FIG-2014.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2014
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to              
Commission File Number: 001-33294
Fortress Investment Group LLC
(Exact name of registrant as specified in its charter) 
Delaware
 
20-5837959
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
(212) 798-6100
(Registrant’s 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  ý  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).  ý  Yes  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Class A Shares: 204,347,285 outstanding as of April 25, 2014.
Class B Shares: 226,331,513 outstanding as of April 25, 2014.


FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013
 
 
 
 
Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statement of Changes in Equity (unaudited) for the three months ended March 31, 2014
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

Set forth below is information about certain terms used in this Quarterly Report on Form 10-Q:
 
‘‘Management Fee Paying Assets Under Management,” or “AUM,” refers to the management fee paying assets we manage, including, as applicable, capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:

(i)
the capital commitments or invested capital (or net asset value, "NAV," if lower) of our private equity funds and credit PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in     connection with private equity funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,
(ii)the contributed capital of our publicly traded permanent capital vehicles,
(iii)
the NAV of our hedge funds, including the Value Recovery Funds and certain advisory engagements which pay fees based on realizations (and on certain managed assets and, in some cases, a fixed fee); and
(iv)the NAV or fair value of our managed accounts, to the extent management fees are charged.

For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our principal investments in funds as well as investments in funds by our principals, directors and employees.

Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements. Finally, our calculation of AUM differs from the manner in which our affiliates registered with the United States Securities and Exchange Commission report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.  Significantly, Regulatory Assets Under Management, unlike Management Fee Paying Assets Under Management, is not reduced by liabilities or indebtedness associated with assets under management and it includes assets under management and uncalled capital for which Fortress receives no compensation.

“Fortress,” “we,” “us,” “our,” the “company” and the “public company” refer, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group (as defined below) and all of its subsidiaries.

“Fortress Funds” and “our funds” refers to the private investment funds, permanent capital vehicles and related managed accounts that we manage. The Fortress Macro Fund is our flagship liquid hedge fund and the Drawbridge Special Opportunities Fund is our flagship credit hedge fund.

“Fortress Operating Group” or “FOG” refers to the limited partnerships and their subsidiaries through which we conduct our business and hold our principal investments. The public company controls the Fortress Operating Group through wholly owned subsidiaries that serve as the general partner of each FOG entity.

Economic interests in each FOG entity are represented by Class A common units and Class B common units. Class A common units are (indirectly) owned by the public company, and Class B common units are owned by the principals (defined below) and, from time to time, one senior employee who owned securities convertible into Class B common units.

The number of outstanding Class A common units equals the number of outstanding Class A shares of the public company. The number of outstanding Class B common units equals the number of outstanding Class B shares of the public company.

“Fortress Operating Group units” or “FOGUs” is the term we use to refer to the aggregate of one limited partner interest (either a Class A common unit or a Class B common unit, as applicable) in each FOG entity. One FOGU together with one Class B share is convertible into one Class A share. A surrendered Class B common unit automatically converts into a Class A common unit.

“principals” or “Principals” refers to Peter Briger, Wesley Edens, Randal Nardone and Michael Novogratz, collectively, as well as Robert Kauffman until his retirement in December 2012. The principals control the public company through their ownership of the public company’s Class B shares (together with, from time to time, a senior employee who owned securities convertible into Class B shares). The Class B shares and the Class A shares are each entitled to one vote per share, and the number of Class B shares outstanding represents a majority of the aggregate number of Class B shares and Class A shares outstanding. The Class B shares do not represent an economic interest in the public company and therefore are not entitled to any dividends. The principals own their economic interest in the public company primarily through their direct ownership of FOGUs.



Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under Part II, Item 1A, “Risk Factors,” Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this Quarterly Report on Form 10-Q may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Readers can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. Accordingly, you should not place undue reliance on any forward-looking statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10‑Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the company or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

•
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the company may be found elsewhere in this Quarterly Report on Form 10‑Q and the company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.
The company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.


 


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
March 31, 2014
(Unaudited)
 
December 31, 2013
Assets
 

 
 

   Investment Manager
 
 
 
   Cash and cash equivalents
$
184,648

 
$
364,583

   Due from affiliates
143,603

 
407,124

   Investments
1,249,685

 
1,253,266

   Investments in options
99,558

 
104,338

   Deferred tax asset, net
391,970

 
354,526

   Other assets
165,836

 
190,595

 
2,235,300

 
2,674,432

   Non-Investment Manager - consolidated VIE
 
 
 
     Cash and cash equivalents
21,947

 
—

     Fixed assets, net
267,289

 
—

     Goodwill
119,502

 
—

     Intangible assets, net
146,098

 
—

     Other assets, net
108,409

 
—

 
663,245

 
—

Total Assets
$
2,898,545

 
$
2,674,432

 


 


Liabilities and Equity
 

 
 

   Investment Manager
 

 
 

   Accrued compensation and benefits
$
129,205

 
$
417,309

   Due to affiliates
352,160

 
344,832

   Deferred incentive income
284,200

 
247,556

   Debt obligations payable
125,000

 
—

   Other liabilities
125,621

 
49,830

 
1,016,186

 
1,059,527

   Non-Investment Manager - consolidated VIE
 
 
 
   Deferred revenue
31,985

 
—

   Debt obligations payable
181,978

 
—

   Accrued expenses and other liabilities
67,258

 
—

 
281,221

 
—

Total Liabilities
1,297,407

 
1,059,527

 
 
 
 
Commitments and Contingencies
 
 
 
 
Continued on next page.




1
Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

 
March 31, 2014
(Unaudited)
 
December 31, 2013
Equity
 

 
 

Class A shares, no par value, 1,000,000,000 shares authorized, 204,347,285
 
 
 
and 240,741,920 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
—

 
—

Class B shares, no par value, 750,000,000 shares authorized, 226,331,513
 
 
 
and 249,534,372 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
—

 
—

Paid-in capital
2,060,626

 
2,112,720

Retained earnings (accumulated deficit)
(1,448,152
)
 
(1,286,131
)
Accumulated other comprehensive income (loss)
(1,834
)
 
(1,522
)
Total Fortress shareholders’ equity
610,640

 
825,067

Principals’ and others’ interests in equity of consolidated subsidiaries
610,192

 
789,838

Non-controlling interests in equity of Non-Investment Manager - consolidated VIE
380,306

 
—

Total Equity
1,601,138

 
1,614,905

Total Liabilities and Equity
$
2,898,545

 
$
2,674,432



See notes to consolidated financial statements.


2
Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except per share data)
 
 
Three Months Ended March 31,
 
2014
 
2013
Revenues
 

 
 

Investment Manager
 
 
 
   Management fees: affiliates
$
128,945

 
$
143,602

   Management fees: non-affiliates
17,622

 
14,815

   Incentive income: affiliates
34,251

 
31,357

   Incentive income: non-affiliates
643

 
1,429

   Expense reimbursements: affiliates
51,186

 
50,666

   Expense reimbursements: non-affiliates
2,448

 
1,371

   Other revenues (affiliate portion disclosed in Note 7)
1,250

 
1,115

 
236,345

 
244,355

 
 
 
 
   Non-Investment Manager - consolidated VIE
 
 
 
      Advertising
43,836

 
—

      Circulation
22,144

 
—

      Commercial printing and other
7,841

 
—

 
73,821

 
—

Total Revenues
310,166

 
244,355

 
 
 
 
Expenses
 

 
 

   Investment Manager
 
 
 
   Compensation and benefits
188,519

 
181,079

   General, administrative and other
37,823

 
33,998

   Depreciation and amortization
4,301

 
3,239

 Interest expense
691

 
2,295

 
231,334

 
220,611

 
 
 
 
   Non-Investment Manager - consolidated VIE
 
 
 
Operating costs
43,573

 
—

     General, administrative and other
25,116

 
—

     Depreciation and amortization
5,213

 
—

     Interest expense
2,134

 
—

 
76,036

 
—

Total Expenses
307,370

 
220,611

 
Continued on next page.









3
Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except per share data)


 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Other Income (Loss)
 

 
 

Investment Manager
 
 
 
   Gains (losses) (affiliate portion disclosed in Note 4)
(11,244
)
 
41,275

   Tax receivable agreement liability adjustment
—

 
(7,739
)
   Earnings (losses) from equity method investees
20,374

 
36,302

Total Other Income (Loss)
9,130

 
69,838

 
 
 
 
Income (Loss) Before Income Taxes
11,926

 
93,582

   Income tax benefit (expense) - Investment Manager
(5,994
)
 
(26,276
)
   Income tax benefit (expense) - Non-Investment Manager -
consolidated VIE
239

 
—

Total Income Tax Benefit (Expense)
(5,755
)
 
(26,276
)
Net Income (Loss)
$
6,171

 
$
67,306

Principals’ and Others’ Interests in Income (Loss) of Consolidated
Subsidiaries
$
5,969

 
$
52,977

Non-Controlling Interests in Income (Loss) of Non-Investment Manager
- consolidated VIE
$
(2,734
)
 
$
—

Net Income (Loss) Attributable to Class A Shareholders
$
2,936

 
$
14,329

Dividends declared per Class A share
$
0.08

 
$
0.06

 
 
 
 

Earnings (Loss) Per Class A share
 

 
 
Net income (loss) per Class A share, basic
$
0.01

 
$
0.06

Net income (loss) per Class A share, diluted
$
0.01

 
$
0.05

Weighted average number of Class A shares outstanding, basic
216,934,917

 
227,287,102

Weighted average number of Class A shares outstanding, diluted
229,033,778

 
496,294,600






See notes to consolidated financial statements.


4
Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
Comprehensive income (loss) (net of tax)
 

 
 

Net income (loss)
$
6,171

 
$
67,306

Investment Manager
 
 
 
Foreign currency translation
(1,032
)
 
(2,856
)
Comprehensive income (loss) from equity method investees
—

 
4,225

Total comprehensive income (loss)
$
5,139

 
$
68,675

Comprehensive income (loss) attributable to principals’ and others’ interests
$
5,310

 
$
53,834

Comprehensive income (loss) attributable to non-controlling interests in Non-
Investment Manager - consolidated VIE
$
(2,734
)
 
$
—

Comprehensive income (loss) attributable to Class A shareholders
$
2,563

 
$
14,841


































See notes to consolidated financial statements.

5
Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(dollars in thousands)
 
 
Class A Shares
 
Class B Shares
 
Paid-In Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Fortress
Shareholders’
Equity
 
Principals’
and Others’
Interests in
Equity of
Consolidated
Subsidiaries
 
Non-Controlling Interests in Equity of Non-Investment Manager
 
Total Equity
Equity - December 31, 2013
240,741,920

 
249,534,372

 
$
2,112,720

 
$
(1,286,131
)
 
$
(1,522
)
 
$
825,067

 
$
789,838

 
$
—

 
$
1,614,905

Contributions from principals’ and others’ interests in
equity
—

 
—

 
—

 
—

 
—

 
—

 
30,440

 
—

 
30,440

Distributions to principals’ and others’ interests in
    equity (net of tax)
—

 
—

 
—

 
—

 
—

 
—

 
(43,684
)
 
—

 
(43,684
)
Consolidation of New Media
—

 
—

 
—

 
—

 
—

 
—

 
—

 
383,040

 
383,040

Dividends declared
—

 
—

 
(14,492
)
 
—

 
—

 
(14,492
)
 
—

 
—

 
(14,492
)
Dividend equivalents accrued in connection with
    equity-based compensation (net of tax)
—

 
—

 
(254
)
 
—

 
—

 
(254
)
 
(455
)
 
—

 
(709
)
Net deferred tax effects resulting from acquisition
    and exchange of Fortress Operating Group units
—

 
—

 
1,369

 
—

 
—

 
1,369

 
—

 
—

 
1,369

Director restricted share grant
18,562

 
—

 
74

 
—

 
—

 
74

 
86

 
—

 
160

Capital increase related to equity-based
    compensation, net
952,219

 
—

 
8,499

 
—

 
—

 
8,499

 
9,881

 
—

 
18,380

Dilution impact of equity transactions (Note 7)
—

 
—

 
(47,290
)
 
—

 
61

 
(47,229
)
 
47,229

 
—

 
—

Public offering of Class A shares
23,202,859

 
—

 
186,551

 
—

 
—

 
186,551

 
—

 
—

 
186,551

Repurchase of Class A shares (Note 9)
(60,568,275
)
 
—

 
—

 
(164,957
)
 
—

 
(164,957
)
 
(228,453
)
 
—

 
(393,410
)
Repurchase of Class B shares (Note 9)
—

 
(23,202,859
)
 
(186,551
)
 
—

 
—

 
(186,551
)
 
—

 
—

 
(186,551
)
Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Net income (loss)
—

 
—

 
—

 
2,936

 
—

 
2,936

 
5,969

 
(2,734
)
 
6,171

Foreign currency translation
—

 
—

 
—

 
—

 
(373
)
 
(373
)
 
(659
)
 
—

 
(1,032
)
Comprehensive income (loss) from equity method
investees
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
2,563

 
5,310

 
(2,734
)
 
5,139

Equity - March 31, 2014
204,347,285

 
226,331,513

 
$
2,060,626

 
$
(1,448,152
)
 
$
(1,834
)
 
$
610,640

 
$
610,192

 
$
380,306

 
$
1,601,138

 
See notes to consolidated financial statements.

6
Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows From Operating Activities
 

 
 

Net income (loss)
$
6,171

 
$
67,306

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
Investment Manager
 
 
 
Depreciation and amortization
4,301

 
3,239

Other amortization and accretion (included in interest expense)
195

 
288

(Earnings) losses from equity method investees
(20,374
)
 
(36,302
)
Distributions of earnings from equity method investees
25,784

 
18,411

(Gains) losses
11,244

 
(41,275
)
Deferred incentive income
(29,503
)
 
(26,795
)
Deferred tax (benefit) expense
2,486

 
36,207

Options received from affiliates
—

 
(26,374
)
Tax receivable agreement liability adjustment
—

 
7,739

Equity-based compensation
8,673

 
9,597

Options in affiliates granted to employees
4,553

 
6,356

Other
44

 
85

     Non-Investment Manager - consolidated VIE
 
 
 
Depreciation and amortization
5,213

 
—

Amortization of deferred financing costs (included in interest expense)
230

 
—

Other
(46
)
 
—

Cash flows due to changes in
 
 
 
Investment Manager
 
 
 
Due from affiliates
39,640

 
(15,226
)
Other assets
40,358

 
11,192

Accrued compensation and benefits
(263,426
)
 
5,463

Due to affiliates
(32,690
)
 
(14,593
)
Deferred incentive income
63,458

 
48,323

Other liabilities
35,553

 
32,007

     Non-Investment Manager - consolidated VIE
 
 
 
Other assets
824

 
—

Deferred revenue
37

 
—

Accrued expenses and other liabilities
(1,254
)
 
—

Net cash provided by (used in) operating activities
(98,529
)
 
85,648


Continued on next page.

7
Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows From Investing Activities
 

 
 

Investment Manager
 
 
 
Contributions to equity method investees
(7,031
)
 
(237
)
Distributions of capital from equity method investees
231,158

 
167,083

Purchase of fixed assets
(1,797
)
 
(2,334
)
Purchase of software and technology-related assets
(14,965
)
 
—

Non-Investment Manager - consolidated VIE


 


Existing cash on consolidation date
23,845

 
—

Purchase of fixed assets
(310
)
 
—

Acquisitions, net of cash acquired
(8,026
)
 
—

Net cash provided by (used in) investing activities
222,874

 
164,512

Cash Flows From Financing Activities
 

 
 

Investment Manager
 
 
 
Repayments of debt obligations
—

 
(40,000
)
Borrowings under debt obligations
125,000

 
—

Payment of deferred financing costs
—

 
(2,054
)
Proceeds from public offering (Note 9)
186,551

 
—

Repurchase of Class B shares (Note 9)
(186,551
)
 
—

Repurchase of Class A shares (Note 9)
(363,410
)
 
—

Dividends and dividend equivalents paid
(15,359
)
 
(13,907
)
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions
1,191

 
320

Principals’ and others’ interests in equity of consolidated subsidiaries - distributions
(33,590
)
 
(52,804
)
Excess tax benefits from delivery of RSUs
425

 
—

Non-Investment Manager - consolidated VIE
 
 
 
Repayments under current portion of long-term debt
(68
)
 
—

Borrowings under debt obligations
4,068

 
—

Payment of debt issuance costs
(590
)
 
—

Net cash provided by (used in) financing activities
(282,333
)
 
(108,445
)
Net Increase (Decrease) in Cash and Cash Equivalents
(157,988
)
 
141,715

Cash and Cash Equivalents, Beginning of Period
364,583

 
104,242

Cash and Cash Equivalents, End of Period
$
206,595

 
$
245,957

Cash and Cash Equivalents - Investment Manager, End of Period
$
184,648

 
$
245,957

Cash and Cash Equivalents - Non-Investment Manager -
consolidated VIE, End of Period
$
21,947

 
$
—

Supplemental Disclosure of Cash Flow Information
 
 
 
Investment Manager


 


Cash paid during the period for interest
$
—

 
$
1,658

Cash paid during the period for income taxes
$
1,559

 
$
1,309

Non-Investment Manager - consolidated VIE:
 
 
 
Cash paid during the period for interest
$
1,616

 
$
—

Supplemental Schedule of Non-cash Investing and Financing Activities
 
 
 
Investment Manager
 
 
 
Employee compensation invested directly in subsidiaries
$
29,230

 
$
23,872

Investments of incentive receivable amounts into Fortress Funds
$
233,260

 
$
162,647

Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid
$
14,925

 
$
3,611


See notes to consolidated financial statements.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)


1. ORGANIZATION AND BASIS OF PRESENTATION
 
Investment Manager

Fortress Investment Group LLC (the “Registrant,” or, together with its subsidiaries, “Fortress”) is a leading, highly diversified global investment management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for, various investment funds and companies, including related managed accounts (collectively, the “Fortress Funds”). Fortress generally makes principal investments in these funds.
 
Fortress has three primary sources of income from the Fortress Funds: management fees, incentive income, and investment income on its principal investments in the funds. The Fortress Funds fall into the following business segments in which Fortress operates:

1)
Private equity:
a)    General buyout and sector-specific funds focused on control-oriented investments in cash flow generating assets and asset-based businesses in North America and Western Europe; and
b)    Publicly traded companies that are externally managed by Fortress pursuant to a management agreement, which Fortress refers to as “permanent capital vehicles,” that invest in a wide variety of real estate related assets, including securities, loans, real estate properties and mortgage servicing related assets, and media assets.

2)
Liquid hedge funds that invest globally in fixed income, currency, equity and commodity markets, and related derivatives to capitalize on imbalances in the financial markets. In addition, this segment includes an endowment style fund, which invests in Fortress Funds, funds managed by external managers, and direct investments; and a fund that seeks to generate returns by executing a positively convex investment strategy.

In January 2014, Fortress announced that it is launching an affiliated manager platform. The first fund to join the new platform will be the Fortress Asia Macro Funds. Over the course of 2014, the Fortress Asia Macro Funds and related managed accounts will be transitioned to Graticule Asset Management Asia, L.P. ("Graticule Asset Management"), a new asset management business in which Fortress will have a non-controlling equity interest. Fortress will retain a perpetual minority interest in Graticule Asset Management amounting up to approximately 42.5% of earnings during 2014 and declining to approximately 27% of earnings over time. Fortress expects to receive additional fees for providing infrastructure services (technology, back office, and other services) to Graticule Asset Management. Upon completing the transition, Fortress will record this interest at its fair value, and expects to record a resulting gain and related compensation expense.

In January 2014, Fortress acquired software and technology-related assets which were accounted for as a business combination. These assets facilitate trading within Fortress's liquid hedge funds segment. The purchase price was $26.0 million of which a remaining $11.0 million was paid in the second quarter of 2014. The purchase price has all been allocated to the acquired software and technology related assets which have an expected useful life of five years.

3)
Credit funds:
a)
Credit hedge funds, which make highly diversified investments in direct lending, corporate debt and securities, portfolios and orphaned assets, real estate and structured finance, on a global basis and throughout the capital structure, with a value orientation, as well as non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and
b)            Credit private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of ''long dated value'' funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), a family of Asia funds, including Japan real estate funds and an Asian investor based global opportunities fund, and a family of real estate opportunities funds, as well as certain sector-specific funds with narrower investment mandates tailored for the applicable sector.


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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

4)
Logan Circle Partners, L.P. (“Logan Circle”), which represents Fortress's traditional asset management business providing institutional clients actively managed investment solutions across a broad spectrum of fixed income and growth equity strategies. Logan Circle's core fixed income products cover the breadth of the maturity and risk spectrums, including short, intermediate and long duration, core/core plus, investment grade credit, high yield and emerging market debt. In April 2013, Logan Circle launched a growth equities investment business focused on investing and managing concentrated portfolios of publicly traded U.S. equities.

5)
Principal investments in the above described funds.

The assets, liabilities and related operations of Fortress’s asset management business (as described above) are disclosed under the Investment Manager caption in the consolidated financial statements and accompanying footnotes. Fortress also consolidates New Media (as described below) whose assets, liabilities and related operations are disclosed under the Non-Investment Manager caption in the consolidated financial statements and accompanying footnotes.

Non-Investment Manager

Consolidation of New Media

On February 14, 2014, Newcastle Investment Corp. ("Newcastle") (NYSE: NCT) completed the distribution of all of the common shares it held of New Media Investment Group Inc. ("New Media" or the "Media Business") (NYSE: NEWM), publishers of locally based print and online media in the United States, to its stockholders. Fortress entered into a management agreement with New Media and under the terms of the management agreement, Fortress manages the operations of New Media and in return receives a management fee of 1.5% per annum of New Media's Total Equity (as defined in the management agreement) and incentive income. Fortress determined that New Media qualifies as a variable interest entity and, upon completion of Newcastle's distribution of New Media's common shares, that it was the primary beneficiary and therefore consolidates New Media. The operations of New Media consist of the consolidated operations of GateHouse Media, LLC ("GateHouse") and Local Media Group Holdings LLC ("Local Media"). Although New Media’s operating results impact net income, they do not have a material impact on the net income attributable to Fortress’s Class A shareholders, Class A basic and diluted earnings per share, or total Fortress’s shareholders’ equity, as substantially all of the operating results of New Media are attributable to non-controlling interests. As of March 31, 2014, Fortress owned approximately 0.25% of New Media’s outstanding common stock.

New Media is one of the largest publishers of locally based print and online media in the United States as measured by the number of daily publications. New Media operates in 356 markets across 24 states. New Media’s portfolio of products includes 429 community publications, 356 websites, 346 mobile sites, and six yellow page directories. New Media reaches over 12 million people per week and serves over 130,000 business customers.

Fortress has no obligation to satisfy the liabilities of New Media. Similarly, Fortress does not have the right to make use of New Media assets to satisfy its obligations.

For accounting purposes, the consolidation of New Media was treated as a business combination. The New Media assets and liabilities were recorded at their estimated fair values as of the date of consolidation. Any excess estimated New Media fair value was allocated to goodwill.

Significant assumptions used in estimating fair values included the following:

•
Intangible assets - The estimated fair values of the acquired subscriber relationships, advertiser relationships and customer relationships were determined based on an excess earnings approach, a form of the income approach, which values assets based upon associated estimated discounted cash flows.

Masthead, which is a publication's designed title or nameplate as it appears on its front page, fair values were determined based on a relief from royalty method, an income approach.

•
Fixed assets - The estimated fair values for fixed assets were determined under three approaches: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active market is available), and the income

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

approach (used for intangibles). These approaches are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income.

The following table summarizes the allocation of the estimated New Media fair value to identifiable assets and liabilities as of the date of consolidation:

 
 
As of February 14, 2014
Cash and cash equivalents
 
$
23,845

Fixed assets
 
266,385

Goodwill
 
118,847

Intangibles assets
 
144,664

Other assets
 
108,072

Total assets
 
661,813

Less:
 
 
Debt obligations payable
 
(177,955
)
Accrued expenses and other liabilities
 
(99,858
)
Net assets
 
$
384,000

Non-controlling interests in equity of New Media
 
$
383,040


If New Media had been consolidated as of January 1, 2013, total revenue would have increased by approximately $68.2 million and $146.1 million, for the three months ended March 31, 2014 and 2013, respectively. In addition, net income would have decreased by approximately $(4.0) million and $(17.6) million for the three months ended March 31, 2014 and 2013, respectively.


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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

FINANCIAL STATEMENT GUIDE
Selected Financial Statement Captions
 
Note Reference
 
Explanation
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Due from Affiliates
 
7
 
Generally, management fees, expense reimbursements and incentive income due from Fortress Funds.
 
 
 
 
 
Investments and Investments in Options
 
4
 
Primarily the carrying value of Fortress’s principal investments in the Fortress Funds.
 
 
 
 
 
Deferred Tax Asset, net
 
6
 
Relates to potential future net tax benefits.
 
 
 
 
 
Due to Affiliates
 
7
 
Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement.
 
 
 
 
 
Deferred Incentive Income
 
3
 
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
 
5
 
The balance outstanding on the Investment Manager's and New Media's credit agreements.
 
 
 
 
 
 
 
 
 
The debt obligations of New Media are not cross collateralized with the debt obligations of Fortress. Fortress has no obligation to satisfy the liabilities of New Media. Similarly, Fortress does not have the right to make use of New Media's assets to satisfy its obligations.
 
 
 
 
 
 
 
 
 
New Media’s debt obligations have no impact on Fortress's cash flows and its ability to borrow or comply with its debt covenants under its revolving credit agreement.  
 
 
 
 
 
Principals' and Others' Interests in Equity of Consolidated Subsidiaries
 
7
 
The GAAP basis of the Principals' and one senior employee's ownership interests in Fortress Operating Group as well as employees' ownership interest in certain subsidiaries.
 
 
 
 
 
Statement of Operations
 
 
 
 
 
 
 
 
 
Management Fees: Affiliates
 
3
 
Fees earned for managing Fortress Funds, generally determined based on the size of such funds.
 
 
 
 
 
Management Fees: Non-Affiliates
 
3
 
Fees earned from managed accounts and our traditional fixed income asset management business, generally determined based on the amount managed.
 
 
 
 
 
Incentive Income: Affiliates
 
3
 
Income earned from Fortress Funds, based on the performance of such funds.
 
 
 
 
 
Incentive Income: Non- Affiliates
 
3
 
Income earned from managed accounts, based on the performance of such accounts.
 
 
 
 
 
Compensation and Benefits
 
8
 
Includes equity-based, profit-sharing and other compensation to employees.
 
 
 
 
 
Gains (Losses)
 
4
 
The result of asset dispositions or changes in the fair value of investments or other financial instruments which are marked to market (including the permanent capital vehicles and GAGFAH).
 
 
 
 
 
Tax Receivable Agreement Liability Adjustment
 
6
 
Represents a change in the amount due to the Principals under the tax receivable agreement.
 
 
 
 
 
Earnings (Losses) from Equity Method Investees
 
4
 
Fortress’s share of the net earnings (losses) of the Fortress Funds resulting from its principal investments.


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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

FINANCIAL STATEMENT GUIDE
Selected Financial Statement Captions
 
Note Reference
 
Explanation
 
 
 
 
 
Income Tax Benefit (Expense)
 
6
 
The net tax result related to the current period. Certain of Fortress’s 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.
 
 
 
 
 
 
 
 
 
Income tax benefit (expense) for the Investment Manager and Media Business are calculated separately and the taxable income (loss) of the Media Business does not impact the amount of income tax benefit (expense) for the Investment Manager (and vice versa).
 
 
 
 
 
Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries
 
7
 
Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group.
 
 
 
 
 
Earnings Per Share
 
9
 
GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels.
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
Distributions
 
9
 
A summary of dividends and distributions, and the related outstanding shares and units, is provided.
 
 
 
 
 
Distributable Earnings
 
11
 
A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, revenue recognition, leases, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on Fortress’s financial reporting. Fortress has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

The accompanying consolidated financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles ("US GAAP") have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s 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 Fortress’s consolidated financial statements for the year ended December 31, 2013 and notes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2014.  Certain disclosures have been expanded to include information related to the consolidation of New Media (as described above) in accordance with US GAAP. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2013.

All significant intercompany accounts and transactions have been eliminated.

Certain prior period amounts have been reclassified to conform to the current period's presentation.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
General

Basis of Accounting and Consolidation - The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying financial statements include the accounts of Fortress and its consolidated subsidiaries, which are comprised of (i) entities in which it has an investment of 50% or more and has control over significant operating, financial and investing decisions of the entity, (ii) variable interest entities (“VIEs”) in which it is the primary beneficiary as described below and (iii) non-VIE partnerships in which it is the general partner where the limited partners do not have rights that would overcome the presumption of control by the general partner.

For those entities in which it has a variable interest, Fortress first determines whether the entity is a VIE. This determination is made by considering whether the entity’s equity investment at risk is sufficient and whether the entity’s at-risk equity holders have the characteristics of a controlling financial interest. A VIE must be consolidated by its primary beneficiary.

The primary beneficiary of a VIE is generally defined as the party who, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of the VIE that most significantly affect its economic performance, and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated continuously.

For investment companies and similar entities, the primary beneficiary of a VIE is the party who, considering the involvement of related parties and de facto agents, absorbs a majority of the VIE's expected losses or receives a majority of the expected residual returns, as a result of holding a variable interest. This evaluation is also updated continuously.

As the general partner or managing member of entities that are limited partnerships or limited liability companies and not VIEs, Fortress is presumed to control the partnership or limited liability company. This presumption is overcome when the unrelated limited partners or members have the substantive ability to liquidate the entity or otherwise remove Fortress as the general partner or managing member without cause based on a simple unaffiliated majority vote, or have other substantive participating rights.

Principals’ and others’ interests in consolidated subsidiaries represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Fortress. This is primarily related to the Principals’ interests in Fortress Operating Group (Note 1). Non-Fortress interests also include employee interests in majority owned and controlled fund advisor and general partner entities.

Non-controlling interests in equity of Non-Investment Manager represent the interests in New Media that are not owned by Fortress.

For entities over which Fortress exercises significant influence but which do not meet the requirements for consolidation, Fortress uses the equity method of accounting whereby it records its share of the underlying income of these entities. These entities include the Fortress Funds. Virtually all of the Fortress Funds are, for GAAP purposes, investment companies. As required, Fortress has retained the specialized accounting of these funds. The Fortress Funds record realized and unrealized gains (losses) resulting from changes in the fair value of their investments as a component of current income. Additionally, these funds generally do not consolidate their majority-owned and controlled investments (the “Portfolio Companies”).

Distributions by Fortress and its subsidiaries are recognized when declared.

Risks and Uncertainties - In the normal course of business, Fortress encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on Fortress’s or the Fortress Funds’ investments in debt securities, loans, leases, derivatives and other financial instruments that results from a borrower's, lessee’s or counterparty's inability or unwillingness to make required or expected payments. Market risk reflects changes in the value of investments due to changes in interest rates, credit spreads or other market factors. Credit risk is enhanced in situations where Fortress or a Fortress Fund is investing in distressed assets, as well as unsecured or subordinate loans or securities, which is a material part of its business.

Fortress makes investments outside of the United States. Fortress’s non-U.S. investments are subject to the same risks associated with its U.S. investments as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

in regulatory requirements, heightened risk of political and economic instability, difficulties in managing non-U.S. investments, potentially adverse tax consequences and the burden of complying with a wide variety of foreign laws.

Fortress is exposed to economic risk concentrations insofar as it is dependent on the ability of the Fortress Funds to compensate it for the services which Fortress provides to these funds. Further, the incentive income component of this compensation is based on the ability of the Fortress Funds to generate adequate returns on their investments. In addition, substantially all of Fortress’s net assets, after deducting the portion attributable to non-controlling interests, are comprised of principal investments in, or receivables from, these funds.

Use of Estimates - The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Revenue Recognition

Investment Manager

Management Fees and Expense Reimbursements - Management fees are recognized in the periods during which the related services are performed and the amounts have been contractually earned. Fortress is entitled to certain expense reimbursements pursuant to its management agreements. Fortress selects the vendors, incurs the expenses, and is the primary obligor under the related arrangements. Fortress is considered the principal under these arrangements and is required to record the expense and related reimbursement revenue on a gross basis. Expense reimbursements are recognized in the periods during which the related expenses are incurred and the reimbursements are contractually earned.

Stock Options Received - Fully vested stock options are issued to Fortress by certain of the permanent capital vehicles as compensation for services performed in raising capital for these entities. These options are recognized by Fortress as management fees at their estimated fair value at the time of issuance. Fair value was estimated using an option valuation model. Since the permanent capital vehicles' option plans have characteristics significantly different from those of traded options, and since the assumptions used in such models, particularly the volatility assumption, are subject to significant judgment and variability, the actual value of the options could vary materially from this estimate. Fortress has elected to account for these options at fair value with changes in fair value recognized in current income as Gains (Losses).

Incentive Income - Incentive income is calculated as a percentage of the profits earned by the Fortress Funds subject, in certain cases, to the achievement of performance criteria. Incentive income from certain funds is subject to contingent repayment based on the applicable Fortress Fund achieving earnings in excess of a specified minimum return. Incentive income that is not subject to contingent repayment is recognized as contractually earned. Incentive income subject to contingent repayment may be paid to Fortress as particular investments made by the funds are realized. However, if upon liquidation of each fund the aggregate amount paid to Fortress as incentive income exceeds the amount actually due to Fortress based upon the aggregate performance of each fund, the excess is required to be repaid by Fortress (i.e. “clawed back”) to that fund. Fortress has elected to adopt the preferred method of recording incentive income subject to contingencies, whereby it does not recognize incentive income subject to contingent repayment until the termination of the related fund, or when and to the extent 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 due to the related contingencies being resolved. Recognition of incentive income allocated or paid to Fortress prior to that date is deferred and recorded as deferred incentive income liability.

Other Revenues and Other Income - Fortress recognizes security transactions on the trade date. Gains and losses are recorded based on the specific identification method and generally include gains (losses) on investments in securities, derivatives, foreign exchange transactions, and contingent consideration accrued in business combinations. Dividend income is recognized on the ex-dividend date, or in the absence of a formal declaration, on the date it is received. Interest income is recognized as earned on an accrual basis.


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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

Non-Investment Manager

Media Revenues - Advertising income from the publication of newspapers is recognized when advertisements are published in newspapers or placed on digital platforms or, with respect to certain digital advertising, each time a user either clicks on or views certain ads, net of commissions and provisions for estimated sales incentives including rebates, rate adjustments, and discounts.

Circulation revenue includes single-copy and subscription revenues. Circulation income is based on the number of copies of the printed newspaper (through home-delivery subscriptions and single-copy sales) and digital subscriptions sold and the rates charged to the respective customers. Single-copy income is recognized based on date of publication, net of provisions for related returns. Proceeds from subscription income are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.

Other revenue is recognized when the related service or product has been delivered.
 
Billings to clients and payments received in advance of the performance of services or delivery of products are recorded as deferred revenue in the consolidated balance sheets until the services are performed or the product is delivered.

Balance Sheet Measurement

Investment Manager

Cash and Cash Equivalents - Fortress considers all highly liquid short term investments with maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial institutions exceed insured limits.

Due from/to Affiliates - For purposes of classifying amounts, Fortress considers its principals, employees, all of the Fortress Funds, and the Portfolio Companies to be affiliates. This definition is broader than the strict GAAP definition of affiliates. Amounts due from and due to affiliates are recorded at their contractual amount, subject to an allowance for uncollectible amounts if collection is not deemed probable.

Other Assets and Other Liabilities:

Other assets and liabilities are comprised of the following. Other assets are presented net of allowances for uncollectible amounts of $3.3 million as of March 31, 2014 and $3.3 million as of December 31, 2013, respectively, which were recorded as General and Administrative expense.

-
Fixed Assets, Depreciation and Amortization - Fixed assets consist primarily of leasehold improvements, furniture, fixtures and equipment, and computer hardware and software, and are recorded at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives, which are the life of the related lease for leasehold improvements, and three to seven years for other fixed assets.

-
Deferred Charges - Deferred charges consist primarily of costs incurred in obtaining financing, which are amortized over the term of the financing generally using the effective interest method.

-
Equity Securities - Equity securities consist primarily of investments in unaffiliated publicly traded companies, which are valued based on quoted market prices.

-
Digital Currency (Bitcoin) - Represents Fortress's holdings of digital currency which is recorded at the lower of cost or fair value. If fair value is below cost, Fortress records an unrealized loss measured as the excess of cost over fair value of the digital currency. Subsequently, to the extent that fair value increases, Fortress records an unrealized gain but shall not report digital currency above cost. Fortress determines fair value based on estimated exit value using significant observable inputs as of the balance sheet date. As of March 31, 2014, Fortress has recorded cumulative unrealized losses of $9.9 million.


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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

-
Prepaid Compensation - Prepaid compensation consists of profit sharing compensation payments previously made to employees which are not considered probable of being incurred as expenses and would become receivable back from employees at the termination of the related funds.

-
Goodwill and Intangibles - Goodwill and intangibles represent amounts recorded in connection with business combinations. Goodwill is not amortized but is tested for impairment at least annually. Other intangible assets are amortized over their estimated useful lives.

-
Deferred Rent - Rent expense is recognized on a straight-line basis based on the total minimum rent required throughout the lease period. Deferred rent represents the difference between the rent expense recognized and cash paid to date.

-
Derivatives and Hedging Activities - All derivatives are recognized as either assets or liabilities in the balance sheet and measured at fair value.

Any unrealized gains or losses on derivatives not designated as hedges are recorded currently in Gains (Losses). Net payments under these derivatives are similarly recorded, but as realized.

In order to reduce interest rate risk, Fortress has and may enter into interest rate hedge agreements. To qualify for cash flow hedge accounting, interest rate swaps must meet certain criteria, including (1) the items to be hedged expose Fortress to interest rate risk, (2) the interest rate swaps or caps are highly effective in reducing Fortress’s exposure to interest rate risk, and (3) with respect to an anticipated transaction, the transaction is probable. In addition, the hedging relationship must be properly documented. Effectiveness is periodically assessed based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and the items being hedged.

In order to reduce foreign currency exchange rates risk, Fortress has and may enter into foreign currency related derivatives. To qualify for hedge accounting with respect to a net investment in a foreign operation, the hedging instrument must be highly effective in reducing Fortress’s exposure to the risk of changes in foreign currency exchange rates with respect to the investment. In addition, the hedging relationship must be properly documented. Effectiveness is periodically assessed based upon a comparison of the relative changes in the fair values of the hedge and the item being hedged (with respect to changes in foreign currency exchange rates).

The effective portion of any gain or loss, and of net payments received or made, is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction effects earnings. The ineffective portion of any gain or loss, and of net payments received or made, is recognized in current earnings.

Fortress did not have any derivatives designated as hedges for the three months ended March 31, 2014 and 2013.

Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For Fortress’s purposes, comprehensive income represents net income, as presented in the accompanying consolidated statements of operations, adjusted for unrealized gains or losses on securities available for sale and on derivatives designated as cash flow hedges, as well as net foreign currency translation adjustments, including Fortress’s relative share of these items from its equity method investees.

Foreign Currency - Assets and liabilities relating to foreign investments are translated using the exchange rates prevailing at the end of each reporting period. Results of foreign operations are translated at the weighted average exchange rate for each reporting period. Translation adjustments are included in current income to the extent that unrealized gains and losses on the related investment are included in income, otherwise they are included as a component of accumulated other comprehensive income until realized. Foreign currency gains or losses resulting from transactions outside of the functional currency of a consolidated entity are recorded in income as incurred and were not material during the quarters ended March 31, 2014 and 2013.

Profit Sharing Arrangements - Pursuant to employment arrangements, certain of Fortress’s employees are granted profit sharing interests and are thereby entitled to a portion of the incentive income or other amounts realized from certain Fortress Funds, which is payable upon a realization event within the respective funds. Accordingly, incentive income resulting from a realization event

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

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 an 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 credit PE funds, where incentive income is received as investments are realized but is subject to clawback (see “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.

Fortress's 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 which 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. In some cases, this accrual is subject to reversal based on a determination that the expense is no longer probable of being incurred (in other words, that a clawback is probable).

Fortress may withhold a portion of the profit sharing payments relating to private equity fund or credit PE fund incentive income as a reserve against contingent repayment (clawback) obligations to the funds. Employees may opt to have these withheld amounts invested in either a money market account or in one of a limited group of Fortress Funds.

Equity-Based Compensation - Fortress currently has several categories of equity-based compensation, which are accounted for as described in Note 8. Generally, the grant date fair value of equity-based compensation granted to employees or directors is expensed ratably over the required service period (or immediately if there is no required service period). Equity-based compensation granted to non-employees, primarily to employees of certain Portfolio Companies, is expensed ratably over the required service period based on its fair value at each reporting date.

Income Taxes - FIG Corp., a subsidiary of the Registrant, is a corporation for tax purposes. As a result, a substantial portion of Fortress’s income earned by FIG Corp. is subject to U.S. federal and state income taxation, taxed at prevailing rates. The remainder of Fortress’s income is allocated directly to its shareholders and is not subject to a corporate level of taxation. Certain subsidiaries of Fortress are subject to the New York City unincorporated business tax (“UBT”) on their U.S. earnings based on a statutory rate of 4%. Certain subsidiaries of Fortress are subject to income tax of the foreign countries in which they conduct business. Interest and penalties, if any, are treated as additional taxes.

Fortress accounts for these taxes using the liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These temporary differences are expected to result in taxable or deductible amounts in future years and the deferred tax effects are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. A valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized.

Fortress is party to a tax receivable agreement whereby the Principals will receive payments from Fortress related to tax savings realized by Fortress in connection with certain transactions entered into by the Principals.

Non-Investment Manager

Purchase Accounting - In determining the allocation of the purchase price between net tangible and intangible assets and liabilities, management made estimates of the fair value of the tangible and intangible assets and liabilities using information obtained as a result of pre-acquisition due diligence and independent valuations and appraisals. Management allocates the purchase price to net tangible and identified intangible assets and liabilities based on their fair values. The determination of fair value involves the use

18
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

of significant judgment and estimation. Acquisition costs in excess of the fair value of tangible and identifiable intangible net assets is recorded as goodwill.

Fixed Assets - Fixed assets are recorded at cost. Routine maintenance and repairs are expensed as incurred. Depreciation is calculated under the straight-line method over the estimated useful lives, principally 21 to 40 years for buildings, 3 to 10 years for buildings improvements, 1 to 20 years for machinery and equipment, and 1 to 7 years for furniture, fixtures and computer software. Leasehold improvements are amortized under the straight-line method over the shorter of the lease term or estimated useful life of the asset.

Fixed assets for New Media consisted of the following:  

 
March 31, 2014
Land
$
23,487

Buildings and improvements
112,272

Machinery and equipment
125,272

Furniture, fixtures, and computer software
9,875

Construction in progress and other non-depreciating assets
741

 
$
271,647

Less: accumulated depreciation
(4,358
)
Total
$
267,289

Depreciation expense related to fixed assets of New Media for the period from February 14, 2014 to March 31, 2014, was $4.4 million.

Goodwill and Intangibles - Intangible assets related to the Media Business consist of advertiser, customer and subscriber relationships, mastheads and trade names. These intangible assets are recorded at fair value at the date of acquisition. New Media estimates the fair value of the advertiser, customer and subscriber relationships and the trade names using the multi-period excess earnings method under the income approach. This valuation method is based on first forecasting revenue for the existing customer base and then applying expected attrition rates. Mastheads are not amortized because it has been determined that the useful lives of such mastheads are indefinite.

Amortization of intangible assets is included within depreciation and amortization on the consolidated statements of operations and is calculated using the straight-line method based on the following estimated useful lives:
Advertiser relationships
 
14 - 16 years
Customer relationships
 
14 - 16 years
Subscriber relationships
 
15 - 16 years
Trade names
 
10 years
 

19
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

Goodwill and intangible assets related to New Media consisted of the following:  

 
 
March 31, 2014
 
 
Gross
 
Accumulated
 
Net
 
 
 Carrying Amount
 
Amortization
 
Carrying Amount
Amortized intangible assets:
 
 
 
 
 
 
   Advertiser relationships
 
$
58,461

 
$
(498
)
 
$
57,963

   Customer relationships
 
5,769

 
(49
)
 
5,720

   Subscriber relationships
 
36,081

 
(306
)
 
35,775

   Trade name
 
262

 
(2
)
 
260

      Total
 
$
100,573

 
$
(855
)
 
$
99,718

 
 
 
 
 
 
 
Nonamortized intangible assets:
 
 
 
 
 
 
Mastheads
 
 
 
 
 
46,380

      Total intangible assets, net
 
 
 
 
 
$
146,098

 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
$
119,502


As of March 31, 2014, the weighted average amortization periods for amortizable intangible assets are 15.9 years for advertiser relationships, 15.9 years for customer relationships, 16.0 years for subscriber relationships and 10.0 years for trade names. The weighted average amortization period in total for all amortizable intangible assets is 15.9 years.
Amortization expense related to amortizable intangible assets of New Media for the period from February 14, 2014 to March 31, 2014 was $0.9 million. Estimated future amortization expense as of March 31, 2014, is as follows:
April 1, 2014 to December 31, 2014
 
$
4,828

2015
 
6,438

2016
 
6,438

2017
 
6,438

2018
 
6,438

Thereafter
 
69,138

   Total
 
$
99,718

Goodwill and intangible assets with indefinite lives are tested for impairment annually or when events indicate that an impairment could exist which may include an economic downturn in a market, a change in the assessment of future operations or a decline in New Media’s stock price. An annual impairment assessment is performed on each of New Media's reporting units. The fair value of the applicable reporting unit is compared to its carrying value. Calculating the fair value of a reporting unit requires significant estimates and assumptions. Fair value is estimated by applying third-party market value indicators to projected cash flows and/or projected earnings before interest, taxes, depreciation, and amortization. In applying this methodology, the company relies on a number of factors, including current operating results and cash flows, expected future operating results and cash flows, future business plans, and market data. If the carrying value of the reporting unit exceeds the estimate of fair value, the amount of impairment is calculated as the excess of the carrying value of goodwill over its implied fair value.

The recoverability of its long-lived assets, including fixed assets and definite lived intangible assets, is estimated whenever events or changes in business circumstances indicate the carrying amount of the assets, or related group of assets, may not be fully recoverable. Impairment indicators include significant under performance relative to historical or projected future operating losses, significant changes in the manner of use of the acquired assets or the strategy for New Media’s overall business, and significant negative industry or economic trends. The assessment of recoverability is based on management’s estimates by comparing the

20
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value.
The newspaper industry and New Media have experienced declining same store revenue and profitability over the past several years. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, this may require impairment charges to be recorded in the future.

Cash Equivalents - Cash equivalents represent highly liquid certificates of deposit which have original maturities of three months or less.

Deferred Revenue - Billings to clients and payments received in advance of the performance of services or delivery of products are recorded as deferred revenue until services are performed or the product is delivered.

Other Assets and Other Liabilities - Other assets and liabilities of the Non-Investment Manager are comprised of the following. Other assets are presented net of allowances for uncollectible amounts of $0.7 million as of March 31, 2014, which were recorded as general, administrative and other.
 
Other Assets
 
 
Other Liabilities
 
March 31, 2014
 
 
March 31, 2014
Accounts receivable, net
$
61,551

 
Accounts payable
$
8,684

Inventory
8,209

 
Accrued expenses
42,979

Prepaid expenses
8,439

 
Pension and postretirement benefit obligations
10,158

Miscellaneous assets
30,210

 
Miscellaneous liabilities
5,437

 
$
108,409

 
 
$
67,258


-
Accounts Receivable - Accounts receivable are stated at amounts due from customers, net of an allowance for uncollectible accounts. Allowance for uncollectible accounts is based upon several factors including the length of time the receivables are past due, historical payment trends and current economic factors. New Media generally does not require collateral.

-
Inventory - Inventory consists principally of newsprint, which is valued at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. In 2014 New Media expects to purchase approximately 95% of newsprint from one vendor.

-
Pension and Other Postretirement Benefit Obligations - Pension plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement benefit plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining other postretirement benefit obligations and expense are the discount rate and the assumed health care cost-trend rates.

New Media maintains a legacy pension plan and legacy postretirement medical and life insurance plans which cover qualifying employees of its subsidiaries. The pension plan and postretirement medical and life insurance plans are closed to new participants and the pension plan was frozen to all future benefit accruals. Also, medical and life insurance benefits for a select group of active employees are frozen and the plan limits future benefits.

The accrued benefit actuarial method is used and best estimate assumptions are used to determine pension costs, liabilities and other pension information for defined benefit plans.


21
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

The following provides information on the components of net periodic benefit cost (income) for the pension plans and postretirement medical and life insurance plans for the period from February 14, 2014 to March 31, 2014:

 
 
Pension
 
Postretirement
Service cost
 
$
75

 
$
9

Interest cost
 
295

 
63

Expected return on plan assets
 
(406
)
 
—

Net periodic benefit cost (income)
 
$
(36
)
 
$
72


The following assumptions were used to calculate the net periodic benefit cost (income) for New Media’s defined benefit pension and postretirement plans:
 
 
Pension
 
Postretirement
Weighted average discount rate
 
5.0
%
 
4.5
%
Expected return on assets
 
8.0
%
 
N/A

Current year trend
 
N/A

 
7.8
%
Ultimate year trend
 
N/A

 
4.8
%
Year of ultimate trend
 
N/A

 
2025


Since the pension plan was frozen to all future benefit accruals and the medical and life insurance benefit plans limit future benefits, management assumed no rate of increase in future compensation levels.


3. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

Investment Manager

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 returns, or profits, subject to the achievement of performance criteria. Substantially all of Fortress's net assets, after deducting the portion attributable to non-controlling interests, are a result of principal investments in, or receivables from, these funds. The terms of agreements between Fortress and the Fortress Funds are generally determined in connection with third party fund investors.




22
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

Management Fees, Incentive Income and Related Profit Sharing Expense

Fortress recognized management fees and incentive income as follows:
 
 
Three Months Ended March 31,
 
2014
 
2013
Private Equity
 
 
  

Private Equity Funds
  
 
  

Management fees: affil.
$
36,064

 
$
32,784

Management fees: non-affil.
149

 
104

       Incentive income: affil.
—

 
10,455

 
 
 
 
Permanent Capital Vehicles
  
 
  

Management fees: affil.
13,662

 
16,688

Management fees, options: affil.
—

 
26,374

Management fees: non-affil.
1,108

 
1,270

Incentive income: affil.
4,009

 
—

 
 
 
 
Liquid Hedge Funds
  
 
  

Management fees: affil.
27,067

 
17,522

Management fees: non-affil.
6,411

 
5,501

Incentive income: affil.
78

 
1,787

Incentive income: non-affil.
—

 
1,053

 
 
 
 
Credit Funds
  
 
  

Credit Hedge Funds
  
 
  

Management fees: affil.
26,834

 
24,530

Management fees: non-affil.
24

 
31

Incentive income: affil.
1,304

 
3,151

Incentive income: non-affil.
—

 
—

 
 
 
 
Credit PE Funds
  
 
  

Management fees: affil.
24,608

 
25,156

Management fees: non-affil.
34

 
35

Incentive income: affil.
28,860

 
15,964

Incentive income: non-affil.
643

 
376

 
 
 
 
Logan Circle
  
 
  

Management fees: affil.
710

 
548

Management fees: non-affil.
9,896

 
7,874

 
 
 
 
Total
  
 
  

Management fees: affil.
$
128,945

 
$
143,602

Management fees: non-affil.
$
17,622

 
$
14,815

Incentive income: affil. (A)
$
34,251

 
$
31,357

Incentive income: non-affil.
$
643

 
$
1,429

(A) See “Deferred Incentive Income” below. The incentive income amounts presented in this table are based on the estimated results of investment vehicles for the current period. These estimates are subject to change based on the final results of such vehicles.

23
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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

Deferred Incentive Income
 
Incentive income from certain Fortress Funds, primarily private equity funds and credit PE funds, is received when such funds realize returns, or profits, based on the related agreements. However, this incentive income is subject to contingent repayment by Fortress to the funds until certain overall fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income as revenue until the related contingencies are resolved. Until such time, this incentive income is recorded on the balance sheet as deferred incentive income and is included as “distributed-unrecognized” deferred incentive income in the table below. Incentive income from such funds, based on their net asset value, which has not yet been received is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the three months ended March 31, 2014 and 2013. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $30.5 million and $59.4 million of additional incentive income from affiliates would have been recognized during the three months ended March 31, 2014 and 2013, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.
 
During the three months ended March 31, 2014 and 2013, Fortress recognized $28.9 million and $16.0 million, respectively, of incentive income distributions from its credit PE funds which represented “tax distributions.” These tax distributions are not subject to clawback and reflect a cash amount approximately equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.
 
Deferred incentive income from the Fortress Funds was comprised of the following, on an inception-to-date basis. This does not include any amounts related to third party funds, receipts from which are reflected as Other Liabilities until all contingencies are resolved.

 
Distributed-Gross
 
Distributed-Recognized (A)
 
Distributed-Unrecognized (B)
 
Undistributed, net of intrinsic clawback (C) (D)
 
Deferred incentive income as of December 31, 2013
$
1,015,084

 
$
(767,528
)
 
$
247,556

 
$
696,333

 
Fortress Funds which matured (no longer subject
to clawback)
—

 
—

 
N/A

 
N/A

 
Share of income (loss) of Fortress Funds
 N/A

 
 N/A

 
N/A

 
146,584

 
Distribution of private equity incentive income
64,843

 
 N/A

 
64,843

 
(64,843
)
 
Recognition of previously deferred incentive income
 N/A

 
(29,503
)
 
(29,503
)
 
 N/A

 
Changes in foreign exchange rates
1,304

 
—

 
1,304

 
N/A

 
Deferred incentive income as of March 31, 2014
$
1,081,231

(E)
$
(797,031
)
 
$
284,200

 
$
778,074

(E)
Deferred incentive income including Fortress Funds
which matured
$
1,134,887

 
$
(850,687
)
 
 
 
 
 

(A)
All related contingencies have been resolved.
(B)
Reflected on the consolidated balance sheet.
(C)
At March 31, 2014, the net undistributed incentive income is comprised of $861.5 million of gross undistributed incentive income, net of $83.4 million of intrinsic clawback. The net undistributed incentive income represents the amount that would be received by Fortress from the related funds if such funds were liquidated on March 31, 2014 at their net asset values.
(D)
From inception to March 31, 2014, Fortress has paid $481.8 million of compensation expense under its employee profit sharing arrangements (Note 8) in connection with distributed incentive income, of which $27.9 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related individuals. If the $861.5 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $424.2 million of compensation expense.
(E)
See detailed reconciliations of Distributed-Gross and Undistributed, net of intrinsic clawback below.




24
Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

The amounts set forth under Distributed-Gross can be reconciled to the incentive income threshold tables (on the following pages) as follows:

 
 
 
 
 
March 31, 2014
Distributed incentive income - Private Equity Funds
$
862,263

Distributed incentive income - Private Equity Funds in Investment period
527

Distributed incentive income - Credit PE Funds
434,575

Distributed incentive income - Credit PE Funds in Investment Period
113,051

Less:
 
 
 
Fortress Funds which are not subject to a clawback provision:
 
 
 
—

 
NIH
(94,513
)
 
 
—

 
GAGACQ Fund
(51,476
)
 
 
Portion of Fund I distributed incentive income that Fortress is not entitled to (see footnote K of incentive income threshold tables)
(183,196
)
Distributed-Gross
$
1,081,231


The amounts set forth under Undistributed, net of intrinsic clawback can be reconciled to the incentive income threshold tables (on the following pages) as follows:

 
 
 
 
 
March 31, 2014
Undistributed incentive income - Private Equity Funds
$
785

Undistributed incentive income - Private Equity Funds in Investment Period
7,414

Undistributed incentive income - Credit PE Funds
493,002

Undistributed incentive income - Credit PE Funds in Investment Period
229,166

Undistributed incentive income - Hedge Funds (total)
131,057

Less:
 
Gross intrinsic clawback per incentive income threshold tables - Private Equity Funds
(83,350
)
Undistributed, net of intrinsic clawback
$
778,074



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Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)

The following tables summarize information with respect to the Fortress Funds and their related incentive income thresholds as of March 31, 2014:

 Fund (Vintage) (A)
 
 Maturity Date (B)
 
 Inception to Date
Capital Invested
 
 Inception to Date Distributions (C)
 
 Net Asset Value (“NAV”)
 
 NAV Surplus (Deficit) (D)
 
 Current Preferred Return Threshold (E)
 
 Gain to Cross Incentive Income Threshold (F)
 
 Undistributed Incentive Income (G)
 
 Distributed Incentive Income (H)
 
 Distributed Incentive Income Subject to Clawback (I)
 
 Gross Intrinsic Clawback (J)
 
 Net Intrinsic Clawback (J)
Private Equity Funds
 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

NIH (1998)
 
In Liquidation
 
$
415,574

 
$
(823,588
)
 
$
—

 
$ N/A
 
$
—

 
$ N/A

 
$
—

 
$
94,513

 
$
—

 
$
—

 
$
—

Fund I (1999) (K)
 
Closed May-13
 
1,015,943

 
(2,847,929
)
 
—

 
N/A

 
—

 
N/A

 
—

 
344,939

 
—

 
—

 
—

Fund II (2002)
 
Feb-13
 
1,974,298

 
(3,329,950
)
 
111,751

 
1,467,403

 
—

 
N/A

 
785

 
287,985

 
21,240

 
—

 
—

Fund III (2004)
 
Jan-15
 
2,762,992

 
(1,655,025
)
 
1,991,209

 
883,242

 
1,828,154

 
944,912

 
—

 
66,903

 
66,903

 
66,903

 
45,108

Fund III Coinvestment (2004)
 
Jan-15
 
273,649

 
(187,844
)
 
111,899

 
26,094

 
218,594

 
192,500

 
—

 
—

 
—

 
—

 
—

Fund IV (2006)
 
Jan-17
 
3,639,561

 
(654,859
)
 
3,619,859

 
635,157

 
2,432,719

 
1,797,562

 
—

 
—

 
—

 
—

 
—

Fund IV Coinvestment (2006)
 
Jan-17
 
762,696

 
(161,674
)
 
569,866

 
(31,156
)
 
519,928

 
551,084

 
—

 
—

 
—

 
—

 
—

Fund V (2007) (K)
 
Feb-18
 
4,103,713

 
(509,915
)
 
4,660,659

 
1,066,861

 
2,145,257

 
1,078,396

 
—

 
—

 
—

 
—

 
—

Fund V Coinvestment (2007) (K)
 
Feb-18
 
990,480

 
(89,115
)
 
564,273

 
(337,092
)
 
564,565

 
901,657

 
—

 
—

 
—

 
—

 
—

GAGACQ Fund (2004) (GAGFAH)
 
Closed
Nov-09
 
545,663

 
(595,401
)
 
 N/A

 
 N/A

 
 N/A

 
 N/A

 
N/A

 
51,476

 
N/A

 
N/A

 
N/A

FRID (2005) (GAGFAH)
 
Apr-15
 
1,220,229

 
(642,599
)
 
539,180

 
(38,450
)
 
886,597

 
925,047

 
—

 
16,447

 
16,447

 
16,447

 
10,041

FRIC (2006) (Brookdale)
 
May-16
 
328,754

 
(17,462
)
 
288,044

 
(23,248
)
 
256,464

 
279,712

 
—

 
—

 
—

 
—

 
—

FICO (2006) (Intrawest)
 
Jan-17
 
724,525

 
(5
)
 
(60,886
)
 
(785,406
)
 
530,785

 
1,316,191

 
—

 
—

 
—

 
—

 
—

FHIF (2006) (Holiday)
 
Jan-17
 
1,543,463

 
(169,180
)
 
2,254,394

 
880,111

 
1,030,991

 
150,880

 
—

 
—

 
—

 
—

 
—

FECI (2007) (Florida East Coast / Flagler)
 
Feb-18
 
982,779

 
(240
)
 
956,074

 
(26,465
)
 
654,097

 
680,562

 
—

 
—

 
—

 
—

 
—

 
 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
$
785

 
$
862,263