund is not considered a new fund for purposes of the above disclosure as it replaces an existing fund.
Historical redemptions during the periods, including affiliates, have been as follows:
Liquid Hedge Funds | Hybrid Hedge Funds | |||||||||||
Six Months Ended June 30, |
Redemption Notices Received |
Redemptions Paid |
Redemption Notices Received |
Redemptions Paid | ||||||||
2009 |
$ | 1,017,045 | $ | 3,427,641 | $ | 142,586 | $ | 292,884 | ||||
2008 |
$ | 207,523 | $ | 337,071 | $ | | $ | 571,375 |
The differences between notices received and redemptions paid are a result of timing (notices received prior to quarter end, paid afterwards) and the contractual agreements regarding redemptions, which in some cases allow for delayed payment.
As a result of not meeting the incentive income thresholds with respect to current investors, the incentive income from a significant portion of the capital invested in Fortresss liquid and hybrid hedge funds has been discontinued for an indeterminate period of time. Returns earned on capital from new investors continue to be incentive income eligible.
On May 5, 2009, consolidated affiliates of Fortress executed several agreements, effective June 1, 2009, to become the investment manager of certain investment funds currently managed by D.B. Zwirn & Co., L.P. (the Value Recovery Funds) and to effect other related transactions. Fortress will receive management fees from these funds equal to 1% of realized proceeds and up to 1% per annum on certain managed assets, and may receive limited incentive income if aggregate realizations exceed an agreed threshold. These funds are now included in the hybrid hedge funds segment. The Value Recovery Funds are reflected in the new fund table above based on the NAV of the funds plus the fee paying basis for certain other managed assets.
10
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
3. INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS
Investments consist primarily of investments in equity method investees and options in these investees. The investees are primarily Fortress Funds.
Investments in Equity Method Investees
Fortress holds investments in certain Fortress Funds which are recorded based on the equity method of accounting. Fortresss maximum exposure to loss with respect to these entities is generally equal to its investment plus its basis in any options received from such entities as described below, plus any receivables from such entities as described in Note 6. In addition, unconsolidated affiliates also hold ownership interests in certain of these entities. Summary financial information related to these investments is as follows:
Fortresss Investment | Fortresss Equity in Net Income (Loss) | |||||||||||||||||||||
June 30, | December 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||
Private equity funds, excluding NIH (A) |
$ | 496,358 | $ | 455,691 | $ | 28,477 | $ | (25,642 | ) | $ | (3,831 | ) | $ | (67,100 | ) | |||||||
NIH |
3,500 | 3,666 | 123 | (178 | ) | (156 | ) | 881 | ||||||||||||||
Castles (B) |
2,827 | 1,171 | N/A | N/A | N/A | N/A | ||||||||||||||||
Total private equity |
502,685 | 460,528 | 28,600 | (25,820 | ) | (3,987 | ) | (66,219 | ) | |||||||||||||
Liquid hedge funds |
14,177 | 29,338 | 957 | (412 | ) | 1,969 | 551 | |||||||||||||||
Hybrid hedge funds |
200,517 | 185,676 | 16,490 | 2,048 | 14,341 | (8,775 | ) | |||||||||||||||
Hybrid PE funds |
96,615 | 96,610 | 5,027 | (2,326 | ) | 3,499 | (1,197 | ) | ||||||||||||||
Total hybrid funds |
297,132 | 282,286 | 21,517 | (278 | ) | 17,840 | (9,972 | ) | ||||||||||||||
Other |
4,153 | 2,230 | (17 | ) | 10 | 386 | 11 | |||||||||||||||
$ | 818,147 | $ | 774,382 | $ | 51,057 | $ | (26,500 | ) | $ | 16,208 | $ | (75,629 | ) | |||||||||
(A) | Includes Fortresss $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). |
(B) | Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to SFAS 159. |
A summary of the changes in Fortresss investments in equity method investees is as follows:
Six Months Ended June 30, 2009 | |||||||||||||||||||||||||||||||
Private Equity | Liquid | Hybrid | |||||||||||||||||||||||||||||
NIH | Other Funds (A) | Castles (B) | Hedge Funds | Hedge Funds | PE Funds | Other | Total | ||||||||||||||||||||||||
Investment, beginning |
$ | 3,666 | $ | 455,691 | $ | 1,171 | $ | 29,338 | $ | 185,676 | $ | 96,610 | $ | 2,230 | $ | 774,382 | |||||||||||||||
Earnings from equity method investees |
(156 | ) | (3,831 | ) | N/A | 1,969 | 14,341 | 3,499 | 386 | 16,208 | |||||||||||||||||||||
Other comprehensive income from equity method investees |
(10 | ) | | N/A | | | (2,544 | ) | | (2,554 | ) | ||||||||||||||||||||
Contributions to equity method investees |
| 29,104 | 1,664 | 5,881 | 500 | 9,881 | 1,603 | 48,633 | |||||||||||||||||||||||
Distributions of earnings from equity method investees |
| | N/A | (724 | ) | | (27 | ) | (20 | ) | (771 | ) | |||||||||||||||||||
Distributions of capital from equity method investees |
| (2,300 | ) | N/A | (22,287 | ) | | (10,804 | ) | (46 | ) | (35,437 | ) | ||||||||||||||||||
Total distributions from equity method investees |
| (2,300 | ) | N/A | (23,011 | ) | | (10,831 | ) | (66 | ) | (36,208 | ) | ||||||||||||||||||
Mark to fair value - during period (C) |
N/A | 16,530 | (35 | ) | N/A | N/A | N/A | N/A | 16,495 | ||||||||||||||||||||||
Translation adjustment |
| 1,164 | 27 | | | | | 1,191 | |||||||||||||||||||||||
Investment, ending |
$ | 3,500 | $ | 496,358 | $ | 2,827 | $ | 14,177 | $ | 200,517 | $ | 96,615 | $ | 4,153 | $ | 818,147 | |||||||||||||||
Ending balance of undistributed earnings |
$ | 899 | $ | 185 | N/A | $ | 156 | $ | 54 | 4,020 | $ | 366 | $ | 5,680 | |||||||||||||||||
(A) | Includes Fortresss $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). |
(B) | Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to SFAS 159. |
(C) | Recorded to Other Investments Net Unrealized Gains (Losses) from Affiliate Investments. |
11
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
The ownership percentages presented in the following tables are reflective of the ownership interests held as of the end of the respective periods. For tables which include more than one Fortress Fund, the ownership percentages are based on a weighted average by total equity of the funds as of period end.
Private Equity Funds excluding NIH | Newcastle Investment Holdings LLC (NIH) |
|||||||||||||||
June 30, 2009 |
December 31, 2008 |
June 30, 2009 |
December 31, 2008 |
|||||||||||||
Assets |
$ | 10,265,746 | $ | 9,362,237 | $ | 268,419 | $ | 278,161 | ||||||||
Liabilities |
(900,313 | ) | (1,058,392 | ) | (209,141 | ) | (215,416 | ) | ||||||||
Equity |
$ | 9,365,433 | $ | 8,303,845 | $ | 59,278 | $ | 62,745 | ||||||||
Fortresss Investment (A) |
$ | 496,358 | $ | 455,691 | $ | 3,500 | $ | 3,666 | ||||||||
Ownership (B) |
5.3 | % | 5.5 | % | 4.8 | % | 4.8 | % | ||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues and gains (losses) on investments |
$ | 824,989 | $ | (2,125,464 | ) | $ | 5,630 | $ | 33,385 | |||||||
Expenses |
(130,114 | ) | (202,808 | ) | (8,573 | ) | (14,225 | ) | ||||||||
Net Income (Loss) |
$ | 694,875 | $ | (2,328,272 | ) | $ | (2,943 | ) | $ | 19,160 | ||||||
Fortresss equity in net income (loss) |
$ | (3,831 | ) | $ | (67,100 | ) | $ | (156 | ) | $ | 881 | |||||
(A) | Includes Fortresss $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). GAGFAHs summary financial information is not included in this table. |
(B) | Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. |
Liquid Hedge Funds | Hybrid Hedge Funds | Hybrid PE Funds (B) | ||||||||||||||||||||||
June 30, 2009 |
December 31, 2008 |
June 30, 2009 |
December 31, 2008 |
June 30, 2009 |
December 31, 2008 |
|||||||||||||||||||
Assets |
$ | 10,172,131 | $ | 7,819,859 | $ | 10,911,466 | $ | 10,803,738 | $ | 5,748,878 | $ | 4,103,809 | ||||||||||||
Liabilities |
(5,587,829 | ) | (540,204 | ) | (3,748,399 | ) | (4,407,170 | ) | (2,399,104 | ) | (1,517,607 | ) | ||||||||||||
Minority interest |
| | (22,889 | ) | (29,922 | ) | | | ||||||||||||||||
Equity |
$ | 4,584,302 | $ | 7,279,655 | $ | 7,140,178 | $ | 6,366,646 | $ | 3,349,774 | $ | 2,586,202 | ||||||||||||
Fortresss Investment |
$ | 14,177 | $ | 29,338 | $ | 200,517 | $ | 185,676 | $ | 96,615 | $ | 96,610 | ||||||||||||
Ownership (A) |
0.3 | % | 0.4 | % | 2.8 | % | 2.9 | % | 2.9 | % | 3.7 | % | ||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Revenues and gains (losses) on investments |
$ | 482,313 | $ | 161,368 | $ | 732,268 | $ | 7,427 | $ | 729,199 | $ | (516 | ) | |||||||||||
Expenses |
(91,392 | ) | (337,725 | ) | (143,270 | ) | (207,400 | ) | (65,007 | ) | (17,745 | ) | ||||||||||||
Net Income (Loss) |
$ | 390,921 | $ | (176,357 | ) | $ | 588,998 | $ | (199,973 | ) | $ | 664,192 | $ | (18,261 | ) | |||||||||
Fortresss equity in net income (loss) |
$ | 1,969 | $ | 551 | $ | 14,341 | $ | (8,775 | ) | $ | 3,499 | $ | (1,197 | ) | ||||||||||
(A) | Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. |
(B) | Includes one entity which is recorded on a one quarter lag (i.e. the balances reflected for this entity are for the periods ended March 31, 2009 and 2008, respectively). It is recorded on a lag because it is a German entity and does not provide financial reports under U.S. GAAP within the reporting timeframe necessary for U.S. public entities. |
Investments in Variable Interest Entities
Fortress is not considered the primary beneficiary of, and therefore does not consolidate, any of the variable interest entities in which it holds an interest. No reconsideration events occurred during the six months ended June 30, 2009 which caused a change in Fortresss accounting.
12
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
The following table presents information as of June 30, 2009 regarding entities formed during the six months ended June 30, 2009 that were determined to be VIEs in which Fortress holds a variable interest. The amounts presented below are included in, and not in addition to, the equity method investment tables above.
Fortress is not Primary Beneficiary | |||||||||||
Business Segment |
Gross Assets | Financial Obligations (A) | Fortress Investment (B) | Notes | |||||||
Hybrid PE Funds |
$ | 106,377 | $ | | $ | 1,344 | (C) (D) | ||||
Liquid Hedge Funds |
$ | 6,624,559 | $ | 4,787,834 | $ | 5,086 | (C) (D) | ||||
Hybrid Hedge Funds |
$ | 823,426 | $ | 598,297 | $ | 458 | (D) (E) |
(A) | Represents financial obligations at the fund level, which are not recourse to Fortresss general credit. Financial obligations include financial borrowings, derivative liabilities and short securities. In many cases, these funds have additional debt within unconsolidated subsidiaries. Of the financial obligations represented herein, $598.3 million represent financial borrowings which have a weighted average maturity of 3.7 years for hybrid hedge funds. |
(B) | Represents Fortresss maximum exposure to loss with respect to these entities, which includes direct and indirect investments in the funds. In addition to the table above, Fortress is exposed to potential changes in cash flow and revenues attributable to the management fees and/or incentive income Fortress earns from these entities. |
(C) | Fortress is not the primary beneficiary of these entities, which represent master funds, because the related feeder funds (which are not consolidated) are more closely associated with these funds than Fortress based on both a quantitative and qualitative analysis. These funds were formed for the sole purpose of acting as investment vehicles for the related feeder funds. |
(D) | Fortresss investment includes $3.5 million and $0.5 million of management fees receivable from the liquid hedge funds and hybrid hedge funds, respectively. Fortresss investment also includes $0.3 million and $1.5 million of other receivables from the hybrid PE funds and liquid hedge funds, respectively. |
(E) | Fortress is not the primary beneficiary of these entities, which represent collateralized loan obligation (CLO) structures whose equity is owned by one of the Fortress hybrid hedge funds, because the related funds (which are not consolidated) are more closely associated with the CLOs than Fortress based on both a quantitative and qualitative analysis. |
Fair Value of Financial Instruments
The following table presents information regarding Fortresss financial instruments which are recorded at fair value:
Fair Value | Valuation Method | |||||||
June 30, 2009 | December 31, 2008 | |||||||
Assets - Carried at Fair Value |
||||||||
Newcastle, Eurocastle and GAGFAH common shares |
$ | 48,769 | $ | 1,171 | Level 1 - Quoted prices in active markets for identical assets | |||
Eurocastle convertible debt |
$ | 1,684 | $ | | Level 2 - Transaction completed at quarter end at market value | |||
Newcastle and Eurocastle options |
$ | 116 | $ | 39 | Level 2 - Lattice-based option valuation models using significant observable inputs |
4. DEBT OBLIGATIONS
The following table presents summarized information regarding Fortresss debt obligations:
June 30, 2009 | |||||||||||||||
Face Amount and | Weighted | Weighted | |||||||||||||
Carrying Value | Contractual | Final | Average | Average | |||||||||||
Debt Obligation | June 30, 2009 |
December 31, 2008 |
Interest |
Stated Maturity |
Funding Cost (A) |
Maturity (Years) | |||||||||
Credit agreement (B) |
|||||||||||||||
Revolving debt (C) |
$ | | $ | 104,041 | LIBOR + 2.50%(D) | May 2012 | | | |||||||
Term loan |
350,000 | 350,000 | LIBOR + 2.50% | May 2012 | 4.14 | % | 1.86 | ||||||||
Delayed term loan (C) |
89,750 | 275,000 | LIBOR + 2.50% | May 2012 | 3.39 | % | 0.40 | ||||||||
Total |
$ | 439,750 | $ | 729,041 | 3.99 | % | 1.56 | ||||||||
(A) | The weighted average funding cost is calculated based on the contractual interest rate (utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing costs. The most recently reset LIBOR rate was 0.31%. |
(B) | Collateralized by substantially all of Fortress Operating Groups assets as well as Fortress Operating Groups rights to fees from the Fortress Funds and its equity interests therein. |
(C) | Approximately $65.5 million was undrawn on the revolving debt facility as of June 30, 2009. The revolving debt facility includes a $25 million letter of credit subfacility of which $9.5 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2 million (including $0.9 million of the outstanding letters of credit) of the $75 million revolving credit facility, has filed for bankruptcy protection, did not fund its pro rata portion of the last borrowing under this facility, and it is reasonably possible that it will not fund its portion of the commitments. As a result, $59.3 million of the undrawn amount was available. |
(D) | Subject to unused commitment fees of 0.50% per annum. |
13
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
On March 12 and March 13, 2009, Fortress entered into amendments to its credit agreement. The amendments, among other things: (i) modified the financial covenants by (a) amending the amount of required management fee earning assets to $22 billion as of the end of each fiscal quarter through December 31, 2009 and $20 billion as of the end of each fiscal quarter thereafter; (b) reducing the amount of investment assets required as of any point in time to an amount equal to the term loans and revolving loans (including outstanding letters of credit) then outstanding; (c) changing the required Consolidated Leverage Ratio to 3.5 to 1.0 for the remainder of the term of the credit agreement; (ii) increased the rate on LIBOR loans to LIBOR + 2.50 (and Base Rate loans to the prime rate plus 1.50%); (iii) reduced the revolving credit facility commitments to $75 million; (iv) established an annual requirement, beginning in 2010, that outstanding loans be prepaid in an amount equal to 75% of Free Cash Flow (as defined in the agreement) generated during the previous year; (v) increased the amount of Fortresss scheduled amortization payments (the amortization schedule now requires the following payments: $50 million in July 2009, $25 million in each of October 2009 and January, April, July and October 2010, and $75 million in January 2011); (vi) established a requirement that 50% of the net proceeds from any equity issuance by the Fortress Operating Group be applied to prepay outstanding term loans; (vii) reduced the amount of certain types of distributions Fortress can make to equity holders of the Fortress Operating Group and, in turn, Fortresss Class A shareholders, and (viii) provided that the dissolution or termination of specified material funds would not constitute an event of default. In connection with the amendment, Fortress prepaid $75 million of outstanding term loans and $50 million of outstanding revolving facility loans.
On June 11, 2009, Fortress entered into an amendment to its credit agreement. This amendment, among other things, (i) allows Fortress to repurchase outstanding loans made under the credit agreement subject to certain conditions, (ii) permits Fortress to make investments in Fortress Funds in any amount it deems appropriate, provided that investments in Fortress Funds created after June 11, 2009 in excess of 1.5% of such Funds aggregate called capital may not be deducted from Free Cash Flow (as defined in the credit agreement), (iii) excludes Managed Accounts (as defined in the credit agreement) from the definition of Material Fortress Funds, (iv) expands the term Permitted Fund Termination to include the termination, dissolution, liquidation or windup of a Fortress Fund either (a) after the last asset or investment is sold in the ordinary course of business or (b) after the date of dissolution as stated in the applicable fund document, and (v) revises the financial covenants by (a) reducing the percentage of Free Cash Flow that must be applied to prepay outstanding term loans from 75% to 50% if, on the applicable measurement dates, the amount of outstanding commitments and loans does not exceed $315 million, the amount of outstanding loans does not exceed $300 million and the Consolidated Leverage Ratio (as calculated according to the terms of the Credit Agreement) does not exceed 2.0 to 1.0, and (b) increasing the amount of restricted payments that can be made, with such increase specified according to formulas set forth in the Credit Agreement.
In connection with the repayment of a portion of the term loan from proceeds of our May 2009 capital raise (Note 1), $1.6 million of deferred loan coasts were written off to interest expense.
To managements knowledge, there have not been any market transactions in Fortresss debt obligations. However, management believes the fair value of this debt was between 75% and 80% of face value at June 30, 2009.
Fortress was in compliance with all of its debt covenants as of June 30, 2009. The following table sets forth the financial covenant requirements as of June 30, 2009 (dollars in millions).
Requirement | Actual | |||||
AUM |
>$ | 22,000 | $ | 31,041 | ||
Consolidated Leverage Ratio |
< | 3.50 | 1.50 | |||
Required Investment Assets |
>$ | 449 | $ | 790 | ||
Fortress Fund Investments |
>$ | 180 | $ | 473 | ||
Total Investments |
>$ | 270 | $ | 605 |
5. INCOME TAXES AND TAX RELATED PAYMENTS
For the six months ended June 30, 2009, an estimated annual effective tax rate of 1.51% was used to compute the tax provision. Fortress incurred a loss before income taxes for financial reporting purposes, after deducting the compensation expense arising from the Principals forfeiture agreement. However, this compensation expense is not deductible for income tax purposes. Also, a portion of Fortresss income is not subject to U.S. federal income tax, but is allocated directly to Fortresss shareholders.
14
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
The provision for income taxes consists of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Current | ||||||||||||||||
Federal income tax |
$ | (196 | ) | $ | (660 | ) | $ | 619 | $ | 1,994 | ||||||
Foreign income tax |
580 | 562 | 992 | 1,199 | ||||||||||||
State and local income tax |
1,709 | 1,862 | 3,834 | 5,544 | ||||||||||||
2,093 | 1,764 | 5,445 | 8,737 | |||||||||||||
Deferred | ||||||||||||||||
Federal income tax expense (benefit) |
(1,752 | ) | (1,311 | ) | (3,271 | ) | (20 | ) | ||||||||
Foreign income tax expense (benefit) |
443 | 22 | 347 | 180 | ||||||||||||
State and local income tax expense (benefit) |
(2,092 | ) | (2,424 | ) | (4,236 | ) | (3,594 | ) | ||||||||
(3,401 | ) | (3,713 | ) | (7,160 | ) | (3,434 | ) | |||||||||
Total expense (benefit) |
$ | (1,308 | ) | $ | (1,949 | ) | $ | (1,715 | ) | $ | 5,303 | |||||
The tax effects of temporary differences have resulted in deferred income tax assets and liabilities as follows:
June 30, 2009 | December 31, 2008 | |||||||
Total deferred tax assets |
$ | 531,249 | $ | 504,017 | ||||
Valuation allowance |
(101,455 | ) | (95,951 | ) | ||||
Net deferred tax assets |
$ | 429,794 | $ | 408,066 | ||||
Total deferred tax liabilities (A) |
$ | 525 | $ | 592 | ||||
(A) | Included in Other Liabilities |
The equity offering during the second quarter increased FIG Corps ownership percentage in the underlying Fortress Operating Group entities. As a result of the increased ownership, the deferred tax asset was increased by $22.8 million with an offsetting increase of $8.3 million to the valuation allowance. The establishment of the net deferred tax asset of $14.5 million increased additional paid-in capital.
For the six months ended June 30, 2009, a deferred income tax provision of $0.18 million was credited to other comprehensive income, primarily related to the equity method investees. A current income tax benefit of $0.30 million was credited to additional paid in capital, related to (i) dividend equivalent payments on RSUs (Note 7), and (ii) distributions to Fortress Operating Group restricted partnership unit holders (Note 7), which are currently deductible for income tax purposes.
Tax Receivable Agreement
Although the tax receivable agreement payments are calculated based on annual tax savings, for the six months ended June 30, 2009, the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were estimated to be $7.8 million.
6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES
Affiliate Receivables and Payables
Due from affiliates was comprised of the following:
Private Equity | Hybrid | ||||||||||||||||||||
Funds | Castles | Liquid Hedge Funds |
Hedge Funds |
PE Funds | Other | Total | |||||||||||||||
June 30, 2009 | |||||||||||||||||||||
Management fees and incentive income |
$ | 29,235 | $ | 4,068 | $ | 3,625 | $ | 2,208 | $ | 8,280 | $ | | $ | 47,416 | |||||||
Expense reimbursements |
6,613 | 4,765 | 2,618 | 4,399 | 2,965 | | 21,360 | ||||||||||||||
Dividends and distributions |
| | | | | | | ||||||||||||||
Other |
172 | | | | 539 | 1,222 | 1,933 | ||||||||||||||
Total |
$ | 36,020 | $ | 8,833 | $ | 6,243 | $ | 6,607 | $ | 11,784 | $ | 1,222 | $ | 70,709 | |||||||
15
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Private Equity | Hybrid | ||||||||||||||||||||
Funds | Castles | Liquid Hedge Funds |
Hedge Funds |
PE Funds | Other | Total | |||||||||||||||
December 31, 2008 | |||||||||||||||||||||
Management fees and incentive income |
$ | 7,833 | $ | 4,094 | $ | 329 | $ | 1,285 | $ | 6,907 | $ | | $ | 20,448 | |||||||
Expense reimbursements |
6,289 | 2,734 | 1,211 | 2,115 | 3,536 | | 15,885 | ||||||||||||||
Dividends and distributions |
| 89 | | | | | 89 | ||||||||||||||
Other |
1 | | | | | 2,081 | 2,082 | ||||||||||||||
Total |
$ | 14,123 | $ | 6,917 | $ | 1,540 | $ | 3,400 | $ | 10,443 | $ | 2,081 | $ | 38,504 | |||||||
Due to affiliates was comprised of the following:
June 30, 2009 | December 31, 2008 | |||||
Principals |
||||||
- Tax receivable agreement - Note 5 |
$ | 321,237 | $ | 338,649 | ||
- Distributions payable on Fortress Operating Group units |
| | ||||
Other |
8,957 | 7,616 | ||||
$ | 330,194 | $ | 346,265 | |||
As of June 30, 2009, Due from Affiliates included $27.9 million of past due management fees from, and $2.9 million of expenses funded on behalf of, certain Fortress Funds. Although such funds are currently experiencing liquidity issues, Fortress believes these fees will ultimately be collectable as the NAVs of the funds exceed the amounts owed.
Other Related Party Transactions
For the six months ended June 30, 2009 and 2008, Other Revenues included approximately $3.3 million and $1.0 million, respectively, of revenues from affiliates.
Fortress has entered into cost sharing arrangements with the Fortress Funds, including market data services and subleases of certain of its office space. Expenses borne by the Fortress Funds under these agreements are generally paid directly by those entities (i.e. they are generally not paid by Fortress and reimbursed). For the six months ended June 30, 2009 and 2008, these expenses, mainly related to subscriptions to market data services, approximated $8.5 million and $9.4 million, respectively.
In February 2007, we entered into an agreement with two employees who were departing from Fortress to form their own investment management company. We received a minority ownership interest in the management company, which receives management fees and incentive income from all funds formed by such company, and as part of the transaction a Fortress Fund received certain rights to invest at discounted fee rates in the fund being formed by the departing employees, and committed to invest $200 million in that fund subject to certain conditions (of which that Fortress Fund has invested approximately $100 million as of April 2009). In December 2008, the Fortress Fund agreed to eliminate its $100 million unfunded commitment and provide that fund with a $25 million revolving credit facility.
In March 2009, a private equity Fortress Fund repaid in full the remaining $14.4 million of non-dividend bearing preferred equity it had issued to three of the Principals.
In April 2009, five employees terminated their employment with Fortresss private equity funds operating subsidiary in order to become employees of GAGFAH, one of Fortresss private equity portfolio companies. These employees had received RSUs from Fortress. Fortress has modified these awards, valued at approximately $0.9 million in the aggregate, such that each employees vesting continues on the original vesting schedule as long as such employee remains employed by GAGFAH.
In April 2009, Fortress advanced $0.7 million to one of its senior employees who is not an officer. This advance bears interest at LIBOR+3% and is payable on the earlier of (i) April 6, 2012, or (ii) the termination of employment.
In May 2009, in connection with the launch of a new Fortress Fund in Asia, Fortress entered into an agreement under which Nomura acted as a placement agent and assisted the fund in raising investor capital. Nomura raised a total of $95.5 million in committed capital for the fund and receives, from Fortress, a fee equal to 1% of all such capital.
16
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Principals and Others Interests in Consolidated Subsidiaries
These amounts relate to equity interests in Fortresss consolidated, but not wholly owned, subsidiaries, which are held by the Principals, employees and others.
This balance sheet caption was comprised of the following:
June 30, 2009 | December 31, 2008 | |||||
Principals Fortress Operating Group units |
$ | 240,388 | $ | 47,305 | ||
Employee interests in majority owned and controlled fund advisor and general partner entities |
29,562 | 23,981 | ||||
Other |
837 | 176 | ||||
Total |
$ | 270,787 | $ | 71,462 | ||
This statement of operations caption was comprised of shares of consolidated net income (loss) related to the following, on a pre-tax basis:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Principals Fortress Operating Group units |
$ | (128,926 | ) | $ | (194,714 | ) | $ | (348,549 | ) | $ | (403,590 | ) | ||||
Employee interests in majority owned and controlled fund advisor and general partner entities |
2,183 | 303 | 2,211 | 442 | ||||||||||||
Other |
5 | | 78 | 468 | ||||||||||||
Total |
$ | (126,738 | ) | $ | (194,411 | ) | $ | (346,260 | ) | $ | (402,680 | ) | ||||
The purpose of this schedule is to disclose the effects of changes in Fortresss ownership interest in Fortress Operating Group on Fortresss equity:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) attributable to Fortress |
$ | (44,592 | ) | $ | (55,556 | ) | $ | (111,751 | ) | $ | (124,473 | ) | ||||
Transfers (to) from the Principals and Others Interests: |
||||||||||||||||
Decrease in Fortresss paid-in-capital for Purchase of 46,000,000 Fortress Operating Group Units |
(144,572 | ) | | (144,572 | ) | | ||||||||||
Change from net income (loss) attributable to Fortress and transfers (to) from Principals and Others Interests |
$ | (189,164 | ) | $ | (55,556 | ) | $ | (256,323 | ) | $ | (124,473 | ) | ||||
As a result of the May 2009 capital raise (Note 1), the Principals recorded interests in FOG were increased by $151.3 million (the capital raise was accretive to the Principals interests).
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 clarifies the classification of non-controlling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such non-controlling interests. SFAS 160 applies to reporting periods beginning after December 15, 2008. SFAS 160 had the following effects on Fortresss financial statements: (i) reclassification of Principals and Others Interests in Equity of Consolidated Subsidiaries from the mezzanine section of the balance sheet (between liabilities and equity) to equity, (ii) removal of Principals and Others Interests in Income of Consolidated Subsidiaries from the calculation of Net Income (Loss) on the statement of operations, and disclosure thereof below Net Income (Loss), and (iii) with respect to potential future transactions in which Fortress could acquire Fortress Operating Group units from the Principals pursuant to their exchange (along with Class B shares) for Class A shares (or otherwise), these transactions would be accounted for as equity transactions rather than as a step acquisition of Fortress Operating Group (as would be required under prior accounting principles). There is no effect from adoption of SFAS 160 on the equity which pertains to Class A shareholders, or net income (loss) allocable to Class A shareholders, or on Fortresss liquidity.
17
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
7. EQUITY-BASED AND OTHER COMPENSATION
Fortresss total compensation and benefits expense, excluding Principals Agreement compensation, is comprised of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Equity-based compensation, per below |
$ | 52,779 | $ | 52,972 | $ | 105,823 | $ | 81,397 | ||||
Profit-sharing expense, per below |
8,245 | 20,171 | 11,849 | 41,989 | ||||||||
Discretionary bonuses |
23,290 | 29,599 | 46,148 | 74,056 | ||||||||
Other payroll, taxes and benefits |
29,142 | 34,718 | 58,872 | 67,037 | ||||||||
$ | 113,456 | $ | 137,460 | $ | 222,692 | $ | 264,479 | |||||
Equity-Based Compensation
The following tables set forth information regarding equity-based compensation activities.
RSUs | Restricted Shares | RPUs | ||||||||||||||||||||
Employees | Non-Employees | Issued to Directors | Employees | |||||||||||||||||||
Number | Value (A) | Number | Value (A) | Number | Value (A) | Number | Value (A) | |||||||||||||||
Outstanding as of December 31, 2008 |
40,865,316 | $ | 16.53 | 8,600,867 | $ | 14.84 | 109,174 | $ | 17.76 | 31,000,000 | $ | 13.75 | ||||||||||
Issued |
| | 352,162 | 2.58 | 37,662 | 2.52 | | | ||||||||||||||
Converted |
(3,857 | ) | 14.54 | | | | | | | |||||||||||||
Forfeited |
(1,031,094 | ) | 13.37 | (1,117,674 | ) | 14.70 | | | | | ||||||||||||
Outstanding as of June 30, 2009 (B) |
39,830,365 | $ | 16.61 | 7,835,355 | $ | 14.31 | 146,836 | $ | 13.85 | 31,000,000 | $ | 13.75 | ||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Expense incurred (B) |
||||||||||||
Employee RSUs |
$ | 24,842 | $ | 27,337 | $ | 49,265 | $ | 53,909 | ||||
Non-Employee RSUs |
3,509 | 5,421 | 7,970 | 5,411 | ||||||||
Restricted Shares |
149 | 150 | 297 | 299 | ||||||||
LTIP |
1,714 | 1,715 | 3,410 | 3,429 | ||||||||
RPUs |
22,565 | 18,349 | 44,881 | 18,349 | ||||||||
Total equity-based compensation expense |
$ | 52,779 | $ | 52,972 | $ | 105,823 | $ | 81,397 | ||||
(A) | Represents the weighted average grant date estimated fair value per share or unit. The weighted average estimated fair value per unit as of June 30, 2009 for awards granted to non-employees was $3.42, which is equal to the closing trading price per share of Fortresss Class A shares on such date. |
(B) | In future periods, Fortress will recognize compensation expense on its non-vested equity based awards of $746.0 million, with a weighted average recognition period of 3.61 years. This does not include amounts related to the Principals Agreement. |
When Fortress records equity-based compensation expense, including that related to the Principals Agreement, it records a corresponding increase in capital.
Profit Sharing Expense
Recognized profit sharing compensation expense is summarized as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Private equity funds (A) |
$ | | $ | 1,146 | $ | (15 | ) | $ | 2,544 | ||||
Castles (A) |
| 1,029 | (137 | ) | 2,157 | ||||||||
Liquid hedge funds |
2,886 | 16,119 | 5,450 | 33,117 | |||||||||
Hybrid hedge funds |
1,765 | 1,651 | 2,957 | 3,706 | |||||||||
Hybrid private equity funds |
3,594 | | 3,594 | | |||||||||
Other |
| 226 | | 465 | |||||||||
Total |
$ | 8,245 | $ | 20,171 | $ | 11,849 | $ | 41,989 | |||||
(A) | Negative amounts reflect the reversal of previously accrued profit sharing expense resulting from the determination that this expense is no longer probable of being incurred. |
18
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
8. EARNINGS PER SHARE AND DISTRIBUTIONS
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Weighted average shares outstanding |
||||||||||||||||
Class A shares outstanding |
114,810,756 | 114,810,756 | 104,711,660 | 104,711,660 | ||||||||||||
Fully vested restricted Class A share units with dividend equivalent rights |
631,260 | 631,260 | 631,260 | 631,260 | ||||||||||||
Fully vested restricted Class A shares |
105,728 | 105,728 | 104,404 | 104,404 | ||||||||||||
Fortress Operating Group units exchangeable into Fortress Investment |
||||||||||||||||
Group LLC Class A shares (1) |
| 312,071,550 | | 312,071,550 | ||||||||||||
Class A restricted shares and Class A restricted share units granted to employees and directors (eligible for dividend and dividend equivalent payments) (2) |
| | | | ||||||||||||
Class A restricted share units granted to employees (not eligible for dividend and dividend equivalent payments) (3) |
| | | | ||||||||||||
Total weighted average shares outstanding |
115,547,744 | 427,619,294 | 105,447,324 | 417,518,874 | ||||||||||||
Basic and diluted net income (loss) per Class A share |
||||||||||||||||
Net income (loss) |
$ | (44,592 | ) | $ | (44,592 | ) | $ | (111,751 | ) | $ | (111,751 | ) | ||||
Dilution in earnings due to RPUs treated as a participating security of Fortress Operating Group (4) |
(2,052 | ) | (2,052 | ) | (3,729 | ) | (3,729 | ) | ||||||||
Dividend equivalents declared on non-vested restricted Class A shares and restricted Class A share units |
| | | | ||||||||||||
Add back Principals and others interests in loss of Fortress Operating Group, net of assumed corporate income taxes at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1) |
| (129,046 | ) | | (345,672 | ) | ||||||||||
Net income (loss) available to Class A shareholders |
$ | (46,644 | ) | $ | (175,690 | ) | $ | (115,480 | ) | $ | (461,152 | ) | ||||
Weighted average shares outstanding |
115,547,744 | 427,619,294 | 105,447,324 | 417,518,874 | ||||||||||||
Basic and diluted net income (loss) per Class A share |
$ | (0.40 | ) | $ | (0.41 | ) | $ | (1.10 | ) | $ | (1.10 | ) | ||||
Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Weighted average shares outstanding |
||||||||||||||||
Class A shares outstanding |
94,500,351 | 94,500,351 | 94,500,351 | 94,500,351 | ||||||||||||
Fully vested restricted Class A share units with dividend equivalent rights |
394,286 | 394,286 | 394,286 | 394,286 | ||||||||||||
Fully vested restricted Class A shares |
19,040 | 19,040 | 9,520 | 9,520 | ||||||||||||
Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1) |
| 312,071,550 | | 312,071,550 | ||||||||||||
Class A restricted shares and Class A restricted share units granted to employees and directors (eligible for dividend and dividend equivalent payments) (2) |
| | | | ||||||||||||
Class A restricted share units granted to employees (not eligible for dividend and dividend equivalent payments) (3) |
| | | | ||||||||||||
Total weighted average shares outstanding |
94,913,677 | 406,985,227 | 94,904,157 | 406,975,707 | ||||||||||||
Basic and diluted net income (loss) per Class A share |
||||||||||||||||
Net income (loss) |
$ | (55,556 | ) | $ | (55,556 | ) | $ | (124,473 | ) | $ | (124,473 | ) | ||||
Dilution in earnings due to RPUs treated as a participating security of Fortress Operating Group (4) |
(2,040 | ) | (2,040 | ) | (1,987 | ) | (1,987 | ) | ||||||||
Dividend equivalents declared on non-vested restricted Class A shares and restricted Class A share units |
(1,159 | ) | (1,159 | ) | (2,276 | ) | (2,276 | ) | ||||||||
Add back Principals and others interests in loss of Fortress Operating Group, net of assumed corporate income taxes at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1) |
| (214,667 | ) | | (429,829 | ) | ||||||||||
Net income (loss) available to Class A shareholders |
$ | (58,755 | ) | $ | (273,422 | ) | $ | (128,736 | ) | $ | (558,565 | ) | ||||
Weighted average shares outstanding |
94,913,677 | 406,985,227 | 94,904,157 | 406,975,707 | ||||||||||||
Basic and diluted net income (loss) per Class A share |
$ | (0.62 | ) | $ | (0.67 | ) | $ | (1.36 | ) | $ | (1.37 | ) | ||||
(1) | The Fortress Operating Group units not held by Fortress (that is, those held by the Principals) are exchangeable into Class A shares on a one-to-one basis. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per Class A share when the effect is dilutive using the if-converted method. To the extent charges, particularly tax related charges, are incurred by the Registrant (i.e. not at the Fortress Operating Group level), the effect may be anti-dilutive. |
19
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
(2) | Restricted Class A shares granted to directors and certain restricted Class A share units granted to employees are eligible to receive dividend or dividend equivalent payments when dividends are declared and paid on Fortresss Class A shares and therefore participate fully in the results of Fortresss operations from the date they are granted. They are included in the computation of both basic and diluted earnings per Class A share using the two-class method for participating securities, except during periods of net losses. |
(3) | Certain restricted Class A share units granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities. These units are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method. As a result of the net loss incurred in the periods presented, the effect of the units on the calculation is anti-dilutive for each of the periods. The weighted average restricted Class A share units which are not entitled to receive dividend or dividend equivalent payments outstanding were: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Share Units |
24,558,303 | 27,641,251 | 24,950,597 | 27,729,198 |
(4) | Fortress Operating Group RPUs are eligible to receive partnership distribution equivalent payments when distributions are declared and paid on Fortress Operating Group units. The RPUs represent a participating security of Fortress Operating Group and the resulting dilution in Fortress Operating Group earnings available to Fortress is reflected in the computation of both basic and diluted earnings per Class A share using the method prescribed for securities issued by a subsidiary. For purposes of the computation of basic and diluted earnings per Class A share, the fully vested restricted Class A share units with dividend equivalent rights are treated as outstanding Class A shares of Fortress and as outstanding partnership units of Fortress Operating Group. |
The Class B shares have no net income (loss) per share as they do not participate in Fortresss earnings (losses) or distributions. The Class B shares have no dividend or liquidation rights. Each Class B share, along with one Fortress Operating Group unit, can be exchanged for one Class A share, subject to certain limitations. The Class B shares have voting rights on a pari passu basis with the Class A shares. The number of Class B shares outstanding did not change subsequent to the IPO.
Fortresss dividend paying shares and units were as follows:
Weighted Average | Weighted Average | |||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Class A shares (public shareholders) |
114,810,756 | 94,500,351 | 104,711,660 | 94,500,351 | ||||
Restricted Class A shares (directors) |
138,160 | 104,219 | 136,836 | 100,757 | ||||
Restricted Class A share units (employees) (A) |
631,260 | 394,286 | 631,260 | 394,286 | ||||
Restricted Class A share units (employees) (B) |
22,955,132 | 23,652,206 | 22,955,132 | 23,708,849 | ||||
Fortress Operating Group units (Principals) |
312,071,550 | 312,071,550 | 312,071,550 | 312,071,550 | ||||
Fortress Operating Group RPUs (senior employee) |
31,000,000 | 25,208,791 | 31,000,000 | 12,604,396 | ||||
Total |
481,606,858 | 455,931,403 | 471,506,438 | 443,380,189 | ||||
As of June 30, 2009 | As of December 31, 2008 | |||
Class A shares (public shareholders) |
140,504,208 | 94,500,351 | ||
Restricted Class A shares (directors) |
146,836 | 109,174 | ||
Restricted Class A share units (employees) (A) |
631,260 | 631,260 | ||
Restricted Class A share units (employees) (B) |
22,955,132 | 22,955,132 | ||
Fortress Operating Group units (Principals) |
312,071,550 | 312,071,550 | ||
Fortress Operating Group RPUs (senior employee) |
31,000,000 | 31,000,000 | ||
Total |
507,308,986 | 461,267,467 | ||
(A) | Represents fully vested restricted Class A share units which are entitled to dividend equivalent payments. |
(B) | Represents nonvested restricted Class A share units which are entitled to dividend equivalent payments. |
20
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Dividends and distributions during the six months ended June 30, 2009 are summarized as follows:
Current Year | ||||||||||||
Declared in Prior Year, Paid Current Year |
Declared and Paid |
Declared but not yet Paid |
Total | |||||||||
Dividends on Class A Shares |
$ | | $ | | $ | | $ | | ||||
Dividend equivalents on restricted Class A share units (A) |
| | | | ||||||||
Distributions to Fortress Operating Group unit holders (Principals) (B) |
| 28,515 | | 28,515 | ||||||||
Distributions to Fortress Operating Group RPU holders (Note 7) (B) |
| 2,832 | | 2,832 | ||||||||
Total distributions |
$ | | $ | 31,347 | $ | | $ | 31,347 | ||||
(A) | A portion of these dividend equivalents, if any, related to RSUs expected to be forfeited, is included as compensation expense in the consolidated statement of operations and is therefore considered an operating cash flow. |
(B) | Fortress Operating Group made distributions to the principals and RPU holders in connection with distributions made to FIG Corp. to pay Fortresss income taxes. |
The following table summarizes our comprehensive income (loss) (net of taxes) for the six months ended June 30, 2008:
Impact to Total Fortress Shareholders Equity |
Impact to Principals and Others Interests in Equity of Consolidated Subsidiaries |
Impact to Total Equity |
||||||||||
Net income (loss) |
$ | (124,473 | ) | $ | (402,680 | ) | $ | (527,153 | ) | |||
Foreign currency translation |
439 | (344 | ) | 95 | ||||||||
Comprehensive income (loss) from equity method investees |
282 | (8 | ) | 274 | ||||||||
Total comprehensive income (loss) |
$ | (123,752 | ) | $ | (403,032 | ) | $ | (526,784 | ) | |||
9. COMMITMENTS AND CONTINGENCIES
Other than as described below, Fortresss commitments and contingencies remain materially unchanged from December 31, 2007.
Private Equity Fund and Hybrid PE Fund Capital Commitments Fortress has remaining capital commitments to certain of the Fortress Funds which aggregated $131.0 million as of June 30, 2009. These commitments can be drawn by the funds on demand.
Minimum Future Rentals Fortress is a lessee under a number of operating leases for office space.
Minimum future rent payments under these leases is as follows:
July 1, to December 31, 2009 |
$ | 9,428 | |
2010 |
18,579 | ||
2011 |
11,981 | ||
2012 |
11,338 | ||
2013 |
11,085 | ||
2014 |
10,698 | ||
Thereafter |
22,633 | ||
Total |
$ | 95,742 | |
Rent expense recognized on a straight-line basis during the six months ended June 30, 2009 and 2008 was $9.8 million and $9.3 million, respectively, and during the three months ended June 30, 2009 and 2008 was $4.9 million and $4.5 million, respectively, and was included in General, Administrative and Other Expense.
Litigation Fortress is, from time to time, a defendant in legal actions from transactions conducted in the ordinary course of business. Management, after consultation with legal counsel, believes the ultimate liability arising from such actions that existed as of June 30, 2009, if any, will not materially affect Fortresss results of operations, liquidity or financial position.
21
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
10. SEGMENT REPORTING
Fortress conducts its management and investment business through the following six primary segments: (i) private equity funds, (ii) Castles, (iii) liquid hedge funds, (iv) hybrid hedge funds, (v) hybrid private equity (PE) funds, and (vi) principal investments in these funds as well as cash that is available to be invested. Due to the increased significance of the hybrid PE funds segment, it has been disaggregated from the private equity fund segment in this period and for all periods presented.
Distributable earnings is a measure of operating performance used by management in analyzing its segment and overall results. For the existing Fortress businesses it is equal to net income (loss) attributable to Fortresss Class A shareholders adjusted as follows:
Incentive Income
(i) a. | for Fortress Funds which are private equity funds and hybrid PE funds, adding (a) incentive income paid (or declared as a distribution) to Fortress, less an applicable reserve for potential future clawbacks if the likelihood of a clawback is deemed greater than remote by Fortresss chief operating decision maker as described below (net of the reversal of any prior such reserves that are no longer deemed necessary), minus (b) incentive income recorded in accordance with GAAP, |
b. | for other Fortress Funds, at interim periods, adding (a) incentive income on an accrual basis as if the incentive income from these funds were payable on a quarterly basis, minus (b) incentive income recorded in accordance with GAAP, |
Other Income
(ii) | with respect to income from certain principal investments and certain other interests that cannot be readily transferred or redeemed: |
a. | for equity method investments in the private equity funds and hybrid PE funds as well as indirect equity method investments in hedge fund special investment accounts (which generally have investment profiles similar to private equity funds), treating these investments as cost basis investments by adding (a) realizations of income, primarily dividends, from these funds, minus (b) impairment with respect to these funds, if necessary, minus (c) equity method earnings (or losses) recorded in accordance with GAAP, |
b. | subtracting gains (or adding losses) on stock options held in the Castles, |
c. | subtracting unrealized gains (or adding unrealized losses) from consolidated private equity funds and hybrid PE funds, |
d. | subtracting unrealized gains (or adding unrealized losses) on direct investments in publicly traded portfolio companies and in the Castles, |
(iii) | adding (a) proceeds from the sale of shares received pursuant to the exercise of stock options in certain of the Castles, in excess of their strike price, minus (b) management fee income recorded in accordance with GAAP in connection with the receipt of these options, |
Expenses
(iv) | adding or subtracting, as necessary, the employee profit sharing in incentive income described in (i) above to match the timing of the expense with the revenue, |
(v) | adding back equity-based compensation expense (including Castle options assigned to employees, RSUs and RPUs (including the portion of related dividend and distribution equivalents recorded as compensation expense), restricted shares and the LTIP), |
(vi) | adding back compensation expense recorded in connection with the forfeiture arrangements entered into among the principals, |
(vii) | adding the income (or subtracting the loss) allocable to the interests in consolidated subsidiaries attributable to Fortress Operating Group units, and |
(viii) | adding back income tax benefit or expense and any expense recorded in connection with the tax receivable agreement (Note 5). |
Total segment assets are equal to total GAAP assets adjusted for:
(i) | the difference between the GAAP carrying amount of equity method investments and their carrying amount for segment reporting purposes, which is generally fair value for publicly traded investments and cost for nonpublic investments, |
(ii) | employee portions of investments, which are reported gross for GAAP purposes (as assets offset by Principals and others interests in equity of consolidated subsidiaries) but net for segment reporting purposes, and |
(iii) | the difference between the GAAP carrying amount for options owned in certain of the Castles and their carrying amount for segment reporting purposes, which is intrinsic value. |
22
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Distributable Earnings Impairment
Investment Impairment for DE purposes
Fortress had the following direct and indirect investments in private equity funds, Castles and hybrid PE funds as of June 30, 2009:
Fund |
Fortress Share of NAV |
Fortress Current Cost Basis (A) |
Deficit | % Below Current Cost Basis (A) |
% Below Original Cost Basis (B) |
Periods in Deficit |
Six Months Ended Jun 30, 2009 DE Impairment Recorded |
Notes | |||||||||||||||
Main Funds |
|||||||||||||||||||||||
Fund I |
$ | 190 | $ | | N/A | N/A | N/A | N/A | $ | | |||||||||||||
Fund II |
3,829 | 2,317 | N/A | N/A | N/A | N/A | (248 | ) | |||||||||||||||
Fund III and Fund III CO |
7,166 | 5,286 | N/A | N/A | (37%) | 5 Quarters | (232 | ) | |||||||||||||||
Fund IV and Fund IV CO |
109,891 | 98,747 | N/A | N/A | (28%) | 7 Quarters | (6,184 | ) | |||||||||||||||
Fund V and Fund V CO |
50,769 | 34,926 | N/A | N/A | (56%) | 7 Quarters | (5,553 | ) | |||||||||||||||
Mortgage Opportunities Funds |
3,506 | 2,947 | N/A | N/A | (62%) | 5 Quarters | (518 | ) | |||||||||||||||
Long Dated Value Funds |
20,372 | 17,792 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Real Assets Funds |
16,881 | 12,581 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Credit Opportunities Funds |
19,982 | 13,353 | N/A | N/A | (1%) | 5 Quarters | (562 | ) | |||||||||||||||
Japan Opportunity Fund |
1,056 | 1,037 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Yama 1 and 2 GK |
2,081 | 2,042 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Single Investment Funds and Investments (combined) |
|||||||||||||||||||||||
GAGFAH (XETRA: GFJ) |
56,264 | 32,578 | N/A | N/A | (43%) | 5 Quarters | (6,588 | ) | |||||||||||||||
Brookdale (NYSE: BKD) |
14,142 | 8,200 | N/A | N/A | (69%) | 7 Quarters | (749 | ) | |||||||||||||||
Aircastle (NYSE: ACT) |
487 | 366 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Private investment #1 |
43,751 | 43,115 | N/A | N/A | (34%) | 5 Quarters | (10,002 | ) | |||||||||||||||
Private investment #2 |
440 | 590 | (150 | ) | (25%) | (95%) | 6 Quarters | (683 | ) | ||||||||||||||
Private investment #3 |
232,989 | 275,708 | (42,719 | ) | (15%) | (15%) | 7 Quarters | | (C | ) | |||||||||||||
Private investment #4 |
37,025 | 31,525 | N/A | N/A | N/A | N/A | | ||||||||||||||||
Other, net |
40,542 | 42,701 | (2,159 | ) | (5%) | N/A | Various | (760 | ) | (D | ) | ||||||||||||
Castles |
|||||||||||||||||||||||
Eurocastle (EURONEXT: ECT) |
2,149 | 1,973 | N/A | N/A | (83%) | 5 Quarters | | ||||||||||||||||
Newcastle (NYSE: NCT) |
677 | 667 | N/A | N/A | (96%) | 4 Quarters | (195 | ) | |||||||||||||||
Total |
$ | 664,189 | $ | 628,451 | $ | (45,028 | ) | $ | (32,274 | ) | |||||||||||||
(A) | Current cost basis is net of any impairments taken in prior quarters but before impairment taken at June 30, 2009. |
(B) | Original cost basis is before any impairment. |
(C) | This fund is a single asset fund invested in a railroad and commercial real estate company. The net asset value of this investment is only 15% below Fortresss basis and the funds life extends to 2017. Fortress anticipates that this value will recover during the funds life and has the intent and ability to hold its investment until recovery. As a result, Fortresss CODM has determined that this decline in value does not meet the definition of other than temporary impairment at this time. |
(D) | This primarily represents indirect investments in funds through hedge fund special investment accounts, including Fortress Funds not represented individually in the table as well as funds managed by third parties. Fortresss CODM has analyzed each of these investments individually and recorded other than temporary impairment where it was deemed appropriate. |
23
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Clawback Reserve on Incentive Income for DE Purposes
Fortress had recognized incentive income for DE purposes from the following private equity funds, which are subject to contingent clawback, as of June 30, 2009:
Fund |
Incentive Income Received |
No Longer Subject to Clawback |
Subject to Clawback (A) |
Intrinsic Clawback (B) |
Employee Portion (C) |
Net Clawback |
Prior Net DE Reserves Taken (D) |
Periods in Intrinsic Clawback |
Six Months Ended June 30, 2009 Gross DE Reserve Recorded (D) |
Notes | ||||||||||||||||||||
Fund I |
$ | 308,633 | $ | 296,882 | $ | 11,751 | $ | | $ | | $ | | $ | | N/A | $ | | (E | ) | |||||||||||
Fund II |
254,688 | 113,872 | 140,816 | 14,835 | 5,494 | 9,341 | (25,842 | ) | 3 Quarters | | (F | ) | ||||||||||||||||||
Fund III |
72,483 | | 72,483 | 72,483 | 27,375 | 45,108 | (45,108 | ) | 6 Quarters | | (G | ) | ||||||||||||||||||
FRID |
16,739 | | 16,739 | 16,739 | 6,698 | 10,041 | (10,041 | ) | 8 Quarters | | (G | ) | ||||||||||||||||||
Total |
$ | 652,543 | $ | 410,754 | $ | 241,789 | $ | 104,057 | $ | 39,567 | $ | 64,490 | $ | (80,991 | ) | $ | | |||||||||||||
(A) | Includes deferred incentive income from the consolidated balance sheet plus the maximum payment under the guarantee, in both cases gross of promote related to non-fee paying investors (affiliates). |
(B) | Intrinsic clawback is the maximum amount of clawback that would be required to be repaid to the fund if the fund were liquidated at its NAV as of the reporting date. It has not been reduced for any tax related effects. |
(C) | Employees who have received profit sharing payments in connection with private equity or hybrid PE incentive income are liable to repay Fortress for their share of any clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees (or former employees). |
(D) | Net of promote related to non-fee paying investors (affiliates). |
(E) | This fund had significant unrealized gains at June 30, 2009. As a result, the CODM determined that no reserve for clawback was required. |
(F) | The net intrinsic clawback in this fund, after the employee portion, is less than previously recorded reserves. As a result, no further reserve was deemed necessary. |
(G) | The potential clawback on these funds has been fully reserved in prior quarters. |
Impairment Determination
Fortress has recorded a total of approximately $32.3 million of impairment and reserves for DE purposes on certain private equity funds and hybrid PE funds as described above for DE purposes during the six months ended June 30, 2009. Fortress expects aggregate returns on its other private equity funds and hybrid PE funds that are in an unrealized investment loss or intrinsic clawback position to ultimately exceed their carrying amount or breakeven point, as applicable. If such funds were liquidated at their June 30, 2009 NAV (although Fortress has no current intention of doing so), the result would be additional impairment losses and reserves for DE purposes of approximately $47.9 million.
Summary financial data on Fortresss segments is presented on the following pages, together with a reconciliation to revenues, assets and net income (loss) for Fortress as a whole. Fortresss investments in, and earnings (losses) from, its equity method investees by segment are presented in Note 3.
24
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
June 30, 2009 and the Six Months Then Ended
Liquid Hedge Funds |
Hybrid | Principal Investments |
Unallocated | Fortress Subtotal | ||||||||||||||||||||||
Private Equity | Hedge Funds |
PE Funds |
||||||||||||||||||||||||
Funds | Castles | |||||||||||||||||||||||||
Segment revenues |
||||||||||||||||||||||||||
Management fees |
$ | 76,515 | $ | 24,430 | $ | 42,522 | $ | 57,624 | $ | 14,435 | $ | | $ | | $ | 215,526 | ||||||||||
Incentive income |
| | 247 | 1,013 | 6,814 | | | 8,074 | ||||||||||||||||||
Segment revenues - total |
$ | 76,515 | $ | 24,430 | $ | 42,769 | $ | 58,637 | $ | 21,249 | $ | | $ | | $ | 223,600 | ||||||||||
Pre-tax distributable earnings |
$ | 56,856 | $ | 10,714 | $ | 12,706 | $ | 10,371 | $ | 6,823 | $ | (29,114 | ) | $ | (294 | ) | $ | 68,062 | ||||||||
Total segment assets |
$ | 36,020 | $ | 8,893 | $ | 6,243 | $ | 6,548 | $ | 11,784 | $ | 867,445 | $ | 507,632 | $ | 1,444,565 | ||||||||||
(A | ) |
Fortress Subtotal |
Reconciliation to GAAP |
Fortress Consolidated* |
Principals and Others |
GAAP Net Income (Loss) |
|||||||||||||||
Revenues |
$ | 223,600 | $ | 37,783 | $ | 261,383 | |||||||||||||
Pre-tax distributable earnings / net income (loss) |
$ | 68,062 | $ | (179,813 | ) | $ | (111,751 | ) | $ | (346,260 | ) | $ | (458,011 | ) | |||||
Total assets |
$ | 1,444,565 | $ | 50,735 | $ | 1,495,300 | |||||||||||||
(A) | Unallocated assets include deferred tax assets of $429.8 million. |
Six Months Ended June 30, 2008
Liquid Hedge Funds |
Hybrid | Principal Investments |
Unallocated | Fortress Subtotal | |||||||||||||||||||||
Private Equity | Hedge Funds |
PE Funds |
|||||||||||||||||||||||
Funds | Castles | ||||||||||||||||||||||||
Segment revenues |
|||||||||||||||||||||||||
Management fees |
$ | 80,143 | $ | 27,655 | $ | 110,325 | $ | 73,455 | $ | 4,187 | $ | | $ | | $ | 295,765 | |||||||||
Incentive income |
28,741 | 12 | 17,040 | 872 | | | | 46,665 | |||||||||||||||||
Segment revenues - total |
$ | 108,884 | $ | 27,667 | $ | 127,365 | $ | 74,327 | $ | 4,187 | $ | | $ | | $ | 342,430 | |||||||||
Pre-tax distributable earnings |
$ | 81,647 | $ | 8,204 | $ | 45,426 | $ | 11,279 | $ | 239 | $ | (30,656 | ) | $ | 7 | $ | 116,146 | ||||||||
Fortress Subtotal |
Reconciliation to GAAP |
Fortress Consolidated* |
Principals and Others |
GAAP Net Income (Loss) |
|||||||||||||||
Revenues |
$ | 342,430 | $ | 46,546 | $ | 388,976 | |||||||||||||
Pre-tax distributable earnings / net income (loss) |
$ | 116,146 | $ | (240,619 | ) | $ | (124,473 | ) | $ | (402,680 | ) | $ | (527,153 | ) | |||||
* | Net income (loss) presented herein represents net income (loss) attributable to Fortresss Class A shareholders. |
25
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Reconciling items between segment measures and GAAP measures:
June 30, 2009 and the Six Months then Ended |
Six Months Ended June 30, 2008 |
|||||||
Adjustments from segment revenues to GAAP revenues |
||||||||
Adjust management fees* |
$ | 325 | $ | 325 | ||||
Adjust incentive income |
(131 | ) | 9,434 | |||||
Adjust income from the receipt of options |
| | ||||||
Other revenues* |
||||||||
Adjust management fees from non-affiliates |
(1,774 | ) | (2,428 | ) | ||||
Adjust incentive income from non-affiliates |
(985 | ) | (655 | ) | ||||
Adjust other revenues (including expense reimbursements) |
40,348 | 39,870 | ||||||
37,589 | 36,787 | |||||||
Total adjustments |
$ | 37,783 | $ | 46,546 | ||||
* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings. |
| |||||||
Adjustments from pre-tax distributable earnings to GAAP net income (loss)** |
||||||||
Adjust incentive income |
||||||||
Incentive income received from private equity funds and hybrid PE funds, subject to contingent repayment |
$ | | $ | (26,077 | ) | |||
Incentive income accrued from private equity funds and hybrid PE funds, no longer subject to contingent repayment |
| 35,494 | ||||||
Incentive income received from private equity funds and hybrid PE funds, not subject to contingent repayment |
| 17 | ||||||
Incentive income from hedge funds, subject to annual performance achievement |
(131 | ) | | |||||
Reserve for clawback, gross (see discussion above) |
| | ||||||
(131 | ) | 9,434 | ||||||
Adjust other income |
||||||||
Distributions of earnings from equity method investees*** |
| (367 | ) | |||||
Earnings (losses) from equity method investees*** |
(1,918 | ) | (67,483 | ) | ||||
Gains (losses) on options in equity method investees |
67 | (15,426 | ) | |||||
Unrealized gains (losses) on publicly traded investments |
17,687 | (20,975 | ) | |||||
Impairment of investments (see discussion above) |
32,274 | 9,507 | ||||||
Adjust income from the receipt of options |
| | ||||||
48,110 | (94,744 | ) | ||||||
Adjust employee compensation |
||||||||
Adjust employee equity-based compensation expense (including Castle options assigned) |
(105,823 | ) | (88,507 | ) | ||||
Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income |
| 9,648 | ||||||
Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment |
| (4 | ) | |||||
(105,823 | ) | (78,863 | ) | |||||
Adjust Principals equity-based compensation expense |
(472,126 | ) | (474,734 | ) | ||||
Adjust Principals interests related to Fortress Operating Group units |
348,549 | 403,591 | ||||||
Adjust tax receivable agreement liability |
(55 | ) | | |||||
Adjust income taxes |
1,663 | (5,303 | ) | |||||
Total adjustments |
$ | (179,813 | ) | $ | (240,619 | ) | ||
** Net income (loss) presented herein represents net income (loss) attributable to Fortresss Class A shareholders. |
| |||||||
*** This adjustment relates to all of the Castles, private equity and hybrid PE Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. |
| |||||||
Adjustments from total segment assets to GAAP assets |
||||||||
Adjust equity investments from fair value |
$ | | ||||||
Adjust equity investments from cost |
20,376 | |||||||
Adjust investments gross of employee portion |
30,243 | |||||||
Adjust option investments from intrinsic value |
116 | |||||||
Total adjustments |
$ | 50,735 | ||||||
26
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Three Months Ended June 30, 2009
Liquid Hedge Funds |
Hybrid | Principal Investments |
Unallocated | Fortress Subtotal | |||||||||||||||||||||
Private Equity | Hedge Funds |
PE Funds |
|||||||||||||||||||||||
Funds | Castles | ||||||||||||||||||||||||
Segment revenues |
|||||||||||||||||||||||||
Management fees |
$ | 38,884 | $ | 12,519 | $ | 19,893 | $ | 29,501 | $ | 8,354 | $ | | $ | | $ | 109,151 | |||||||||
Incentive income |
| | 247 | 191 | 6,814 | | | 7,252 | |||||||||||||||||
Segment revenues - total |
$ | 38,884 | $ | 12,519 | $ | 20,140 | $ | 29,692 | $ | 15,168 | $ | | $ | | $ | 116,403 | |||||||||
Pre-tax distributable earnings |
$ | 27,567 | $ | 6,725 | $ | 6,731 | $ | 7,467 | $ | 4,590 | $ | 5,920 | $ | (143 | ) | $ | 58,857 | ||||||||
Fortress Subtotal |
Reconciliation to GAAP |
Fortress Consolidated* |
Principals and Others |
GAAP Net Income (Loss) |
|||||||||||||||
Revenues |
$ | 116,403 | $ | 22,684 | $ | 139,087 | |||||||||||||
Pre-tax distributable earnings / net income (loss) |
$ | 58,857 | $ | (103,449 | ) | $ | (44,592 | ) | $ | (126,738 | ) | $ | (171,330 | ) | |||||
Three Months Ended June 30, 2008
Liquid Hedge Funds |
Hybrid | Principal Investments |
Unallocated | Fortress Subtotal | ||||||||||||||||||||||
Private Equity | Hedge Funds |
PE Funds |
||||||||||||||||||||||||
Funds | Castles | |||||||||||||||||||||||||
Segment revenues |
||||||||||||||||||||||||||
Management fees |
$ | 40,372 | $ | 13,961 | $ | 57,606 | $ | 36,611 | $ | 2,178 | $ | | $ | | $ | 150,728 | ||||||||||
Incentive income |
| | 14,345 | 447 | | | | 14,792 | ||||||||||||||||||
Segment revenues - total |
$ | 40,372 | $ | 13,961 | $ | 71,951 | $ | 37,058 | $ | 2,178 | $ | | $ | | $ | 165,520 | ||||||||||
Pre-tax distributable earnings |
$ | 31,591 | $ | 3,928 | $ | 30,695 | $ | 9,231 | $ | 351 | $ | (17,326 | ) | $ | (31 | ) | $ | 58,439 | ||||||||
Fortress Subtotal |
Reconciliation to GAAP |
Fortress Consolidated* |
Principals and Others |
GAAP Net Income (Loss) |
|||||||||||||||
Revenues |
$ | 165,520 | $ | 22,576 | $ | 188,096 | |||||||||||||
Pre-tax distributable earnings / net income (loss) |
$ | 58,439 | $ | (113,995 | ) | $ | (55,556 | ) | $ | (194,411 | ) | $ | (249,967 | ) | |||||
* | Net income (loss) presented herein represents net income (loss) attributable to Fortresss Class A shareholders. |
27
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Reconciling items between segment measures and GAAP measures:
Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
|||||||
Adjustments from segment revenues to GAAP revenues |
||||||||
Adjust management fees* |
$ | 163 | $ | 162 | ||||
Adjust incentive income |
(131 | ) | 3,535 | |||||
Adjust income from the receipt of options |
| | ||||||
Other revenues* |
||||||||
Adjust management fees from non-affiliates |
(889 | ) | (1,285 | ) | ||||
Adjust incentive income from non-affiliates |
(163 | ) | (27 | ) | ||||
Adjust other revenues (including expense reimbursements) |
23,704 | 20,191 | ||||||
22,652 | 18,879 | |||||||
Total adjustments |
$ | 22,684 | $ | 22,576 | ||||
* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings. |
| |||||||
Adjustments from pre-tax distributable earnings to GAAP net income (loss)** |
||||||||
Adjust incentive income |
||||||||
Incentive income received from private equity funds and hybrid PE funds, subject to contingent repayment |
$ | | $ | | ||||
Incentive income accrued from private equity funds and hybrid PE funds, no longer subject to contingent repayment |
| 3,535 | ||||||
Incentive income received from private equity funds and hybrid PE funds, not subject to contingent repayment |
| | ||||||
Incentive income from hedge funds, subject to annual performance achievement |
(131 | ) | | |||||
Reserve for clawback, gross (see discussion above) |
| | ||||||
(131 | ) | 3,535 | ||||||
Adjust other income |
||||||||
Distributions of earnings from equity method investees*** |
| (2 | ) | |||||
Earnings (losses) from equity method investees*** |
37,004 | (26,841 | ) | |||||
Gains (losses) on options in equity method investees |
43 | (2,933 | ) | |||||
Unrealized gains (losses) on publicly traded investments |
19,540 | (3,651 | ) | |||||
Impairment of investments (see discussion above) |
| 9,507 | ||||||
Adjust income from the receipt of options |
| | ||||||
56,587 | (23,920 | ) | ||||||
Adjust employee compensation |
||||||||
Adjust employee equity-based compensation expense (including Castle options assigned) |
(52,779 | ) | (52,906 | ) | ||||
Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income |
| | ||||||
Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment |
| | ||||||
(52,779 | ) | (52,906 | ) | |||||
Adjust Principals equity-based compensation expense |
(237,367 | ) | (237,367 | ) | ||||
Adjust Principals interests related to Fortress Operating Group units |
128,926 | 194,714 | ||||||
Adjust tax receivable agreement liability |
| | ||||||
Adjust income taxes |
1,315 | 1,949 | ||||||
Total adjustments |
$ | (103,449 | ) | $ | (113,995 | ) | ||
28
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
Fortresss depreciation expense by segment was as follows:
Liquid | Hybrid | ||||||||||||||||||||
Private Equity | Hedge | Hedge | PE | ||||||||||||||||||
Funds | Castles | Funds | Funds | Funds | Unallocated | Total | |||||||||||||||
Six Months Ended June 30, |
|||||||||||||||||||||
2009 |
$ | 568 | $ | 300 | $ | 1,142 | $ | 1,406 | $ | 238 | $ | 1,748 | $ | 5,402 | |||||||
2008 |
$ | 478 | $ | 374 | $ | 1,495 | $ | 1,486 | $ | 68 | $ | 971 | $ | 4,872 | |||||||
Three Months Ended June 30, |
|||||||||||||||||||||
2009 |
$ | 284 | $ | 131 | $ | 531 | $ | 710 | $ | 131 | $ | 974 | $ | 2,761 | |||||||
2008 |
$ | 250 | $ | 182 | $ | 767 | $ | 714 | $ | 37 | $ | 486 | $ | 2,436 |
11. SUBSEQUENT EVENTS
These financial statements include a discussion of material events which have occurred subsequent to June 30, 2009 (referred to as subsequent events) through the issuance of these consolidated financial statements on August 10, 2009. Events subsequent to that date have not been considered in these financial statements.
On July 19, 2009, Fortress entered into an employment offer letter with Daniel H. Mudd, pursuant to which Mr. Mudd will serve as the Chief Executive Officer of Fortress, commencing on August 11, 2009. Fortress will provide Mr. Mudd with an annual base salary of $200,000 for each of 2009 and 2010. Mr. Mudd will receive a cash bonus of $1.3 million for 2009 and $1.8 million for 2010.
Mr. Mudd will also receive a grant of 7,243,577 restricted stock units (the RSU Grant) with a value of $25,000,000. One-half of the RSU Grant will consist of dividend-paying restricted stock units. The RSU Grant will vest in equal annual installments on each of the first eight (8) anniversaries of Mr. Mudds start date, subject to Mr. Mudds continued employment on each such anniversary. Mr. Mudd will be granted restricted Class A Shares with a value of $500,000 on January 1, 2010, subject to his continued employment on such date.
Effective upon Mr. Mudd commencing employment as Chief Executive Officer, Wesley R. Edens will no longer hold the position of Chief Executive Officer of Fortress. Mr. Edens will continue to serve as a member of Fortresss board of directors, and effective as of August 11, 2009, Wesley R. Edens and Peter L. Briger, Jr. will become co-chairmen of Fortresss board of directors. Mr. Mudd will retain his seat on the board.
In August 2009, Fortress appointed a new director to its board and granted such director restricted Class A shares value at $300,000.
29
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2009
(dollars in tables in thousands, except share data)
NOTE 12 CONSOLIDATING FINANCIAL INFORMATION
The consolidating financial information presents the balance sheet, statement of operations and statement of cash flows for Fortress Operating Group (on a combined basis) and Fortress Investment Group LLC (including its consolidated subsidiaries other than those within Fortress Operating Group) on a deconsolidated basis, as well as the related eliminating entries for intercompany balances and transactions, which sum to Fortress Investment Groups consolidated financial statements as of, and for the six months ended, June 30, 2009.
Fortress Operating Group includes all of Fortresss operating and investing entities. The upper tier Fortress Operating Group entities are the obligors on Fortresss credit agreement (Note 4). Segregating the financial results of this group of entities provides a more transparent view of the capital deployed in Fortresss businesses and the relevant ratios for borrowing entities.
The consolidating balance sheet information is as follows:
As of June 30, 2009 | ||||||||||||||||
Fortress Operating Group Combined |
Fortress Investment Group LLC Consolidated (A) |
Intercompany Eliminations |
Fortress Investment Group LLC Consolidated |
|||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 90,138 | $ | 368 | $ | | $ | 90,506 | ||||||||
Due from affiliates |
78,182 | | (7,473 | ) | 70,709 | |||||||||||
Investments |
||||||||||||||||
Equity method investees |
818,147 | 108,840 | (108,840 | ) | 818,147 | |||||||||||
Options in affiliates |
116 | | | 116 | ||||||||||||
Deferred tax asset |
11,253 | 418,541 | | 429,794 | ||||||||||||
Other assets |
80,881 | 5,147 | | 86,028 | ||||||||||||
$ | 1,078,717 | $ | 532,896 | $ | (116,313 | ) | $ | 1,495,300 | ||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Liabilities |
||||||||||||||||
Accrued compensation and benefits |
$ | 63,268 | $ | | $ | | $ | 63,268 | ||||||||
Due to affiliates |
8,953 | 328,714 | (7,473 | ) | 330,194 | |||||||||||
Deferred incentive income |
163,635 | | | 163,635 | ||||||||||||
Debt obligations payable |
439,750 | | | 439,750 | ||||||||||||
Other liabilities |
23,484 | | | 23,484 | ||||||||||||
699,090 | 328,714 | (7,473 | ) | 1,020,331 | ||||||||||||
Commitments and Contingencies |
||||||||||||||||
Equity |
||||||||||||||||
Paid-in capital |
2,423,994 | 830,447 | (2,423,994 | ) | 830,447 | |||||||||||
Retained earnings (accumulated deficit) |
(2,066,957 | ) | (625,130 | ) | 2,066,957 | (625,130 | ) | |||||||||
Accumulated other comprehensive income (loss) |
(7,809 | ) | (1,135 | ) | 7,809 | (1,135 | ) | |||||||||
& |