Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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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)
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Delaware
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20-5837959 |
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.) |
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1345 Avenue of the Americas, New York, NY
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10105 |
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(Address of principal executive offices)
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(Zip Code) |
(212) 798-6100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the last practicable date.
Class A Shares: 94,638,415 outstanding as of May 6, 2009.
Class B Shares: 312,071,550 outstanding as of May 6, 2009.
FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
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:
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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, |
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(ii) |
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the contributed capital of our publicly traded alternative investment vehicles, which
we refer to as our Castles, |
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(iii) |
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the net asset value, or NAV, of our hedge funds; and |
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(iv) |
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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:
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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; |
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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; |
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may apply standards of materiality in a way that is different from what may be viewed as
material to you or other investors; and |
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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
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
43,308 |
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$ |
263,337 |
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Due from affiliates |
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64,188 |
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38,504 |
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Investments |
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Equity method investees |
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759,980 |
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774,382 |
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Options in affiliates |
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72 |
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39 |
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Deferred tax asset |
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411,656 |
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408,066 |
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Other assets |
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93,299 |
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93,407 |
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$ |
1,372,503 |
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$ |
1,577,735 |
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Liabilities and Shareholders Equity |
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Liabilities |
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Accrued compensation and benefits |
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$ |
42,679 |
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$ |
158,033 |
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Due to affiliates |
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350,380 |
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346,265 |
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Deferred incentive income |
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163,635 |
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163,635 |
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Debt obligations payable |
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604,041 |
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729,041 |
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Other liabilities |
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59,333 |
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26,741 |
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1,220,068 |
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1,423,715 |
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Commitments and Contingencies |
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Equity |
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Class A shares, no par value, 1,000,000,000 shares authorized, 94,638,415
and 94,609,525 shares issued and outstanding at March 31, 2009
and December 31, 2008, respectively |
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Class B shares, no par value, 750,000,000 shares authorized, 312,071,550
shares issued and outstanding |
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Paid-in capital |
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663,848 |
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596,803 |
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Retained earnings (accumulated deficit) |
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(580,538 |
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(513,379 |
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Accumulated other comprehensive income (loss) |
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(939 |
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(866 |
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Total Fortress shareholders equity |
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82,371 |
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82,558 |
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Principals and others interests in equity of consolidated subsidiaries Note 6 |
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70,064 |
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71,462 |
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Total equity |
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152,435 |
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154,020 |
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$ |
1,372,503 |
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$ |
1,577,735 |
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See notes to consolidated financial statements
1
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
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Three Months Ended March 31, |
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2009 |
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2008 |
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Revenues |
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Management fees from affiliates |
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$ |
105,652 |
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$ |
144,057 |
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Incentive income from affiliates |
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37,144 |
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Expense reimbursements from affiliates |
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13,047 |
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14,270 |
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Other revenues (affiliate portion disclosed in Note 6) |
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3,597 |
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5,409 |
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122,296 |
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200,880 |
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Expenses |
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Interest expense |
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8,186 |
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10,336 |
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Compensation and benefits |
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109,236 |
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127,019 |
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Principals agreement compensation |
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234,759 |
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237,367 |
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General, administrative and other |
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17,185 |
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16,570 |
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Depreciation and amortization |
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2,641 |
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2,436 |
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372,007 |
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393,728 |
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Other Income (Loss) |
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Gains (losses) from investments |
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Net realized gains (losses) |
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(396 |
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1,613 |
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Net realized gains (losses) from affiliate investments |
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(248 |
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247 |
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Net unrealized gains (losses) |
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Net unrealized gains (losses) from affiliate investments |
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(1,829 |
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(29,817 |
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Tax receivable agreement liability reduction |
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(55 |
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Earnings (losses) from equity method investees |
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(34,849 |
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(49,129 |
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(37,377 |
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(77,086 |
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Income (Loss) Before Income Taxes |
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(287,088 |
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(269,934 |
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Income tax benefit (expense) |
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407 |
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(7,252 |
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Net Income (Loss) |
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$ |
(286,681 |
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$ |
(277,186 |
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Principals and Others Interests in Income (Loss) of
Consolidated Subsidiaries |
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$ |
(219,522 |
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$ |
(208,269 |
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Net Income (Loss) Attributable to Class A Shareholders Note 6 |
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$ |
(67,159 |
) |
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$ |
(68,917 |
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Dividends declared per Class A share |
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$ |
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$ |
0.225 |
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Earnings Per Class A share Fortress Investment Group |
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Net income (loss) per Class A share, basic |
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$ |
(0.71 |
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$ |
(0.74 |
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Net income (loss) per Class A share, diluted |
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$ |
(0.71 |
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$ |
(0.74 |
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Weighted average number of Class A shares outstanding, basic |
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95,202,243 |
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94,894,636 |
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Weighted average number of Class A shares outstanding, diluted |
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95,202,243 |
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406,966,186 |
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See notes to consolidated financial statements
2
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(dollars in thousands)
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Principals and |
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Retained |
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Accumulated |
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Others Interests in |
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Earnings |
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Other |
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Total Fortress |
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Equity of |
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Paid-In |
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(Accumulated |
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Comprehensive |
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Shareholders |
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Consolidated |
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Class A Shares |
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Class B Shares |
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Capital |
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Deficit) |
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Income (Loss) |
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Equity |
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Subsidiaries |
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Total Equity |
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Equity December 31, 2008 |
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94,609,525 |
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312,071,550 |
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$ |
596,803 |
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$ |
(513,379 |
) |
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$ |
(866 |
) |
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$ |
82,558 |
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$ |
71,462 |
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$ |
154,020 |
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Contributions from principals and others interests in equity |
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3,117 |
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3,117 |
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Distributions to principals and others interests in equity (net of tax) |
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9 |
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9 |
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(5,225 |
) |
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(5,216 |
) |
Director restricted share grant |
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28,890 |
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99 |
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99 |
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113 |
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212 |
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Capital increase related to equity-based compensation |
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66,937 |
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66,937 |
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220,718 |
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|
287,655 |
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Comprehensive income (loss) (net of tax) |
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Net income (loss) |
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(67,159 |
) |
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(67,159 |
) |
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(219,522 |
) |
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|
(286,681 |
) |
Foreign currency translation |
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(2 |
) |
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(2 |
) |
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(244 |
) |
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(246 |
) |
Comprehensive income (loss) from equity method investees |
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(71 |
) |
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(71 |
) |
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(355 |
) |
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(426 |
) |
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Total comprehensive income (loss) |
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(287,353 |
) |
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Equity March 31, 2009 |
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94,638,415 |
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312,071,550 |
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$ |
663,848 |
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$ |
(580,538 |
) |
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$ |
(939 |
) |
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$ |
82,371 |
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$ |
70,064 |
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$ |
152,435 |
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See notes to consolidated financial statements
3
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
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Three Months Ended March 31, |
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2009 |
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2008 |
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Cash Flows From Operating Activities |
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Net income (loss) |
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$ |
(286,681 |
) |
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$ |
(277,186 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
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|
|
|
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
2,436 |
|
Other amortization and accretion |
|
|
3,414 |
|
|
|
628 |
|
(Earnings) losses from equity method investees |
|
|
34,849 |
|
|
|
49,129 |
|
Distributions of earnings from equity method investees |
|
|
11 |
|
|
|
3,252 |
|
(Gains) losses from investments |
|
|
2,473 |
|
|
|
27,957 |
|
Deferred incentive income |
|
|
|
|
|
|
(31,959 |
) |
Deferred tax (benefit) expense |
|
|
(3,759 |
) |
|
|
279 |
|
Tax receivable agreement liablity reduction |
|
|
55 |
|
|
|
|
|
Equity-based compensation |
|
|
287,803 |
|
|
|
265,792 |
|
Cash flows due to changes in |
|
|
|
|
|
|
|
|
Due from affiliates |
|
|
(25,932 |
) |
|
|
104,038 |
|
Other assets |
|
|
(1,257 |
) |
|
|
5,839 |
|
Accrued compensation and benefits |
|
|
(108,216 |
) |
|
|
(164,335 |
) |
Due to affiliates |
|
|
(1,367 |
) |
|
|
11,446 |
|
Deferred incentive income |
|
|
|
|
|
|
26,077 |
|
Other liabilities |
|
|
32,657 |
|
|
|
28,462 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(63,309 |
) |
|
|
51,855 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Contributions to equity method investees |
|
|
(31,792 |
) |
|
|
(70,215 |
) |
Distributions of capital from equity method investees |
|
|
10,538 |
|
|
|
155,006 |
|
Purchase of fixed assets |
|
|
(1,110 |
) |
|
|
(2,248 |
) |
Proceeds from disposal of fixed assets |
|
|
6 |
|
|
|
53 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(22,358 |
) |
|
|
82,596 |
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Borrowings under debt obligations |
|
|
|
|
|
|
450,000 |
|
Repayments of debt obligations |
|
|
(125,000 |
) |
|
|
(185,000 |
) |
Payment of deferred financing costs |
|
|
(4,162 |
) |
|
|
(61 |
) |
Dividends and dividend equivalents paid |
|
|
|
|
|
|
(26,381 |
) |
Principals and others interests in equity of consolidated subsidiaries contributions |
|
|
25 |
|
|
|
|
|
Principals and others interests in equity of consolidated subsidiaries distributions |
|
|
(5,225 |
) |
|
|
(100,740 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(134,362 |
) |
|
|
137,818 |
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(220,029 |
) |
|
|
272,269 |
|
Cash and Cash Equivalents, Beginning of Period |
|
|
263,337 |
|
|
|
100,409 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
43,308 |
|
|
$ |
372,678 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
3,730 |
|
|
$ |
9,462 |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
3,008 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
Employee compensation invested directly in subsidiaries |
|
$ |
1,701 |
|
|
$ |
16,743 |
|
|
|
|
|
|
|
|
Investments of receivable amounts into Fortress Funds |
|
$ |
|
|
|
$ |
42,782 |
|
|
|
|
|
|
|
|
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid |
|
$ |
|
|
|
$ |
96,657 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
4
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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:
|
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 |
|
|
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, and 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). |
|
4) |
|
Principal investments in the above described funds. |
2007 Reorganization of Fortress Operating Group
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.
Financial Statement Guide
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
Reference |
|
Explanation |
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Affiliates
|
|
|
6 |
|
|
Generally, management
fees, expense
reimbursements and
incentive income earned
from Fortress Funds
which are expected to be
received in the short
term. |
|
|
|
|
|
|
|
Investments in Equity Method
Investees
|
|
|
3 |
|
|
The carrying value of
Fortresss principal
investments in the
Fortress Funds. |
5
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
Reference |
|
Explanation |
|
|
|
|
|
|
|
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)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
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
annual report on Form 10-K filed with the Securities and Exchange Commission. 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)
MARCH 31, 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 March 31, |
|
|
|
2009 |
|
|
2008 |
|
Private Equity |
|
|
|
|
|
|
|
|
Private Equity Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
$ |
37,669 |
|
|
$ |
39,808 |
|
Incentive income affil. |
|
|
|
|
|
|
34,640 |
|
|
|
|
|
|
|
|
|
|
Castles |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
11,390 |
|
|
|
12,937 |
|
Incentive income affil. |
|
|
|
|
|
|
12 |
|
Management fees non-affil. (A) |
|
|
646 |
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
22,604 |
|
|
|
52,647 |
|
Incentive income affil. |
|
|
|
|
|
|
2,492 |
|
Management fees non-affil. (A) |
|
|
25 |
|
|
|
72 |
|
Incentive income non-affil. (A) |
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
Hybrid Funds |
|
|
|
|
|
|
|
|
Hybrid Hedge Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
27,908 |
|
|
|
36,656 |
|
Incentive income affil. |
|
|
|
|
|
|
|
|
Management fees non-affil. (A) |
|
|
215 |
|
|
|
189 |
|
Incentive income non-affil. (A) |
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid PE Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
6,081 |
|
|
|
2,009 |
|
Incentive income affil. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Management fees affil. |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
Incentive income affil. (B) |
|
$ |
|
|
|
$ |
37,144 |
|
Management fees non-affil. (A) |
|
$ |
886 |
|
|
$ |
1,143 |
|
Incentive income non-affil. (A) |
|
$ |
822 |
|
|
$ |
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)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Incentive income from certain Fortress Funds, primarily hybrid hedge funds, as well as 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 three months ended March 31, 2009 and 2008. As a result of not achieving
incentive income thresholds, if the amount of incentive income contingent on achieving annual
performance criteria was not contingent on the results of the subsequent quarters, no additional
incentive income from affiliates would have been recognized during the three months ended March 31,
2009 or 2008. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net of |
|
|
|
Distributed- |
|
|
Distributed- |
|
|
Distributed- |
|
|
intrinsic clawback |
|
|
|
Gross |
|
|
Recognized (A) |
|
|
Unrecognized (B) |
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of previously deferred
incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred incentive income as of March 31, 2009 |
|
$ |
470,798 |
|
|
$ |
(307,163 |
) |
|
$ |
163,635 |
|
|
$ |
(104,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
All related contingencies have been resolved. |
|
(B) |
|
Reflected on the balance sheet. |
|
(C) |
|
At March 31, 2009, the undistributed incentive income is comprised of $25.3 million of
gross undistributed incentive income, net of $129.4 million of previously distributed
incentive income that would be returned by Fortress to the related funds if such funds were
liquidated on March 31, 2009 at their net asset values. |
|
(D) |
|
From inception to March 31, 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 $25.3 million of gross undistributed incentive income were
realized, Fortress would recognize and pay an additional $10.0 million of compensation
expense. |
Private Equity Funds and Hybrid PE Funds
During the three months ended March 31, 2009, Fortress did not form any new private equity funds or
hybrid PE funds.
Unrealized losses in a significant portion of Fortresss private equity funds and 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
valued at $28.2 million as of March 31, 2009. Fortress elected to account for these shares at fair
value pursuant to SFAS 159.
Liquid Hedge Funds and Hybrid Hedge Funds
During the three months ended March 31, 2009, Fortress did not form any new hedge funds.
Historical redemptions during the periods, including affiliates, have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
Hybrid Hedge Funds |
|
|
|
Redemption Notices |
|
|
|
|
|
|
Redemption Notices |
|
|
|
|
Three Months Ended March 31, |
|
Received |
|
|
Redemptions Paid |
|
|
Received |
|
|
Redemptions Paid |
|
2009 |
|
$ |
582,785 |
|
|
$ |
2,801,035 |
|
|
$ |
|
|
|
$ |
141,092 |
|
2008 |
|
$ |
8,587 |
|
|
$ |
138,862 |
|
|
$ |
|
|
|
$ |
549,315 |
|
9
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
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.
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) |
|
|
|
March 31, |
|
|
December 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Private equity funds,
excluding NIH (A) |
|
$ |
450,578 |
|
|
$ |
455,691 |
|
|
$ |
(32,308 |
) |
|
$ |
(41,459 |
) |
NIH |
|
|
3,382 |
|
|
|
3,666 |
|
|
|
(279 |
) |
|
|
1,059 |
|
Castles (B) |
|
|
1,027 |
|
|
|
1,171 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity |
|
|
454,987 |
|
|
|
460,528 |
|
|
|
(32,587 |
) |
|
|
(40,400 |
) |
|
|
Liquid hedge funds (C) |
|
|
28,777 |
|
|
|
29,338 |
|
|
|
1,012 |
|
|
|
963 |
|
|
|
Hybrid hedge funds |
|
|
183,527 |
|
|
|
185,676 |
|
|
|
(2,149 |
) |
|
|
(10,823 |
) |
Hybrid PE funds |
|
|
88,516 |
|
|
|
96,610 |
|
|
|
(1,528 |
) |
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hybrid funds |
|
|
272,043 |
|
|
|
282,286 |
|
|
|
(3,677 |
) |
|
|
(9,693 |
) |
|
|
Other |
|
|
4,173 |
|
|
|
2,230 |
|
|
|
403 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
759,980 |
|
|
$ |
774,382 |
|
|
$ |
(34,849 |
) |
|
$ |
(49,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 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) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009. |
10
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
A summary of the changes in Fortresss investments in equity method investees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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 |
|
|
(279 |
) |
|
|
(32,308 |
) |
|
|
N/A |
|
|
|
1,012 |
|
|
|
(2,149 |
) |
|
|
(1,528 |
) |
|
|
403 |
|
|
|
(34,849 |
) |
Other comprehensive income
from equity method investees |
|
|
(5 |
) |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
(467 |
) |
Contributions to equity
method investees |
|
|
|
|
|
|
29,102 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
3,986 |
|
|
|
1,560 |
|
|
|
34,648 |
|
Distributions of earnings
from equity method investees |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Distributions of capital
from equity method investees |
|
|
|
|
|
|
(198 |
) |
|
|
N/A |
|
|
|
(1,573 |
) |
|
|
|
|
|
|
(10,090 |
) |
|
|
(9 |
) |
|
|
(11,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions from equity
method investees |
|
|
|
|
|
|
(198 |
) |
|
|
N/A |
|
|
|
(1,573 |
) |
|
|
|
|
|
|
(10,090 |
) |
|
|
(20 |
) |
|
|
(11,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark to fair value during
period (C) |
|
|
N/A |
|
|
|
(981 |
) |
|
|
(132 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(1,113 |
) |
Translation adjustment |
|
|
|
|
|
|
(728 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment, ending (D) |
|
$ |
3,382 |
|
|
$ |
450,578 |
|
|
$ |
1,027 |
|
|
$ |
28,777 |
|
|
$ |
183,527 |
|
|
$ |
88,516 |
|
|
$ |
4,173 |
|
|
$ |
759,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of undistributed
earnings |
|
$ |
776 |
|
|
$ |
|
|
|
|
N/A |
|
|
$ |
87 |
|
|
$ |
301 |
|
|
|
5,859 |
|
|
$ |
392 |
|
|
$ |
7,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 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. |
|
(D) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009 from the liquid hedge fund. |
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newcastle Investment Holdings LLC |
|
|
|
Private Equity Funds excluding NIH |
|
|
(NIH) |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
8,693,410 |
|
|
$ |
9,362,237 |
|
|
$ |
268,891 |
|
|
$ |
278,161 |
|
Liabilities |
|
|
(856,169 |
) |
|
|
(1,058,392 |
) |
|
|
(212,065 |
) |
|
|
(215,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
7,837,241 |
|
|
$ |
8,303,845 |
|
|
$ |
56,826 |
|
|
$ |
62,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss Investment (A) |
|
$ |
450,578 |
|
|
$ |
455,691 |
|
|
$ |
3,382 |
|
|
$ |
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership (B) |
|
|
5.7 |
% |
|
|
5.5 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues and gains (losses)
on investments |
|
$ |
(767,348 |
) |
|
$ |
(1,178,032 |
) |
|
$ |
(1,021 |
) |
|
$ |
30,363 |
|
Expenses |
|
|
(121,035 |
) |
|
|
(103,852 |
) |
|
|
(4,474 |
) |
|
|
(7,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(888,383 |
) |
|
$ |
(1,281,884 |
) |
|
$ |
(5,495 |
) |
|
$ |
22,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss equity in net income (loss) |
|
$ |
(32,308 |
) |
|
$ |
(41,459 |
) |
|
$ |
(279 |
) |
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 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. |
11
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
Hybrid Hedge Funds |
|
|
Hybrid PE Funds (C) |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
5,099,120 |
|
|
$ |
7,819,859 |
|
|
$ |
10,518,758 |
|
|
$ |
10,803,738 |
|
|
$ |
4,486,562 |
|
|
$ |
4,103,809 |
|
Liabilities |
|
|
(634,141 |
) |
|
|
(540,204 |
) |
|
|
(4,153,920 |
) |
|
|
(4,407,170 |
) |
|
|
(2,187,367 |
) |
|
|
(1,517,607 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
(38,242 |
) |
|
|
(29,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
4,464,979 |
|
|
$ |
7,279,655 |
|
|
$ |
6,326,596 |
|
|
$ |
6,366,646 |
|
|
$ |
2,299,195 |
|
|
$ |
2,586,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss Investment (A) |
|
$ |
28,777 |
|
|
$ |
29,338 |
|
|
$ |
183,527 |
|
|
$ |
185,676 |
|
|
$ |
88,516 |
|
|
$ |
96,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership (B) |
|
|
0.6 |
% |
|
|
0.4 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
|
|
3.8 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues and gains (losses)
on investments |
|
$ |
158,965 |
|
|
$ |
106,405 |
|
|
$ |
172,679 |
|
|
$ |
(123,468 |
) |
|
$ |
(18,429 |
) |
|
$ |
23,413 |
|
Expenses |
|
|
(48,119 |
) |
|
|
(156,539 |
) |
|
|
(77,849 |
) |
|
|
(109,619 |
) |
|
|
(31,590 |
) |
|
|
(6,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
110,846 |
|
|
$ |
(50,134 |
) |
|
$ |
94,830 |
|
|
$ |
(233,087 |
) |
|
$ |
(50,019 |
) |
|
$ |
16,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss equity in net
income (loss) |
|
$ |
1,012 |
|
|
$ |
963 |
|
|
$ |
(2,149 |
) |
|
$ |
(10,823 |
) |
|
$ |
(1,528 |
) |
|
$ |
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009 from the liquid hedge funds. |
|
(B) |
|
Excludes ownership interests held by other Fortress Funds, the Principals, employees and
other affiliates. |
|
(C) |
|
Includes one entity which is recorded on a one quarter lag (i.e. the balances reflected for
this entity are for December 31, 2008 and 2007, respectively, and the periods then ended). 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 three months ended March 31, 2009 which caused a change in Fortresss accounting.
The following table presents information as of March 31, 2009 regarding entities formed during the
three months ended March 31, 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. The only VIE formed during this period was not yet capitalized as
of quarter end and therefore had no assets or liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortress is not Primary Beneficiary |
|
Business Segment |
|
Gross Assets |
|
|
Financial Obligations |
|
|
Fortress Investment (A) |
|
Hybrid PE Funds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(A) |
|
Represents Fortresss maximum exposure to loss with respect to these entities, which includes
direct and indirect investments in these funds, which in this case is zero. In addition to the
table above, Fortress is exposed to potential changes in cash flow and revenues attributable
to the incentive income Fortress earns from these entities. |
Fair Value of Financial Instruments
The following table presents information regarding Fortresss financial instruments which are
recorded at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Valuation Method |
Assets Carried at Fair Value |
|
|
|
|
|
|
|
|
|
|
Newcastle, Eurocastle and GAGFAH common shares
|
|
$ |
29,249 |
|
|
$ |
1,171 |
|
|
Level 1 Quoted prices in active markets for identical assets |
Newcastle and Eurocastle options
|
|
$ |
72 |
|
|
$ |
39 |
|
|
Level 2 Lattice-based option valuation models using
significant observable inputs |
12
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
4. DEBT OBLIGATIONS
The following table presents summarized information regarding Fortresss debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Face Amount and |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
Carrying Value |
|
|
Contractual |
|
Final |
|
Average |
|
|
Average |
|
|
|
March 31, |
|
|
December 31, |
|
|
Interest |
|
Stated |
|
Funding |
|
|
Maturity |
|
Debt Obligation |
|
2008 |
|
|
2008 |
|
|
Rate |
|
Maturity |
|
Cost (A) |
|
|
(Years) |
|
Credit agreement (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt (C) |
|
$ |
54,041 |
|
|
$ |
104,041 |
|
|
LIBOR + 2.50% (D) |
|
May 2012 |
|
|
3.04 |
% |
|
|
3.11 |
|
Term loan |
|
|
350,000 |
|
|
|
350,000 |
|
|
LIBOR + 2.50% |
|
May 2012 |
|
|
3.20 |
% |
|
|
2.40 |
|
Delayed term loan (C) |
|
|
200,000 |
|
|
|
275,000 |
|
|
LIBOR + 2.50% |
|
May 2012 |
|
|
3.11 |
% |
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
$ |
729,041 |
|
|
|
|
|
|
|
3.16 |
% |
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 0.48%. |
|
(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 $11.4 million was undrawn on the revolving debt facility as of March 31, 2009.
The revolving debt facility includes a $25 million letter of credit subfacility of which $9.6
million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2
million (including $1.0 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, $5.2 million of the undrawn amount was
available. |
|
(D) |
|
Subject to unused commitment fees of 0.50% per annum. |
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.
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 55% and 60% of
face value at March 31, 2009.
Fortress was in compliance with all of its debt covenants as of March 31, 2009. The following table
sets forth the financial covenant requirements as of March 31, 2009 (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
Requirement |
|
|
Actual |
|
AUM |
|
≥ $ |
22,000 |
|
|
$ |
26,538 |
|
|
|
|
|
|
|
|
|
|
Consolidated Leverage Ratio |
|
≤ |
3.50 |
|
|
|
1.98 |
|
|
|
|
|
|
|
|
|
|
Required Investment Assets |
|
≥ $ |
614 |
|
|
$ |
731 |
|
|
|
|
|
|
|
|
|
|
Fortress Fund Investments |
|
≥ $ |
245 |
|
|
$ |
394 |
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
≥ $ |
368 |
|
|
$ |
521 |
|
13
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
5. INCOME TAXES AND TAX RELATED PAYMENTS
For the three months ended March 31, 2009, an estimated annual effective tax rate of 0.62% 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.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
Federal income tax |
|
$ |
814 |
|
|
$ |
2,654 |
|
Foreign income tax |
|
|
411 |
|
|
|
637 |
|
State and local income tax |
|
|
2,127 |
|
|
|
3,682 |
|
|
|
|
|
|
|
|
|
|
|
3,352 |
|
|
|
6,973 |
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(1,518 |
) |
|
|
1,291 |
|
Foreign income tax expense (benefit) |
|
|
(96 |
) |
|
|
166 |
|
State and local income tax expense
(benefit) |
|
|
(2,145 |
) |
|
|
(1,178 |
) |
|
|
|
|
|
|
|
|
|
|
(3,759 |
) |
|
|
279 |
|
|
|
|
|
|
|
|
Total expense (benefit) |
|
$ |
(407 |
) |
|
$ |
7,252 |
|
|
|
|
|
|
|
|
The tax effects of temporary differences have resulted in deferred income tax assets and
liabilities as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Total deferred tax assets |
|
$ |
507,723 |
|
|
$ |
504,017 |
|
Valuation allowance |
|
|
(96,067 |
) |
|
|
(95,951 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
411,656 |
|
|
$ |
408,066 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities (A) |
|
$ |
482 |
|
|
$ |
592 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Included in Other Liabilities. |
For the three months ended March 31, 2009, a deferred income tax provision of $0.11 million was
credited to other comprehensive income, primarily related to the equity method investees. A current
income tax benefit of $0.01 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
three months ended March 31, 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 $3.9 million.
14
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES
Affiliate Receivables and Payables
Due from affiliates was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
|
|
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Other |
|
|
Total |
|
Management fees and incentive income |
|
$ |
28,014 |
|
|
$ |
3,933 |
|
|
$ |
127 |
|
|
$ |
1,300 |
|
|
$ |
6,080 |
|
|
$ |
|
|
|
$ |
39,454 |
|
Expense reimbursements |
|
|
7,957 |
|
|
|
2,960 |
|
|
|
2,708 |
|
|
|
3,371 |
|
|
|
3,726 |
|
|
|
|
|
|
|
20,722 |
|
Dividends and distributions |
|
|
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
Other |
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
1,828 |
|
|
|
2,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,646 |
|
|
$ |
6,893 |
|
|
$ |
2,835 |
|
|
$ |
4,671 |
|
|
$ |
10,315 |
|
|
$ |
1,828 |
|
|
$ |
64,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
|
|
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Other |
|
|
Total |
|
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:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Principals |
|
|
|
|
|
|
|
|
- Tax receivable agreement Note 5 (A) |
|
$ |
338,765 |
|
|
$ |
338,649 |
|
- Distributions payable on Fortress Operating Group units |
|
|
|
|
|
|
|
|
Other |
|
|
11,615 |
|
|
|
7,616 |
|
|
|
|
|
|
|
|
|
|
$ |
350,380 |
|
|
$ |
346,265 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes $17.4 million due currently with respect to the tax return filed for the tax year
ended December 31, 2007. |
Other Related Party Transactions
For the three months ended March 31, 2009 and 2008, Other Revenues included approximately $1.7
million and $0.7 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 three months ended March 31, 2009 and 2008, these expenses,
mainly related to subscriptions to market data services, approximated $2.9 million and $5.3
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.
15
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Principals Fortress Operating Group units |
|
$ |
46,950 |
|
|
$ |
47,305 |
|
Employee interests in majority owned
and controlled fund advisor and
general partner entities |
|
|
22,285 |
|
|
|
23,981 |
|
Other |
|
|
829 |
|
|
|
176 |
|
|
|
|
|
|
|
|
Total |
|
$ |
70,064 |
|
|
$ |
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 March 31, |
|
|
|
2009 |
|
|
2008 |
|
Principals Fortress Operating Group units |
|
$ |
(219,623 |
) |
|
$ |
(208,877 |
) |
Employee interests in majority owned
and controlled fund advisor and
general partner entities |
|
|
28 |
|
|
|
139 |
|
Other |
|
|
73 |
|
|
|
469 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(219,522 |
) |
|
$ |
(208,269 |
) |
|
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 160 Accounting for Noncontrolling Interests. 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.
16
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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 March 31, |
|
|
|
2009 |
|
|
2008 |
|
Equity-based compensation, per below |
|
$ |
53,045 |
|
|
$ |
28,425 |
|
Profit-sharing expense, per below |
|
|
3,605 |
|
|
|
21,818 |
|
Discretionary bonuses |
|
|
22,859 |
|
|
|
44,457 |
|
Other payroll, taxes and benefits |
|
|
29,727 |
|
|
|
32,319 |
|
|
|
|
|
|
|
|
|
|
$ |
109,236 |
|
|
$ |
127,019 |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,890 |
|
|
|
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(196,759 |
) |
|
|
14.54 |
|
|
|
(705,885 |
) |
|
|
14.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
March 31, 2009 (B) |
|
|
40,668,557 |
|
|
$ |
16.54 |
|
|
|
7,894,982 |
|
|
$ |
14.83 |
|
|
|
138,064 |
|
|
$ |
14.52 |
|
|
|
31,000,000 |
|
|
$ |
13.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Expense incurred (B) |
|
|
|
|
|
|
|
|
Employee RSUs |
|
$ |
24,423 |
|
|
$ |
26,572 |
|
Non-Employee RSUs |
|
|
4,461 |
|
|
|
(10 |
) |
Restricted Shares |
|
|
148 |
|
|
|
149 |
|
LTIP |
|
|
1,696 |
|
|
|
1,714 |
|
RPUs |
|
|
22,317 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense |
|
$ |
53,045 |
|
|
$ |
28,425 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the weighted average grant date estimated fair value per share or unit. The
weighted average estimated fair value per unit as of March 31, 2009 for awards granted to
non-employees was $2.51, 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 $800.8 million, with a weighted average recognition period of 3.87 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.
17
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Profit Sharing Expense
Recognized profit sharing compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Private equity funds (A) |
|
$ |
(15 |
) |
|
$ |
4,971 |
|
Castles (A) |
|
|
(137 |
) |
|
|
1,128 |
|
Liquid hedge funds |
|
|
2,564 |
|
|
|
13,425 |
|
Hybrid hedge funds |
|
|
1,193 |
|
|
|
2,055 |
|
Other |
|
|
|
|
|
|
239 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,605 |
|
|
$ |
21,818 |
|
|
|
|
|
|
|
|
|
|
|
(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. |
8. EARNINGS PER SHARE AND DISTRIBUTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A shares outstanding |
|
|
94,500,351 |
|
|
|
94,500,351 |
|
|
|
94,500,350 |
|
|
|
94,500,350 |
|
Fully vested restricted Class A share units with dividend equivalent rights |
|
|
631,260 |
|
|
|
631,260 |
|
|
|
394,286 |
|
|
|
394,286 |
|
Fully vested restricted Class A shares |
|
|
70,632 |
|
|
|
70,632 |
|
|
|
|
|
|
|
|
|
Fortress Operating Group units exchangeable into Fortress Investment
Group LLC Class A shares (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
95,202,243 |
|
|
|
95,202,243 |
|
|
|
94,894,636 |
|
|
|
406,966,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A shareholders |
|
$ |
(67,159 |
) |
|
$ |
(67,159 |
) |
|
$ |
(68,917 |
) |
|
$ |
(68,917 |
) |
Dilution in earnings due to RPUs treated as a participating security of
Fortress
Operating Group and fully vested restricted Class A share units with
dividend
equivalent rights treated as outstanding Fortress Operating Group units
(4) |
|
|
(359 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
|
Dividend equivalents declared on non-vested restricted Class A share units |
|
|
|
|
|
|
|
|
|
|
(1,117 |
) |
|
|
(1,117 |
) |
Dilution in earnings of certain equity method investees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Class A shareholders |
|
$ |
(67,518 |
) |
|
$ |
(67,518 |
) |
|
$ |
(70,034 |
) |
|
$ |
(303,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
95,202,243 |
|
|
|
95,202,243 |
|
|
|
94,894,636 |
|
|
|
406,966,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A share |
|
$ |
(0.71 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(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. |
18
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
(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: |
|
|
|
|
|
Period |
|
Share Units |
|
Three months ended: |
|
|
|
|
March 31, 2009 |
|
|
25,347,250 |
|
March 31, 2008 |
|
|
27,817,295 |
|
|
|
|
(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 |
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Class A shares (public shareholders) |
|
|
94,500,351 |
|
|
|
94,500,350 |
|
Restricted Class A shares (directors) |
|
|
135,496 |
|
|
|
97,296 |
|
Restricted Class A share units (employees) (A) |
|
|
631,260 |
|
|
|
394,286 |
|
Restricted Class A share units (employees) (B) |
|
|
22,955,132 |
|
|
|
23,765,492 |
|
Fortress Operating Group units (Principals) |
|
|
312,071,550 |
|
|
|
312,071,550 |
|
Fortress Operating Group RPUs (senior employee) |
|
|
31,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
461,293,789 |
|
|
|
430,828,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
As of December 31, 2008 |
|
Class A shares (public shareholders) |
|
|
94,500,351 |
|
|
|
94,500,351 |
|
Restricted Class A shares (directors) |
|
|
138,064 |
|
|
|
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 |
|
|
461,296,357 |
|
|
|
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. |
Dividends and distributions during the three months ended March 31, 2009 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Year |
|
|
|
Declared in Prior Year, |
|
|
Declared and |
|
|
Declared but not |
|
|
|
|
|
|
Paid Current Year |
|
|
Paid |
|
|
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) |
|
|
|
|
|
|
963 |
|
|
|
|
|
|
|
963 |
|
Distributions to Fortress Operating Group RPU holders (Note 7) (B) |
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions |
|
$ |
|
|
|
$ |
1,059 |
|
|
$ |
|
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
19
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The following table summarizes our comprehensive income (loss) (net of taxes) for the three
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to Principals |
|
|
|
|
|
|
Impact to Total |
|
|
and Others Interests |
|
|
|
|
|
|
Fortress |
|
|
in Equity of |
|
|
|
|
|
|
Shareholders |
|
|
Consolidated |
|
|
Impact to |
|
|
|
Equity |
|
|
Subsidiaries |
|
|
Total Equity |
|
Net income (loss) |
|
$ |
(68,917 |
) |
|
$ |
(208,269 |
) |
|
$ |
(277,186 |
) |
Foreign currency translation |
|
|
533 |
|
|
|
(138 |
) |
|
|
395 |
|
Comprehensive income (loss) from
equity method investees |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(68,385 |
) |
|
$ |
(208,411 |
) |
|
$ |
(276,796 |
) |
|
|
|
|
|
|
|
|
|
|
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 $132.4 million as of March 31, 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:
|
|
|
|
|
April 1 to December 31, 2009 |
|
$ |
13,763 |
|
2010 |
|
|
21,332 |
|
2011 |
|
|
11,530 |
|
2012 |
|
|
10,893 |
|
2013 |
|
|
10,874 |
|
2014 |
|
|
10,311 |
|
Thereafter |
|
|
21,691 |
|
|
|
|
|
Total |
|
$ |
100,394 |
|
|
|
|
|
Rent expense recognized on a straight-line basis during the three months ended March 31, 2009 and
2008 was $4.9 million and $4.8 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 March 31, 2009, if
any, will not materially affect Fortresss results of operations, liquidity or financial position.
20
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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, |
21
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)
MARCH 31, 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 March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
% Below |
|
|
Periods |
|
|
Mar 31, 2009 |
|
|
|
|
|
|
Share of |
|
|
Cost |
|
|
|
|
|
|
Cost |
|
|
in |
|
|
DE Impairment |
|
|
|
|
Fund |
|
NAV |
|
|
Basis (A) |
|
|
Deficit |
|
|
Basis |
|
|
Deficit |
|
|
Recorded |
|
|
Notes |
|
Main Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund I |
|
$ |
159 |
|
|
$ |
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
$ |
|
|
|
|
|
|
Fund II |
|
|
2,317 |
|
|
|
2,565 |
|
|
|
(248 |
) |
|
|
(10 |
%) |
|
2 Quarters |
|
|
(248 |
) |
|
|
(B |
) |
Fund III and Fund III CO |
|
|
4,798 |
|
|
|
5,030 |
|
|
|
(232 |
) |
|
|
(5 |
%) |
|
4 Quarters |
|
|
(232 |
) |
|
|
(B |
) |
Fund IV and Fund IV CO |
|
|
98,747 |
|
|
|
104,931 |
|
|
|
(6,184 |
) |
|
|
(6 |
%) |
|
6 Quarters |
|
|
(6,184 |
) |
|
|
(B |
) |
Fund V and Fund V CO |
|
|
34,926 |
|
|
|
40,479 |
|
|
|
(5,553 |
) |
|
|
(14 |
%) |
|
6 Quarters |
|
|
(5,553 |
) |
|
|
(B |
) |
Mortgage Opportunities Funds |
|
|
3,097 |
|
|
|
3,615 |
|
|
|
(518 |
) |
|
|
(14 |
%) |
|
4 Quarters |
|
|
(518 |
) |
|
|
(B |
) |
Long Dated Value Funds |
|
|
19,277 |
|
|
|
17,792 |
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Real Assets Funds |
|
|
17,264 |
|
|
|
12,586 |
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Credit Opportunities Funds |
|
|
11,157 |
|
|
|
11,747 |
|
|
|
(590 |
) |
|
|
(5 |
%) |
|
4 Quarters |
|
|
(562 |
) |
|
|
(B |
) |
Single Investment Funds and Investments (combined) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAGFAH (XETRA: GFJ) |
|
|
33,866 |
|
|
|
39,682 |
|
|
|
(5,816 |
) |
|
|
(15 |
%) |
|
4 Quarters |
|
|
(6,588 |
) |
|
|
(B |
) |
Brookdale (NYSE: BKD) |
|
|
9,637 |
|
|
|
10,386 |
|
|
|
(749 |
) |
|
|
(7 |
%) |
|
6 Quarters |
|
|
(749 |
) |
|
|
(B |
) |
Aircastle (NYSE: ACT) |
|
|
318 |
|
|
|
366 |
|
|
|
(48 |
) |
|
|
(13 |
%) |
|
2 Quarters |
|
|
|
|
|
|
|
|
Private investment #1 |
|
|
43,064 |
|
|
|
53,066 |
|
|
|
(10,002 |
) |
|
|
(19 |
%) |
|
4 Quarters |
|
|
(10,002 |
) |
|
|
(B |
) |
Private investment #2 |
|
|
590 |
|
|
|
1,273 |
|
|
|
(683 |
) |
|
|
(54 |
%) |
|
5 Quarters |
|
|
(683 |
) |
|
|
(B |
) |
Private investment #3 |
|
|
242,945 |
|
|
|
275,705 |
|
|
|
(32,760 |
) |
|
|
(12 |
%) |
|
6 Quarters |
|
|
|
|
|
|
(C |
) |
Other |
|
|
25,473 |
|
|
|
35,028 |
|
|
|
(9,555 |
) |
|
|
(27 |
%) |
|
Various |
|
|
(760 |
) |
|
|
(D |
) |
Castles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurocastle (EURONEXT: ECT) |
|
|
360 |
|
|
|
309 |
|
|
|
N/A |
|
|
|
|
|
|
4 Quarters |
|
|
|
|
|
|
|
|
Newcastle (NYSE: NCT) |
|
|
667 |
|
|
|
862 |
|
|
|
(195 |
) |
|
|
(23 |
%) |
|
3 Quarters |
|
|
(195 |
) |
|
|
(B |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
548,662 |
|
|
$ |
615,422 |
|
|
$ |
(73,133 |
) |
|
|
|
|
|
|
|
|
|
$ |
(32,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Before impairment taken at March 31, 2009. |
|
(B) |
|
The investments in these funds were impaired in prior quarters. Further downward
movement in underlying estimated fair values has resulted in additional required
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 13% 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)
MARCH 31, 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
and hybrid PE funds, which are subject to contingent clawback, as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Incentive |
|
|
No Longer |
|
|
Subject to |
|
|
Intrinsic |
|
|
Employee |
|
|
|
|
|
|
Prior Net |
|
|
Periods |
|
|
March 31, 2009 |
|
|
|
|
|
|
Income |
|
|
Subject to |
|
|
Clawback |
|
|
Clawback |
|
|
Portion |
|
|
Net |
|
|
DE Reserves |
|
|
in Intrinsic |
|
|
Gross DE Reserve |
|
|
|
|
Fund |
|
Received |
|
|
Clawback |
|
|
(A) |
|
|
(B) |
|
|
(C) |
|
|
Clawback |
|
|
Taken (D) |
|
|
Clawback |
|
Recorded (D) |
|
|
Notes |
|
|
|
Fund I |
|
$ |
308,633 |
|
|
$ |
296,882 |
|
|
$ |
11,751 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
N/A |
|
$ |
|
|
|
|
(E) |
|
Fund II |
|
|
254,688 |
|
|
|
113,872 |
|
|
|
140,816 |
|
|
|
46,742 |
|
|
|
17,312 |
|
|
|
29,430 |
|
|
|
(25,842 |
) |
|
2 Quarters |
|
|
|
|
|
|
(F) |
|
Fund III |
|
|
72,483 |
|
|
|
|
|
|
|
72,483 |
|
|
|
72,483 |
|
|
|
27,375 |
|
|
|
45,108 |
|
|
|
(45,108 |
) |
|
5 Quarters |
|
|
|
|
|
|
(G) |
|
FRID |
|
|
16,739 |
|
|
|
|
|
|
|
16,739 |
|
|
|
16,739 |
|
|
|
6,698 |
|
|
|
10,041 |
|
|
|
(10,041 |
) |
|
7 Quarters |
|
|
|
|
|
|
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
652,543 |
|
|
$ |
410,754 |
|
|
$ |
241,789 |
|
|
$ |
135,964 |
|
|
$ |
51,385 |
|
|
$ |
84,579 |
|
|
$ |
(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 March 31, 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, in excess of
previously recorded reserves was approximately $3.6 million at March 31, 2009. Increases in
the values of underlying investments have reversed this excess subsequent to March 31,
2009. 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 three months ended March 31, 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 March 31, 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 $45.2 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)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
March 31, 2009 and the Three Months Then Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
PE |
|
|
Principal |
|
|
|
|
|
|
Fortress |
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Investments |
|
|
Unallocated |
|
|
Subtotal |
|
Segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
37,631 |
|
|
$ |
11,911 |
|
|
$ |
22,629 |
|
|
$ |
28,123 |
|
|
$ |
6,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
106,375 |
|
Incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
37,631 |
|
|
$ |
11,911 |
|
|
$ |
22,629 |
|
|
$ |
28,945 |
|
|
$ |
6,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
107,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
29,289 |
|
|
$ |
3,989 |
|
|
$ |
5,975 |
|
|
$ |
2,904 |
|
|
$ |
2,233 |
|
|
$ |
(35,034 |
) |
|
$ |
(151 |
) |
|
$ |
9,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
36,137 |
|
|
$ |
6,910 |
|
|
$ |
2,860 |
|
|
$ |
4,800 |
|
|
$ |
10,315 |
|
|
$ |
804,208 |
|
|
$ |
493,696 |
|
|
$ |
1,358,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
|
Fortress |
|
|
Reconciliation |
|
|
Fortress |
|
|
Principals |
|
|
Net Income |
|
|
|
Subtotal |
|
|
to GAAP |
|
|
Consolidated* |
|
|
and Others |
|
|
(Loss) |
|
Revenues |
|
$ |
107,197 |
|
|
$ |
15,099 |
|
|
$ |
122,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings / net income (loss) |
|
$ |
9,205 |
|
|
$ |
(76,364 |
) |
|
$ |
(67,159 |
) |
|
$ |
(219,522 |
) |
|
$ |
(286,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,358,926 |
|
|
$ |
13,577 |
|
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Unallocated assets include deferred tax assets of $411.7 million.
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
PE |
|
|
Principal |
|
|
|
|
|
|
Fortress |
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Investments |
|
|
Unallocated |
|
|
Subtotal |
|
Segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
39,771 |
|
|
$ |
13,694 |
|
|
$ |
52,719 |
|
|
$ |
36,844 |
|
|
$ |
2,009 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
145,037 |
|
Incentive income |
|
|
28,741 |
|
|
|
12 |
|
|
|
2,695 |
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
68,512 |
|
|
$ |
13,706 |
|
|
$ |
55,414 |
|
|
$ |
37,269 |
|
|
$ |
2,009 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
176,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable
earnings |
|
$ |
50,056 |
|
|
$ |
4,276 |
|
|
$ |
14,731 |
|
|
$ |
2,048 |
|
|
$ |
(112 |
) |
|
$ |
(13,330 |
) |
|
$ |
38 |
|
|
$ |
57,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
|
Fortress |
|
|
Reconciliation |
|
|
Fortress |
|
|
Principals |
|
|
Net Income |
|
|
|
Subtotal |
|
|
to GAAP |
|
|
Consolidated* |
|
|
and Others |
|
|
(Loss) |
|
Revenues |
|
$ |
176,910 |
|
|
$ |
23,970 |
|
|
$ |
200,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
distributable
earnings / net
income (loss) |
|
$ |
57,707 |
|
|
$ |
(126,624 |
) |
|
$ |
(68,917 |
) |
|
$ |
(208,269 |
) |
|
$ |
(277,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 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)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Reconciling items between segment measures and GAAP measures:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 and |
|
|
|
|
|
|
the Three Months then |
|
|
Three Months Ended |
|
|
|
Ended |
|
|
March 31, 2008 |
|
Adjustments from segment revenues to GAAP revenues |
|
|
|
|
|
|
|
|
Adjust management fees* |
|
$ |
163 |
|
|
$ |
163 |
|
Adjust incentive income |
|
|
|
|
|
|
5,899 |
|
Adjust income from the receipt of options |
|
|
|
|
|
|
|
|
|
|
Other revenues* |
|
|
|
|
|
|
|
|
Adjust management fees from non-affiliates |
|
|
(886 |
) |
|
|
(1,143 |
) |
Adjust incentive income from non-affiliates |
|
|
(822 |
) |
|
|
(628 |
) |
Adjust other revenues (including expense reimbursements) |
|
|
16,644 |
|
|
|
19,679 |
|
|
|
|
|
|
|
|
|
|
|
14,936 |
|
|
|
17,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
15,099 |
|
|
$ |
23,970 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 |
|
|
|
|
|
|
31,959 |
|
Incentive income received from private equity funds and hybrid |
|
|
|
|
|
|
|
|
PE funds, not subject to contingent repayment |
|
|
|
|
|
|
17 |
|
Incentive income received from hedge funds, subject
to annual performance achievement |
|
|
|
|
|
|
|
|
Reserve for clawback, gross (see discussion above) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,899 |
|
Adjust other income |
|
|
|
|
|
|
|
|
Distributions of earnings from equity method investees*** |
|
|
|
|
|
|
(365 |
) |
Earnings (losses) from equity method investees*** |
|
|
(38,921 |
) |
|
|
(40,642 |
) |
Gains (losses) on options in equity method investees |
|
|
24 |
|
|
|
(12,493 |
) |
Unrealized gains (losses) on publicly traded investments |
|
|
(1,853 |
) |
|
|
(17,324 |
) |
Impairment of investments (see discussion above) |
|
|
32,274 |
|
|
|
|
|
Adjust income from the receipt of options |
|
|
|
|
|
|
|
|
|
|
|
(8,476 |
) |
|
|
(70,824 |
) |
Adjust employee compensation |
|
|
|
|
|
|
|
|
Adjust employee equity-based compensation expense
(including Castle options assigned) |
|
|
(53,044 |
) |
|
|
(35,601 |
) |
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 |
) |
|
|
|
|
|
|
|
|
|
|
(53,044 |
) |
|
|
(25,957 |
) |
Adjust Principals equity-based compensation expense |
|
|
(234,759 |
) |
|
|
(237,367 |
) |
Adjust Principals interests related to Fortress Operating Group units |
|
|
219,623 |
|
|
|
208,877 |
|
Adjust tax receivable agreement liability |
|
|
(55 |
) |
|
|
|
|
Adjust income taxes |
|
|
347 |
|
|
|
(7,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
(76,364 |
) |
|
$ |
(126,624 |
) |
|
|
|
|
|
|
|
|
|
|
** |
|
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 |
|
|
(11,135 |
) |
Adjust investments gross of employee portion |
|
|
24,640 |
|
Adjust option investments from intrinsic value |
|
|
72 |
|
|
|
|
|
Total adjustments |
|
$ |
13,577 |
|
|
|
|
|
26
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Fortresss depreciation expense by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Unallocated |
|
|
Total |
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
284 |
|
|
$ |
169 |
|
|
$ |
611 |
|
|
$ |
696 |
|
|
$ |
107 |
|
|
$ |
774 |
|
|
$ |
2,641 |
|
2008 |
|
$ |
229 |
|
|
$ |
192 |
|
|
$ |
728 |
|
|
$ |
772 |
|
|
$ |
30 |
|
|
$ |
485 |
|
|
$ |
2,436 |
|
11. SUBSEQUENT EVENTS
These financial statements include a discussion of material events which have occurred subsequent
to March 31, 2009 (referred to as subsequent events) through May 11, 2009. Events subsequent to
that date have not been considered in these financial statements.
On May 5, 2009, consolidated affiliates of Fortress executed several agreements to become the
investment manager of certain investment funds currently managed by D.B. Zwirn & Co., L.P. (the
Zwirn Funds) and to effect other related transactions. Consummation of these transactions is
currently anticipated to occur in the second quarter of 2009 subject to the satisfaction of various
conditions, including the approval of investors in certain of the Zwirn funds. As of May 5, 2009,
the Zwirn Funds managed approximately $2 billion of assets.
27
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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 three months ended, March 31, 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 March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Combined |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
42,541 |
|
|
$ |
767 |
|
|
$ |
|
|
|
$ |
43,308 |
|
Due from affiliates |
|
|
64,188 |
|
|
|
|
|
|
|
|
|
|
|
64,188 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investees |
|
|
759,980 |
|
|
|
20,320 |
|
|
|
(20,320 |
) |
|
|
759,980 |
|
Options in affiliates |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Deferred tax asset |
|
|
10,280 |
|
|
|
401,376 |
|
|
|
|
|
|
|
411,656 |
|
Other assets |
|
|
88,733 |
|
|
|
4,566 |
|
|
|
|
|
|
|
93,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
965,794 |
|
|
$ |
427,029 |
|
|
$ |
(20,320 |
) |
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits |
|
$ |
42,679 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42,679 |
|
Due to affiliates |
|
|
11,615 |
|
|
|
338,765 |
|
|
|
|
|
|
|
350,380 |
|
Deferred incentive income |
|
|
163,635 |
|
|
|
|
|
|
|
|
|
|
|
163,635 |
|
Debt obligations payable |
|
|
604,041 |
|
|
|
|
|
|
|
|
|
|
|
604,041 |
|
Other liabilities |
|
|
59,333 |
|
|
|
|
|
|
|
|
|
|
|
59,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,303 |
|
|
|
338,765 |
|
|
|
|
|
|
|
1,220,068 |
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
1,918,740 |
|
|
|
663,848 |
|
|
|
(1,918,740 |
) |
|
|
663,848 |
|
Retained earnings (accumulated deficit) |
|
|
(1,850,576 |
) |
|
|
(580,538 |
) |
|
|
1,850,576 |
|
|
|
(580,538 |
) |
Accumulated other comprehensive income (loss) |
|
|
(6,787 |
) |
|
|
(939 |
) |
|
|
6,787 |
|
|
|
(939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fortress shareholders equity (B) |
|
|
61,377 |
|
|
|
82,371 |
|
|
|
(61,377 |
) |
|
|
82,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principals and others interests in equity of
consolidated subsidiaries |
|
|
23,114 |
|
|
|
5,893 |
|
|
|
41,057 |
|
|
|
70,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
84,491 |
|
|
|
88,264 |
|
|
|
(20,320 |
) |
|
|
152,435 |
|
|
|
$ |
965,794 |
|
|
$ |
427,029 |
|
|
$ |
(20,320 |
) |
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group. |
(B) |
|
Includes the Principals members equity in the
Fortress Operating Group column, which is eliminated in consolidation. |
28
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The consolidating statement of operations information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Consolidated |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
105,652 |
|
Incentive income from affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
|
|
|
|
|
|
|
|
13,047 |
|
Other revenues |
|
|
3,594 |
|
|
|
3 |
|
|
|
|
|
|
|
3,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,293 |
|
|
|
3 |
|
|
|
|
|
|
|
122,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,125 |
|
|
|
61 |
|
|
|
|
|
|
|
8,186 |
|
Compensation and benefits |
|
|
109,236 |
|
|
|
|
|
|
|
|
|
|
|
109,236 |
|
Principals agreement compensation |
|
|
234,759 |
|
|
|
|
|
|
|
|
|
|
|
234,759 |
|
General, administrative and other |
|
|
17,185 |
|
|
|
|
|
|
|
|
|
|
|
17,185 |
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,946 |
|
|
|
61 |
|
|
|
|
|
|
|
372,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
(396 |
) |
Net realized gains (losses) from affiliate investments |
|
|
(248 |
) |
|
|
|
|
|
|
|
|
|
|
(248 |
) |
Net unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) from affiliate investees |
|
|
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
(1,829 |
) |
Tax
receivable agreements liability reduction |
|
|
|
|
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(66,606 |
) |
|
|
66,606 |
|
|
|
(34,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,322 |
) |
|
|
(66,661 |
) |
|
|
66,606 |
|
|
|
(37,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
(286,975 |
) |
|
|
(66,719 |
) |
|
|
66,606 |
|
|
|
(287,088 |
) |
Income tax benefit (expense) |
|
|
847 |
|
|
|
(440 |
) |
|
|
|
|
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(286,128 |
) |
|
$ |
(67,159 |
) |
|
$ |
66,606 |
|
|
$ |
(286,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principals and Others Interests in Income (Loss) of Consolidated
Subsidiaries |
|
$ |
101 |
|
|
$ |
|
|
|
$ |
(219,623 |
) |
|
$ |
(219,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to Class A Shareholders (B) |
|
$ |
(286,229 |
) |
|
$ |
(67,159 |
) |
|
$ |
286,229 |
|
|
$ |
(67,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group.
|
(B) |
|
Includes net income (loss) attributable to the
Principals interests in the Fortress Operating Group column,
which is eliminated in consolidation.
|
29
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The consolidating statement of cash flows information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Consolidated |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(286,128 |
) |
|
$ |
(67,159 |
) |
|
$ |
66,606 |
|
|
$ |
(286,681 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
2,641 |
|
Other amortization and accretion |
|
|
3,414 |
|
|
|
|
|
|
|
|
|
|
|
3,414 |
|
(Earnings) losses from equity method investees |
|
|
34,849 |
|
|
|
66,606 |
|
|
|
(66,606 |
) |
|
|
34,849 |
|
Distributions of earnings from equity method investees |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
(Gains) losses from investments |
|
|
2,473 |
|
|
|
|
|
|
|
|
|
|
|
2,473 |
|
Deferred incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense |
|
|
(2,937 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
(3,759 |
) |
Tax receivable agreement liability reduction |
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Equity-based compensation |
|
|
287,803 |
|
|
|
|
|
|
|
|
|
|
|
287,803 |
|
Cash flows due to changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from affiliates |
|
|
(25,932 |
) |
|
|
|
|
|
|
|
|
|
|
(25,932 |
) |
Other assets |
|
|
(3,317 |
) |
|
|
2,060 |
|
|
|
|
|
|
|
(1,257 |
) |
Accrued compensation and benefits |
|
|
(108,216 |
) |
|
|
|
|
|
|
|
|
|
|
(108,216 |
) |
Due to affiliates |
|
|
(1,428 |
) |
|
|
61 |
|
|
|
|
|
|
|
(1,367 |
) |
Deferred incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
33,857 |
|
|
|
(1,200 |
) |
|
|
|
|
|
|
32,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(62,910 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
(63,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to equity method investees |
|
|
(31,792 |
) |
|
|
|
|
|
|
|
|
|
|
(31,792 |
) |
Distributions of capital from equity method investees |
|
|
10,538 |
|
|
|
292 |
|
|
|
(292 |
) |
|
|
10,538 |
|
Purchase of fixed assets |
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
|
|
(1,110 |
) |
Proceeds from disposal of fixed assets |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(22,358 |
) |
|
|
292 |
|
|
|
(292 |
) |
|
|
(22,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under debt obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt obligations |
|
|
(125,000 |
) |
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
Payment of deferred financing costs |
|
|
(4,162 |
) |
|
|
|
|
|
|
|
|
|
|
(4,162 |
) |
Dividends and dividend equivalents paid |
|
|
(292 |
) |
|
|
|
|
|
|
292 |
|
|
|
|
|
Principals and others interests in equity of consolidated subsidiaries distributions |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Principals and others interests in equity of consolidated subsidiaries contributions |
|
|
(5,225 |
) |
|
|
|
|
|
|
|
|
|
|
(5,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(134,654 |
) |
|
|
|
|
|
|
292 |
|
|
|
(134,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(219,922 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
(220,029 |
) |
Cash and Cash Equivalents, Beginning of Period |
|
|
262,463 |
|
|
|
874 |
|
|
|
|
|
|
|
263,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
42,541 |
|
|
$ |
767 |
|
|
$ |
|
|
|
$ |
43,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group. |
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(tables in thousands except as otherwise indicated and per share data)
The following discussion should be read in conjunction with Fortress Investment Groups
consolidated financial statements and the related notes (referred to as consolidated financial
statements or historical consolidated financial statements) included within this Quarterly
Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known
and unknown risks and uncertainties. Actual results and the timing of events may differ
significantly from those expressed or implied in such forward-looking statements due to a number of
factors, including those included in Part II, Item 1A, Risk Factors and elsewhere in this
Quarterly Report on Form 10-Q.
General
Our Business
Fortress is a leading global alternative asset manager with approximately $26.5 billion in AUM as
of March 31, 2009. We raise, invest and manage private equity funds, liquid hedge funds and hybrid
funds. We earn management fees based on the size of our funds, incentive income based on the
performance of our funds, and investment income from our principal investments in those funds. We
invest capital in each of our businesses.
As of March 31, 2009, we managed alternative assets in three core businesses:
Private Equity a business that manages approximately $13.2 billion of AUM comprised of two
business segments: (i) private equity funds that primarily make significant, control-oriented
investments in debt and equity securities of public or privately held entities in North America and
Western Europe, with a focus on acquiring and building asset-based businesses with significant cash
flows; and (ii) publicly traded alternative investment vehicles, which we refer to as Castles,
that invest primarily in real estate and real estate related debt investments.
Liquid Hedge Funds a business that manages approximately $4.8 billion of AUM. These funds invest
globally in fixed income, currency, equity and commodity markets and related derivatives to
capitalize on imbalances in the financial markets.
Hybrid Funds a business that manages approximately $8.5 billion of AUM comprised of two business
segments: (i) 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 (ii) 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, and 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).
In addition, we treat our principal investments in these funds as a distinct business segment.
Managing Business Performance
We conduct our 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 those funds as well as cash that is
available to be invested. These segments are differentiated based on the varying investment
strategies of the funds we manage in each segment.
The amounts not allocated to a segment consist primarily of certain general and administrative
expenses. Where applicable, portions of the general and administrative expenses have been allocated
between the segments.
Management assesses our segments on a Fortress Operating Group and pre-tax basis, and therefore
adds back the interests in consolidated subsidiaries related to Fortress Operating Group units
(held by the principals) and income tax expense.
Management assesses the net performance of each segment based on its distributable earnings.
Distributable earnings is not a measure of cash generated by operations which is available for
distribution. Rather distributable earnings is a supplemental measure of operating performance used
by management in analyzing its segment and overall results. Distributable earnings should not be
considered as an alternative to cash flow in accordance with GAAP or as a measure of our liquidity,
and is not necessarily indicative of cash available to fund cash needs (including dividends and
distributions).
We believe that the presentation of distributable earnings enhances a readers understanding of the
economic operating performance of our segments. For a more detailed discussion of distributable
earnings and how it reconciles to our GAAP net income (loss), see Results of Operations
Segments Analysis below.
31
Market Considerations
Our revenues consist primarily of (i) management fees based generally on the size of our funds,
(ii) incentive income based on the performance of our funds and (iii) investment income from our
investments in those funds. Our ability to maintain and grow our revenues both at Fortress and
within our funds depends on our ability to attract new capital and investors, secure investment
opportunities, obtain financing for transactions, consummate investments and deliver attractive
risk-adjusted returns. Our ability to execute this investment strategy depends upon a number of
market conditions, including:
The strength and liquidity of U.S. and global financial institutions and the financial system.
Many market participants have become increasingly uncertain about the health of a number of
financial institutions as well as the financial system in general. Continuing write-downs and
capital related issues in the financial services industry have contributed to the recent wave of
significant events affecting financial institutions, including the insolvency of Lehman Brothers,
the governments placing of Fannie Mae, Freddie Mac and AIG under its supervision, the governments
increasing its equity investment in Citigroup, and the announced distressed sales of all or
portions of Bear Stearns, Merrill Lynch, Wachovia and Washington Mutual. These events have
impacted the credit and equity markets and global economy in a number of ways (some of which are
discussed in more detail below under -The strength and liquidity of the U.S. and global equity and
debt markets). In addition, certain of these institutions serve as key counterparties for a
tremendous number of derivatives and other financial instruments held by Fortress and our funds.
The consolidation and elimination of counterparties has increased our concentration of counterparty
risk, decreased the universe of potential counterparties and reduced our ability to obtain
competitive financing rates. Moreover, the insolvency of Lehman Brothers affected some of our
funds in various ways. For example, some of our hedge funds had prime brokerage accounts with
Lehman Brothers, and Lehman Brothers was the counterparty on a number of these funds derivatives,
repurchase agreements and other financial instruments. These funds are working to close out such
arrangements, and we do not currently expect losses as a result of the Lehman insolvency to have a
material effect on the net asset value of any Fortress Fund or on Fortress. However, due to the
sudden nature of Lehmans insolvency, the complexity and ambiguity of both the contractual
arrangements and applicable regulations, this process will take time, may be expensive and may
result in one or more funds receiving only a portion of the amount they are owed (or potentially
receiving nothing at all). Additional failures of financial institutions, particularly those who
serve as counterparties to our financing arrangements, would have a meaningfully negative impact on
the financial markets in which we operate and could have a meaningfully negative impact on Fortress
and one or more of our funds.
The strength and liquidity of the U.S. and global equity and debt markets.
Strong equity market conditions enable our private equity funds and hybrid PE funds to increase the
value, and effect realizations, of their portfolio company investments. In addition, strong equity
markets make it generally easier for our funds that invest in equities to generate positive
investment returns. The condition of debt markets also has a meaningful impact on our business.
Several of our funds make investments in debt instruments, which are assisted by a strong and
liquid debt market. In addition, our funds borrow money to make investments. Our funds utilize
leverage in order to increase investment returns, which ultimately drive the performance of our
funds. Furthermore, we utilize debt to finance our investments in our funds and for working capital
purposes.
Although equity and debt market conditions had been favorable for a number of years, the debt
market conditions began to deteriorate in mid-2007, as the United States experienced considerable
turbulence in the housing and sub-prime mortgage markets, which negatively affected other fixed
income markets. The difficult conditions in the fixed income markets prompted lenders to cease
committing to new senior loans and other debt, which, in turn, made it extremely difficult to
finance new and pending private equity acquisitions or to refinance existing debt. Recently
announced private equity-led acquisitions have been smaller, less levered, and subject to more
restrictive debt covenants than acquisitions done prior to the disruption.
As the turbulence continued and its intensity increased, equity market conditions also began to
deteriorate in the latter part of 2007 as concerns of an economic slowdown began to affect equity
valuations. The resulting reduction in liquidity and increase in volatility caused several
commercial and investment banks, hedge funds and other financial institutions to reduce the
carrying value of a significant amount of their fixed income holdings, which further reduced the
liquidity of debt and, to a lesser extent, equity instruments. Although the United States and
other governments took a number of significant steps to improve market conditions, such efforts to
date have not brought stability or liquidity to the capital markets, and we cannot predict the
future conditions of these markets or the impact of such conditions on our business.
The current market conditions have negatively impacted our business in several ways:
|
|
|
There currently is less debt and equity capital available in the market relative to the
levels available in recent years, which, coupled with additional margin collateral
requirements imposed by lenders on some types of investments, debt and derivatives, has
increased the importance of maintaining sufficient liquidity without relying upon additional
infusions of capital from the debt and equity markets. Based on cash balances, committed
financing and short-term operating cash flows, in the judgment of management we have
sufficient liquidity in the current market environment. However, maintaining this liquidity
rather than investing available capital, and the reduced availability of attractive
financing, has reduced our returns. Furthermore, we expect that our ability to access
liquidity through the raising of equity capital or the issuance of debt obligations has been
limited by the current market environment. This, in turn, may
limit our ability to make investments, distributions, or engage in other strategic
transactions. The dislocation of values and associated decreased liquidity in the global
equity and debt markets have caused a material depreciation in equity and fixed income asset
values, greater price volatility and weaker economic conditions around the globe. This has
resulted in a significant reduction in the value of our investments, which in turn impacts our
management fees, incentive income and investment income as described below. |
32
|
|
|
There has been a prolonged reduction in market trading activity. This reduction and
concern over market conditions have resulted in significant reductions in valuations by third
party brokers and pricing agents. |
|
|
|
The per share market prices of the investments held by our private equity funds in public
companies have decreased substantially. This, in turn, has contributed to a significant
decrease in our public company surplus. A decrease in this surplus hinders our ability to
realize gains within these funds and therefore our ability to earn incentive income.
Furthermore, the disruptions in the debt and equity markets have made exit strategies for
private investments more difficult to execute as potential buyers have difficulty obtaining
attractive financing and the demand for IPOs has been greatly reduced. |
|
|
|
These conditions have made it more difficult to generate positive investment returns and
have contributed to increased redemption requests from investors throughout the hedge fund
industry, and a number of our funds have been affected by this trend. |
|
|
|
As a result of the above factors: |
|
|
|
We did not pay a dividend on our Class A shares for the third quarter of 2008
through the first quarter of 2009. The decision to pay a dividend, as well as the amount
of any dividends paid, is subject to change at the discretion of our board of directors
based upon a number of factors, including actual and projected distributable earnings. If
current conditions persist or deteriorate, we may be unable to pay any dividends. |
|
|
|
Our share of the NAV of certain fund investments, including certain investments on
which we have received incentive returns, has declined below their related carrying
amounts for distributable earnings purposes. During the three months ended March 31,
2009, we have taken $32.3 million of impairments and reserves related to such funds for
distributable earnings purposes. While we expect aggregate returns on our other private
equity fund and hybrid PE fund investments to ultimately exceed their carrying amount, if
such funds were liquidated at their current NAV (although we have no present intention of
doing so), the result would be additional impairment and reserves of approximately $45.2
million. Declines in the NAV of our fund investments have also caused us to record GAAP
losses from equity method investees of $34.8 million in 2009. Furthermore, such declines
impact our future management fees, generally at an annual rate of between 1% 3% of the
decline in aggregate fund NAV. See - Fee Paying Assets Under Management below for a
table summarizing our AUM. |
|
|
|
Our liquid hedge funds received a total of $0.6 billion in redemption requests,
including affiliates, for the three months ended March 31, 2009. These redemptions will
directly impact the management fees we receive in 2009 from such funds (which pay
management fees of between 2% 3% of AUM). Investors in our hybrid hedge funds are
permitted to request that their capital be returned on an annual basis, and such returns
of capital are paid over time as the underlying investments are liquidated, in accordance
with the governing documents of the applicable funds. During this period, such amounts
continue to be subject to management fees and, as applicable, incentive income. The 2009
notice date for the hybrid hedge funds has not yet occurred. |
|
|
|
As a result of not meeting the incentive income thresholds with respect to such
funds current investors, the incentive income from substantially all of our liquid and
hybrid hedge funds has been discontinued for an indefinite period of time. Returns earned
on capital from new investors continue to be incentive income eligible. Unrealized losses
in substantially all of our private equity funds and hybrid PE funds have resulted in
significantly higher future returns being required before we earn incentive income from
such funds. The returns required are subject to a number of variables including: the
amount of loss incurred, the amount of outstanding capital in the fund, the amount and
timing of future capital draws and distributions, the rate of preferential return earned
by investors, and others. We do not expect to earn a substantial amount of incentive
income in 2009. |
|
|
|
The current ratio of our distributable earnings to our AUM is lower than it has
been historically, and it is reasonably likely that the future ratios may also be below
historic levels for an indeterminate period of time. |
|
|
|
Decreases in revenues and in the value of our principal investments could
potentially affect our ability to comply with our debt covenants in the future. See
Covenants below. |
|
|
|
We are currently focused on preserving capital and liquidity rather than making
investments. |
The strength of, and competitive dynamics within, the alternative asset management industry,
including the amount of capital invested in, and withdrawn from, alternative investments.
The strength of the alternative asset management industry, and our competitive strength relative to
our peers, are dependent upon several factors, including, among other things, (1) the investment
returns alternative asset managers can provide relative
to other investment options, (2) the amount of capital investors allocate to alternative asset
managers and (3) our performance relative to our competitors and the related impact on our ability
to attract new capital.
33
First, the strength of the alternative asset management industry is dependent upon the investment
returns alternative asset managers can provide relative to other investment options. This factor
depends, in part, on the interest rate and credit spreads (which represent the yield demanded on
financial instruments by the market in comparison to a benchmark rate, such as the relevant U.S.
treasury rate or LIBOR) available on other investment products because as interest rates rise
and/or spreads widen, returns available on such investments would tend to increase and, therefore,
become more attractive relative to the returns offered by investment products offered by
alternative asset managers. We have benefited in the past from relatively tight spreads, which
have allowed us and the funds we manage to obtain financing for investments at attractive rates and
made our investment products attractive relative to many other products. Over the past two years,
spreads have widened significantly. In addition to potentially reducing the relative
attractiveness of our investment products, this widening will typically increase our costs when
financing our investments using debt, which, in turn, reduces the net return we can earn on those
investments. Furthermore, wider spreads reduce the value of investments currently owned by our
funds. A reduction in the value of our funds investments directly impacts our management fees and
incentive income from such funds. As a result, this dynamic could slow capital flow to the
alternative investment sector.
A second and related factor is the amount of capital invested with such managers. Over the past
several years, institutions, high net worth individuals and other investors (including sovereign
wealth funds) have increased their allocations of capital to the alternative investment sector.
However, investors have recently begun reducing the amount of capital they are allocating to
certain alternative asset investment products, particularly hedge funds, for three reasons. First,
as discussed above, challenging market conditions have reduced the returns generated by hedge
funds, with many funds posting negative returns in 2008. Second, the lack of available credit has
prompted many investors to maximize their cash holdings. Because the terms of many hedge funds
allow investors to redeem their capital periodically (as opposed to most private equity funds,
which do not allow redemptions), investors have begun redeeming their investments at rates that are
generally higher than redemptions rates in previous years. This wave of redemptions may affect the
investment decisions, and impair the viability, of many hedge funds who may not have sufficient
cash on hand to satisfy redemption requests and may thus be forced either to sell assets at
distressed prices in order to generate cash or take other measures. Certain of our hedge funds have
recently received higher levels of redemption requests than those received in previous years.
Third, negative investment performance has significantly reduced the amount of capital held by
university endowments, pension funds, insurance companies and other traditionally significant
investors in the alternative assets sector. As a result, many of these investors are decreasing the
amount of capital they will allocate to alternative assets.
The third factor, which most directly impacts our results, is our investment performance relative
to other investment alternatives, including products offered by other alternative asset managers.
As a historical leader in the alternative asset management sector based on the size, diversity and
historical performance of our funds, we have been able to attract a significant amount of new
capital. However, as noted above, current market conditions have reduced the flow of new capital
into the alternative asset management sector, and we have recently experienced stronger headwinds
in our capital raising efforts, and we expect to continue to experience these trends during 2009.
These factors have prompted us to reduce our expectations regarding future management fees and
potential incentive income.
Market Considerations Summary
While short-term disruptions in the markets, with respect to equity prices, interest rates, credit
spreads or other market factors, including market liquidity, may adversely affect our existing
positions, we believe such disruptions generally present significant new opportunities for
investment, particularly in distressed asset classes. Our ability to take advantage of these
opportunities will depend on our ability to access debt and equity capital, both at Fortress and
within the funds. No assurance can be given that future trends will not be disadvantageous to us,
particularly if current challenging conditions persist or intensify.
We do not currently know the full extent to which this disruption will affect us or the markets in
which we operate. If the disruption continues, or results in a permanent, fundamental change in
the credit markets, we and the funds we manage may experience further tightening of liquidity,
reduced earnings and cash flow, impairment charges, increased margin requirements, as well as
challenges in maintaining our reputation, raising additional capital, maintaining compliance with
debt covenants, obtaining investment financing and making investments on attractive terms, and may
need to make corresponding fundamental changes in our investment practices. However, to date we
have been able to continue raising capital for our funds, on a net basis, both through new and
existing funds, which serves both to increase our AUM and our management fee income and to give us
a significant amount of capital available to be invested at a time when we believe attractive
returns in distressed and other asset classes are available.
34
Results of Operations
The following is a discussion of our results of operations as reported under GAAP. For a detailed
discussion of distributable earnings and revenues from each of our segments, see Segment
Analysis below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
|
$ |
(38,405 |
) |
Incentive income from affiliates |
|
|
|
|
|
|
37,144 |
|
|
|
(37,144 |
) |
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
14,270 |
|
|
|
(1,223 |
) |
Other revenues |
|
|
3,597 |
|
|
|
5,409 |
|
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
122,296 |
|
|
|
200,880 |
|
|
|
(78,584 |
) |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,186 |
|
|
|
10,336 |
|
|
|
(2,150 |
) |
Compensation and benefits |
|
|
109,236 |
|
|
|
127,019 |
|
|
|
(17,783 |
) |
Principals agreement compensation |
|
|
234,759 |
|
|
|
237,367 |
|
|
|
(2,608 |
) |
General, administrative and other expense (including
depreciation and amortization) |
|
|
19,826 |
|
|
|
19,006 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372,007 |
|
|
|
393,728 |
|
|
|
(21,721 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) other investments |
|
|
(2,473 |
) |
|
|
(27,957 |
) |
|
|
25,484 |
|
Tax receivable agreement liability reduction |
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(49,129 |
) |
|
|
14,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,377 |
) |
|
|
(77,086 |
) |
|
|
39,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
(287,088 |
) |
|
|
(269,934 |
) |
|
|
(17,154 |
) |
Income tax benefit (expense) |
|
|
407 |
|
|
|
(7,252 |
) |
|
|
7,659 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(286,681 |
) |
|
$ |
(277,186 |
) |
|
$ |
(9,495 |
) |
|
|
|
|
|
|
|
|
|
|
Factors Affecting Our Business
During the periods discussed herein, the following are significant factors which have affected our
business and materially impacted our results of operations:
|
|
|
level of performance of our funds; and |
|
|
|
growth of our fund management and investment platform and our compensation
structure to sustain that growth. |
Fee Paying Assets Under Management
We measure AUM by reference to the fee paying assets we manage, including the capital we have the
right to call from our investors due to their capital commitments. As a result of raising new funds
and increases in the NAVs of our hedge funds from new investor capital, our AUM has increased over
the periods discussed. Recently, lower performance in our funds, coupled with redemptions in our
liquid hedge funds, have caused offsetting reductions in our AUM.
35
Our AUM has changed for the three months ended March 31, 2009 as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid |
|
|
|
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Hedge Funds |
|
|
PE Funds |
|
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM December 31, 2008 |
|
$ |
10,307 |
|
|
$ |
3,182 |
|
|
$ |
7,169 |
|
|
$ |
6,494 |
|
|
$ |
2,302 |
|
|
$ |
29,454 |
|
Capital raised (A) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Increase in invested capital |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376 |
|
|
|
436 |
|
Redemptions (B) |
|
|
|
|
|
|
|
|
|
|
(2,494 |
) |
|
|
(152 |
) |
|
|
|
|
|
|
(2,646 |
) |
Return of capital distributions |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(565 |
) |
|
|
(577 |
) |
Adjustment for reset date (C) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystallized incentive income (D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) and foreign exchange (E) |
|
|
(201 |
) |
|
|
(104 |
) |
|
|
125 |
|
|
|
116 |
|
|
|
(74 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM March 31, 2009 |
|
$ |
10,161 |
|
|
$ |
3,078 |
|
|
$ |
4,809 |
|
|
$ |
6,451 |
|
|
$ |
2,039 |
|
|
$ |
26,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes offerings of shares by the Castles, if any. |
|
(B) |
|
Excludes redemptions which reduced AUM subsequent to March 31, 2009. See - Market
Considerations above. |
|
(C) |
|
The reset date is the date on which a private equity fund or hybrid PE fund stops paying
management fees based on commitments and starts paying such fees based on invested capital,
which therefore changes fee paying AUM. |
|
(D) |
|
Represents the transfer of value from investors (fee paying) to Fortress (non-fee paying)
related to realized hedge fund incentive income. |
|
(E) |
|
Represents the change in fee-paying NAV resulting from realized and unrealized changes in the
reported value of the fund. |
Average Fee Paying AUM
Average fee paying AUM represents the reference amounts upon which our management fees are based.
The reference amounts for management fee purposes are: (i) capital commitments or invested capital
(or NAV, on an investment by investment basis, if lower) for the private equity funds and hybrid PE
funds, which in connection with funds raised after March 2006 includes the mark-to-market value on
public securities held within the fund, (ii) contributed capital for the Castles, or (iii) the NAV
for hedge funds.
Management Fees
Changes in our average AUM have an effect on our management fee revenues. Depending on the timing
of capital contributions in a given period, the full economic benefits of a change in AUM may not
be recognized until the following period.
36
Performance of Our Funds
The performance of our funds has been as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM |
|
|
|
|
|
|
Inception |
|
|
March 31, |
|
|
Returns (A) |
|
Name of Fund |
|
Date |
|
|
2009 |
|
|
2008 |
|
|
Inception to March 31, 2009 |
|
Private Equity Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund I |
|
Nov-99 |
|
$ |
36 |
|
|
$ |
36 |
|
|
|
25.6 |
% |
Fund II |
|
Jul-02 |
|
|
328 |
|
|
|
143 |
|
|
|
34.3 |
% |
Fund III |
|
Sep-04 |
|
|
880 |
|
|
|
1,084 |
|
|
|
(16.0 |
)% |
Fund III Coinvestment |
|
Nov-04 |
|
|
106 |
|
|
|
162 |
|
|
|
(9.1 |
)% |
Fund IV |
|
Mar-06 |
|
|
1,780 |
|
|
|
2,408 |
|
|
|
(21.3 |
)% |
Fund IV Coinvestment |
|
Apr-06 |
|
|
412 |
|
|
|
643 |
|
|
|
(20.9 |
)% |
Fund V |
|
May-07 |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
(C |
) |
Fund V Coinvestment |
|
Jun-07 |
|
|
938 |
|
|
|
553 |
|
|
|
(C |
) |
FRID |
|
Mar-05 |
|
|
293 |
|
|
|
860 |
|
|
|
(29.3 |
)% |
FECI |
|
Jun-07 |
|
|
532 |
|
|
|
532 |
|
|
|
(8.8 |
)% |
GAGACQ Fund |
|
Sep-04 |
|
|
|
|
|
|
|
|
|
|
2.1 |
% |
GAGACQ Coinvestment Fund |
|
Sep-04 |
|
|
9 |
|
|
|
25 |
|
|
|
14.2 |
% |
RIC Coinvestment Fund LP |
|
May-06 |
|
|
30 |
|
|
|
143 |
|
|
|
(45.5 |
)% |
FICO |
|
Aug-06 |
|
|
113 |
|
|
|
606 |
|
|
|
(74.1 |
)% |
FHIF |
|
Dec-06 |
|
|
626 |
|
|
|
1,028 |
|
|
|
(19.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
(B) |
|
Other Private Equity Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Opportunities Funds I, II and III |
|
Apr-08 |
|
|
78 |
|
|
|
|
|
|
|
(C |
) |
|
|
N/A |
|
|
|
(C |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newcastle Investment Corp. |
|
Jun-98 |
|
|
1,165 |
|
|
|
1,192 |
|
|
|
N/A |
|
|
|
(22.2 |
)% |
|
|
N/A |
|
Eurocastle Investment Limited |
|
Oct-03 |
|
|
1,913 |
|
|
|
2,311 |
|
|
|
(20.6 |
)% |
|
|
6.2 |
% |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drawbridge Global Macro Funds |
|
Jul-02 |
|
|
3,771 |
|
|
|
8,567 |
|
|
|
5.2 |
% |
|
|
(0.2 |
)% |
|
|
8.6 |
% |
Fortress Commodities Fund |
|
Jan-08 |
|
|
1,028 |
|
|
|
657 |
|
|
|
(0.5 |
)% |
|
|
(C |
) |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drawbridge Special Opportunities Fund LP (D) |
|
Aug-02 |
|
|
4,383 |
|
|
|
5,668 |
|
|
|
3.1 |
% |
|
|
(1.6 |
)% |
|
|
6.3 |
% |
Drawbridge Special Opportunities Fund LTD (D) |
|
Aug-02 |
|
|
449 |
|
|
|
644 |
|
|
|
3.5 |
% |
|
|
(1.9 |
)% |
|
|
5.6 |
% |
Fortress Partners Fund LP |
|
Jul-06 |
|
|
862 |
|
|
|
1,126 |
|
|
|
(2.0 |
)% |
|
|
(4.6 |
)% |
|
|
(7.7 |
)% |
Fortress Partners Offshore Fund LP |
|
Nov-06 |
|
|
674 |
|
|
|
605 |
|
|
|
(1.4 |
)% |
|
|
(4.0 |
)% |
|
|
(8.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to March 31, 2009 |
|
Hybrid PE Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Opportunities Fund |
|
Jan-08 |
|
|
914 |
|
|
|
133 |
|
|
(C) |
|
Long Dated Value Fund I |
|
Apr-05 |
|
|
201 |
|
|
|
191 |
|
|
(C) |
|
Long Dated Value Fund II |
|
Nov-05 |
|
|
207 |
|
|
|
202 |
|
|
0.0% |
|
Long Dated Value Fund III |
|
Feb-07 |
|
|
115 |
|
|
|
103 |
|
|
(C) |
|
Long Dated Value Patent Fund |
|
Nov-07 |
|
|
14 |
|
|
|
21 |
|
|
(C) |
|
Real Assets Fund |
|
Jun-07 |
|
|
126 |
|
|
|
91 |
|
|
(C) |
|
Assets Overflow Fund |
|
Jul-08 |
|
|
82 |
|
|
|
|
|
|
(C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal all funds |
|
|
|
|
|
|
26,065 |
|
|
|
33,734 |
|
|
|
|
|
|
|
|
|
Managed accounts |
|
|
|
|
|
|
473 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
26,538 |
|
|
$ |
34,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the following: |
|
|
|
For private equity funds, other than the Mortgage Opportunities Funds, and hybrid PE funds,
returns represent net internal rates of return to limited partners after management fees and
incentive allocations, and are computed on an inception to date basis consistent with industry
standards. Incentive allocations are computed based on a hypothetical liquidation of net
assets of each fund as of the balance sheet date. Returns are calculated for the investors as
a whole. The computation of such returns for an individual investor may vary from these
returns based on different management fee and incentive arrangements, and the timing of
capital transactions. |
|
|
|
For Castles, returns represent the return on invested equity (ROE) as reported by such
entities. ROE is not reported on an inception to date basis. Newcastles 2009 ROE is not
meaningful because Newcastle incurred a loss and had negative book equity. Eurocastles 2009
ROE is estimated as they have not yet finalized their first quarter results. |
|
|
|
For liquid and hybrid hedge funds, as well as the Mortgage Opportunities Funds, returns
represent net returns after taking into account any fees borne by the funds for a new issue
eligible, single investor class as of the close of business on the last date of the relevant
period. Specific performance may vary based on, among other things, whether fund investors are
invested in one or more special investments. |
37
|
|
|
(B) |
|
For liquid hedge funds, hybrid hedge funds and the Mortgage Opportunities Funds, reflects a
composite of monthly returns presented on an annualized net return basis. |
|
(C) |
|
These funds were in their investment periods, or less than one year had elapsed from their
inception, through the end of these years. In some cases, particularly the Mortgage
Opportunities Funds, Fund V, Fund V Coinvestment and Credit Opportunities Fund, returns during
these periods were significantly negative. |
|
(D) |
|
The returns for the Drawbridge Special Opportunities Funds reflect the performance of each
fund excluding the performance of the redeeming capital accounts which relate to December 31,
2008 redemptions. |
Incentive Income
Incentive income is calculated as a percentage of profits earned by the Fortress Funds. Incentive
income that is not subject to contingent repayment is recorded as earned. Incentive income received
from funds that continue to be subject to contingent repayment is deferred and recorded as a
deferred incentive income liability until the related contingency is resolved. The contingencies
related to a portion of the incentive income we have received from certain private equity Fortress
Funds have been resolved.
Fund Management and Investment Platform
In order to accommodate the demands of our funds growing investment portfolios, we have created
investment platforms, which are comprised primarily of our people, financial and operating systems
and supporting infrastructure. Expansion of our investment platform historically required increases
in headcount, consisting of newly hired investment professionals and support staff, as well as
leases and associated improvements to corporate offices to house the increased number of employees,
and related augmentation of systems and infrastructure. Our headcount decreased from 833 employees
as of March 31, 2008 to 819 employees as of March 31, 2009. This resulted in net decreases in our
compensation, office related and other personnel related expenses, although there were increases in
certain businesses.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
|
$ |
(38,405 |
) |
Incentive income from affiliates |
|
|
|
|
|
|
37,144 |
|
|
|
(37,144 |
) |
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
14,270 |
|
|
|
(1,223 |
) |
Other revenues |
|
|
3,597 |
|
|
|
5,409 |
|
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
122,296 |
|
|
$ |
200,880 |
|
|
$ |
(78,584 |
) |
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total revenues decreased as a result of the following:
Management fees from affiliates decreased by $38.4 million primarily due to the net effect of
increases (decreases) in average AUM of ($0.4) billion, ($0.5) billion, ($4.2) billion, ($1.9)
billion and $1.1 billion in our private equity funds, our Castles, our liquid hedge funds, our
hybrid hedge funds, and our hybrid PE funds, respectively. The combined net decrease to average
AUM generated a reduction in the amount of $31.9 million in management fees. In addition,
management fees from affiliates decreased by $6.3 million as a result of a decrease in the average
management fee percentage earned and by $1.5 million as a result of changes in foreign currency
exchange rates.
Incentive income from affiliates decreased by $37.1 million as a result of a decrease in
performance in our funds that resulted in no incentive income being recognized for the three months
ended March 31, 2009, compared to $37.1 million of incentive income recognized from our funds for
the three months ended March 31, 2008.
Expense reimbursements from affiliates decreased by $1.2 million primarily due to a decrease in
compensation and benefits expenses that we have incurred for the three months ended March 31, 2009,
as compared to the three months ended March 31, 2008.
Other revenues decreased by $1.8 million primarily due to a decrease in interest income of $2.5
million and a net decrease of $0.2 million in fees from non-affiliates, offset by a net increase of
$0.8 million in dividend income earned primarily from our direct investment in GAGFAH common stock
compared to dividends earned from the Castles in the prior period.
38
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Interest expense |
|
$ |
8,186 |
|
|
$ |
10,336 |
|
|
$ |
(2,150 |
) |
Compensation and benefits |
|
|
109,236 |
|
|
|
127,019 |
|
|
|
(17,783 |
) |
Principals agreement compensation |
|
|
234,759 |
|
|
|
237,367 |
|
|
|
(2,608 |
) |
General, administrative and other
(including depreciation and amortization) |
|
|
19,826 |
|
|
|
19,006 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
$ |
372,007 |
|
|
$ |
393,728 |
|
|
$ |
(21,721 |
) |
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total expenses decreased as a result of the following:
Interest expense decreased by $2.2 million primarily due to a combined decrease of $4.7 million due
to a decrease in average interest rates and a decrease in average borrowings from the first quarter
of 2008, offset by an increase of $2.8 million due to write-offs and increased amortization of
deferred financing costs.
Compensation and benefits decreased by $17.8 million primarily due to a decrease in profit sharing
compensation of $18.2 million and a decrease of $21.6 million in discretionary bonuses, offset by
an increase in equity based compensation of $24.6 million primarily due to the 31 million FOG RPUs
granted in April 2008 (see discussion below). Profit-sharing compensation decreased due largely to
decreased profit from our liquid and hybrid hedge funds.
Principals agreement compensation is being amortized on a straight-line basis over the term of the
agreement.
General, administrative and other expenses increased by $0.8 million, primarily as a result of an
increase in professional fees and consulting fees of $2.5 million, offset by a net decrease of $1.7
million in other general expenses.
Future Compensation Expense
In future periods, we will further recognize non-cash compensation expense on our non-vested
equity-based awards of $800.8 million with a weighted average recognition period of 3.87 years.
This does not include amounts related to the Principals Agreement, which is discussed above.
In April 2008, we granted 31 million Fortress Operating Group (FOG) restricted partnership units
(RPUs) to a senior employee. In connection with the grant of these interests, the employee
receives partnership distribution equivalent payments on such units with economic effect as from
January 1, 2008. The interests will vest into full capital interests in FOG units in three equal
portions on the first business day of 2011, 2012 and 2013, respectively, subject to continued
employment with Fortress. In connection with this grant, we have reduced the employees profit
sharing interests in various Fortress Funds.
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Net gains (losses) other investments |
|
$ |
(2,473 |
) |
|
$ |
(27,957 |
) |
|
$ |
25,484 |
|
Tax
receivable agreement liability reduction |
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(49,129 |
) |
|
|
14,280 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Loss) |
|
$ |
(37,377 |
) |
|
$ |
(77,086 |
) |
|
$ |
39,709 |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total other income (loss) decreased as a result of the following:
Net (losses) other investments decreased by $25.5 million primarily due to the recognition of an
unrealized loss of $1.9 million for the three months ended March 31, 2009 on our investments in
GAGFAH and in our Castles, as compared to the recognition of an unrealized loss of $15.5 million on
our investments in our Castles and other securities and an unrealized loss of $12.7 million on our
options in our Castles as a result of a decline in the relative performance of their underlying
stock price for the three months ended March 31, 2008. Our investments in GAGFAH and the Castles
are held at fair value pursuant to the provisions of SFAS 159.
39
Losses from equity method investees decreased by $14.3 million primarily due to the net effect of
(i) the recognition of a $34.8 million net loss from equity method investees in 2009 as a result of
losses attributable to investments in our private equity funds, liquid hedge funds, hybrid hedge
funds and hybrid PE funds, compared to (ii) the recognition of a $49.1 million loss on our equity
method investments for the three months ended March 31, 2008. The overall decrease in loss was
primarily a result of slightly improved returns within the funds.
Income Tax Benefit (Expense)
Fortress has recorded a significant deferred tax asset, primarily in connection with the Nomura
Transaction and IPO. A substantial portion of this asset is offset by a liability associated with
the tax receivable agreement with our Principals. This deferred tax asset is further discussed
under - Critical Accounting Policies below.
For the three months ended March 31, 2009, Fortress recognized income tax expense (benefit) of
($0.4 million). For the three months ended March 31, 2008, Fortress recognized income tax expense
(benefit) of $7.3 million. The primary reasons for the increase in income tax benefit for the three
months ended March 31, 2009 compared to the three months ended March 31, 2008 are (i) changes in
the mix of business segments producing income, which may be subject to tax at different rates, and
(ii) changes in the forecasts of annual taxable income which are used to calculate the tax
provision.
Segment Analysis
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. These segments are differentiated based on their
varying investment strategies. Due to the increased significance of the hybrid PE funds segment,
it has been disaggregated from the private equity funds segment in this period and for all periods
presented.
Discussed below are our results of operations for each of our reportable segments. They represent
the separate segment information available and utilized by our management committee, which consists
of our principals and certain key officers, and which functions as our chief operating decision
maker to assess performance and to allocate resources. Management evaluates the performance of each
segment based on its distributable earnings.
Management assesses our segments on a Fortress Operating Group and pre-tax basis, and therefore
adds back the non-controlling interests in consolidated subsidiaries related to Fortress Operating
Group units (held by the principals) and income tax expense.
Distributable earnings is defined in Note 10 to Part I, Item 1, Financial Statements Segment
Reporting. Furthermore, a complete discussion of distributable earnings basis impairment and
reserves, including the methodology used in estimating the amounts as well as the amounts incurred
in the relevant periods, is disclosed therein.
Private Equity Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
37,631 |
|
|
$ |
39,771 |
|
|
$ |
(2,140 |
) |
Incentive Income |
|
|
|
|
|
|
28,741 |
|
|
|
(28,741 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
37,631 |
|
|
$ |
68,512 |
|
|
$ |
(30,881 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
29,289 |
|
|
$ |
50,056 |
|
|
$ |
(20,767 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $20.8 million primarily due to:
|
|
|
a $0.9 million net decrease in management fees. Management fees decreased by $2.1 million
due to a decrease of $4.6 million primarily as a result of the net asset value of certain
portfolio companies of Fund III, FRID, and special investments declining below their invested
capital, partially offset by an increase of $2.5 million primarily generated by capital
called for Fund V Coinvestment and Fund II after March 31, 2008. The management fee decrease
of $2.1 million was partially offset by a corresponding reduction of $1.2 million in the
employees percentage share of management fees; |
|
|
|
a $18.4 million net decrease in incentive income. The decrease in incentive income is
primarily attributable to a decrease in performance in the private equity funds that resulted
in no incentive income (and no employees share of incentive income) recognized for the three
months ended March 31, 2009 as compared to $28.7 million in incentive income (reduced by the
employees share of incentive income of $10.3 million) for the three months ended March 31,
2008; and |
|
|
|
a $1.4 million net increase in operating expenses primarily related to an increase in
general and administrative expenses. |
40
Publicly Traded Alternative Investment Vehicles (Castles)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
11,911 |
|
|
$ |
13,694 |
|
|
$ |
(1,783 |
) |
Incentive Income |
|
|
|
|
|
|
12 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
11,911 |
|
|
$ |
13,706 |
|
|
$ |
(1,795 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
3,989 |
|
|
$ |
4,276 |
|
|
$ |
(287 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $0.3 million primarily due to:
|
|
|
a $0.6 million net decrease in management fees. Management fees decreased by $1.8 million
primarily due to a $1.5 million decrease as a result of changes in foreign currency exchange rates and a $0.3 million
decrease as a result of a decrease in average AUM. These decreases to management fees
were partially offset by a decrease in the employees share of management fees of $1.2
million; and |
|
|
|
a $0.3 million net decrease in operating expenses primarily due to a reduction in headcount
resulting in lower anticipated compensation expenses. |
Liquid Hedge Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
22,629 |
|
|
$ |
52,719 |
|
|
$ |
(30,090 |
) |
Incentive Income |
|
|
|
|
|
|
2,695 |
|
|
|
(2,695 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
22,629 |
|
|
$ |
55,414 |
|
|
$ |
(32,785 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
5,975 |
|
|
$ |
14,731 |
|
|
$ |
(8,756 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $8.8 million primarily due to:
|
|
|
a $26.5 million net decrease in management fees. Management fees decreased $30.1 million
primarily due to a $29.3 million decrease resulting from a decline in average AUM due to
lower cumulative returns and investor redemptions from the Drawbridge Global Macro Funds
subsequent to March 31, 2008 and a $5.0 million decrease due to a reduction in the average
management fee percentage earned partially offset by (i) $3.0 million generated by the growth
in the average AUM of Fortress Commodities Fund and (ii) $0.6 million due to management fees
earned on a Drawbridge Global Macro fund raised in April 2008. The management fee decrease of
$30.1 million was offset primarily by a $3.6 million reduction in the employees share of
management fees; |
|
|
|
an $8.1 million net increase in incentive income. Incentive income decreased $2.7 million
primarily due to incentive income generated by special investments and the Fortress
Commodities Fund of $2.0 million and $0.5 million, respectively, for the three months ended
March 31, 2008 as compared to no incentive income recognized for the three months ended March
31, 2009. The $2.7 million decrease was offset by a $10.8 million net decrease in the
employees share of incentive income primarily as a result of (i) a $12.4 million decrease in
the accrual of the employees share of incentive income due to the decreased performance in
the Drawbridge Global Macro Funds partially offset by (ii) a $1.6 million increase in the
employees share of incentive income earned on the Fortress Commodities Fund; |
|
|
|
a $9.6 million net decrease in operating expenses primarily due to a decrease in average
headcount. |
41
Hybrid Hedge Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
28,123 |
|
|
$ |
36,844 |
|
|
$ |
(8,721 |
) |
Incentive Income |
|
|
822 |
|
|
|
425 |
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
28,945 |
|
|
$ |
37,269 |
|
|
$ |
(8,324 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
2,904 |
|
|
$ |
2,048 |
|
|
$ |
856 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings increased by $0.9 million primarily due to:
|
|
|
an $8.9 million net decrease in management fees. Management fees decreased by $8.7 million
and the employees share of management fees increased by $0.2 million (due to an increase in
management fees eligible for profit sharing). The $8.7 million decrease in management fees
was primarily a result of a decrease in average AUM, primarily due to negative fund returns
in 2008; |
|
|
|
a $1.7 million net increase in incentive income. Incentive income increased by $0.4 million
and the employees share of incentive income, reflected as profit sharing compensation
expense, decreased by $1.3 million. The $0.4 million increase in incentive income was
primarily attributable to a net increase of $0.4 million in incentive income primarily from
third party accounts we manage. The decrease of $1.3 million in profit sharing compensation
expense was primarily a result of a decline in the returns of our hybrid hedge funds; and |
|
|
|
an $8.3 million decrease in operating expenses primarily related to a decrease in average
headcount. |
Hybrid PE Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
6,081 |
|
|
$ |
2,009 |
|
|
$ |
4,072 |
|
Incentive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
6,081 |
|
|
$ |
2,009 |
|
|
$ |
4,072 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
2,233 |
|
|
$ |
(112 |
) |
|
$ |
2,345 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings increased by $2.3 million primarily due to:
|
|
|
a $4.1 million increase in management fees primarily due to $1.5 million of management fees
generated by the creation of new Hybrid PE Funds, most notably the Assets Overflow Fund and a
managed account, and an increase of $2.6 million in management fees primarily as a result of
growth in average AUM; and |
|
|
|
a $1.8 million increase in operating expenses primarily related to an increase in average
headcount primarily due to new funds. |
42
Principal Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) |
|
$ |
(35,034 |
) |
|
$ |
(13,330 |
) |
|
$ |
(21,704 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable loss increased by $21.7 million primarily due to:
|
|
|
a $12.6 million increase in net investment income due to higher returns on our investments
in our liquid hedge funds and hybrid hedge funds for the three months ended March 31, 2009 as
compared to the three months ended March 31, 2008; |
|
|
|
a $0.8 million increase in net investment income due to dividend income earned primarily
from our direct investment in GAGFAH common stock; |
|
|
|
a $32.3 million decrease in net investment income primarily as a result of impairments of
$28.4 million, $0.2 million, $0.1 million, $3.0 million and $0.6 million in our investments
in our private equity funds, Castles, liquid hedge funds, hybrid hedge funds and hybrid PE
funds, respectively; and |
|
|
|
a $2.4 million decrease in net investment income primarily due to (i) a $2.3 million
decrease in interest income as a result of lower interest rates and lower average cash
balances, (ii) a $2.2 million decrease due to foreign currency translation adjustments, (iii)
a net decrease of $0.2 million due to an increase in investment related expenses, offset by
(iv) a net decrease of $2.2 million in interest expense primarily due to a decrease in average
interest rates and a decrease in average borrowings during the three months ended March 31,
2009.
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) |
|
$ |
(151 |
) |
|
$ |
38 |
|
|
$ |
(189 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) decreased by $0.2 million. The decrease in earnings is
primarily due to an increase in general corporate expense.
43
Sensitivity
For an analysis of the sensitivity of segment revenues to changes in the estimated fair value of
the Fortress Fund investments, see Part I, Item 3, Quantitative and Qualitative Disclosures About
Market Risk.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing
commitments to repay borrowings, fund and maintain investments, including our capital commitments
to our funds, pay compensation, and satisfy our other general business needs including our
obligation to pay U.S. federal income tax. In addition, we may require cash to make distributions.
Our primary sources of funds for liquidity consist of cash flows provided by operating activities,
primarily the management fees and incentive income paid to us from the Fortress Funds, borrowings
under loans, and the potential issuance of debt and equity securities, as well as the investment
returns on our principal investments in these funds. Our primary uses of liquidity include
operating expenses (which include compensation, rent and interest among others), working capital
expenses, amortization payments under our credit agreement, capital commitments to our funds, and
tax and tax-related payments.
The receipt of management fees generally occurs on a fixed and fairly predictable schedule, subject
to changes in the NAV of the Fortress Funds (due to performance or capital transactions). From time
to time, we may elect, in our discretion, to defer the receipt of management or other fees, to
which we are legally entitled, in order to optimize the operations of the underlying managed funds.
The timing of receipt of cash flows from other operating activities is in large part dependent on
the timing of distributions from our private equity funds and hybrid PE funds, which are subject to
restrictions and to managements judgment regarding the optimal timing of the monetization of
underlying investments, as well as dates specified in our hedge funds operating documents, which
outline the determination and payment of our incentive income, if any. The timing of capital
requirements to cover fund commitments is subject to managements judgment regarding the
acquisition of new investments by the funds, as well as the ongoing liquidity requirements of the
respective funds. The timing of capital requirements and the availability of liquidity from
operating activities may not always coincide, and we may make short-term, lower-yielding
investments with excess liquidity or fund shortfalls with short-term debt or other sources of
capital.
We expect that our cash on hand and our cash flows from operating activities, capital receipts from
balance sheet investments and available financing will be sufficient to satisfy our liquidity needs
with respect to expected current commitments relating to investments and with respect to our debt
obligations over the next twelve months. We estimate that our expected management fee receipts over
the next twelve months, a portion of which may be deferred, will be sufficient (along with our cash
on hand of $43.3 million at March 31, 2009 and expected capital receipts from our balance sheet
investments) to meet our operating expenses (including compensation and lease obligations),
required debt amortization payments, and fund capital commitments, in each case expected to be
funded during the next twelve months (see obligation tables below). These uses of cash would not
(barring changes in other relevant variables) cause us to violate any of our debt covenants. We
believe that the compensation we will be able to pay from these available sources will be
sufficient to retain key employees and maintain an effective workforce. We may elect, if we deem it
appropriate, to defer certain payments due to our principals and affiliates or raise capital to
enable us to satisfy the amortization payments required under our credit agreement.
We expect to meet our long-term liquidity requirements, including the repayment of our debt
obligations and any new commitments or increases in our existing commitments relating to principal
investments, through the generation of operating income (including management fees, a portion of
which may be deferred), capital receipts from balance sheet investments and, potentially,
additional borrowings and equity offerings. As discussed above, we believe that we will generate
adequate operating cash flows to service our periodic debt payments, which will result in a gradual
reduction in our debt level. Our ability to execute our business strategy, particularly our ability
to form new funds and increase our AUM, depends on our ability to raise additional investor capital
within our funds and on our ability to monetize our balance sheet investments, each of which is
more challenging given current market conditions. Furthermore, strategic initiatives and the
ability to make principal investments in funds may be dependent on our ability to raise capital at
the Fortress level. Decisions by counterparties to enter into transactions with us will depend upon
a number of factors, such as our historical and projected financial performance and condition,
compliance with the terms of our current credit arrangements, industry and market trends and
performance, the availability of capital and our counterparties policies and rates applicable
thereto, the rates at which we are willing to borrow, and the relative attractiveness of
alternative investment or lending opportunities. Furthermore, given the current, depressed level of
the market price of our Class A shares as well as the illiquidity in the credit market (as
described above under Market Considerations), raising equity capital could be highly dilutive to
our current shareholders and issuing debt obligations could result in significant increases to
operating costs, if either were achieved in this market. The level of our share price also limits
our ability to use our equity as currency in the potential acquisition of businesses, other
companies or assets.
On February 8, 2007, we completed an initial public offering of 39,428,900 of our Class A shares.
We contributed the net proceeds from the offering to Fortress Operating Group in exchange for
39,428,900 limited partnership units. We are a publicly traded partnership and have established a
wholly owned corporate subsidiary (FIG Corp.). Accordingly, a substantial portion of our income
earned by the corporate subsidiary is subject to U.S. federal income taxation and taxed at
prevailing rates. The
remainder of our income is allocated directly to our shareholders and is not subject to any
corporate level of taxation.
44
As of March 31, 2009, our material cash commitments and contractual cash requirements were related
to our capital commitments to our funds, lease obligations and debt obligations. Our potential
liability for the contingent repayment of incentive income is discussed under - Contractual
Obligations below.
Capital Commitments
We determine whether to make capital commitments to our private equity funds and hybrid PE funds in
excess of the minimum required amounts based on a variety of factors, including estimates regarding
our liquidity over the estimated time period during which commitments will have to be funded,
estimates regarding the amounts of capital that may be appropriate for other funds which we are in
the process of raising or are considering raising, and our general working capital requirements.
We generally fund our principal investments in the Fortress Funds with cash, either from working
capital or borrowings, and not with carried interest. We do not hold any principal investments in
the funds other than through the Fortress Operating Group entities. Our principals do not own any
portion of the carried interest in any fund personally. Accordingly, their personal investments in
the funds are funded directly with cash.
Our capital commitments to our funds with outstanding commitments as of March 31, 2009 consisted of
the following (in thousands):
|
|
|
|
|
|
|
Outstanding |
|
Private Equity Funds |
|
Commitment |
|
Fund I |
|
$ |
12 |
|
Fund II |
|
|
566 |
|
Fund III Coinvestment |
|
|
2 |
|
Fund IV |
|
|
4,053 |
|
Fund IV Coinvestment |
|
|
3 |
|
Fund V |
|
|
45,292 |
|
Fund V Coinvestment |
|
|
4 |
|
Fund VI |
|
|
15,000 |
|
FRID |
|
|
796 |
|
FHIF |
|
|
11,446 |
|
FECI |
|
|
1,551 |
|
Karols Development Co |
|
|
5,153 |
|
|
|
Hybrid PE Funds |
|
|
|
|
Credit Opportunities Fund |
|
|
7,337 |
|
Long Dated Value Fund I |
|
|
460 |
|
Long Dated Value Fund II |
|
|
2,081 |
|
Long Dated Value Fund III |
|
|
453 |
|
Real Assets Fund |
|
|
37,521 |
|
Assets Overflow Fund |
|
|
19 |
|
FTS SIP L.P. |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
132,359 |
|
|
|
|
|
Lease Obligations
Minimum future rental payments under our operating leases are as follows (in thousands):
|
|
|
|
|
April 1, 2009 to December 31, 2009 |
|
$ |
13,763 |
|
2010 |
|
|
21,332 |
|
2011 |
|
|
11,530 |
|
2012 |
|
|
10,893 |
|
2013 |
|
|
10,874 |
|
2014 |
|
|
10,311 |
|
Thereafter |
|
|
21,691 |
|
|
|
|
|
Total |
|
$ |
100,394 |
|
|
|
|
|
45
Debt Obligations
As of March 31, 2009, our debt obligations consisted of the amount outstanding under our credit
agreement, as described below.
In May 2007, we entered into a new $1 billion credit agreement (as amended, the 2007 Credit
Agreement or our credit agreement) in order to refinance our then existing credit agreement,
reduce the amount of interest and other fees payable under our credit facilities and increase the
amount of funds available for investments. The credit facilities available under the 2007 Credit
Agreement include a $200 million revolving credit facility (including a $25 million letter of
credit subfacility) and an $800 million term loan facility. Borrowings and letters of credit
issued under the 2007 Credit Agreement bore interest at a rate equal to (i) with respect to LIBOR
loans, LIBOR plus 1.20%, or (ii) with respect to base rate loans, the base rate, as defined in the
agreement, plus 0.20%. On February 1, 2008, the rate on LIBOR loans was reduced to LIBOR + 0.65%
pursuant to the terms of the agreement. In addition, we were required to pay a commitment fee of
0.20% per annum on the unused portion of amounts available under our revolving credit facility.
On April 17, 2008, we entered into an amendment to the 2007 Credit Agreement. The amendment, among
other things, (i) permits us to issue an unlimited amount of subordinated indebtedness with
specified terms so long as 40% of the net proceeds are used to repay amounts outstanding under the
2007 Credit Agreement, (ii) increased the applicable rate on Eurodollar loans and letters of credit
by 20 basis points (making the current rate LIBOR plus 0.85%) and the undrawn commitment fee by 5
basis points (making the current fee 0.25%), (iii) added an amortization schedule requiring us to
repay $100 million of amounts outstanding under the agreement each year during the next three years
(with the first payment due on January 15, 2009), (iv) modified the financial covenants by (a)
replacing the EBITDA-based financial covenant with a Consolidated Leverage Ratio covenant, (b)
increasing the minimum amount of management fee earning assets by $3 billion to $21.5 billion
(which minimum amount increases annually by $500 million) and (c) eliminating the annual $50
million increase in required minimum investment assets, and (v) revised various definitions and
clarified terms with respect to swap providers who are lenders under the agreement. In addition, on
May 29, 2008, we entered into an amendment of our credit agreement to change from a co-borrower
structure to a single borrower structure.
On November 12, 2008, we entered into an additional amendment to the 2007 Credit Agreement. The
amendment, among other things: (i) modified the definition of EBITDA, which is used to calculate
our Consolidated Leverage Ratio, to exclude any realized or unrealized gains and losses on
investments and to reflect private equity fund and hybrid PE fund incentive income clawbacks on a
cash basis; (ii) modified the financial covenants by (a) reducing the amount of required investment
assets to $975 million (less any future term loan repayments) and (b) changing the required
Consolidated Leverage Ratios for the quarters ending June 30 and September 30, 2009 from 2.5 to 1.0
to 2.75 to 1.0; (iii) increased the rate on LIBOR loans to LIBOR + 2.00% (and Base Rate loans to
the prime rate + 1.00%) this rate is no longer subject to change pursuant to a ratings-based
pricing grid; (iv) established the commitment fee for the unused portion of the revolving credit
facility at 0.25% this rate is also no longer subject to change pursuant to a ratings-based
pricing grid; (v) reduced the revolving credit facility commitments to $125 million; (vi)
established a requirement that outstanding term loans be prepaid with 25% of the amount by which
EBITDA for any twelve-month period exceeds $370 million (unless and until the amount of outstanding
term loans equals or is less than $250 million); (vii) required $50 million of additional term loan
repayments ($25 million in July of 2009 and 2010); (viii) established a requirement that the
borrower cash collateralize the letter of credit obligations of distressed lenders under certain
circumstances, including lender non-funding or bankruptcy; and (ix) established an event of default
under certain circumstances if the borrower, any guarantor or certain of their subsidiaries are
required to make incentive income clawback payments in excess of $20 million during any calendar
year. In connection with the amendment, we prepaid $75 million of the outstanding term loans.
On March 12 and March 13, 2009, we entered into additional amendments to the 2007 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 our 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 we can make to equity holders of the Fortress Operating Group and,
in turn, our 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, we prepaid $75 million of outstanding term loans and $50 million of outstanding
revolving facility loans.
46
The foregoing description of the terms of the amendments is not complete and is qualified in its
entirety by the full text of both the amendments, and the 2007 Credit Agreement (including other
amendments thereto), each of which has been filed with the Securities and Exchange Commission.
Increases in the interest rate on our debt obligations, whether through amendments, refinancings,
or increases in LIBOR, result in a direct reduction in our earnings and cash flow from operations
and, therefore, our liquidity.
The following table presents information regarding our debt obligations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Final |
|
|
|
|
|
|
Average |
|
|
|
Face Amount and Carrying Value |
|
|
Stated |
|
|
Weighted Average |
|
|
Maturity |
|
Debt Obligation |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Maturity |
|
|
Funding Cost (1) |
|
|
(Years) |
|
Credit Agreement (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt (3) |
|
$ |
54,041 |
|
|
$ |
104,041 |
|
|
May 2012 |
|
|
3.04 |
% |
|
|
3.11 |
|
Term loan |
|
|
350,000 |
|
|
|
350,000 |
|
|
May 2012 |
|
|
3.20 |
% |
|
|
2.40 |
|
Delayed term loan |
|
|
200,000 |
|
|
|
275,000 |
|
|
May 2012 |
|
|
3.11 |
% |
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
$ |
729,041 |
|
|
|
|
|
|
|
3.16 |
% |
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 0.48%. |
|
(2) |
|
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. |
|
(3) |
|
Approximately $11.4 million was undrawn under the revolving debt facility as of March 31,
2009. The revolving debt facility included a $25 million letter of credit subfacility of
which $9.6 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed
to fund $7.2 million (including $1.0 million of the outstanding letters of credit) of the $75
million revolving credit facility, has filed for bankruptcy protection, did not fund its
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, $5.2 million of the undrawn amount was
available. |
Assuming no EBITDA-based required prepayments, our outstanding debt matures as follows as of March
31, 2009 (in thousands).
|
|
|
|
|
April 1 - December 31, 2009 |
|
$ |
75,000 |
|
2010 |
|
|
100,000 |
|
2011 |
|
|
75,000 |
|
2012 |
|
|
354,041 |
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
|
|
|
As a result of the Nomura transaction and our initial public offering, FIG Asset Co. LLC lent
excess proceeds of $215 million to FIG Corp. pursuant to a demand note. Since then, FIG Corp. has
repaid a portion of the demand note and, as of March 31, 2009, the outstanding balance was $125.3
million. This intercompany debt is eliminated in consolidation.
Covenants
Fortress Operating Group is required to prepay the 2007 Credit Agreement upon the occurrence of
certain events, including certain asset sales and other dispositions.
The events of default under the 2007 Credit Agreement are typical of such agreements and include
payment defaults, failure to comply with credit agreement covenants, cross-defaults to material
indebtedness, bankruptcy and insolvency, change of control, and adverse events (as defined in the
2007 Credit Agreement) with respect to our material funds. A default under this agreement would
likely have a material, adverse impact on our liquidity and, given the current lack of available
credit for refinancing in the market, could threaten our ability to continue as a going concern.
The 2007 Credit Agreement includes customary covenants. We were in compliance with all of these
covenants as of March 31, 2009. Among other things, we are prohibited from incurring additional
unsubordinated indebtedness or further encumbering our assets, subject to certain exceptions. In
addition, Fortress Operating Group must not:
|
|
|
Permit AUM to be less than $22.0 billion as of the end of each fiscal quarter through December
31, 2009 and $20.0 billion as of the end of each fiscal quarter thereafter; |
|
|
|
|
Permit the Consolidated Leverage Ratio, as defined in the 2007 Credit Agreement, to be greater
than 3.5 to 1.0 for the remainder of the term of the credit agreement; |
|
|
|
|
Permit the aggregate value of investments held, including certain cash, as of any point in time,
to be less than the amount equal to the sum of the term loans and the revolving loans (including
outstanding letters of credit) then outstanding (the Required Investment Assets); |
47
|
|
|
Permit the aggregate value of Fortress Fund Investments (generally defined in the 2007 Credit
Agreement as the stock of Newcastle, Eurocastle and any other publicly traded company pledged as
collateral (and any options in respect of such stock), and Fortress Operating Groups interest in
the Fortress private equity funds, liquid hedge funds and hybrid funds and certain other
investment funds) to be less than 40% of the Required Investment Assets; |
|
|
|
|
Permit the aggregate value of the sum of (i) the Fortress Fund Investments plus (ii) certain
investments in co-investment funds (in the aggregate, Total Investments) to be less than 60% of
the Required Investment Assets (with no single co-investment fund investment exceeding $75
million). |
|
|
|
|
Make incentive income clawback payments in excess of $20 million during a calendar year. To
date, no clawback payments have been required. See Note 10 to Part I, Item 1 Financial Statements
and Supplementary Data Segment Reporting for a further discussion of clawback. |
The following table sets forth the financial covenant requirements as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
Requirement |
|
|
Actual |
|
|
Notes |
|
AUM |
|
≥ $ |
22,000 |
|
|
$ |
26,538 |
|
|
|
(A |
) |
|
|
Consolidated Leverage Ratio |
|
≤ $ |
3.50 |
|
|
|
1.98 |
|
|
|
(B |
) |
|
|
Required Investment Assets |
|
≥ $ |
614 |
|
|
$ |
731 |
|
|
|
(C |
) |
|
|
Fortress Fund Investments |
|
≥ $ |
245 |
|
|
$ |
394 |
|
|
|
(C |
) |
|
|
Total Investments |
|
≥ $ |
368 |
|
|
$ |
521 |
|
|
|
(C |
) |
|
|
|
(A) |
|
Impacted by capital raised in funds, redemptions from funds, and valuations of fund
investments. |
|
(B) |
|
Impacted by EBITDA, as defined, which is impacted by the same factors as distributable
earnings, except EBITDA is not impacted by clawback reserves or the impairment of
investments. |
|
(C) |
|
Impacted by capital investments in funds and the valuation of such funds investments. |
Fortress expects to comply with these covenants as of the applicable testing dates. However, as a
result of recent market conditions and their impact on Fortress, it is possible that we may not be
able to comply with one or more of these covenants if conditions continue to worsen over time. As
a result of the amortization requirements, we may take steps to ensure that we are able to make the
required periodic cash amortization payments, including (i) deferring payments to our Principals
and affiliates in order to preserve cash, including payments to our Principals under the tax
receivable agreement, and (ii) considering potential capital raise transactions in order to
increase investments, reduce debt, or a combination of the two options.
This summary is qualified by reference to our 2007 Credit Agreement, a copy of which, including all
amendments thereto, has been filed with the SEC.
Dividends / Distributions
During the three months ended March 31, 2009, Fortress Operating Group made distributions of $1.1
million to the principals and RPU holders in connection with distributions made to FIG Corp. to pay
Fortresss income taxes.
Cash Flows
Our historical consolidated statements of cash flows reflect the cash flows of Fortress Operating
Group, for the three months ended March 31, 2009.
The primary cash flow activities of Fortress Operating Group are: (i) generating cash flow from
operations, (ii) making investments in Fortress Funds, (iii) meeting financing needs through, and
making required amortization payments under, our credit agreement, and (iv) distributing cash flow
to equity holders.
As described above in Results of Operations, our AUM has changed throughout the periods
reflected in our financial statements included in this Quarterly Report on Form 10-Q. This change
is a result of the Fortress Funds raising and investing capital, and generating gains from
investments, offset by redemptions and losses.
Our dividend policy has certain risks and limitations, particularly with respect to liquidity.
Although we may pay dividends in accordance with our stated dividend policy, we may not pay the
amount of dividends suggested by our policy, or at all, if, among other things, we do not have the
cash necessary to pay the intended dividends, or if our board of directors determines it would be
prudent to reduce or eliminate future dividend payments. To the extent we do not have cash on hand
sufficient to pay dividends, we may borrow funds to pay dividends, but we are not obligated to do
so. By paying cash dividends rather than investing that cash in our future growth, we risk slowing
the pace of our growth, or not having a sufficient amount of cash to fund our operations or
unanticipated capital expenditures, should the need arise.
48
Operating Activities
Our net cash flow provided by (used in) operating activities was ($63.3) million and $51.9 million
during the three months ended March 31, 2009 and 2008, respectively.
Operating Activities Comparative (First Quarter of 2009 vs. First Quarter of 2008)
Cash received for management fees decreased by $42.4 million from $139.1 million in 2008 to $96.7
million in 2009. Management fees are based on average fee paying AUM, which decreased from 2008 to
2009 (private equity funds decreased by $0.4 billion, Castles decreased by $0.5 billion, liquid
hedge funds decreased by $4.2 billion, hybrid hedge funds decreased by $1.9 billion, and hybrid PE
funds increased by $1.1 billion) as a result of capital raising, including new fund formation,
offset by redemptions and losses.
Incentive income is calculated as a percentage of profits earned by the Fortress Funds or is based
on profitable realization events within private equity funds and hybrid PE funds. Severe market
conditions have resulted in lower fund performance and reduced realizations and thus a decrease of
$164.7 million in cash received for incentive income from 2008 to 2009.
Despite an increase in average headcount from March 31, 2008 to March 31, 2009, cash paid for
compensation decreased by $65.0 million for the three month periods ended March 31, 2008 compared
to March 31, 2009. This decrease is mainly attributable to reduced profit sharing compensation, as
a result of lower performance within our funds.
Cash paid for interest decreased approximately $5.7 million due to a lower average debt balance of
$703.1 million in 2009 compared to $722.4 million in 2008. The weighted average interest rate also
decreased to 2.61% in 2009 as compared to 5.13% in 2008.
Investing Activities
Our net cash flow provided by (used in) investing activities was ($22.4) million and $82.6 million
during the three months ended March 31, 2009 and 2008, respectively. Our investing activities
primarily included: (i) contributions to equity method investees of ($31.8) million and ($70.2)
million during the three months ended March 31, 2009 and 2008, respectively, (ii) distributions of
capital from equity method investees of $10.5 million and $155.0 million during the three months
ended March 31, 2009 and 2008, respectively, and (iii) purchases of fixed assets, net of proceeds
from the disposal of fixed assets, of ($1.1) million and ($2.2) million during these periods,
respectively.
Financing Activities
Our net cash flow provided by (used in) financing activities was ($134.4) million and $137.8
million during the three months ended March 31, 2009 and 2008, respectively. Our financing
activities primarily included (i) distributions made to principals, including those classified
within principals and others interests in consolidated subsidiaries, of ($1.0) million and
($63.2) million during these periods, respectively, (ii) distributions to employees related to
their interests in consolidated subsidiaries of ($4.3) million and ($37.3) million during these
periods, respectively, (iii) dividends to our shareholders, and (iv) our net borrowing and
repayment activity.
Critical Accounting Policies
Consolidation
The analysis as to whether to consolidate an entity is subject to a significant amount of judgment.
Some of the criteria considered are the determination as to the degree of control over an entity by
its various equity holders, the design of the entity, how closely related the entity is to each of
its equity holders, the relation of the equity holders to each other and a determination of the
primary beneficiary in entities in which we have a variable interest. These analyses involve
estimates, probability weighting of subjectively determined cash flow scenarios, and other
estimates based on the assumptions of management.
49
Revenue Recognition on Incentive Income
Incentive income is calculated as a percentage of the profits earned by the Fortress Funds subject
to the achievement of performance criteria. Incentive income from certain of the private equity
funds and hybrid PE funds we manage is subject to contingent repayment (or clawback) and may be
paid to us as particular investments made by the funds are realized. If, however, upon liquidation
of a fund the aggregate amount paid to us as incentive income exceeds the amount actually due to us
based upon the aggregate performance of the fund, the excess is required to be returned by us (i.e.
''clawed back) to that fund. We have elected to adopt the preferred method of recording incentive
income subject to contingencies, Method 1 of Emerging Issues Task Force Topic D-96 Accounting for
Management Fees Based on a Formula. Under this method, we do not recognize incentive income
subject to contingent repayment until all of the related contingencies have been resolved. Deferred
incentive income related to a particular private equity fund or hybrid PE fund, each of which has a
limited life, would be recognized upon the termination of such fund, or when distributions from the
fund exceed the point at which a clawback of a portion or all of the historic incentive income
distributions could no longer occur. Recognition of incentive income allocated to us prior to that
date is deferred and recorded as a deferred incentive income liability. For GAAP purposes, the
determination of when incentive income is recognized as income is formulaic in nature, resulting
directly from each funds governing documents.
Profit Sharing Arrangements
Pursuant to employment arrangements, certain of Fortresss employees are granted profit sharing
interests and are thereby entitled to a portion of the incentive income realized from certain
Fortress Funds, which is payable upon a realization event within the respective funds. Accordingly,
incentive income resulting from a realization event within a fund gives rise to the incurrence of a
profit sharing obligation. Amounts payable under these profit sharing plans are recorded as
compensation expense when they become probable and reasonably estimable.
For profit sharing plans related to hedge funds, where incentive income is received on a quarterly
or annual basis, the related compensation expense is accrued during the period for which the
related payment is made.
For profit sharing plans related to private equity funds and hybrid PE funds, where incentive
income is received as investments are realized but is subject to clawback (see Revenue Recognition
on Incentive Income above), although Fortress defers the recognition of incentive income until all
contingencies are resolved, accruing expense for employee profit sharing is based upon when it
becomes probable and reasonably estimable that incentive income has been earned and therefore a
profit sharing liability has been incurred. Based upon this policy, the recording of an accrual for
profit sharing expense to employees generally precedes the recognition of the related incentive
income revenue. Furthermore, such profit sharing expense may be reversed upon determination that
the expense is no longer probable of being incurred based on the performance of the fund.
Our determination of the point at which it becomes probable and reasonably estimable that incentive
income will be earned and therefore a corresponding profit sharing expense should be recorded is
based upon a number of factors, the most significant of which is the level of realized gains
generated by the underlying funds that may ultimately give rise to incentive income payments.
Accordingly, profit sharing expense is generally recorded upon realization events within the
underlying funds. A realization event has occurred when an investment within a fund generates
proceeds in excess of its related invested capital, such as when an investment is sold at a gain.
Changes in the judgments and estimates made in arriving at the appropriate amount of profit sharing
expense accrual could materially impact net income.
For further information on amounts paid and payable in the future under our profit sharing
arrangements, please see Note 2 to Part I, Item 1, Financial Statements Management Agreements
and Fortress Funds.
Valuation of Investments
Our investments in the Fortress Funds are recorded based on the equity method of accounting. The
Fortress Funds themselves apply specialized accounting principles specified by the AICPA Audit and
Accounting Guide Investment Companies. As such, our results are based on the reported fair value
of the investments held by the funds as of the reporting date with our pro rata ownership interest
(based on our principal investment) in the changes in each funds NAV reflected in our results of
operations. Fair value generally represents the amount at which an investment could be exchanged in
a current transaction between willing parties, other than in a forced or liquidation sale. We are
the manager of these funds and in certain cases participate in the valuation of underlying
investments, many of which are illiquid and/or without a public market. The fair value of these
investments is generally estimated based on either values provided by independent valuation agents,
who use their own proprietary valuation models, or proprietary models developed by us, which
include discounted cash flow analyses, public market comparables, and other techniques and may be
based, at least in part, on independently sourced market parameters. The material estimates and
assumptions used in these models include the timing and expected amount of cash flows, the
appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and
estimated proceeds from expected financings. Significant judgment and estimation goes into the
selection of an appropriate valuation methodology as well as the assumptions which generate these
models, and the actual values realized with respect to investments could be materially different
from values obtained based on the use of those estimates. The valuation methodologies applied
impact the reported value of our investments in the Fortress Funds in our consolidated financial
statements.
50
Private Equity Funds
Under the valuation policies and guidelines of our private equity funds, investments are
categorized into two types of securities: those for which there is a market quotation and those
for which there is no market quotation. Securities for which there is a market quotation are valued
at their quoted market price. A discount may be applied to those securities with sale restrictions.
Securities for which there is no market quotation are referred to as private securities and are
valued at fair value. Our guidelines state that the fair values of private securities are generally
based on the following methods:
|
1. |
|
Public market transactions of similar securities |
|
|
2. |
|
Private market transactions of similar or identical securities |
|
|
3. |
|
Analytical methods |
Our private equity funds have never based a valuation of a private security upon public or private
market transactions in a similar security. There have been no circumstances to date in which a
security in a public market transaction, or a private market transaction of which we were aware,
has been considered to be sufficiently similar to a private security owned by one of our private
equity funds to be used as a measure of valuation for such private security investment.
Our private equity funds have used the price of private market transactions in identical securities
as a valuation method for investments. In cases in which there has been a significant private
transaction in a private security held by our private equity funds, the value of private equity
fund investments in the private security are based upon the price of such recent private
transaction in that security and no sensitivity analysis is used.
If the fair value of private security investments held by our private equity funds cannot be valued
by reference to a public or private market transaction, then the primary analytical methods used to
estimate the fair value of such private securities are the discounted cash flow method, by
reference to performance statistics of similar public companies (for example, EBITDA multiples) or
the use of third party valuations. Sensitivity analysis is applied to the estimated future cash
flows using various factors depending on the investment, including assumed growth rates (in cash
flows), capitalization rates (for determining terminal values) and appropriate discount rates based
on the investment to determine a range of reasonable values. The valuation based on the inputs
determined to be the most probable is used as the fair value of the investment.
Liquid Hedge Funds
The majority of the investments in our liquid hedge funds are valued based on quoted market prices,
including broker quotations in illiquid or inactive markets which include disclaimers stating they
are not actionable and are therefore included in level 3A as described below. Investments valued
based on other observable market parameters in our liquid hedge funds include (i) interest rate
swaps and swaptions, equity swaps and foreign exchange swaps which are valued by the independent
fund administrator using models with significant observable market parameters, and (ii) funds
managed by third parties for which we receive value information from the fund managers. The fair
value of interest rate swaps and swaptions is calculated using the current market yield of the
relevant interest rate durations and an appropriate discount rate to determine a present value. The
fair value of equity swaps and foreign exchange swaps is calculated using the market price of the
underlying stock or foreign exchange pair, plus the financing cost of carrying the transaction. The
fair value of these investments is also confirmed independently with the counterparty to the
transaction. Investments valued using methods, including internal models, with significant
unobservable market parameters consist primarily of investments in other funds and certain illiquid
securities. Counterparty risk is also considered.
Hybrid Hedge Funds
In our hybrid hedge funds, investments are valued using quoted market prices, to the extent
available. Independent valuation agents are used by our hybrid hedge funds to provide estimates of
the fair value of investments, other than investments in other funds, for which quoted market
prices are not available. For these investments, we understand that the independent valuation
agents use some or all of the following methods and techniques to estimate the fair value of the
relevant type of investments:
Private loans The most common method used to value private loans is a discounted cash flow
analysis. In this method, the estimated future payments to be made by the borrower under the loan
agreement are discounted to the present using a discount rate appropriate to the risk level of the
borrower and current market interest rates.
If it is likely that a borrower will not be able to repay a loan in full, the loan may be valued by
estimating how much the borrower will be able to repay based on obtaining refinancing from a new
lender. Under this method, the borrowers business must be examined in detail, and then compared to
known loans in the market to estimate how much the borrower will likely be able to borrow, and
therefore repay under the existing loan. If the amount likely to be able to be refinanced is less
than the total payments due under the loan, the fair value of the loan will be reduced.
Another method used to value loans that may not be repaid in full is to value the total amount of
assets of the borrower that might be sold to raise proceeds to repay the loan (and debt, if any,
that has a higher claim against assets) if necessary. Under this method, all assets of the borrower
must be analyzed and valued. If the total value is less than the total payments due under the loan
(and debt, if any, that has a higher claim against assets), the fair value of the loan will be
reduced.
51
Asset-backed securities and collateralized debt obligations for which there are no quoted market
prices are valued using a discounted cash flow analysis based on the estimated cash flows to be
generated by the relevant underlying assets and the appropriate interest rate based on the nature
of the underlying assets.
Real estate is usually valued based on sales of comparable property. The value of real estate which
is net leased is also influenced by the credit quality of major tenants, as their ability to make
lease payments is relevant to the value of the property under lease.
Investments in other funds are valued primarily based on the net asset values provided by the fund
managers of those funds. Adjustments to such net asset values are made for liquidity or to other
factors if deemed material and necessary.
Investments valued using methods, including internal models, with significant unobservable market
parameters consist primarily of investments in other funds and certain illiquid investments.
Hybrid PE Funds
Investments held within these funds are valued in a consistent manner with either the private
equity funds or hybrid hedge funds, as applicable depending on the nature of the investment.
Sensitivity
Changes in the fair value of our funds investments would impact our results of operations as
described in Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk.
As discussed above, the determination of investment fair values involves managements judgments and
estimates. The degree of judgment involved is dependent upon the availability of quoted market
prices or observable market parameters. The following table summarizes the investments held by the
Fortress Funds by valuation methodology as of March 31, 2009.
The categories displayed below correspond directly with the disclosures which are required under
SFAS 157. Note that negative percentages represent net short positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid Hedge |
|
|
Hybrid PE |
|
|
Total Investment |
|
Basis for Determining Fair Value |
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Company Holdings |
|
1. Quoted market prices (A) |
|
|
6 |
% |
|
|
13 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Other observable market parameters |
|
|
2 |
% |
|
|
33 |
% |
|
|
1 |
% |
|
|
0 |
% |
|
|
4 |
% |
|
|
3A. Third party pricing sources with
significant unobservable market
parameters (B) |
|
|
3 |
% |
|
|
52 |
% |
|
|
93 |
% |
|
|
87 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3B. Internal models with significant
unobservable market parameters |
|
|
89 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
12 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
For liquid hedge funds, includes gross long positions of 23% and short positions of (10%). |
|
(B) |
|
Primarily represents valuations based on third party pricing services, certain broker
quotes, and third party fund managers. The result is skewed for the liquid hedge funds due to
the offsetting net short positions in Level 1 and net long positions in Level 2. |
As of March 31, 2009, $7.1 billion of investments in our private equity funds, $0.04 billion of
investments in our liquid hedge funds, $0.6 billion of investments in our hybrid hedge funds, and
$0.5 billion of investments in our hybrid PE funds are valued by internal models with significant
unobservable market parameters. A 10% increase or decrease in the value of investments held by the
Fortress Funds valued at level 3 (A or B) would have had the following effects on our results of
operations on an unconsolidated basis for the three months ended March 31, 2009, consistent with
the table above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid Hedge |
|
|
Hybrid PE |
|
|
|
Funds |
|
Funds |
|
Funds |
|
Funds |
|
Management fees, per annum on a prospective basis |
|
$3.2 million or |
|
$2.0 million |
|
$15.7 million |
|
$1.0 million or |
|
|
($3.3 million) (A) |
|
|
|
|
|
|
|
|
|
($1.3 million) (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive income |
|
|
N/A (B) |
|
|
$0.0 million |
|
|
N/A (C) |
|
|
|
N/A (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investees |
|
$40.9 million |
|
$0.5 million |
|
$23.0 million |
|
$7.0 million |
Note: The tables above exclude non-investment assets and liabilities of the funds, which are not
classified in the fair value hierarchy. Such net assets may be material, particularly within the
hedge funds.
52
|
|
|
(A) |
|
Private equity fund and hybrid PE fund management fees would be generally unchanged as, for
investments in non-publicly traded securities, they are not based on the value of the funds,
but rather on the amount of capital invested in the funds. However, if the NAV of a portfolio
company of certain private equity funds or hybrid PE funds is reduced below its invested
capital, there would be a reduction in management fees. As of March 31, 2009, $3.1 billion of
such private equity fund or hybrid PE fund portfolio companies valued at level 3 (A or B)
were carried at or below their invested capital and are in funds which are no longer in their
commitment period. Management fees are generally calculated as of certain reset dates. The
amounts disclosed show what the estimated effects would be to management fees over the next
year assuming March 31, 2009 is the current reset date. |
|
(B) |
|
Private equity fund and hybrid PE fund incentive income would be unchanged as it is not
recognized until received and all contingencies are resolved. Furthermore, incentive income
would be based on the actual price realized in a transaction, not based on a valuation. |
|
(C) |
|
Hybrid hedge fund incentive income would be unchanged as it is not recognized until all
contingencies are resolved in the fourth quarter. Incentive income is generally not charged
on amounts invested by hybrid hedge funds in funds managed by external managers. |
Income Taxes
FIG Corp. has recorded a significant deferred tax asset, primarily in connection with the Nomura
transaction and the IPO. These transactions resulted in the basis of Fortress Operating Groups net
assets being in excess of its book basis, which will result in future tax deductions. A substantial
portion of this asset is offset by a liability associated with the tax receivable agreement with
our Principals.
The realization of the deferred tax assets is dependent on the amount of our future taxable income
before deductions related to the establishment of the deferred tax asset. The deferred tax asset is
comprised of a portion that would be realized in connection with future ordinary income and a
portion that would be realized in connection with future capital gains.
We project that we will have sufficient future taxable ordinary income in the normal course of
business without any projected significant change in circumstances to fully realize the portion of
the deferred tax asset that would be realized in connection with future ordinary income. Our
projections do not include material changes in AUM or incentive income from the current levels
which, due to the market crisis, have declined from historical levels. However, the projections do
contain an estimated marginal growth assumption in years beyond 2009. Based on our historical and
projected taxable income, we have concluded that the realization of the portion of the deferred tax
asset that would be realized in connection with future taxable ordinary income is more likely than
not. If our estimates change in the future and it is determined that it is more likely than not
that some portion, or all, of this portion of the deferred tax asset will not be realized, a
valuation allowance would be recorded for that portion. However, in most cases, any tax expense
recorded in connection with the establishment of a valuation allowance or the reversal of a
deferred tax asset would be partially offset by other income recorded in connection with a
corresponding reduction of a portion of the tax receivable agreement liability (see below). The
following table sets forth our estimated federal taxable ordinary income for 2007 and 2008 before
deductions relating to the establishment of the deferred tax assets, excluding deferred tax assets
arising from equity-based compensation, as well as the average of such amount needed over the
approximate period of the deductibility (approximately 15 years from the date of establishment,
based on the amortization period of the tax basis intangible assets recorded) in order to fully
realize the portion of the deferred tax asset that would be realized in connection with future
ordinary income (in millions):
|
|
|
|
|
2007 |
|
$ |
74.9 |
|
|
|
2008: Estimated |
|
$ |
47.9 |
|
|
|
2009 - 2015: Average Required |
|
$ |
55.4 |
|
|
|
2016 - 2021: Average Required |
|
$ |
79.1 |
|
As of December 31, 2008, based on the effects of the continuing credit crisis, particularly the
fourth quarter declines in equity investment values, we revised our assessment of the realizability
of the portion of the deferred tax asset that would only be realized in connection with future
capital gains. We have established a full valuation allowance for this portion of the deferred tax
asset as management does not believe that the projected generation of material taxable capital
gains is sufficiently assured in the foreseeable future. In addition, the establishment of the
valuation allowance resulted in a reduction of the obligations associated with the tax receivable
agreement and a corresponding reduction of the deferred tax asset.
For further information on our effective tax rate, and the tax receivable agreement, see Note 5 to
our financial statements in Part I, Item 1, Financial Statements Income Taxes and Tax Related
Payments.
Our effective tax rate for GAAP reporting purposes may be subject to significant variation from
period to period.
The amount of income taxes that we may be required to pay could increase significantly if
legislation introduced in Congress is passed in its proposed form. For more information on the
proposed legislation, see Part II, Item 1A, Risk Factors -Risks Related to Taxation Legislation
has been introduced that would, if enacted, preclude us from qualifying for treatment as a
partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our
structure also is subject to potential judicial or administrative change and differing
interpretations, possibly on a retroactive basis.
53
Equity-Based Compensation
We currently have several categories of equity-based compensation which are described in Note 7 to
Part I, Item 1, Financial Statements Equity-Based Compensation. The aggregate fair value of
each of the RSU grants that are subject to service conditions is reduced by an estimated forfeiture
factor (that is, the estimated amount of awards which will be forfeited prior to vesting). The
estimated forfeiture factor is based upon historic turnover rates within our company adjusted for
the expected effects of the grants on turnover, if any, and other factors in the judgment of
management. The estimated forfeiture factor is updated at each reporting date.
The volatility assumption used in valuing certain awards, as described below, was based on
five-year historical stock price volatilities observed for a group of comparable companies, since
we do not have sufficient historical share performance to use our own historical volatility,
adjusted for managements judgment regarding our expected volatility. Since our IPO in February
2007, our actual volatility has exceeded the volatility assumption used. To the extent that this
trend continues, and managements judgment concerning volatility is changed, we would adjust the
volatility assumption used. The risk-free discount rate assumptions used in valuing certain awards
were based on the applicable U.S. treasury rate of like term. The dividend yield assumptions used
in valuing certain awards were based on our actual dividend rate at the time of the award; the
dividend growth rate used with respect to one type of award was based on managements judgment and
expectations.
The following elements of the accounting for equity-based compensation are subject to significant
judgment and estimation:
|
|
|
the estimated forfeiture factor; |
|
|
|
|
the discount related to RSUs which do not entitle the recipients to dividend equivalents
prior to the delivery of Class A shares. This discount was based on the estimated present
value of dividends to be paid during the service period, which in turn was based on an
estimated initial dividend rate, an estimated dividend growth rate and a risk-free discount
rate of like term; |
|
|
|
|
the discount related to RSUs with no service conditions which are subject to the delayed
delivery of Class A shares, which occurs in periods subsequent to the grant date. This
discount was based on the estimated value of a put option on such shares over the delayed
delivery period since essentially this would be the value of owning, and being able to trade,
those shares during the delayed delivery period rather than having to wait for delivery. This
estimated value was in turn derived from a binomial option pricing model based on the
following assumptions: volatility, term, dividend rate and risk-free discount rate; and |
|
|
|
|
the estimated fair value of the LTIP awards, which was estimated using a Monte Carlo
simulation valuation model, with the following assumptions: volatility, term, dividend rate,
and risk-free discount rate. |
Each of these elements, particularly the forfeiture factor and the volatility assumptions used in
valuing certain awards, are subject to significant judgment and variability and the impact of
changes in such elements on equity-based compensation expense could be material. Increases in the
assumed forfeiture factor would decrease compensation expense. Increases in the volatility
assumption would (i) decrease compensation expense related to RSUs with no service conditions since
the discount for delayed delivery would have increased, and (ii) increase compensation expense
related to the LTIP since the value of the LTIP would have increased. Increases in the assumed
risk-free rate would (i) decrease compensation expense related to RSUs which do not entitle
recipients to dividend equivalents since the estimated value of the foregone dividends would have
increased, thereby increasing the discount related to their non-receipt, (ii) decrease compensation
expense related to RSUs with no service conditions since the discount for delayed delivery would
have increased, and (iii) increase compensation expense related to the LTIP since the value of the
LTIP would have increased. Except for the forfeiture factor, changes in these assumptions will only
affect awards made in the future and awards whose accounting is impacted by changes in their fair
value (generally those to non-employees, known as liability awards).
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160 Accounting for Noncontrolling Interests. 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 the 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.
54
In September 2008, the FASB issued exposure drafts of two proposed standards, Accounting for
Transfers of Financial Assets, an amendment of FASB Statement No. 140, and Amendments to FASB
Interpretation No. 46(R). These proposed standards would fundamentally change the requirements to
consolidate (or deconsolidate) special purpose and variable interest
entities and would be effective for us in 2010. We are currently evaluating the potential impact of
these proposed standards on us. To the extent they result in changes to the entities included in
our consolidated financial statements, the impact could be material to our gross assets,
liabilities, revenues and expenses but would not be material to our net income or equity.
In April 2009, the FASB issued three FSPs related to fair value and impairment, FSP FAS 107-1 and
APB 28-1 Interim Disclosures about Fair Value of Financial Instruments, FSP FAS 115-2 and FAS
124-2 Recognition and Presentation of Other-Than-Temporary Impairments, and FSP FAS 157-4
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly. These FSPs (i) require
disclosures about the fair value of financial instruments on an interim basis, (ii) change the
guidance for determining, recording and disclosing other-than-temporary impairment, and (iii)
provide additional guidance for estimating fair value when the volume or level of activity for an
asset or liability have significantly decreased. These FSPs will be effective for Fortress in the
second quarter of 2009. We anticipate that they will have a small impact on our disclosures, a
potential impact on future impairment determinations for distributable earnings purposes (if any),
but no material impact on our financial condition, liquidity, or results of operations upon
adoption.
Market Risks
Our predominant exposure to market risk is related to our role as investment manager for the
Fortress Funds and the sensitivities to movements in the fair value of their investments on
management fee and incentive income revenue, as well as on returns on our principal investments in
such funds. For a discussion of the impact of market risk factors on our financial instruments
refer to Part I, Item 3 Quantitative and Qualitative Disclosures About Market Risk and
Critical Accounting Policies Valuation of Investments above.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
As of March 31, 2009, our material contractual obligations are our capital commitments to our
funds, our lease obligations and our debt obligations as described above. Furthermore, we have
potential clawback obligations with respect to our private equity deferred incentive income
received to date.
Our future contractual obligations decreased from $1.5 billion as of December 31, 2008 to $1.4
billion as of March 31, 2009.
Our debt obligations payable decreased from $777.7 million as of December 31, 2008 to $646.4
million as of March 31, 2009, including estimates for interest payments. This decrease was
primarily attributable to our March 13, 2009 amendment to our credit agreement. In connection with
the amendment, we repaid (i) $50.0 million of outstanding revolving debt and (ii) $75.0 million of
outstanding term loans.
Our outstanding capital commitments, including our commitments to our funds, have decreased from
$140.9 million as of December 31, 2008 to $132.4 million as of March 31, 2009. The decrease is
primarily attributable to a $14.4 million contribution we have made to Fund V in the three months
ended March 31, 2009. This decrease in outstanding capital commitments was partially offset by the
net effect of recallable capital distributions from the Real Assets Fund and the Credit
Opportunities Fund, which increased our outstanding commitments by $6.5 million.
The amount of clawback that would be due based on a liquidation of the related Fortress Funds at
their net recorded asset value as of March 31, 2009, which we refer to as intrinsic clawback, was
$136.0 million as compared to $130.3 million at December 31, 2008.
55
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our predominant exposure to market risk is related to our role as investment manager for the
Fortress Funds and the sensitivities to movements in the fair value of their investments on
management fee and incentive income revenue and investment income (loss).
The fair value of the financial assets and liabilities of the Fortress Funds may fluctuate in
response to changes in the value of securities, foreign exchange, commodities and interest rates.
Fluctuations in the fair value of the Fortress Funds will continue to directly affect the carrying
value of our investments in the Fortress Funds and thereby our earnings (losses) from equity method
investees, as well as the management fees and incentive income we record, to the extent that they
are earned based on fair value or NAV.
Risks are analyzed across funds from the bottom up and from the top down with a particular
focus on asymmetric risk. Management gathers and analyzes data, monitors investments and markets in
detail, and constantly strives to better quantify, qualify and circumscribe relevant risks.
Although the Fortress Funds share many common themes, each segment within the investment companies
runs their own investment and risk management process subject to the companys overall risk
tolerance and philosophy:
|
|
|
the investment process of our private equity funds involves a detailed analysis of
potential acquisitions, and asset management teams assigned to oversee the strategic development,
financing and capital deployment decisions of each portfolio investment; |
|
|
|
|
our hybrid funds and Castles perform credit and cash-flow analysis of borrowers, tenants
and credit-based assets, and have asset management teams that monitor covenant compliance by, and
relevant financial data of, borrowers, tenants and other obligors, asset pool performance
statistics, tracking of cash payments relating to investments, and ongoing analysis of the credit
status of investments; and |
|
|
|
|
our liquid hedge funds continuously monitor a variety of markets for attractive trading
opportunities, applying a number of traditional and customized risk management metrics to analyze
risk related to specific assets or portfolios, as well as fund-wide risks. |
Each segment has an institutional risk management process and related infrastructure to address
these risks. The following table summarizes our financial assets and liabilities that may be
impacted by various market risks such as equity prices, interest rates and exchange rates as of
March 31, 2009 (in thousands):
|
|
|
|
|
Assets |
|
|
|
|
Equity method investees |
|
$ |
759,980 |
|
Options in affiliates |
|
|
72 |
|
|
|
|
|
|
|
$ |
760,052 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Debt obligations payable |
|
$ |
604,041 |
|
|
|
|
|
Since Fortresss investments in the various Fortress Funds are not equal, Fortresss risks from a
management fee and incentive income perspective (which mirror the funds investments) and its risks
from an investment perspective are not proportional.
Fortress Funds Market Risk Impact on GAAP Management Fees
Our management fees are based on either: (i) capital commitments to a Fortress Fund, (ii) capital
invested in a Fortress Fund, or (iii) the NAV of a Fortress Fund, as described in our historical
consolidated financial statements. Management fees will only be impacted by changes in market risk
factors to the extent they are based on NAV. These management fees will be increased (or reduced)
in direct proportion to the impact of changes in market risk factors on our investments in the
related funds and would occur only in periods subsequent to the change, as opposed to having an
immediate impact. The proportion of our management fees that are based on NAV is dependent on the
number and types of Fortress Funds in existence and the current stage of each funds life cycle. As
of March 31, 2009, approximately 49% of our management fees earned were based on the NAV of the
applicable funds.
|
|
|
For private equity funds and hybrid PE funds, management fees are charged on committed
capital during the investment period of a new fund, and then generally on invested capital
after the investment period, with the exception of funds formed after March 2006. For funds
formed after March 2006 that are no longer in the investment period, management fees are
earned on the NAV of investments in publicly traded entities. Reductions in net asset value
below invested capital for any fund investment will also cause reductions in management fees. |
|
|
|
|
For Castles, management fees are not calculated based on NAV but instead a fee is charged
based on the funds contributed capital. |
|
|
|
|
For hedge funds, management fees are based on their NAV, which in turn is dependent on the
estimated fair values of their investments. |
56
Changes in values of investments could indirectly affect future management fees by, among other
things, reducing the funds access to capital or liquidity and their ability to currently pay the
management fees.
Fortress Funds Market Risk Impact on GAAP Incentive Income
Our incentive income is generally based on a percentage of profits of the various Fortress Funds
subject to the achievement of performance criteria. Our incentive income will be impacted by
changes in market risk factors. However, several major factors will influence the degree of impact:
(i) the performance criteria for each individual fund in relation to how that funds results of
operations are impacted by changes in market risk factors, (ii) whether such performance criteria
are annual or over the life of the fund, (iii) to the extent applicable, the previous performance
of each fund in relation to its performance criteria, and (iv) whether each funds incentive income
is subject to contingent repayment. As a result, the impact of changes in market risk factors on
incentive income will vary widely from fund to fund, as summarized below, and is heavily dependent
on the prior performance of each fund, and is therefore not readily predicted or estimated.
|
|
|
Incentive income from our private equity funds and hybrid PE funds is not recorded as
revenue but instead is deferred under GAAP until the related clawback contingency is
resolved. Deferred incentive income, which is subject to contingencies, will be recognized as
revenue to the extent it is received and all the associated contingencies are resolved.
Assuming that the deferred incentive income earned to date would be equal to what would be
recognized when all contingencies are resolved, a 10% increase or decrease in the fair values
of investments held by all of the private equity funds and hybrid PE funds where incentive
income is subject to contingencies at March 31, 2009 would increase or decrease future
incentive income by $21.3 million or ($8.8 million), respectively; however, this would have
no effect on our current reported financial condition or results of operations. |
|
|
|
|
Incentive income from the Castles is not impacted by changes in the fair values of their
investments, except to the extent they represent impairment, since these changes do not
impact the measure of current operating results (i.e. FFO in excess of specified returns to
the companys shareholders) upon which the incentive income is calculated. The definition of
FFO excludes unrealized changes in the values of the Castles investments (primarily real
estate, loans and securities), except for minor items (for example, the unrealized gain or
loss on non-hedge derivatives which make up only an immaterial portion of their assets). |
|
|
|
|
Incentive income from our hedge funds is directly impacted by changes in the fair value of
their investments. Incentive income from certain of our hedge funds is earned based on
achieving quarterly or annual performance criteria. For the hedge funds with quarterly
performance criteria, a 10% decrease to the NAV of the fund on March 31, 2009 would have
resulted in a loss to investors for the quarter. In future quarters, this loss would create
or cause the fund to fall further below a high water mark (minimum future return to recover
the loss to the investors) for our funds performance which would need to be achieved prior
to any incentive income being earned by us. For the hedge funds with annual performance
criteria, a 10% decrease to the NAV of the fund on March 31, 2009, assuming that NAV is
constant for the rest of the current year, would result in no incentive income recorded as
revenue at year end (in the fourth quarter of the year). |
Fortress Funds Market Risk Impact on GAAP Investment Income
Our investments in the Fortress Funds, other than the Castles, are accounted for under the equity
method. To the extent they are investment companies, our investments are directly affected by the
impact of changes in market risk factors on the investments held by such funds, which could vary
significantly from fund to fund.
57
Market Risk Quantitative Analysis
The following table presents information on the impact to Fortress of a 10% change in the fair
values of all of the investments held by the Fortress Funds at March 31, 2009 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Positive Change |
|
|
|
GAAP Revenues |
|
|
Segment Revenues (A) |
|
|
|
|
|
|
|
|
|
|
|
Earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Incentive |
|
|
Equity Method |
|
|
Management |
|
|
Incentive |
|
|
Investment |
|
|
|
Fees (B) |
|
|
Income |
|
|
Investees (C) |
|
|
Fees (B) |
|
|
Income |
|
|
Income |
|
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
$ |
3.9 |
|
|
$ |
N/A |
(E) |
|
$ |
42.5 |
|
|
$ |
3.9 |
|
|
$ |
N/A |
(E) |
|
$ |
N/A |
|
Castles (D) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Liquid Hedge Funds |
|
|
7.1 |
|
|
|
0.6 |
|
|
|
1.9 |
|
|
|
7.1 |
|
|
|
0.6 |
|
|
|
1.7 |
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds |
|
|
9.4 |
|
|
|
N/A |
(G) |
|
|
17.0 |
|
|
|
9.4 |
|
|
|
|
|
|
|
9.0 |
|
PE Funds |
|
|
1.1 |
|
|
|
N/A |
(E) |
|
|
8.9 |
|
|
|
1.1 |
|
|
|
N/A |
(E) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21.5 |
|
|
$ |
0.6 |
|
|
$ |
70.3 |
|
|
$ |
21.5 |
|
|
$ |
0.6 |
|
|
$ |
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Negative Change |
|
|
|
GAAP Revenues |
|
|
Segment Revenues (A) |
|
|
|
|
|
|
|
|
|
|
|
Earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Incentive |
|
|
Equity Method |
|
|
Management |
|
|
Incentive |
|
|
Investment |
|
|
|
Fees (B) |
|
|
Income |
|
|
Investees (C) |
|
|
Fees (B) |
|
|
Income |
|
|
Income |
|
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
$ |
(4.0 |
) |
|
$ |
N/A |
(E) |
|
$ |
(42.5 |
) |
|
$ |
(4.0 |
) |
|
$ |
N/A |
(E) (F) |
|
$ |
N/A |
(F) |
Castles (D) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
(F) |
Liquid Hedge Funds |
|
|
(7.1 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
(7.1 |
) |
|
|
|
|
|
|
(1.7 |
) |
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds |
|
|
(9.4 |
) |
|
|
N/A |
(G) |
|
|
(17.0 |
) |
|
|
(9.4 |
) |
|
|
|
|
|
|
(9.0 |
) |
PE Funds |
|
|
(1.3 |
) |
|
|
N/A |
(E) |
|
|
(8.9 |
) |
|
|
(1.3 |
) |
|
|
N/A |
(E) (F) |
|
|
N/A |
(F) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(21.8 |
) |
|
$ |
|
|
|
$ |
(70.3 |
) |
|
$ |
(21.8 |
) |
|
$ |
|
|
|
$ |
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations -
Segment Analysis for a discussion of the differences between GAAP and segment basis revenues. |
|
(B) |
|
Changes in management fees represent an annual change for the one year period following the
measurement date assuming there is no change to the investments held by the funds during that
period. For private equity funds and hybrid PE funds, it assumes that the management fees
reset as of the reporting date. Private equity fund and hybrid PE fund management fees would
be generally unchanged as, for investments in non-publicly traded securities, they are not
based on the value of the funds, but rather on the amount of capital invested in the funds.
However, if the NAV of a portfolio company of certain private equity funds or hybrid PE funds
is reduced below its invested capital, there would be a reduction in management fees. As of
the reporting date, $3.5 billion of such private equity fund or hybrid PE fund portfolio
companies were carried at or below their invested capital and are in funds which are no longer
in their commitment period. |
|
(C) |
|
Presented on a gross basis, before Principals and others interests in income of
consolidated subsidiaries. The changes presented do not include any effect related to our
direct investment in GAGFAH common stock. A 10% increase (decrease) in the equity price of
GAGFAHs common shares would affect our unrealized gains and losses by $2.8 million. |
|
(D) |
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Our investments in the Castles are held at fair value, based on the market value of the
shares we own. Gains (losses) on our shares in the Castles and options granted to us by the
Castles are affected by movements in the equity price of the shares. A 10% increase (decrease)
in the equity price of the shares would affect unrealized gains and losses by $0.1 million.
Furthermore, the Castles management fees and incentive income are not directly impacted by
changes in the fair value of their investments (unless the changes are deemed to be
impairment, which would impact incentive income). |
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(E) |
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For GAAP Revenues, private equity fund and hybrid PE fund incentive income would be unchanged
as it is not recognized until received and all contingencies are resolved. Furthermore,
incentive income would be based on the actual price realized in a transaction, not based on a
valuation. For Segment Revenues, private equity fund and hybrid PE fund incentive income is
based on realizations. |
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(F) |
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A reduction in the fair value of investments could impact our conclusion regarding the
potential impairment of our investments or a potential segment basis incentive income reserve
for funds which are subject to clawback. |
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(G) |
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For GAAP Revenues, hybrid hedge fund incentive income would be unchanged as it is not
recognized until all contingencies are resolved in the fourth quarter. Incentive income is
generally not charged on amounts invested by hybrid hedge funds in funds managed by external
managers. |
Interest Rate Risk
Fortress Operating Group has debt obligations payable that accrue interest at variable rates.
Interest rate changes may therefore impact the amount of interest payments, future earnings and
cash flows. Based on debt obligations payable as of March 31, 2009, we estimate that interest
expense relating to variable rate debt obligations payable would increase $6.0 million on an annual
basis in the event interest rates were to increase by one percentage point.
Exchange Rate Risk
Our investments in Eurocastle and GAGFAH are directly exposed to foreign exchange risk. As of March
31, 2009, we had a $0.4 million investment in Eurocastle and a $28.2 million investment in GAGFAH
which are accounted for at fair value. In the event of a 10% change in the applicable foreign
exchange rate against the U.S. dollar on March 31, 2009, we estimate the gains and losses for the
three months ended March 31, 2009 in relation to the value of the shares and options would increase
or decrease by $2.9 million.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
The Companys disclosure controls and procedures are designed to provide reasonable assurance that
information is recorded, processed, summarized and reported accurately and on a timely basis.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures were
effective.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent
fiscal quarter to which this report relates that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may from time to time be involved in litigation and claims incidental to the conduct of our
business. Our industry is always subject to scrutiny by government regulators, which could result
in litigation related to regulatory compliance matters. As a result, we maintain insurance policies
in amounts and with the coverage and deductibles we believe are adequate, based on the nature and
risks of our business, historical experience and industry standards. We believe that the cost of
defending any pending or future litigation or challenging any pending or future regulatory
compliance matter will not have a material adverse effect on our business. However, increased
regulatory scrutiny of hedge fund trading activities combined with extensive trading in our liquid
hedge funds may cause us to re-examine our beliefs regarding the likelihood that potential
investigation and defense-related costs could have a material adverse effect on our business.
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Item 1A. Risk Factors
We face a variety of significant and diverse risks, many of which are inherent in our business.
Described below are certain risks that we currently believe could materially affect us. Other
risks and uncertainties that we do not presently consider to be material or of which we are not
presently aware may become important factors that affect us in the future. The occurrence of any of
the risks discussed below could materially and adversely affect our business, prospects, financial
condition, results of operations or cash flow.
Risks Related to the Financial Services Industry and Financial Markets
We do not know what impact the U.S. governments various plans to attempt to stabilize the economy
and the financial markets will have on our business.
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, the U.S. government enacted
the Emergency Economic Stabilization Act of 2008, or EESA, on October 3, 2008. Pursuant to the
EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of
mortgage-backed and other securities from financial institutions for the purpose of stabilizing the
financial markets. In addition, the U.S. government also made preferred equity
investments in a number of the largest financial institutions, including Citigroup, Bank of America
and AIG. In addition, on March 3, 2009, the U.S. Department of the Treasury and the Federal
Reserve announced the launch of the Term Asset-Backed Securities Loan Facility, or TALF, which
provides up to $200 billion (which may be increased to up to $1 trillion) of financing to certain
U.S. entities to purchase qualifying AAA-rated asset-backed securities. Such financing is subject
to various conditions, has a term of three years and accrues interest at specified rates. It is
not clear what impact the various plans to attempt to stabilize the
economy and the
financial markets will have on our business.
In March
2009, the US Treasury announced plans for the Public Private
Investment Partnership Program (or PPIP) for legacy
assets, which is intended to generate purchasing power to help
facilitate the purchase of various loans and securities held by
financial institutions. As part of the PPIP, the Treasury accepted
applications from investment managers to become pre-qualified to
manage assets of to-be-formed investment funds that would invest in
legacy securities on behalf of the government and private investors.
We applied in April of this year to be pre-qualified as an
investment manager under this program, and have not yet been informed
of whether we have been selected as one of the managers by the
Treasury. We do not currently anticipate that the PPIP will have a
material impact on our business irrespective of whether we are
selected as a manager. The details of the TALF, PPIP and other
initiatives are subject to change, and it is unclear whether we
and/or our funds will be eligible to participate directly in these
programs (whether as an investment manager, as a recipient of
financing
or otherwise) and, therefore, these
initiatives may not directly benefit us. If any of our competitors are able to benefit from these
programs, they may gain a competitive advantage over us. In addition, the government
may decide to implement these programs in unanticipated ways that have a more direct impact on our
funds or our businesses. For example, the government may decide that
it will not purchase or finance certain
types of loans or securities, which may adversely affect the price of those securities. If we own such
securities in our funds, such price impacts may have an adverse impact on the liquidity and/or
performance of such funds.
Risks Related To Our Business
The terms of our credit agreement may restrict our current and future operations, particularly our
ability to respond to certain changes or to take future actions.
Our credit agreement contains a number of restrictive covenants and requires significant
amortization payments over the next several years, which collectively impose significant operating
and financial restrictions on us, including restrictions that may limit our ability to engage in
acts that may be in our long-term best interests. Although we recently amended our credit agreement
to, among other things, make the financial covenants less restrictive, the terms of our credit
agreement still impose significant operating and financial restrictions on us. Our credit agreement
includes financial covenants that we:
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not exceed a total leverage ratio; |
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maintain a minimum AUM; and |
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maintain a minimum amount of investment assets (and maintain specific amounts of
certain types of investments). |
The leverage ratio covenant is tested as of the end of each fiscal quarter while the AUM and
investment asset covenants are applicable at all times. We have amended these and other covenants
several times in the last year in order to provide sufficient flexibility to ensure compliance with
the terms of our credit agreement. Our ability to comply with these and other covenants is
dependent upon a number of factors, some of which are beyond our control but could nonetheless
result in noncompliance. For example, our leverage ratio fluctuates depending upon the amount of
cash flow that we generate, and the value of our AUM and investment assets fluctuates due to a
variety of factors, including mark-to-market valuations of certain assets and other market factors.
The ongoing global economic recession has negatively impacted the cash flow that we have generated
and expect to generate in the future as well as the current and expected value of our investment
assets and current and expected AUM. These negative conditions, in turn, negatively affect our
ability to comply with these covenants. For example, the investment assets on our balance sheet
include a limited number of concentrated positions in companies or other ventures whose liquidity,
operating results and financial condition have been adversely affected by the ongoing recession.
Our largest on-balance sheet investment relates to a portfolio
company that has a large amount of debt that must be refinanced in
the summer of 2009. The failure of the portfolio company to
successfully refinance its debt (or a material default by any other
portfolio company in which we have a material direct or indirect
investment) would likely cause us
to lose all, or nearly all, of the value of our investment, which
would, in turn, decrease the amount of our investment assets and could result in our failure to
comply with the investment asset covenant in our credit agreement. Our credit agreement also
contains other covenants that restrict our operations as well as a number of events that, if they
occurred, would constitute an event of default under the agreement.
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In addition, our credit agreement requires that we make the
following amortization payments during the following time periods: $50 million in July 2009, $25
million in October 2009, an additional $100 million during 2010, an additional $75 million by
January 2011, and the remaining balance at the maturity of the facilities in May 2012. Making
these payments will require a significant amount of our available cash flow that could otherwise be
applied to other purposes such as making investments.
A failure by us to comply with the covenants or amortization requirements or upon the occurrence
of other defaults or events of default specified in our credit agreement could result in an event
of default under the agreement, which would give the lenders under the agreement the right to
terminate their commitments to provide additional loans under our revolving credit facility, to
declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be
immediately due and payable. In addition, the lenders would have the right to proceed against the
collateral we granted to them, which consists of substantially all our assets. If the debt under
our credit agreement were to be accelerated, we may not have sufficient cash on hand or be able to
sell sufficient collateral to repay this debt, which would have an immediate material adverse
affect on our business, results of operations and financial condition. For more detail regarding
our credit agreement, its terms and the current status of our compliance with the agreement, please
see Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources and Debt Obligations, and Covenants.
We depend on Messrs. Briger, Edens, Kauffman, Nardone and Novogratz, and the loss of any of their
services would have a material adverse effect on us.
The success of our business depends on the efforts, judgment and personal reputations of our
principals, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone and Michael Novogratz. Our
principals reputations, expertise in investing, relationships with our investors and relationships
with members of the business community on whom our funds depend for investment opportunities and
financing, are each critical elements in operating and expanding our businesses. We believe our
performance is strongly correlated to the performance of these individuals. Accordingly, the
retention of our principals is crucial to our success. In addition, if any of our principals were
to join or form a competitor, some of our investors could choose to invest with that competitor
rather than in our funds. The loss of the services of any of our principals would have a material
adverse effect on us, including our ability to retain and attract investors and raise new funds,
and the performance of our funds. Two or more of our principals occasionally fly together, which
concentrates the potential impact of an accident on our company. We do not carry any key man
insurance that would provide us with proceeds in the event of the death or disability of any of our
principals.
Each of our principals has entered into an employment agreement with us. The initial term of these
agreements is five years from the date of our initial public offering in February 2007, with
automatic one-year renewals until a non-renewal notice is given by us or the principal. If a
principal terminates his employment voluntarily or we terminate his employment for cause (as
defined in the agreement), the principal will be subject to eighteen-month post-employment
covenants requiring him not to compete with us. However, if we terminate a principals employment
without cause, the principal will not be subject to the non-competition provisions.
The principals have also entered into an agreement among themselves, which provides that, in the
event a principal voluntarily terminates his employment with us for any reason prior to the fifth
anniversary of the consummation of our initial public offering, the principal may be required to
forfeit a portion of his Fortress Operating Group units (and the corresponding Class B shares) to
the other principals who continue to be employed by the Fortress Operating Group. However, this
agreement may be amended by the principals who are then employed by the Fortress Operating Group.
We, our shareholders and the Fortress Operating Group have no ability to enforce any provision of
this agreement or to prevent the principals from amending the agreement or waiving any of its
obligations.
There is no guarantee that our principals will not resign, join our competitors or form a competing
company, or that the non-competition provisions in the employment agreements would be upheld by a
court. If any of these events were to occur, our business, prospects, financial condition and
results of operation would be materially adversely affected.
Several of our funds have key person provisions pursuant to which the failure of one or more of
our senior employees to be actively involved in the business provides investors with the right to
redeem from the funds or otherwise limits our rights to manage the funds. The loss of the services
of any one of such senior employees could have a material adverse effect on certain of our funds to
which such key person provisions relate and in some circumstances on us.
Investors in most of our hedge funds may generally redeem their investment without paying
redemption fees if the relevant key person ceases to perform his functions with respect to the fund
for 90 consecutive days. In addition, the terms of certain of our
hedge funds financing arrangements contain key person provisions, which may result, under
certain circumstances, in the acceleration of such funds debt or the inability to continue funding
certain investments if the relevant employee ceases to perform his functions with respect to the
fund and a replacement has not been approved.
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The loss or inability of Mr. Novogratz to perform his services for 90 days could result in
substantial withdrawal requests from investors in our Drawbridge Global Macro funds and, in the
event that a replacement is not approved, the termination of a substantial portion of the funds
financing arrangements. Such withdrawals and terminations would have a material adverse effect on
the Drawbridge Global Macro funds by reducing our management fees from those funds. Further, such
withdrawals and terminations could lead possibly to the liquidation of the funds and a
corresponding elimination of our management fees and potential to earn incentive income from those
funds. The loss of Mr. Novogratz could, therefore, ultimately result in a loss of a material
portion of our earnings attributable to our liquid hedge fund business segment.
The loss or inability of Mr. Briger to perform his services for 90 days could result in substantial
withdrawal requests from investors in our Drawbridge Special Opportunities funds and, in the event
that a replacement for him is not approved, the termination of a substantial portion of the funds
financing arrangements. Such withdrawals and terminations would have a material adverse effect on
the Drawbridge Special Opportunities funds by reducing our management fees from those funds.
Further, such withdrawals and terminations could lead possibly to the eventual liquidation of the
funds and a corresponding elimination of our management fees and potential to earn incentive income
from those funds. The loss or inability of Mr. Briger to perform his services or devote an
appropriate portion of his business time to the long dated value funds for 90 days would (unless
approved by a majority of fund investors) prevent some of the Drawbridge long dated value funds
from making additional investments. This could have a material adverse effect on such long dated
value funds, resulting in us receiving reduced management fees. The loss of Mr. Briger could,
therefore, ultimately result in a loss of a material portion of our earnings attributable to our
hybrid hedge fund and hybrid PE fund business segments.
If either Mr. Edens or both of Mr. Kauffman and Mr. Nardone cease to devote certain minimum
portions of their business time to the affairs of certain of our private equity funds, the funds
will not be permitted to make further investments, and then-existing investments may be liquidated
if investors vote to do so. Our ability to earn management fees and realize incentive income from
our private equity funds therefore would be adversely affected if we cannot make further
investments or if we are required to liquidate fund investments at a time when market conditions
result in our obtaining less for investments than could be obtained at later times. In addition, we
may be unable to raise additional private equity funds if existing private equity fund key-man
provisions are triggered. The loss of either Mr. Edens or both of Mr. Kauffman and Mr. Nardone
could, therefore, ultimately result in a loss of substantially all of our earnings attributable to
our private equity funds.
In addition, the terms of certain of our existing funds may be amended over time to add additional
key persons, and senior employees (including but not limited to Fortress principals) may also be
deemed as key persons for funds that are formed in the future.
Any such events would potentially have a direct material adverse effect on our revenues and
earnings (depending on the size of the particular fund to which a key person event relates), and
would likely harm our ability to maintain or grow management fee paying assets under management in
existing funds or raise additional funds in the future.
Our ability to retain our managing directors is critical to our success and our ability to grow
depends on our ability to attract additional key personnel.
Our success depends on our ability to retain our managing directors and the other members of our
investment management team and recruit additional qualified personnel. We collectively refer to
these key employees (other than our principals) as our investment professionals. Our investment
professionals possess substantial experience and expertise in investing, are responsible for
locating and executing our funds investments, have significant relationships with the institutions
which are the source of many of our funds investment opportunities, and in certain cases have
strong relationships with our investors. Therefore, if our investment professionals join
competitors or form competing companies it could result in the loss of significant investment
opportunities and certain existing investors. As a result, the loss of even a small number of our
investment professionals could jeopardize the performance of our funds, which could have a material
adverse effect on our results of operations as well as our ability to retain and attract investors
and raise new funds. Also, while we have non-competition and non-solicitation agreements with
certain investment professionals, there is no guarantee that the agreements to which our investment
professionals are subject, together with our other arrangements with them, will prevent them from
leaving us, joining our competitors or otherwise competing with us or that these agreements will be
enforceable in all cases. In addition, these agreements will expire after a certain period of time,
at which point each of our investment professionals would be free to compete against us and solicit
investors in our funds, clients and employees.
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Efforts to retain or attract investment professionals may result in significant additional
expenses, which could adversely affect our profitability, and changes in law could hamper our
recruitment and retention efforts. For example, we might not be able, or may elect not, to provide
future investment professionals with equity interests in our business to the same extent or with
the same tax consequences as our existing investment professionals. Therefore, in order to recruit
and retain existing and future investment professionals, we may need to increase the level of cash
compensation that we pay to them. Accordingly, as we promote or hire new investment professionals
over time, we may increase the level of cash compensation we pay to our investment professionals,
which would cause our total employee compensation and benefits expense as a percentage of our
total revenue to increase and adversely affect our profitability. In addition, we may deem it
necessary to maintain compensation levels to retain employees even during periods when we generate
less revenues than in previous periods, which would reduce our profit margins. Also, if proposed
legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income
rather than as capital gain for U.S. federal income tax purposes, such legislation would materially
increase the amount of taxes that we and our investment professionals that are compensated in part
with carried interest would be required to pay, thereby adversely affecting our ability to recruit,
retain and motivate our current and future professionals. See Our structure involves complex
provisions of U.S. federal income tax law for which no clear precedent or authority may be
available. Our structure also is subject to potential legislative, judicial or administrative
change and differing interpretations, possibly on a retroactive basis. Lastly, issuance of
certain equity interests in our business to current or future investment professionals would dilute
Class A shareholders.
Certain of our funds face particular retention issues with respect to investment professionals
whose compensation is tied, often in large part, to performance thresholds, or high water marks.
For example, several investment professionals receive performance-based compensation at the end of
each year based upon their annual investment performance, and this performance-based compensation
represents substantially all of the compensation the professional is entitled to receive during the
year. If the investment professionals annual performance is negative, the professional will not
be entitled to receive any performance-based compensation for the year. Alternatively, certain
other investment professionals are compensated in part based upon the performance fees earned by
the fund during each quarter. The funds positive quarterly investment performance represents a
high water mark, and neither the fund nor the investment professional is entitled to receive future
performance-based compensation until the funds cumulative performance at the end of a subsequent
quarter is greater than the previously set mark. In either compensation scenario, if the
investment professional or fund, as the case may be, does not produce investment results sufficient
to merit performance-based compensation, any affected investment professional may be incentivized
to join a competitor because doing so would allow the professional to eliminate the burden of
having to satisfy the high water mark before earning performance-based compensation. Similarly,
many of our investment professionals in our private equity and hybrid PE fund businesses are
compensated with grants of carried interest in our funds. During periods of economic volatility
such as what we are currently experiencing, realization events in our private equity and hybrid PE
fund businesses may be delayed, and it may therefore take significantly longer for investments to
result in payments to such professionals. In addition, in the event that overall returns for any of
our private equity funds or hybrid PE funds result in the generation of less incentive income than
might have otherwise been anticipated, such professionals grants of carried interest in such fund
will have similarly decreased value. To retain such professionals, the funds manager may elect to
compensate the professional using a portion of the management fees earned by the manager, which
would, in turn, reduce the amount of cash available to the public company, thereby reducing the
amount available for distribution to our Class A shareholders or other liquidity needs. This
retention risk is heightened during periods similar to those we are currently experiencing where
market conditions make it more difficult to generate positive investment returns.
We have experienced rapid growth, which may be difficult to sustain and which may place significant
demands on our administrative, operational and financial resources.
Our rapid growth in recent years has created significant demands on our legal, accounting and
operational infrastructure, and increased expenses. The complexity of these demands, and the
expense required to address them, is a function not simply of the amount by which our fee paying
assets under management have grown, but of significant differences in the investing strategies of
our different funds. In addition, we are required to continuously develop our systems and
infrastructure in response to the increasing sophistication of the investment management market and
legal, accounting and regulatory developments. Moreover, the strains upon our resources caused by
our growth are compounded by the additional demands imposed upon us as a public company with
shares listed on the New York Stock Exchange and, thus, subject to an extensive body of regulations
that did not apply to us prior to our initial public offering.
Our future growth will depend, among other things, on our ability to maintain an operating platform
and management system sufficient to address our growth and will require us to incur significant
additional expenses and to commit additional senior management and operational resources. As a
result, we face significant challenges:
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in maintaining adequate accounting, financial, compliance, trading and other
business controls, |
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implementing new or updated information, financial and disclosure systems and
procedures, and |
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in recruiting, training, managing and appropriately sizing our work force and other
components of our business on a timely and cost-effective basis. |
There can be no assurance that we will be able to manage our expanding operations effectively or
that we will be able to continue to grow, and any failure to do so could adversely affect our
ability to generate revenue and control our expenses.
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Operational risks may disrupt our businesses, result in losses or limit our growth.
We face operational risk from errors made in the negotiation, execution, confirmation or settlement
of transactions. We also face operational risk from transactions not being properly recorded,
evaluated or accounted for in our funds. In particular, our liquid hedge and hybrid fund businesses
are highly dependent on our ability to process and evaluate, on a daily basis, transactions across
markets and geographies in a time-sensitive, efficient and accurate manner. Consequently, we rely
heavily on our financial, accounting and other data processing systems. In addition, new investment
products we introduce create (and recently introduced products created) a significant risk that our
existing systems may not be adequate to identify or control the relevant risks in the investment
strategies employed by such new investment products. If any of these systems do not operate
properly, are inadequately designed or are disabled, we could suffer financial loss, a disruption
of our businesses, liability to our funds, regulatory intervention and reputational damage.
In addition, we operate in an industry that is highly dependent on its information systems and
technology. We believe that we have designed, purchased and installed high-quality information
systems to support our business. There can be no assurance, however, that our information systems
and technology will continue to be able to accommodate our operations, or that the cost of
maintaining such systems will not increase from its current level. Such a failure to accommodate
our operations, or a material increase in costs related to such information systems, could have a
material adverse effect on us.
Furthermore, we depend on our headquarters, which is located in New York City, for the operation of
our business. A disaster or a disruption in the infrastructure that supports our businesses,
including a disruption involving electronic communications or other services used by us or third
parties with whom we conduct business, or directly affecting our headquarters, may have an adverse
impact on our ability to continue to operate our business without interruption, which could have a
material adverse effect on us. Although we have disaster recovery programs in place, there can be
no assurance that these will be sufficient to mitigate the harm that may result from such a
disaster or disruption. In addition, insurance and other safeguards might only partially reimburse
us for our losses.
Finally, we rely on third party service providers for certain aspects of our business, including
certain financial operations of our hedge funds. In particular, we rely heavily on the services of
third party administrators in our hedge fund businesses and on the general ledger software provider
for a number of our funds. Any interruption or deterioration in the performance of these third
parties could impair the quality of the funds operations and could impact our reputation and
adversely affect our business and limit our ability to grow.
Our removal as the investment manager, or the liquidation, of one or more of our funds could have a
material negative effect on our business, results of operations and financial condition.
We derive a substantial portion of our revenues from funds managed pursuant to management
agreements that may be terminated or fund partnership agreements that permit investors to request
liquidation of investments in our funds on short notice. The termination of certain management
agreements or commencement of the dissolution of certain funds would constitute an event of default
under our credit agreement.
The terms of our funds generally give either the general partner of the fund or the funds board of
directors the right to terminate our investment management agreement with the fund. However,
insofar as we control the general partner of our funds which are limited partnerships, the risk of
termination of investment management agreement for such funds is limited, subject to our fiduciary
or contractual duties as general partner. This risk is more significant for our offshore hedge
funds where we do not serve as the general partner, which represent a significant portion of our
hedge fund AUM.
With respect to our private equity funds formed as registered investment companies, each funds
investment management agreement must be approved annually by the independent members of such funds
board of directors and, in certain cases, by its members, as required by law. Termination of these
agreements would reduce the fees we earn from the relevant funds, which could have a material
adverse effect on our results of operations.
In addition, investors in any private equity fund or hybrid PE fund and certain hedge funds have
the ability to act, without cause, to accelerate the date on which the fund must be wound down. We
will cease earning management fees on the assets of any such fund that is wound down. In addition,
the winding down of a material fund or group of funds within a short period of time could trigger
an event of default under certain debt covenants in our credit facility. Our ability to realize
incentive income from such funds therefore would be adversely affected if we are required to
liquidate fund investments at a time when market conditions result in our obtaining less for
investments than could be obtained at later times.
In addition, management agreements of our funds that are registered investment companies under the
Investment Company Act of 1940 would terminate if we were to experience a change of control without
obtaining investor consent. Such a change of control could be deemed to occur in the event our
principals exchange enough of their interests in the Fortress Operating Group into our Class A
shares such that our principals no longer own a controlling interest in us. We cannot be certain
that consents required for the assignment of our investment management agreements will be obtained
if such a deemed change of control occurs. In addition, the board of directors of certain hedge
funds have the right under certain circumstances to terminate the investment management agreements
with the applicable fund. Termination of these agreements would affect the fees we earn from the
relevant funds, which could have a material adverse effect on our results of operations.
Under the terms of our credit agreement, if, subject to certain exceptions, we cease to serve as
the investment manager of any fund that generates management and incentive fees during the previous
twelve months or which we expect to generate such fees within the next twelve months in an
aggregate amount of at least $25 million, such termination would constitute an event of default
under our credit agreement. In addition, if any such fund commenced a process to dissolve,
liquidate or otherwise wind-up the fund, such commencement would also constitute an event of
default under our credit agreement. If either event of
default occurred, it would give our lenders the right to terminate their commitments to lend us
funds under our revolving credit facility and to require us to repay all outstanding term loans
immediately (in addition to other remedies available under the credit agreement). If our lenders
exercised their rights upon the occurrence of an event of default, doing so would likely have an
immediate material adverse effect on our business, results of operations and financial condition.
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We are subject to third-party litigation risk that could result in significant liabilities and
reputational harm, which could materially adversely affect our results of operations, financial
condition and liquidity.
In general, we will be exposed to risk of litigation by our fund investors if our management of any
fund is alleged to constitute gross negligence or willful misconduct. Investors could sue us to
recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss.
Further, we may be subject to litigation arising from investor dissatisfaction with the performance
of our funds or from allegations that we improperly exercised control or influence over companies
in which our funds have large investments. By way of example, we, our funds and certain of our
employees, are each exposed to the risks of litigation relating to investment activities in our
funds and actions taken by the officers and directors (some of whom may be Fortress employees) of
portfolio companies, such as risks relating to a portfolio companys mortgage servicing activities
and the risk of shareholder litigation by other shareholders of public companies in which our funds
have large investments. The stock prices of several of our publicly traded portfolio companies and
Castles have decreased significantly over the past two years (resulting in the delisting of
one of our portfolio companies from the NYSE), which decreases may lead to securities class action
claims or other suits against us. In addition, we are exposed to risks of litigation or
investigation relating to transactions that presented conflicts of interest that were not properly
addressed. In such actions we would be obligated to bear legal, settlement and other costs (which
may be in excess of available insurance coverage). In addition, although we are indemnified by the
funds we manage, our rights to indemnification may be challenged. If we are required to incur all
or a portion of the costs arising out of litigation or investigations as a result of inadequate
insurance proceeds or failure to obtain indemnification from our funds, our results of operations,
financial condition and liquidity could be materially adversely affected. As a general matter, the
litigation environment in the investment management business tends to become worse in times of
extreme market volatility such as what we are currently experiencing. We have experienced negative
performance over the past several months in several of our investment funds, which increases the
likelihood that we will be sued by one or more of our investors.
In our liquid hedge funds, we are exposed to the risk of litigation if the funds suffer
catastrophic losses due to the failure of a particular investment strategy or due to the trading
activity of an employee who has violated market rules and regulations. Any litigation arising in
such circumstances is likely to be protracted, expensive and surrounded by circumstances which are
materially damaging to our reputation and our business. In addition, we face the risk of litigation
from investors in our private equity funds, hybrid hedge funds and hybrid PE funds if we violate
restrictions in such funds organizational documents (for example, by failing to seek approval for
related party transactions requiring approval or by exceeding the mandate of such funds).
Our liquid hedge funds, our offshore hybrid hedge fund and many of our private equity funds and
hybrid PE funds are incorporated or formed under the laws of the Cayman Islands. Cayman Islands
laws, particularly with respect to shareholder rights, partner rights and bankruptcy, may differ
from the laws of the United States. Cayman Islands laws could change, possibly to the detriment of
our funds and investment management subsidiaries. In November 2008, our flagship liquid hedge
funds, the Drawbridge Global Macro Funds, temporarily suspended redemptions from the funds due to
the heavy volume of redemption requests received during the fourth quarter of 2008. The suspensions
were based, in large part, on the need to renegotiate the terms of various financing arrangements
to which one or more of the funds were party. In addition, the Drawbridge Global Macro Funds announced their intention to engage in a significant
restructuring of their business, including the planned bifurcation of
the funds assets into liquid and illiquid pools, revisions to certain of the fees charged to the
funds investors, payment of redemption proceeds in a
combination of cash and in-kind distributions in the form of
interests in an entity that holds interests in the illiquid pool and
a plan to allow non-redeeming investors to exchange their interests
in the liquid pool of assets into a newly-formed fund. Since the time
of such announcements, the Drawbridge Global Macro Funds have successfully renegotiated the terms
of their financing arrangements, lifted the suspension of
redemptions and paid cash redemptions for the liquid portion of the redeemed investments (in the amount of $2.1
billion), and have also proceeded with the formation and launch of the new fund as of
May 1, 2009. On May 7, 2009, a suit was filed in the
Grand Court Cayman Islands by an investor in the Drawbridge Global Macro
Fund Ltd challenging the payment of redemption proceeds partially in
kind as described above;
however, the fund
believes that the suit is without merit. There can be no assurances
that additional investors will not file similar or other litigation at a later date based on claims stemming from the transactions.
Also, as a public company, we are subject to the risk of investigation or litigation by regulators
or our public shareholders arising from an array of possible claims, including investor
dissatisfaction with the performance of our businesses or our share price, allegations of
misconduct by our officers and directors or claims that we have inappropriately dealt with
conflicts of interest or investment allocations. It is also likely that the public company would
be brought into any lawsuit that is filed involving any of the fund-related litigation risks
described above. As with the funds, while the public company maintains insurance, there can be no
assurance that its insurance will prove to be adequate. If the public company is required to incur
all or a portion of the costs arising out of litigation or investigations, our results of
operations could be materially adversely affected. Furthermore, any such litigation or
investigation could be protracted, expensive and highly damaging to the public companys
reputation, even if the underlying claims are without merit. In addition, we may participate in
transactions that involve litigation (including the enforcement of property rights) from time to time, and such
transactions may expose us to reputational risk and increased risk from countersuits.
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In addition, with a workforce consisting of many very highly paid investment professionals, we face
the risk of lawsuits relating to claims for compensation, which may individually or in the
aggregate be significant in amount. Such claims are more likely to occur in the current environment
where individual employees may experience significant volatility in their year-to-year compensation
due to trading performance or other issues and in situations where previously highly compensated
employees were terminated for performance or efficiency reasons. The cost of settling such claims
could adversely affect our results of operations.
Our reputation, business and operations could be adversely affected by regulatory compliance
failures, the potential adverse effect of changes in laws and regulations applicable to our
business and effects of negative publicity surrounding the alternative asset management industry in
general.
Potential regulatory action poses a significant risk to our reputation and thereby to our business.
Our business is subject to extensive regulation in the United States and in the other countries in
which our investment activities occur. The Securities and Exchange Commission, or SEC, oversees our
activities as a registered investment adviser under the Investment Advisers Act of 1940. In
addition, we are subject to regulation under the Investment Company Act of 1940, the Securities
Exchange Act of 1934, and various other statutes. We are subject to regulation by the Department of
Labor under the Employee Retirement Income Security Act of 1974 or ERISA. We and our Castles, as
public companies, are subject to applicable stock exchange regulations, and both we and Newcastle
are subject to the Sarbanes-Oxley Act of 2002. A number of portfolio companies in our private
equity funds are also publicly traded and/or are subject to significant regulatory oversight (such
as our senior living and railroad investments). A number of our investing activities, such as our
lending business, are subject to regulation by various U.S. state regulators. In the United
Kingdom, we are subject to regulation by the U.K. Financial Services Authority. Our other European
operations, and our investment activities around the globe, are subject to a variety of regulatory
regimes that vary country by country.
Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many
aspects of financial services, including the authority to grant, and in specific circumstances to
cancel, permissions to carry on particular businesses. A failure to comply with the obligations
imposed by the Investment Advisers Act of 1940 on investment advisers, including record-keeping,
advertising and operating requirements, disclosure obligations and prohibitions on fraudulent
activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and
reputational damage. Our liquid hedge fund business, and, to a lesser degree, our hybrid fund
business, are involved regularly in trading activities which implicate a broad number of U.S. and
foreign securities law regimes, including laws governing trading on inside information, market
manipulation and a broad number of technical trading requirements that implicate fundamental market
regulation policies. Violation of such laws could result in severe restrictions on our activities
and in damage to our reputation.
Some of our private equity funds currently qualify as venture capital operating companies, or VCOC,
and therefore are not subject to the fiduciary requirements of ERISA with respect to their assets.
However, it is possible that the U.S. Department of Labor may amend the relevant regulations or the
characteristics of our funds may change. If these funds fail to qualify as VCOCs or otherwise
satisfy the requirements of ERISA, including the requirement of investment prudence and
diversification or the prohibited transaction rules, it could materially interfere with our
activities in relation to these funds or expose us to risks related to our failure to comply with
such requirements.
Our failure to comply with applicable laws or regulations could result in fines, censure,
suspensions of personnel or investing activities or other sanctions, including revocation of our
registration as an investment adviser. The regulations to which our businesses are subject are
designed primarily to protect investors in our funds and to ensure the integrity of the financial
markets. They are not designed to protect our Class A shareholders. Even if a sanction imposed
against us or our personnel by a regulator is for a small monetary amount, the adverse publicity
related to such sanction against us by regulators could harm our reputation, result in redemptions
by investors from our funds and impede our ability to raise additional capital or new funds.
As a result of recent highly-publicized financial scandals as well as the ongoing financial
turmoil and related recently enacted government bailout measures, investors, regulators and the
general public have exhibited concerns over the integrity of both the U.S. financial markets and
the regulatory oversight of these markets. As a result, the regulatory environment in which we
operate is subject to heightened scrutiny. With respect to alternative asset management funds, in
recent years, there has been debate in both the U.S. and foreign governments about new rules or
regulations to be applicable to hedge funds or other alternative investment products. For example,
certain officials in Germany have called for implementing additional regulations, which, if
enacted, could potentially apply to our business activities throughout the European Union. In
April 2008, the U.S. Department of the Treasury released a blueprint for modernizing financial
regulations that called for, among other things, the regulation of hedge funds and private equity
funds. In January 2009, members of the Senate introduced the Hedge Fund Transparency Act, which,
among other things, proposes to require private equity funds and hedge funds to register with the
SEC. Moreover, as calls for additional regulation have increased, there may be a related increase
in regulatory investigations of the trading and other investment activities of alternative asset
management funds, including our funds. Such investigations may impose additional expenses on us,
may require the attention of senior management and may result in fines if any of our funds are
deemed to have violated any regulations.
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In addition, the financial industry will likely become more highly regulated in the near future in
response to recent events. The chairman of the SEC and the president of the Federal Reserve Bank
of New York have recently commented about the perceived need for additional regulation of financial
industry firms. Also, the chairman of the Senate committee that regulates the Commodities Futures
Trading Commission recently announced his intention to introduce legislation to require credit
default swaps and other derivatives to be traded exclusively on regulated exchanges.
We may be adversely affected if new or revised legislation or regulations are enacted, or by
changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC,
other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that
supervise the financial markets. Such changes could place limitations on the type of investor that
can invest in alternative asset funds or on the conditions under which such investors may invest.
Further, such changes may limit the scope of investing activities that may be undertaken by
alternative asset managers as well as their funds and portfolio companies. For example, the SECs
recent temporary ban on short sales of certain securities restricted the investment tools that some
of our funds have used previously, and it is possible that the ban may be re-instituted in the
future. It is impossible to determine the extent of the impact of any new laws, regulations or
initiatives that may be proposed, or whether any of the proposals will become law. Compliance with
any new laws or regulations could make compliance more difficult and expensive and affect the
manner in which we conduct business.
Our results of operations may also be negatively impacted if certain proposed tax legislation is
enacted. If legislation were to be enacted by the U.S. Congress to treat carried interest as
ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation
would materially increase the amount of taxes that we and possibly our equityholders are required
to pay, thereby reducing the value of our Class A shares and adversely affecting our ability to
recruit, retain and motivate our current and future professionals. President Obama has publicly
stated that he supports similar changes to the tax code. See Our structure involves complex
provisions of U.S. federal income tax law for which no clear precedent or authority may be
available. Our structure also is subject to potential legislative, judicial or administrative
change and differing interpretations, possibly on a retroactive basis and Legislation has been
introduced that would, if enacted, preclude us from qualifying for treatment as a partnership for
U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is
subject to potential judicial or administrative change and differing interpretations, possibly on a
retroactive basis. Any such changes could increase our costs of doing business or materially
adversely affect our profitability.
Congress
and foreign regulators have proposed legislation that would require
essentially all of our funds to register with the SEC and become
subject to full SEC oversight and additional requirements (or in the
case of foreign jurisdictions would impose a number of other new
regulatory requirements), which would increase our costs.
Members of the Senate recently proposed the Hedge Fund Transparency Act, which would apply to
private equity funds, venture capital funds, real estate funds and other private investment
vehicles with at least $50 million in assets under management. If enacted, the bill would require
that such funds in order to remain exempt from the substantive provisions of the Investment
Company Act to register with the SEC, maintain books and records in accordance with SEC
requirements, and become subject to SEC examinations and information requests. In addition, the
Act would require each fund to file annual disclosures, which would be made public, containing
detailed information about the fund, most notably including the names of all beneficial owners of
the fund, an explanation of the funds ownership structure and the current value of the funds
assets under management. Also, the Act would require each fund to establish anti-money laundering
programs. We cannot predict whether this Act will be enacted or, if enacted, what the final terms
of the Act would require or the impact of such new regulations on our funds. If enacted, this Act
would likely negatively impact our funds in a number of ways, including increasing the funds
regulatory costs, imposing additional burdens on the funds staff, and potentially requiring the
disclosure of sensitive information.
On
April 30, 2009, the European Commission published the draft of a
proposed EU Directive on Alternative Investment Fund Managers. The
Directive, if adopted in the form proposed, would impose significant
new regulatory requirements on investment managers operating within
the EU, including with respect to conduct of business, regulatory
capital, valuations, disclosures and marketing. Such rules could
potentially impose significant additional costs on the operation of
our business in the EU and could limit our operating flexibility
within that jurisdiction.
Our failure to deal appropriately with conflicts of interest could damage our reputation and
adversely affect our business.
As we have expanded the number and scope of our businesses, we increasingly confront potential
conflicts of interest relating to our funds investment activities. Certain of our funds have
overlapping investment objectives, including funds which have different fee structures, and
potential conflicts may arise with respect to our decisions regarding how to allocate investment
opportunities among those funds. For example, a decision to acquire material non-public information
about a company while pursuing an investment opportunity for a particular fund gives rise to a
potential conflict of interest when it results in our having to restrict the ability of other funds
to take any action. In addition, holders of Class A shares may perceive conflicts of interest
regarding investment decisions for funds in which our principals, who have and may continue to make
significant personal investments in a variety of Fortress Funds, are personally invested.
Similarly, conflicts of interest may exist or develop regarding decisions about the allocation of
specific investment opportunities between Fortress and the Fortress Funds. In addition, because
the Operating Entities are held, in part, by FIG Corp., which is subject to tax, conflicts of
interest may exist regarding decisions about which of Fortresss holdings should be held by
Operating Entities and which by Principal Holdings. We have historically extended loans and other
forms of credit support from time to time to various of our investment funds in order to support
funding and liquidity needs. In addition, our principals have sometimes extended similar credit
support to our funds in their individual capacities. The existence and the repayment of such
obligations by the funds to us and our principals creates the potential for claims of conflicts of
interest by our fund investors.
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Pursuant to the terms of our operating agreement, whenever a potential conflict of interest exists
or arises between any of the principals, one or more directors or their respective affiliates, on
the one hand, and the company, any subsidiary of the
company or any member other than a principal, on the other, any resolution or course of action by
our board of directors shall be permitted and deemed approved by all shareholders if the resolution
or course of action (i) has been specifically approved by a majority of the members of a committee
composed entirely of two or more independent directors, or it is deemed approved because it
complies with rules or guidelines established by such committee, (ii) has been approved by a
majority of the total votes that may be cast in the election of directors that are held by
disinterested parties, (iii) is on terms no less favorable to the company or shareholders (other
than a principal) than those generally being provided to or available from unrelated third parties
or (iv) is fair and reasonable to the company taking into account the totality of the relationships
between the parties involved. Notwithstanding the foregoing, it is possible that potential or
perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory
enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and
our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or
more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection
with, conflicts of interest would have a material adverse effect on our reputation, which would
materially adversely affect our business in a number of ways, including as a result of redemptions
by our investors from our hedge funds, an inability to raise additional funds and a reluctance of
counterparties to do business with us.
Employee misconduct could harm us by impairing our ability to attract and retain investors and by
subjecting us to significant legal liability, regulatory scrutiny and reputational harm.
Our reputation is critical to maintaining and developing relationships with the investors in our
funds, potential investors and third-parties with whom we do business. In recent years, there have
been a number of highly-publicized cases involving fraud, conflicts of interest or other misconduct
by individuals in the financial services industry in general and the hedge fund industry in
particular. There is a risk that our employees could engage in misconduct that adversely affects
our business. For example, if an employee were to engage in illegal or suspicious activities (such
as improper trading, disclosure of confidential information or breach of fiduciary duties), we
could be subject to regulatory sanctions and suffer serious harm to our reputation, financial
position, investor relationships and ability to attract future investors. It is not always possible
to deter employee misconduct, and the precautions we take to detect and prevent this activity may
not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations,
could result in a material adverse effect on our reputation and our business.
The alternate investment management business is intensely competitive, and the industry is in a
state of flux.
Due to the global economic recession, the general state of distress in the financial markets and
the generally poor returns in the alternative asset management business over the last 18 months,
the alternative asset management industry is generally perceived to be in a state of transition.
The industry has been marked over this period by increasing anxiety on the part of institutional
fund investors as those investors have suffered from decreasing returns, liquidity pressure,
increased volatility and difficulty maintaining targeted asset allocations, and a significant
number of investors have materially decreased or temporarily stopped making new fund investments
during this period. Market commentators and analysts have expressed the belief that as the economy
begins to recover and such investors begin to increase the pace of new investments, those investors
are likely to concentrate their holdings in a smaller overall group of managers that have
relatively long-term track records, and that such factors are likely to result in a period of
significant industry consolidation, especially in the hedge fund sector. In addition, it is
possible that such investors may elect to reduce their overall portfolio allocations to alternative
investments such as private equity and hedge funds, resulting in a smaller overall pool of
available capital in our sector.
In the event all or part of this analysis proves true, when trying to raise new capital the Company
will be competing for fewer total available assets in an increasingly competitive environment, and
there can be no assurance that we will be successful in continuing to raise capital at our
historical growth rates. Depending on industry dynamics, we and our competitors may be compelled to
offer investors improved terms (such as lower fees or improved liquidity) in order to continue to
attract significant amounts of fresh investment capital. Such changes would adversely affect our
revenues and profitability. As has historically been the case, competition in our industry is based
on a number of factors, including:
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investment performance; |
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investors liquidity and willingness to invest; |
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investor perception of investment managers drive, focus and alignment of interest; |
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actual or perceived financial condition, liquidity and stability of the Company; |
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quality of service provided to and duration of relationship with investors; |
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business reputation; and |
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level of fees and expenses charged for services. |
We compete in all aspects of our business with a large number of investment management firms,
private equity fund sponsors, hedge fund sponsors and other financial institutions. A number of
factors serve to increase our competitive risks:
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investors may develop concerns that we will allow a business to grow to the
detriment of its performance; |
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investors may reduce their investments with us or not make additional investments
with us based upon current market conditions, their available capital or their perception of
the health of our business; |
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some of our competitors have greater capital, a lower cost of capital, better access
to financing, lower targeted returns or greater sector or investment strategy specific
expertise than we do, which creates competitive disadvantages with respect to
investment opportunities; |
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some of our competitors may have greater technical, marketing and other resources
than we possess; |
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some of our competitors may perceive risk differently than we do, which could allow
them either to outbid us for investments in particular sectors or, generally, to
consider a wider variety of investments; |
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some of our funds may not perform as well as competitor funds or other available
investment products; |
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our competitors that are corporate buyers may be able to achieve synergistic cost
savings in respect of an investment, which may provide them with a competitive
advantage in bidding for an investment, particularly if conditions in the debt markets
increase our financing costs or make debt financing generally unavailable or cost
prohibitive; |
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some investors may prefer to invest with an investment manager that is not publicly
traded; and |
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other industry participants continuously seek to recruit our investment
professionals, particularly our best and brightest, away from us. |
These and other factors could reduce our earnings and revenues and materially adversely affect our
business. In addition, if we are forced to compete with other alternative asset managers on the
basis of price, we may not be able to maintain our current management and performance fee
structures. We have historically competed primarily on the performance of our funds, and not on the
level of our fees relative to those of our competitors.
The due diligence process that we undertake in connection with investments by our inv