Q2 FIG-2015.6.30-10Q
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 June 30, 2015
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: 215,673,299 outstanding as of July 24, 2015.
Class B Shares: 226,331,513 outstanding as of July 24, 2015.



FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statement of Changes in Equity (unaudited) for the six months ended June 30, 2015
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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. In addition, AUM includes management fee paying assets managed by autonomous businesses in which we retain a minority interest under our affiliated manager platform. 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, private permanent capital vehicle through May 2015 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 or book equity of our publicly traded permanent capital vehicles,
(iii)
the NAV of our hedge funds, including the Value Recovery Funds which pay fees based on realizations;
(iv)
the NAV or fair value of our managed accounts, to the extent management fees are charged; and
(v)
AUM related to affiliated managers.

For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our investments in our funds as well as investments in our 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 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, a former 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 former 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 Securities and Exchange Commission's ("SEC") 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)
 
June 30, 2015
(Unaudited)
 
December 31, 2014
Assets
 

 
 

   Cash and cash equivalents
$
233,912

 
$
391,089

   Due from affiliates
188,051

 
326,575

   Investments
1,144,597

 
1,121,545

   Investments in options
60,950

 
71,844

   Deferred tax asset, net
415,915

 
417,623

   Other assets
165,531

 
173,708

Total Assets
$
2,208,956

 
$
2,502,384

 


 


Liabilities and Equity
 

 
 

   Accrued compensation and benefits
$
181,967

 
$
374,709

   Due to affiliates
372,660

 
375,424

   Deferred incentive income
326,338

 
304,526

   Debt obligations payable
75,000

 
75,000

   Other liabilities
90,430

 
88,053

Total Liabilities
1,046,395

 
1,217,712

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Redeemable Non-controlling Interests
19

 
1,717

 
 
 
 
Equity
 

 
 

Class A shares, no par value, 1,000,000,000 shares authorized, 215,673,299
 
 
 
and 208,535,157 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

Class B shares, no par value, 750,000,000 shares authorized, 226,331,513
 
 
 
shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

Paid-in capital
1,922,869

 
1,996,137

Retained earnings (accumulated deficit)
(1,312,093
)
 
(1,350,122
)
Accumulated other comprehensive income (loss)
(2,409
)
 
(2,416
)
Total Fortress shareholders’ equity
608,367

 
643,599

Principals’ and others’ interests in equity of consolidated subsidiaries
554,175

 
639,356

Total Equity
1,162,542

 
1,282,955

Total Liabilities, Redeemable Non-controlling Interests and Equity
$
2,208,956

 
$
2,502,384



See notes to consolidated financial statements.


1

Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 

 
 

 
 
 
 
Management fees: affiliates
$
150,936

 
$
136,045

 
$
278,643

 
$
265,755

Management fees: non-affiliates
14,966

 
17,716

 
30,257

 
35,338

Incentive income: affiliates
82,158

 
60,442

 
106,381

 
94,693

Incentive income: non-affiliates
296

 
44

 
296

 
687

Expense reimbursements: affiliates
53,991

 
51,662

 
108,556

 
102,848

Expense reimbursements: non-affiliates
3,568

 
2,614

 
6,816

 
5,062

Other revenues (affiliate portion disclosed in Note 6)
2,573

 
1,821

 
4,228

 
3,071

 
308,488

 
270,344

 
535,177

 
507,454

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Compensation and benefits
199,108

 
168,114

 
377,996

 
356,633

General, administrative and other
45,185

 
42,186

 
88,166

 
80,009

Depreciation and amortization
12,768

 
5,037

 
18,099

 
9,338

Interest expense
1,039

 
947

 
1,878

 
1,638

Transfer of interest in Graticule (see Note 1)

 

 
101,000

 

 
258,100

 
216,284

 
587,139

 
447,618

 
 
 
 
 
 
 
 
Other Income (Loss)
 

 
 

 
 
 
 
Gains (losses) (affiliate portion disclosed in Note 3)
(6,787
)
 
4,864

 
24,774

 
(6,191
)
Tax receivable agreement liability adjustment
(7,500
)
 

 
(7,500
)
 

Earnings (losses) from equity method investees
(36,321
)
 
22,448

 
5,387

 
42,822

Gain on transfer of Graticule (see Note 1)

 

 
134,400

 

 
(50,608
)
 
27,312

 
157,061

 
36,631

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
(220
)
 
81,372

 
105,099

 
96,467

   Income tax benefit (expense)
5,199

 
(7,916
)
 
(13,200
)
 
(13,910
)
Net Income (Loss)
$
4,979

 
$
73,456

 
$
91,899

 
$
82,557

Allocation of Net Income (Loss):
 
 
 
 
 
 
 
Principals’ and Others’ Interests in Income (Loss) of
Consolidated Subsidiaries
$
1,653

 
$
42,100

 
$
53,876

 
$
48,177

Redeemable Non-controlling Interests in Income (Loss)
10

 
157

 
(6
)
 
157

Net Income (Loss) Attributable to Class A Shareholders
3,316

 
31,199

 
38,029

 
34,223

 
$
4,979

 
$
73,456

 
$
91,899

 
$
82,557

Dividends declared per Class A share
$
0.08

 
$
0.08

 
$
0.46

 
$
0.16

 
 
 
 

 
 
 
 
Earnings (Loss) Per Class A share
 

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

 
$
0.15

 
$
0.16

 
$
0.16

Net income (loss) per Class A share, diluted
$
0.00

 
$
0.12

 
$
0.16

 
$
0.14

Weighted average number of Class A shares outstanding, basic
216,183,181

 
207,783,751

 
215,985,577

 
212,328,315

Weighted average number of Class A shares outstanding, diluted
449,210,362

 
444,566,847

 
222,210,732

 
459,673,136


See notes to consolidated financial statements.

2

Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

Net income (loss)
$
4,979

 
$
73,456

 
$
91,899

 
$
82,557

Foreign currency translation
526

 
(570
)
 
(372
)
 
(1,602
)
Total comprehensive income (loss)
$
5,505

 
$
72,886

 
$
91,527

 
$
80,955

Allocation of Comprehensive Income (Loss):
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to
principals’ and others’ interests
$
1,949

 
$
41,739

 
$
53,568

 
$
47,157

Comprehensive income (loss) attributable to
redeemable non-controlling interests
10

 
157

 
(6
)
 
157

Comprehensive income (loss) attributable to
Class A shareholders
3,546

 
30,990

 
37,965

 
33,641

 
$
5,505

 
$
72,886

 
$
91,527

 
$
80,955

































See notes to consolidated financial statements.

3

Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(dollars in thousands)
 
 
Class A Shares
 
Class B Shares
 
Paid-In Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Fortress
Shareholders’
Equity
 
Principals’
and Others’
Interests in
Equity of
Consolidated
Subsidiaries
 
Total Equity
Equity - December 31, 2014
208,535,157

 
226,331,513

 
$
1,996,137

 
$
(1,350,122
)
 
$
(2,416
)
 
$
643,599

 
$
639,356

 
$
1,282,955

Contributions from principals’ and others’ interests in equity

 

 

 

 

 

 
36,165

 
36,165

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

 

 

 

 

 

 
(175,755
)
 
(175,755
)
Dividends declared

 

 
(96,501
)
 

 

 
(96,501
)
 

 
(96,501
)
Dividend equivalents accrued in connection with equity-based
    compensation (net of tax)

 

 
(2,335
)
 

 

 
(2,335
)
 
(4,184
)
 
(6,519
)
Net deferred tax effects resulting from acquisition and exchange of
Fortress Operating Group units

 

 
4,859

 

 

 
4,859

 
15

 
4,874

Director restricted share grant
71,208

 

 
271

 

 

 
271

 
289

 
560

Capital increase related to equity-based compensation, net
7,066,934

 

 
12,145

 

 

 
12,145

 
13,085

 
25,230

Dilution impact of equity transactions (Note 6)

 

 
8,293

 

 
71

 
8,364

 
(8,364
)
 

Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss) (excludes loss allocated to redeemable
non-controlling interests)

 

 

 
38,029

 

 
38,029

 
53,876

 
91,905

Foreign currency translation

 

 

 

 
(64
)
 
(64
)
 
(308
)
 
(372
)
Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
37,965

 
53,568

 
91,533

Equity - June 30, 2015
215,673,299

 
226,331,513

 
$
1,922,869

 
$
(1,312,093
)
 
$
(2,409
)
 
$
608,367

 
$
554,175

 
$
1,162,542











See notes to consolidated financial statements.

4

Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash Flows From Operating Activities
 

 
 

Net income (loss)
$
91,899

 
$
82,557

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities
 
 
 
Depreciation and amortization
18,099

 
9,338

Other amortization (included in interest expense)
390

 
390

(Earnings) losses from equity method investees
(5,387
)
 
(42,822
)
Distributions of earnings from equity method investees
23,756

 
51,204

(Gains) losses
(24,774
)
 
6,191

Deferred incentive income
(65,709
)
 
(53,362
)
Deferred tax (benefit) expense
4,448

 
12,756

Options received from affiliates
(25,158
)
 
(1,604
)
Tax receivable agreement liability adjustment
7,500

 

Equity-based compensation
25,388

 
18,334

Options in affiliates granted to employees
5,681

 
4,052

Other
356

 
(764
)
Transfer of interest in Graticule (see Note 1)
101,000

 

Gain on transfer of Graticule (see Note 1)
(134,400
)
 

Cash flows due to changes in
 
 
 
Due from affiliates
18,392

 
3,146

Other assets
(5,927
)
 
30,487

Accrued compensation and benefits
(157,551
)
 
(187,033
)
Due to affiliates
(17,007
)
 
(30,248
)
Deferred incentive income
74,610

 
59,128

Other liabilities
2,810

 
4,573

Purchase of investments by consolidated funds
(66,965
)
 
(144,313
)
Proceeds from sale of investments by consolidated funds
53,494

 
126,240

Receivables from brokers and counterparties
(211
)
 
(41,302
)
Due to brokers and counterparties
2,727

 
7,305

Net cash provided by (used in) operating activities
(72,539
)
 
(85,747
)
Cash Flows From Investing Activities
 

 
 

Contributions to equity method investees
(18,862
)
 
(6,012
)
Distributions of capital from equity method investees
155,255

 
321,085

Purchase of securities
(883
)
 
(7,217
)
Proceeds from sale of securities
18,101

 
74,922

Proceeds from exercise of options
51,543

 

Purchase of fixed assets
(11,075
)
 
(4,176
)
Purchase of software and technology-related assets

 
(25,976
)
Net cash provided by (used in) investing activities
194,079

 
352,626



Continued on next page.

5

Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash Flows From Financing Activities
 

 
 

 
 
 
 
Repayments of debt obligations

 
(50,000
)
Borrowings under debt obligations

 
125,000

Proceeds from public offering (Note 8)

 
186,551

Repurchase of Class B shares (Note 8)

 
(186,551
)
Payments to repurchase Class A shares (Note 8)
(9,676
)
 
(363,410
)
Dividends and dividend equivalents paid
(104,554
)
 
(32,583
)
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions
283

 
3,670

Principals’ and others’ interests in equity of consolidated subsidiaries - distributions
(167,554
)
 
(78,833
)
Excess tax benefits from delivery of RSUs
4,476

 
2,931

Redeemable non-controlling interests - (distributions) contributions
(1,692
)
 
16,253

Net cash provided by (used in) financing activities
(278,717
)
 
(376,972
)
Net Increase (Decrease) in Cash and Cash Equivalents
(157,177
)
 
(110,093
)
Cash and Cash Equivalents, Beginning of Period
391,089

 
364,583

Cash and Cash Equivalents, End of Period
$
233,912

 
$
254,490

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
1,019

 
$
788

Cash paid during the period for income taxes
$
7,702

 
$
3,447

Supplemental Schedule of Non-cash Investing and Financing Activities
 
 
 
Employee compensation invested directly in subsidiaries
$
35,800

 
$
33,450

Investments of incentive receivable amounts into Fortress Funds
$
134,657

 
$
249,740

Dividends, dividend equivalents and Fortress Operating Group unit distributions
declared but not yet paid
$
5,240

 
$
5,839

Retained equity interest related to Graticule transfer (Note 1)
$
33,400

 
$

Non-cash redeemable non-controlling interest - contributions
$

 
$
20,519



















See notes to consolidated financial statements.

6

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)


1. ORGANIZATION AND BASIS OF PRESENTATION

Fortress Investment Group LLC (the “Registrant,” or, together with its subsidiaries, “Fortress”) is a leading, highly diversified global investment management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for various investment funds, permanent capital vehicles and managed accounts (collectively, the “Fortress Funds”). Fortress generally makes investments in these funds.

Fortress has three primary sources of income from the Fortress Funds: management fees, incentive income, and investment income on its investments in the funds. In addition, Fortress receives expense reimbursements pursuant to management agreements. 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)
Entities which Fortress collectively refers to as "permanent capital vehicles" which includes (i) Newcastle Investment Corp. ("Newcastle"), New Residential Investment Corp. ("New Residential"), Eurocastle Investment Limited ("Eurocastle"), New Media Investment Group Inc. ("New Media"), New Senior Investment Group Inc. ("New Senior") and Fortress Transportation and Infrastructure Investors LLC ("FTAI"), which are publicly traded companies that are externally managed by Fortress pursuant to management agreements (collectively referred to as the "publicly traded permanent capital vehicles") and (ii) FHC Property Management LLC, (together with its subsidiaries, referred to as "Blue Harbor"), a senior living property management business. The publicly traded permanent capital vehicles invest in a wide variety of real estate related assets, including securities, loans, real estate properties and mortgage servicing related assets, media assets and transportation and infrastructure assets. All of the capital of Worldwide Transportation and Infrastructure Investors ("WWTAI"), a private fund managed by Fortress, was contributed to FTAI which completed its initial public offering ("IPO") in May 2015 (see Note 2).

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; a fund that primarily focuses on an international "event driven" investment strategy, particularly in Europe, Asia-Pacific and Latin America; and a fund that seeks to generate returns by executing a positively convex investment strategy.

On January 5, 2015, Fortress Asia Macro Funds and related managed accounts became the first group of funds to join Fortress's affiliated manager platform ("Affiliated Managers") as they transitioned to an autonomous asset management business named Graticule Asset Management Asia, L.P. ("Graticule"). Fortress retained a perpetual minority interest in Graticule amounting to 30% of earnings during 2015 and declining to approximately 27% of earnings over time. Fortress also receives additional fees for providing infrastructure services (technology, back office, and related services) to Graticule. During the quarter ended June 30, 2015, Graticule notified Fortress of its intention to terminate the infrastructure services agreement effective at the end of May 2016. Fortress will continue to earn fees for providing services to Graticule through the effective date of the termination. Fortress recorded the results of this transaction at fair value. During the six months ended June 30, 2015, Fortress recorded a non-cash gain of $134.4 million, non-cash expense of $101.0 million related to the fair value of the controlling interest in Graticule transferred to a former senior employee for no consideration, and $33.4 million from its resulting retained interest as an equity method investment. Fortress utilized an income approach to value Graticule, its retained interest in Graticule and the controlling interest in Graticule which was transferred. This approach relies on a number of factors, including actual operating results, discount rates and economic projections.

In the second quarter of 2015, Fortress determined that certain software and technology-related assets which were used in its liquid hedge funds business had not met certain growth targets and performed an asset impairment test. As a result of this test, $7.5 million of assets were written off and included in Depreciation and Amortization.

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

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

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 the following 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.

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 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.

For a reconciliation between the financial statements and the segment-based financial data that management uses for making operating decisions and assessing performance, see Note 10.

FINANCIAL STATEMENT GUIDE
Selected Financial Statement Captions
 
Note Reference
 
Explanation
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Due from Affiliates
 
6
 
Generally, management fees, expense reimbursements and incentive income due from Fortress Funds.
 
 
 
 
 
Investments and Investments in Options
 
3
 
Primarily the carrying value of Fortress’s investments in the Fortress Funds.
 
 
 
 
 
Deferred Tax Asset, net
 
5
 
Relates to potential future net tax benefits.
 
 
 
 
 
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' and a former senior employee's ownership interests in Fortress Operating Group as well as employees' ownership interests in certain subsidiaries.
 
 
 
 
 
Statement of Operations
 
 
 
 
 
 
 
 
 
Management Fees: Affiliates
 
2
 
Fees earned for managing Fortress Funds and other affiliates, generally determined based on the size of such funds.
 
 
 
 
 
Management Fees: Non-Affiliates
 
2
 
Fees earned from managed accounts and the traditional fixed income asset management business, generally determined based on the amount managed.
 
 
 
 
 
Incentive Income: Affiliates
 
2
 
Income earned from Fortress Funds, based on the performance of such funds.
 
 
 
 
 
Incentive Income: Non- Affiliates
 
2
 
Income earned from managed accounts, based on the performance of such accounts.
 
 
 
 
 
Compensation and Benefits
 
7
 
Includes equity-based, profit-sharing and other compensation to employees.
 
 
 
 
 
Gains (Losses)
 
3
 
The result of asset dispositions or changes in the fair value of investments or other financial instruments which are marked to market (including the publicly traded permanent capital vehicles and publicly traded portfolio companies).

Continued on next page.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

FINANCIAL STATEMENT GUIDE
Selected Financial Statement Captions
 
Note Reference
 
Explanation
Tax Receivable Agreement Liability Adjustment
 
5
 
Represents a change in the amount due to the Principals under the tax receivable agreement.
 
 
 
 
 
Earnings (Losses) from Equity Method Investees
 
3
 
Fortress’s share of the net earnings (losses) of the Fortress Funds resulting from its investments in these funds.
 
 
 
 
 
Income Tax Benefit (Expense)
 
5
 
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.
 
 
 
 
 
Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries
 
6
 
Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group.
 
 
 
 
 
Earnings Per Share
 
8
 
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
 
8
 
A summary of dividends and distributions, and the related outstanding shares and units, is provided.
 
 
 
 
 
Distributable Earnings
 
10
 
A presentation of Fortress's financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee.

Recent Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. This standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one year deferral of the effective date of the new revenue recognition standard. The new standard is effective for Fortress beginning January 1, 2018. Early adoption is permitted but not before the original public entity effective date (that is, annual periods beginning after December 15, 2016). The standard permits the use of either the retrospective or cumulative effect transition method. Fortress is currently evaluating the impact on its consolidated financial statements upon the adoption of this new standard.

The FASB has recently issued or discussed a number of proposed standards on such topics as, 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.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 eliminates the deferral of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46 (R) previously provided to investment companies and certain other entities pursuant to ASC 810-10-65-2. ASU 2015-02 also amends the evaluation of whether (1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a variable interest entity ("VIE") and (3) a reporting entity is the primary beneficiary of a VIE. ASU 2015-02 eliminates certain conditions for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest. Fees received by a decision maker or service provider are no longer considered variable interests and are now excluded from the evaluation of whether the reporting entity is the primary beneficiary of a VIE if the fees are both customary and commensurate with the level of effort required for the services provided and the decision maker or service provider does not hold other interests in the entity being evaluated that would absorb more than an insignificant amount of the expected losses or returns of the entity. If the reporting entity determines that it does not have a variable interest in an entity, no further consolidation analysis is performed as the reporting entity would not be required to consolidate the entity.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

The effective date of ASU 2015-02 is for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015 for public companies and early adoption is permitted. Fortress has elected to early adopt ASU 2015-02 on a retrospective basis as permitted, for all periods presented. The consolidated financial statements and related footnote disclosures have been adjusted for the impact of the adoption. The adoption did not result in a cumulative effect adjustment to Fortress’s retained earnings (accumulated deficit). Fortress’s accounting policy, updated for the adoption of ASU 2015-02, is described below.

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 consolidated financial statements include the accounts of Fortress and its consolidated subsidiaries, which are comprised of VIEs in which it is the primary beneficiary as described below and voting interest entities (“VOEs”) in which it is determined to have a controlling financial interest under ASC 810, as amended by ASU 2015-02.

For legal entities evaluated for consolidation, Fortress must determine whether the interests that it holds and fees paid to it qualify as a variable interest in the entity. This includes an evaluation of fees paid to Fortress where Fortress acts as a decision maker or service provider to the entity being evaluated. Fees received by Fortress are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length and (iii) Fortress’s other economic interests in the VIE held directly and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits.

For those entities in which it has a variable interest, Fortress performs an analysis to first determine whether the entity is a VIE. This determination includes considering whether the entity’s equity investment at risk is sufficient, whether the voting rights of an investor are not proportional to its obligation to absorb the income or loss of the entity and substantially all of the entity's activities either involve or are conducted on behalf of that investor and its related parties 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. Performance of such analysis requires the exercise of judgment.

The primary beneficiary of a VIE is generally defined as the party who has a controlling financial interest in the VIE. Fortress is generally deemed to have a controlling financial interest in a VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. For purposes of evaluating (ii) above, fees paid to Fortress are excluded if the fees are compensation for services provided commensurate with the level of effort required to be performed and the arrangement includes only customary terms, conditions or amounts present in arrangements for similar services negotiated at arm’s length. Fortress also evaluates its economic interests in the VIE held directly by it and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These analyses require judgment. Changes in the economic interests (either by Fortress, related parties of Fortress or third parties) or amendments to the governing documents of the VIE could affect an entity's status as a VIE or the determination of the primary beneficiary. The primary beneficiary evaluation is updated continuously.

For VOEs, Fortress shall consolidate the entity if it has a controlling financial interest. Fortress has a controlling financial interest in a VOE if (i) for legal entities other than limited partnerships, Fortress owns a majority voting interest in the VOE or, for limited partnerships and similar entities, Fortress owns a majority of the entity’s kick-out rights through voting limited partnership interests and (ii) non-controlling shareholders or partners do not hold substantive participating rights and no other conditions exist that would indicate that Fortress does not control the entity.

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. The evaluation of whether Fortress exerts control or significant influence over the financial and operational policies of an entity requires judgment based on the facts and circumstances surrounding each individual entity.

Virtually all of the Fortress Funds are, for GAAP purposes, investment companies. Investment companies record realized and unrealized gains (losses) resulting from changes in the fair value of their investments as a component of current income. Additionally, investment companies generally do not consolidate their majority-owned and controlled investments (the “Portfolio Companies”).

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

Distributions by Fortress and its subsidiaries are recognized when declared.

Redeemable Non-controlling Interests represent ownership interests in consolidated subsidiaries which are redeemable and not owned by Fortress.

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 6). Non-Fortress interests also include employee interests in majority owned and controlled fund advisor and general partner entities.

Deconsolidation of New Media

Prior to the adoption of ASU 2015-02, Fortress consolidated New Media, a VIE. The financial results of New Media were included in Fortress’s consolidated financial statements in previous filings with the Securities and Exchange Commission, based on the then existing consolidation guidance. The adoption of ASU 2015-02 resulted in the deconsolidation of New Media as Fortress determined that under ASU 2015-02, it was not the primary beneficiary of New Media. The fee arrangement with New Media is both commensurate with the level of effort required for the services provided and include only customary terms and Fortress does not hold other interests in New Media that would absorb more than an insignificant amount of New Media's losses or benefits. Therefore, Fortress no longer considers this fee arrangement to be a variable interest. Under ASU 2015-02, Fortress and its related parties under common control as a group, where applicable, do not have the obligation to absorb losses or the right to receive benefits from New Media that could potentially be significant to New Media. Also see Note 3 for the related disclosures for certain unconsolidated variable interest entities.

The accompanying consolidated financial statements and related footnotes 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 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, 2014 and footnotes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015, as revised in Fortress's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2015.  Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2014.

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)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

Fortress has two principal sources of fee 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 Fortress's 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.

Management Fees and Incentive Income

Fortress recognized management fees and incentive income as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Private Equity
 
 
  

 
 

 
 

Private Equity Funds
  
 
  

 
 

 
 

Management fees: affil.
$
29,222

 
$
35,330

 
$
58,362

 
$
70,643

Management fees: non-affil.

 
162

 

 
311

Incentive income: affil.

 
22,094

 

 
22,094

 
 
 
 
 
 
 
 
Permanent Capital Vehicles
  
 
  

 
 

 
 

Management fees: affil.
22,276

 
16,318

 
41,278

 
31,496

Management fees, options: affil.
21,014

 
1,604

 
25,158

 
1,604

Management fees: non-affil.
482

 
583

 
932

 
1,691

Incentive income: affil.
23,156

 
19,246

 
25,744

 
23,255

 
 
 
 
 
 
 
 
Liquid Hedge Funds
  
 
  

 
 

 
 

Management fees: affil.
16,638

 
29,998

 
35,133

 
57,065

Management fees: non-affil.
2,054

 
6,164

 
4,548

 
12,575

Incentive income: affil.
41

 
908

 
53

 
986

Incentive income: non-affil.
39

 
44

 
39

 
44

 
 
 
 
 
 
 
 
Credit Funds
  
 
  

 
 

 
 

Credit Hedge Funds
  
 
  

 
 

 
 

Management fees: affil.
29,834

 
28,455

 
59,488

 
55,289

Management fees: non-affil.
13

 
20

 
23

 
44

Incentive income: affil.
21,516

 
16,429

 
22,169

 
17,733

Incentive income: non-affil.

 

 

 

 
 
 
 
 
 
 
 
Credit PE Funds
  
 
  

 
 

 
 

Management fees: affil.
31,068

 
23,651

 
57,387

 
48,259

Management fees: non-affil.
29

 
34

 
58

 
68

Incentive income: affil.
37,445

 
1,765

 
58,409

 
30,625

Incentive income: non-affil.
257

 

 
257

 
643

 
 
 
 
 
 
 
 
Logan Circle
  
 
  

 
 

 
 

Management fees: affil.
884

 
689

 
1,837

 
1,399

Management fees: non-affil.
12,388

 
10,753

 
24,696

 
20,649

Incentive income: affil.

 

 
6

 

Incentive income: non-affil.

 

 

 

 
 
 
 
 
 
 
 
Total
  
 
  

 
 

 
 

Management fees: affil.
$
150,936

 
$
136,045

 
$
278,643

 
$
265,755

Management fees: non-affil.
$
14,966

 
$
17,716

 
$
30,257

 
$
35,338

Incentive income: affil. (A)
$
82,158

 
$
60,442

 
$
106,381

 
$
94,693

Incentive income: non-affil.
$
296

 
$
44

 
$
296

 
$
687


(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.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

Deferred Incentive Income
 
Incentive income from certain Fortress Funds, primarily the private equity funds, private permanent capital vehicle through its IPO in May 2015 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 six months ended June 30, 2015 and 2014. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $46.4 million and $56.3 million of additional incentive income would have been recognized during the six months ended June 30, 2015 and 2014, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

During the six months ended June 30, 2015 and 2014, Fortress recognized $58.4 million and $30.6 million, respectively, of incentive income distributions from its credit PE funds which were non-clawbackable or represented “tax distributions.” 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, 2014
$
1,243,441

 
 
$
(938,915
)
 
$
304,526

 
$
868,549

 
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

 
173,199

 
Distribution of private equity funds and credit PE
funds incentive income
81,671

 
 
 N/A

 
81,671

 
(81,671
)
 
Distribution of private permanent capital vehicle
incentive income through IPO in May 2015
6,299

 
 
N/A

 
6,299

 
(6,299
)
 
Recognition of previously deferred incentive income
 N/A

 
 
(65,709
)
 
(65,709
)
 
 N/A

 
Changes in foreign exchange rates
(449
)
 
 

 
(449
)
 
N/A

 
Deferred incentive income as of June 30, 2015
$
1,330,962

(E)
 
$
(1,004,624
)
 
$
326,338

 
$
953,778

(E)
Deferred incentive income including Fortress Funds
which matured
$
1,384,618

 
 
$
(1,058,280
)
 
 
 
 
 

(A)
All related contingencies have been resolved.
(B)
Reflected on the consolidated balance sheet.
(C)
At June 30, 2015, the net undistributed incentive income is comprised of $1.0 billion of gross undistributed incentive income, net of $66.9 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 June 30, 2015 at their net asset values.
(D)
From inception to June 30, 2015, Fortress has paid $621.9 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $21.5 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 individuals. As of June 30, 2015, Fortress has recovered $6.4 million from individuals relating to their clawback obligations. If the $1.0 billion of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $498.7 million of compensation expense.
(E)
See detailed reconciliations of Distributed-Gross and Undistributed, net of intrinsic clawback below.

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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(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:

 
 
 
 
 
June 30, 2015
Distributed incentive income - Private Equity Funds
$
846,671

Distributed incentive income - Private Equity Funds in Investment Period or Commitment
Period

Distributed incentive income - Credit PE Funds
801,657

Distributed incentive income - Credit PE Funds in Investment Period or Commitment Period
4,776

Distributed incentive income - Private Permanent Capital Vehicle through IPO in May 2015
(see footnote (P) of incentive income threshold tables)
7,043

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
$
1,330,962


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:

 
 
 
 
 
June 30, 2015
Undistributed incentive income - Private Equity Funds
$
26,310

Undistributed incentive income - Private Equity Funds in Investment Period or Commitment
Period
3,509

Undistributed incentive income - Credit PE Funds
848,001

Undistributed incentive income - Credit PE Funds in Investment Period or Commitment
Period
26,482

Undistributed incentive income - Permanent Capital Vehicles
1,191

Undistributed incentive income - Hedge Funds (total)
115,083

Undistributed incentive income - Logan Circle
105

Less:
 
Gross intrinsic clawback per incentive income threshold tables - Private Equity Funds
(66,903
)
Undistributed, net of intrinsic clawback
$
953,778



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FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(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 June 30, 2015:

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)
Closed Jun-15
 
$
415,574

 
$
(823,588
)
 
$

 
$ N/A
 
$ N/A

 
$ N/A

 
$

 
$
94,513

 
$

 
$

 
$

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

 
(2,847,929
)
 

 
N/A

 
N/A

 
N/A

 

 
344,939

 

 

 

Fund II (2002)
In Liquidation
 
1,974,298

 
(3,442,900
)
 
3,534

 
1,472,136

 

 
N/A

 
696

 
288,840

 

 

 

Fund III (2004)
In Liquidation
 
2,762,992

 
(2,138,524
)
 
930,951

 
306,483

 
2,154,994

 
1,848,511

 

 
66,903

 
66,903

 
66,903

 
45,108

Fund III Coinvestment (2004)
In Liquidation
 
273,649

 
(225,188
)
 
68,246

 
19,785

 
252,921

 
233,136

 

 

 

 

 

Fund IV (2006)
Jan-17
 
3,639,561

 
(1,357,054
)
 
2,225,663

 
(56,844
)
 
2,925,391

 
2,982,235

 

 

 

 

 

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

 
(271,319
)
 
412,859

 
(78,518
)
 
625,163

 
703,681

 

 

 

 

 

Fund V (2007)
Feb-18
 
4,103,713

 
(1,435,456
)
 
5,303,858

 
2,635,601

 
2,355,965

 
81,806

 
13,665

 

 

 

 

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

 
(173,600
)
 
526,359

 
(290,521
)
 
708,207

 
998,728

 

 

 

 

 

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

 
(595,401
)
 

 
 N/A

 
N/A

 
 N/A

 

 
51,476

 

 

 

FRID (2005) (GAGFAH)
Closed Nov-14
 
1,220,229

 
(1,202,153
)
 

 
 N/A

 
N/A

 
N/A

 

 

 

 

 

FRIC (2006) (Brookdale)
Closed Dec-14
 
328,754

 
(291,330
)
 

 
 N/A

 
N/A

 
N/A

 

 

 

 

 

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

 

 
(63,960
)
 
(788,485
)
 
657,265

 
1,445,750

 

 

 

 

 

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

 
(685,652
)
 
1,520,480

 
662,669

 
1,249,260

 
586,591

 

 

 

 

 

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

 
(624
)
 
960,420

 
(21,735
)
 
818,492

 
840,227

 

 

 

 

 

MSR Opportunities Fund I A (2012)
Aug-22
 
341,135

 
(141,754
)
 
298,754

 
99,373

 

 
N/A

 
9,566

 

 

 

 

MSR Opportunities Fund I B (2012)
Aug-22
 
82,760

 
(34,275
)
 
72,327

 
23,842

 

 
N/A

 
2,383

 

 

 

 

 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
$
26,310

 
$
846,671

 
$
66,903

 
$
66,903

 
$
45,108

Private Equity Funds in Investment or Commitment Period
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

MSR Opportunities Fund II A (2013)
Jul-23
 
$
158,724

 
$
(15,482
)
 
$
162,338

 
$
19,096

 
$

 
$ N/A

 
$
2,820

 
$

 
$

 
$

 
$

MSR Opportunities Fund II B (2013)
Jul-23
 
2,264

 
(212
)
 
2,311

 
259

 

 
N/A

 
39

 

 

 

 

MSR Opportunities MA I (2013)
Jul-23
 
36,425

 
(3,541
)
 
37,287

 
4,403

 

 
N/A

 
650

 

 

 

 

Italian NPL Opportunities Fund (2013)
Sep-24
 
32,312

 
(5,768
)
 
24,044

 
(2,500
)
 
1,767

 
4,267

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
3,509

 
$

 
$

 
$

 
$




Continued on next page.

15

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)

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)
Credit PE Funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long Dated Value Fund I (2005)
 
Apr-30
 
$
267,325

 
$
(127,971
)
 
$
290,441

 
$
151,087

 
$
153,774

 
$
4,579

 
$
48

 
$

 
$

 
$

 
$

Long Dated Value Fund II (2005)
 
Nov-30
 
274,280

 
(150,977
)
 
204,428

 
81,125

 
123,552

 
42,427

 

 
412

 

 

 

Long Dated Value Fund III (2007)
 
Feb-32
 
343,156

 
(283,517
)
 
190,703

 
131,064

 

 
N/A

 
17,839

 
6,473

 

 

 

LDVF Patent Fund (2007)
 
Nov-27
 
41,779

 
(34,903
)
 
33,493

 
26,617

 

 
N/A

 
1,071

 
1,471

 

 

 

Real Assets Fund (2007)
 
Jun-17
 
359,024

 
(352,783
)
 
105,051

 
98,810

 

 
N/A

 
9,043

 
6,285

 

 

 

Credit Opportunities Fund (2008)
 
Oct-20
 
5,646,864

 
(7,084,071
)
 
1,274,505

 
2,711,712

 

 
N/A

 
169,710

 
362,870

 
145,297

 

 

Credit Opportunities Fund II (2009)
 
Jul-22
 
2,335,264

 
(2,487,310
)
 
1,083,393

 
1,235,439

 

 
N/A

 
129,496

 
112,816

 
43,733

 

 

Credit Opportunities Fund III (2011)
 
Mar-24
 
3,088,327

 
(1,298,051
)
 
2,479,191

 
688,915

 

 
N/A

 
108,185

 
26,852