þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2008 | ||
or
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||
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Delaware
|
20-5837959 | |
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
1345 Avenue of the Americas,
New York, NY (Address of principal executive offices) |
10105 (Zip Code) |
Large accelerated filer o
|
Accelerated filer o |
Non-accelerated filer þ
(Do not check if a smaller reporting company) |
Smaller reporting company o |
ITEM 1. | FINANCIAL STATEMENTS |
September 30, |
December 31, |
|||||||
2008 | 2007 | |||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 259,252 | $ | 100,409 | ||||
Due from affiliates
|
49,429 | 198,669 | ||||||
Investments
|
||||||||
Equity method investees
|
949,709 | 1,091,918 | ||||||
Options in affiliates
|
137 | 16,001 | ||||||
Deferred tax asset
|
517,578 | 511,204 | ||||||
Other assets
|
78,772 | 71,580 | ||||||
$ | 1,854,877 | $ | 1,989,781 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
Liabilities
|
||||||||
Accrued compensation and benefits
|
$ | 146,702 | $ | 269,324 | ||||
Due to affiliates
|
395,508 | 455,734 | ||||||
Dividends payable
|
| 21,285 | ||||||
Deferred incentive income
|
163,635 | 173,561 | ||||||
Debt obligations payable
|
750,000 | 535,000 | ||||||
Other liabilities
|
57,726 | 36,729 | ||||||
1,513,571 | 1,491,633 | |||||||
Commitments and Contingencies
|
||||||||
Principals and Others Interests in Equity of
Consolidated Subsidiaries
|
174,854 | 308,023 | ||||||
Shareholders Equity
|
||||||||
Class A shares, no par value, 1,000,000,000 shares
authorized, 94,609,525 and 94,597,646 shares issued and
outstanding at September 30, 2008 and December 31,
2007, respectively
|
| | ||||||
Class B shares, no par value, 750,000,000 shares
authorized, 312,071,550 shares issued and outstanding
|
| | ||||||
Paid-in capital
|
538,619 | 384,700 | ||||||
Retained earnings (accumulated deficit)
|
(373,004 | ) | (193,200 | ) | ||||
Accumulated other comprehensive income (loss)
|
837 | (1,375 | ) | |||||
166,452 | 190,125 | |||||||
$ | 1,854,877 | $ | 1,989,781 | |||||
1
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues
|
||||||||||||||||
Management fees from affiliates
|
$ | 154,266 | $ | 124,991 | $ | 447,928 | $ | 286,956 | ||||||||
Incentive income from affiliates
|
718 | 106,690 | 56,162 | 283,879 | ||||||||||||
Other revenues (affiliate portion disclosed in Note 6)
|
30,152 | 15,601 | 70,022 | 51,866 | ||||||||||||
Interest and dividend income investment company
holdings
|
||||||||||||||||
Interest income
|
| | | 243,713 | ||||||||||||
Interest income from controlled affiliate investments
|
| | | 4,707 | ||||||||||||
Dividend income
|
| | | 7,436 | ||||||||||||
Dividend income from controlled affiliate investments
|
| | | 53,174 | ||||||||||||
185,136 | 247,282 | 574,112 | 931,731 | |||||||||||||
Expenses
|
||||||||||||||||
Interest expense
|
||||||||||||||||
Investment company holdings
|
| | | 132,620 | ||||||||||||
Other
|
9,481 | 7,285 | 29,705 | 26,016 | ||||||||||||
Compensation and benefits
|
134,774 | 101,703 | 399,253 | 507,003 | ||||||||||||
Principals agreement compensation
|
239,976 | 232,048 | 714,710 | 612,981 | ||||||||||||
General, administrative and other
|
23,536 | 17,412 | 59,852 | 80,320 | ||||||||||||
Depreciation and amortization
|
2,437 | 2,230 | 7,309 | 6,423 | ||||||||||||
410,204 | 360,678 | 1,210,829 | 1,365,363 | |||||||||||||
Other Income (Loss)
|
||||||||||||||||
Gains (losses) from investments
|
||||||||||||||||
Investment company holdings
|
||||||||||||||||
Net realized gains (losses)
|
| | | 86,264 | ||||||||||||
Net realized gains (losses) from controlled affiliate investments
|
| | | 715,024 | ||||||||||||
Net unrealized gains (losses)
|
| | | (19,928 | ) | |||||||||||
Net unrealized gains (losses) from controlled affiliate
investments
|
| | | (1,428,837 | ) | |||||||||||
Other investments
|
||||||||||||||||
Net realized gains (losses)
|
(2,477 | ) | 777 | (803 | ) | 831 | ||||||||||
Net realized gains (losses) from affiliate investments
|
(671 | ) | (2,475 | ) | (516 | ) | 143,017 | |||||||||
Net unrealized gains (losses)
|
| (1,921 | ) | | (2,597 | ) | ||||||||||
Net unrealized gains (losses) from affiliate investments
|
(6,951 | ) | (54,579 | ) | (43,352 | ) | (221,745 | ) | ||||||||
Earnings (losses) from equity method investees
|
(37,921 | ) | (30,716 | ) | (113,550 | ) | (23,289 | ) | ||||||||
(48,020 | ) | (88,914 | ) | (158,221 | ) | (751,260 | ) | |||||||||
Income (Loss) Before Deferred Incentive Income,
Principals and Others Interests in Income of
Consolidated Subsidiaries and Income Taxes
|
(273,088 | ) | (202,310 | ) | (794,938 | ) | (1,184,892 | ) | ||||||||
Deferred incentive income
|
| | | 307,034 | ||||||||||||
Principals and others interests in (income) loss of
consolidated subsidiaries
|
210,012 | 152,534 | 612,692 | 854,550 | ||||||||||||
Income (Loss) Before Income Taxes
|
(63,076 | ) | (49,776 | ) | (182,246 | ) | (23,308 | ) | ||||||||
Income tax benefit (expense)
|
5,636 | 12,219 | 333 | (7,237 | ) | |||||||||||
Net Income (Loss)
|
$ | (57,440 | ) | $ | (37,557 | ) | $ | (181,913 | ) | $ | (30,545 | ) | ||||
Dividends declared per Class A share
|
$ | | $ | 0.2250 | $ | 0.4500 | $ | 0.6174 | ||||||||
Earnings Per Unit Fortress Operating Group
|
January 1 through January 16 | |||||||||||||||
Net income per Fortress Operating Group unit
|
$ | 0.36 | ||||||||||||||
Weighted average number of Fortress Operating Group units
outstanding
|
367,143,000 | |||||||||||||||
Earnings Per Class A share Fortress Investment
Group
|
January 17 through September 30 | |||||||||||||||
Net income (loss) per Class A share, basic
|
$ | (0.61 | ) | $ | (0.41 | ) | $ | (1.96 | ) | $ | (1.83 | ) | ||||
Net income (loss) per Class A share, diluted
|
$ | (0.66 | ) | $ | (0.52 | ) | $ | (1.97 | ) | $ | (1.83 | ) | ||||
Weighted average number of Class A shares outstanding, basic
|
94,938,434 | 94,894,636 | 94,915,666 | 91,255,519 | ||||||||||||
Weighted average number of Class A shares outstanding,
diluted
|
407,009,984 | 406,966,186 | 406,987,216 | 91,255,519 | ||||||||||||
2
Retained |
Accumulated |
|||||||||||||||||||||||
Earnings |
Other |
Total |
||||||||||||||||||||||
Class A |
Class B |
Paid-In |
(Accumulated |
Comprehensive |
Shareholders |
|||||||||||||||||||
Shares | Shares | Capital | Deficit) | Income (Loss) | Equity | |||||||||||||||||||
Shareholders Equity December 31,
2007
|
94,597,646 | 312,071,550 | $ | 384,700 | $ | (193,200 | ) | $ | (1,375 | ) | $ | 190,125 | ||||||||||||
Director restricted share grant
|
11,879 | | 244 | | | 244 | ||||||||||||||||||
Dividends declared
|
| | (42,572 | ) | | | (42,572 | ) | ||||||||||||||||
Capital increase related to equity-based compensation
|
| | 198,503 | | | 198,503 | ||||||||||||||||||
Dividend and distribution equivalents accrued in connection with
equity-based compensation (net of tax)
|
| | (2,256 | ) | | | (2,256 | ) | ||||||||||||||||
Cumulative effect adjustment adoption of
SFAS 159 (Note 3)
|
| | | 2,109 | 1,212 | 3,321 | ||||||||||||||||||
Comprehensive income (loss) (net of tax)
|
||||||||||||||||||||||||
Net income (loss)
|
| | | (181,913 | ) | | (181,913 | ) | ||||||||||||||||
Foreign currency translation
|
| | | | (787 | ) | (787 | ) | ||||||||||||||||
Comprehensive income (loss) from equity method investees
|
| | | | 333 | 333 | ||||||||||||||||||
Allocation to Principals and others interests in
equity of consolidated subsidiaries
|
| | | | 1,454 | 1,454 | ||||||||||||||||||
Total comprehensive income (loss)
|
(180,913 | ) | ||||||||||||||||||||||
Shareholders Equity September 30,
2008
|
94,609,525 | 312,071,550 | $ | 538,619 | $ | (373,004 | ) | $ | 837 | $ | 166,452 | |||||||||||||
3
Nine Months Ended September 30, | ||||||||
2008 | 2007 | |||||||
Cash Flows From Operating Activities
|
||||||||
Net income (loss)
|
$ | (181,913 | ) | (30,545 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
|
||||||||
Depreciation and amortization
|
7,309 | 6,423 | ||||||
Other amortization and accretion
|
3,401 | 1,876 | ||||||
(Earnings) losses from equity method investees
|
113,550 | 23,289 | ||||||
Distributions of earnings from equity method investees
|
9,386 | 9,765 | ||||||
(Gains) losses from investments
|
44,671 | 727,971 | ||||||
Deferred incentive income
|
(36,003 | ) | (355,381 | ) | ||||
Principals and others interests in income (loss) of
consolidated subsidiaries
|
(612,692 | ) | (854,550 | ) | ||||
Deferred tax (benefit) expense
|
(8,297 | ) | (16,775 | ) | ||||
Options received from affiliates
|
| (2,006 | ) | |||||
Assignments of options to employees
|
| 4,627 | ||||||
Equity-based compensation
|
853,861 | 713,850 | ||||||
Cash flows due to changes in
|
||||||||
Cash held at consolidated subsidiaries and restricted cash
|
| (166,199 | ) | |||||
Due from affiliates
|
90,724 | 214,558 | ||||||
Receivables from brokers and counterparties and other assets
|
(13,052 | ) | (23,024 | ) | ||||
Accrued compensation and benefits
|
(93,466 | ) | 92,475 | |||||
Due to affiliates
|
(50 | ) | (6,392 | ) | ||||
Deferred incentive income
|
26,077 | | ||||||
Due to brokers and counterparties and other liabilities
|
30,076 | 118,098 | ||||||
Investment company holdings
|
||||||||
Purchases of investments
|
| (5,105,865 | ) | |||||
Proceeds from sale of investments
|
| 3,398,739 | ||||||
Net cash provided by (used in) operating activities
|
233,582 | (1,249,066 | ) | |||||
Cash Flows From Investing Activities
|
||||||||
Purchase of other loan and security investments
|
| (10,578 | ) | |||||
Proceeds from sale of other loan and security investments
|
| 317 | ||||||
Contributions to equity method investees
|
(135,036 | ) | (410,447 | ) | ||||
Distributions of capital from equity method investees
|
211,162 | 115,190 | ||||||
Proceeds from sale of equity method investments
|
| 29,071 | ||||||
Cash received on settlement of derivatives
|
| 132 | ||||||
Purchase of fixed assets
|
(9,120 | ) | (8,907 | ) | ||||
Proceeds from disposal of fixed assets
|
53 | 2,532 | ||||||
Net cash provided by (used in) investing activities
|
67,059 | (282,690 | ) | |||||
Cash Flows From Financing Activities
|
||||||||
Borrowings under debt obligations
|
450,000 | 1,999,070 | ||||||
Repayments of debt obligations
|
(235,000 | ) | (2,010,025 | ) | ||||
Payment of deferred financing costs
|
(5,020 | ) | (6,813 | ) | ||||
Issuance of Class A shares to Nomura
|
| 888,000 | ||||||
Issuance of Class A shares in initial public offering
|
| 729,435 | ||||||
Costs related to initial public offering
|
| (76,766 | ) | |||||
Dividends and dividend equivalents paid
|
(81,026 | ) | (43,237 | ) | ||||
Fortress Operating Group capital distributions to Principals
|
| (219,112 | ) | |||||
Purchase of Fortress Operating Group units from Principals
|
| (888,000 | ) | |||||
Principals and others interests in equity of
consolidated subsidiaries contributions
|
145 | 3,183,792 | ||||||
Principals and others interests in equity of
consolidated subsidiaries distributions
|
(270,897 | ) | (1,916,216 | ) | ||||
Net cash provided by (used in) financing activities
|
(141,798 | ) | 1,640,128 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents
|
158,843 | 108,372 | ||||||
Cash and Cash Equivalents, Beginning of Period
|
100,409 | 61,120 | ||||||
Cash and Cash Equivalents, End of Period
|
$ | 259,252 | $ | 169,492 | ||||
Supplemental Disclosure of Cash Flow Information
|
||||||||
Cash paid during the period for interest (excluding interest
paid by master funds while such funds were consolidated of
$85.1 million in 2007)
|
$ | 26,084 | 70,003 | |||||
Cash paid during the period for income taxes
|
$ | 7,184 | 30,158 | |||||
Supplemental Schedule of Non-cash Investing and Financing
Activities
|
||||||||
Employee compensation invested directly in subsidiaries
|
$ | 22,861 | 59,403 | |||||
Investments of receivable amounts into Fortress Funds
|
$ | 59,133 | 149,825 | |||||
Dividends, dividend equivalents and Fortress Operating Group
unit distributions declared but not yet paid
|
$ | | 43,009 | |||||
Fortress Operating Group pre-IPO distributions of investments to
Principals
|
$ | | 196,764 | |||||
Fortress Operating Group pre-IPO distributions of investments to
employees
|
$ | | 23,338 | |||||
See Note 1 regarding the non-cash deconsolidation
transaction in 2007
|
4
1. | ORGANIZATION AND BASIS OF PRESENTATION |
| subsequent to Fortresss reorganization and the inception of operations of Fortress Investment Group LLC on January 17, 2007, the accounts of Fortress Investment Group LLC and its consolidated subsidiaries, and |
5
| prior to such reorganization and the inception of operations of Fortress Investment Group LLC, the accounts of eight affiliated entities under common control and management (Fortress Operating Group or the predecessor) and their respective consolidated subsidiaries. Each of the eight entities was owned either directly or indirectly by its members, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone, and Michael Novogratz (the Principals). |
6
Note |
||||||
Selected Financial Statement Captions
|
Reference |
Explanation
|
||||
Balance Sheet
|
||||||
Due from Affiliates
|
6 | Generally, management fees and incentive income earned from Fortress Funds which are expected to be received in the short term. | ||||
Investments in Equity Method Investees
|
3 | The carrying value of Fortresss principal investments in the Fortress Funds. | ||||
Options in Affiliates
|
3 | The fair value of common stock options received from the Castles. | ||||
Deferred Tax Asset
|
5 | Relates to tax benefits expected to be realized in the future. | ||||
Due to Affiliates
|
6 | Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement. | ||||
Deferred Incentive Income
|
2 | Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance. | ||||
Debt Obligations Payable
|
4 | The balance outstanding on the credit agreement. | ||||
Principals and Others Interests in Equity of
Consolidated Subsidiaries
|
6 | The GAAP basis of the Principals ownership interests in Fortress Operating Group as well as employees ownership interests in certain subsidiaries. |
7
Note |
||||||
Selected Financial Statement Captions
|
Reference |
Explanation
|
||||
Income Statement
|
||||||
Management Fees from Affiliates
|
2 | Fees earned for managing Fortress Funds, generally determined based on the size of such funds. | ||||
Incentive Income from Affiliates
|
2 | Income earned from Fortress Funds, based on the performance of such funds. | ||||
Compensation and Benefits
|
7 | Includes equity-based, profit-sharing and other compensation to employees. | ||||
Principals Agreement Compensation
|
N/A | As a result of the principals agreement, the value of a significant portion of the Principals equity in Fortress prior to the Nomura Transaction is being recorded as an expense over a five year period. Fortress is not a party to this agreement. It is an agreement between the Principals to further incentivize them to remain with Fortress. This GAAP expense has no economic effect on Fortress or its shareholders. | ||||
Gains (Losses) from Other Investments
|
N/A | Subsequent to the IPO, the result of asset dispositions or changes in the fair value of assets which are marked to market (primarily the Castles). | ||||
Earnings (Losses) from Equity Method Investees
|
3 | Fortresss share of the net earnings (losses) of Fortress Funds resulting from its principal investments. | ||||
Principals and Others Interests in (Income) Loss of
Consolidated Subsidiaries
|
6 | Primarily the Principals and employees share of Fortresss earnings based on their ownership interests in subsidiaries, including Fortress Operating Group. This amount is recorded in order to provide a net income (loss) which relates only to Fortresss Class A shareholders. | ||||
Income Tax Benefit (Expense)
|
5 | The net tax result related to the current period. Certain of Fortresss revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings. | ||||
Earnings Per Share
|
8 | GAAP earnings per share based on Fortresss capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortresss earnings, at both the Fortress and subsidiary levels. |
8
Note |
||||||
Selected Financial Statement Captions
|
Reference |
Explanation
|
||||
Other
|
||||||
Distributions
|
8 | A summary of dividends and distributions, and the related outstanding shares and units, is provided. | ||||
Distributable Earnings
|
10 | A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortresss management committee. |
9
2. | MANAGEMENT AGREEMENTS AND FORTRESS FUNDS |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007(A) | |||||||||||||
Private Equity
|
||||||||||||||||
Funds
|
||||||||||||||||
Management fees affil.
|
$ | 44,221 | $ | 35,064 | $ | 128,626 | $ | 97,358 | ||||||||
Incentive income affil.
|
509 | 105,632 | 38,684 | 317,574 | ||||||||||||
Castles
|
||||||||||||||||
Management fees affil.
|
12,755 | 12,256 | 38,828 | 35,251 | ||||||||||||
Management fees, options affil.
|
| | | 2,006 | ||||||||||||
Incentive income affil.
|
| 691 | 12 | 18,596 | ||||||||||||
Hedge Funds
|
||||||||||||||||
Liquid Hedge Funds
|
||||||||||||||||
Management fees affil.
|
59,530 | 44,319 | 169,721 | 112,381 | ||||||||||||
Incentive income affil.
|
47 | (640 | ) | 16,885 | 157,559 | |||||||||||
Management fees non-affil.(B)
|
110 | 32 | 246 | 311 | ||||||||||||
Incentive income non-affil.(B)
|
36 | 431 | 240 | 431 | ||||||||||||
Hybrid Hedge Funds
|
||||||||||||||||
Management fees affil.
|
37,760 | 33,352 | 110,753 | 93,032 | ||||||||||||
Incentive income affil.
|
162 | 1,007 | 581 | 1,832 | ||||||||||||
Management fees non-affil.(B)
|
270 | 24 | 730 | 83 | ||||||||||||
Incentive income non-affil.(B)
|
13,094 | | 13,094 | | ||||||||||||
Total
|
||||||||||||||||
Management fees affil.
|
$ | 154,266 | $ | 124,991 | $ | 447,928 | $ | 340,028 | ||||||||
Incentive income affil.(C)
|
$ | 718 | $ | 106,690 | $ | 56,162 | $ | 495,561 | ||||||||
Management fees non-affil.(B)
|
$ | 380 | $ | 56 | $ | 976 | $ | 394 | ||||||||
Incentive income non-affil.(B)
|
$ | 13,130 | $ | 431 | $ | 13,334 | $ | 431 |
(A) | Presented on a pro forma basis (Note 12), as adjusted for the deconsolidation of the Fortress Funds as if it had occurred on January 1, 2007. | |
(B) | Included in Other Revenues on the statement of operations. | |
(C) | See Deferred Incentive Income below. |
10
Distributed- |
Distributed- |
Distributed- |
Undistributed, net |
|||||||||||||
Gross | Recognized(A) | Unrecognized(B) | (C)(D) | |||||||||||||
Deferred incentive income as of December 31, 2007
|
$ | 444,721 | $ | (271,160 | ) | $ | 173,561 | $ | 384,520 | |||||||
Share of income (loss) of Fortress Funds
|
26,077 | | 26,077 | (313,058 | ) | |||||||||||
Recognition of previously deferred incentive income
|
| (36,003 | ) | (36,003 | ) | | ||||||||||
Deferred incentive income as of September 30, 2008
|
$ | 470,798 | $ | (307,163 | ) | $ | 163,635 | $ | 71,462 | |||||||
(A) | All related contingencies have been resolved. | |
(B) | Reflected on the balance sheet. | |
(C) | On a deconsolidated basis, subsequent to March 31, 2007, undistributed incentive income is no longer recorded and is not reflected on the balance sheet. At September 30, 2008, the undistributed incentive income is comprised of $155.0 million of gross undistributed incentive income, net of $83.5 million of previously distributed incentive income that would be returned by Fortress to the related funds if such funds were liquidated on September 30, 2008 at their net asset values. | |
(D) | From inception to September 30, 2008, Fortress has recognized and paid compensation expense under its employee profit sharing arrangements (Note 7) in connection with the $470.8 million of distributed incentive income. If the $71.5 million of undistributed incentive income were realized, Fortress would recognize and pay an additional $30.4 million of compensation expense. |
11
Fortresss commitments
|
$ | 48,328 | ||
Fortresss affiliates commitments
|
87,963 | |||
Third party investors commitments
|
3,966,006 | |||
Total capital commitments
|
$ | 4,102,297 | ||
September 30, 2008 NAV | ||||||||
Liquid | Hybrid | |||||||
Fortress(A)
|
$ | 1,265 | $ | | ||||
Fortresss affiliates
|
497,654 | | ||||||
Third party investors
|
1,369,993 | | ||||||
Total NAV
|
$ | 1,868,912 | $ | | ||||
(A) | Includes a third quarter incentive income allocation of $159,000. |
3. | INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS |
12
Fortresss Equity in Net Income (Loss) | ||||||||||||||||||||||||
Fortresss Investment | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
September 30, |
December 31, |
|||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Private equity funds, excluding NIH(A)
|
$ | 667,180 | $ | 623,830 | $ | (6,309 | ) | $ | (33,658 | ) | $ | (74,606 | ) | $ | (41,682 | ) | ||||||||
NIH
|
4,523 | 5,770 | (9 | ) | 4,019 | 872 | 2,995 | |||||||||||||||||
Newcastle(B)
|
6,513 | 3,184 | N/A | (412 | ) | N/A | 777 | |||||||||||||||||
Eurocastle(B)
|
4,150 | 11,799 | N/A | 1,487 | N/A | 1,398 | ||||||||||||||||||
Total private equity
|
682,366 | 644,583 | (6,318 | ) | (28,564 | ) | (73,734 | ) | (36,512 | ) | ||||||||||||||
Liquid hedge funds(A)
|
32,535 | 73,748 | (3,668 | ) | (3,801 | ) | (3,117 | ) | 192 | |||||||||||||||
Hybrid hedge funds(A)
|
232,166 | 371,310 | (27,940 | ) | 1,649 | (36,715 | ) | 12,984 | ||||||||||||||||
Other
|
2,642 | 2,277 | 5 | | 16 | 47 | ||||||||||||||||||
$ | 949,709 | $ | 1,091,918 | $ | (37,921 | ) | $ | (30,716 | ) | $ | (113,550 | ) | $ | (23,289 | ) | |||||||||
(A) | These entities were consolidated prior to March 31, 2007. | |
(B) | Fortress elected to record these investments at fair value pursuant to SFAS 159 beginning on January 1, 2008. |
13
Nine Months Ended September 30, 2008 | ||||||||||||||||||||||||||||||||
Private Equity Funds | Castles(A) |
Liquid |
Hybrid |
|||||||||||||||||||||||||||||
NIH | Other | Newcastle | Eurocastle | Hedge Funds | Hedge Funds | Other | Total | |||||||||||||||||||||||||
Investment, beginning
|
$ | 5,770 | $ | 623,830 | $ | 3,184 | $ | 11,799 | $ | 73,748 | $ | 371,310 | $ | 2,277 | $ | 1,091,918 | ||||||||||||||||
Earnings from equity method investees
|
872 | (74,606 | ) | N/A | N/A | (3,117 | ) | (36,715 | ) | 16 | (113,550 | ) | ||||||||||||||||||||
Other comprehensive income from equity method investees
|
(17 | ) | 3,309 | N/A | N/A | | | | 3,292 | |||||||||||||||||||||||
Contributions to equity method investees
|
| 134,511 | N/A | N/A | 59,037 | 262 | 359 | 194,169 | ||||||||||||||||||||||||
Distributions of earnings from equity method investees
|
(2,102 | ) | (7,021 | ) | N/A | N/A | (253 | ) | | (10 | ) | (9,386 | ) | |||||||||||||||||||
Distributions of capital from equity method investees
|
| (11,706 | ) | N/A | N/A | (96,880 | ) | (102,691 | ) | | (211,277 | ) | ||||||||||||||||||||
Total distributions from equity method investees
|
(2,102 | ) | (18,727 | ) | N/A | N/A | (97,133 | ) | (102,691 | ) | (10 | ) | (220,663 | ) | ||||||||||||||||||
Sale of investments
|
| (1,137 | ) | | | | | | (1,137 | ) | ||||||||||||||||||||||
Mark to fair value January 1, 2008(B)
|
N/A | N/A | 10,110 | 12,762 | N/A | N/A | N/A | 22,872 | ||||||||||||||||||||||||
Mark to fair value during period(C)
|
N/A | N/A | (6,781 | ) | (21,524 | ) | N/A | N/A | N/A | (28,305 | ) | |||||||||||||||||||||
Translation adjustment
|
| | | 1,113 | | | | 1,113 | ||||||||||||||||||||||||
Investment, ending
|
$ | 4,523 | $ | 667,180 | $ | 6,513 | $ | 4,150 | $ | 32,535 | $ | 232,166 | $ | 2,642 | $ | 949,709 | ||||||||||||||||
Ending balance of undistributed earnings
|
$ | | $ | | N/A | N/A | $ | 75 | $ | 1,066 | $ | 6 | $ | 1,147 | ||||||||||||||||||
(A) | Fortress elected to record these investments at fair value pursuant to SFAS 159 beginning on January 1, 2008. | |
(B) | Recorded as a cumulative effect adjustment as described above. | |
(C) | Recorded to Other Investments Net Unrealized Gains (Losses) from Affiliate Investments. |
14
Private Equity Funds Excluding NIH(C) | Newcastle Investment Holdings LLC (NIH) | |||||||||||||||
September 30, |
December 31, |
September 30, |
December 31, |
|||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Assets
|
$ | 17,091,841 | $ | 16,982,495 | $ | 299,219 | $ | 336,176 | ||||||||
Liabilities
|
(2,711,408 | ) | (3,445,658 | ) | (218,648 | ) | (230,457 | ) | ||||||||
Equity
|
$ | 14,380,433 | $ | 13,536,837 | $ | 80,571 | $ | 105,719 | ||||||||
Fortresss Investment
|
$ | 667,180 | $ | 623,830 | $ | 4,523 | $ | 5,770 | ||||||||
Ownership(A)
|
4.6 | % | 4.6 | % | 4.8 | % | 4.8 | % | ||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues and gains (losses) on investments
|
$ | (3,325,753 | ) | $ | (3,329,819 | ) | $ | 35,773 | $ | 93,918 | ||||||
Expenses
|
(345,364 | ) | (194,551 | ) | (16,808 | ) | (22,962 | ) | ||||||||
Net Income (Loss)
|
$ | (3,671,117 | ) | $ | (3,524,370 | ) | $ | 18,965 | $ | 70,956 | ||||||
Fortresss equity in net income (loss)
|
$ | (74,606 | ) | $ | (41,682 | ) | $ | 872 | $ | 2,995 | ||||||
(B | ) |
(A) | Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. | |
(B) | The revenues and expenses of these entities were consolidated through March 31, 2007, the effective date of the deconsolidation (Note 1). As a result, the amounts shown for Fortresss equity in net income of these entities relate to the period subsequent to March 31, 2007. | |
(C) | Includes one entity which is recorded on a one quarter lag (i.e. the balances reflected for this entity are for June 30, 2008 and the period then ended). It is recorded on a lag because it is a German entity and does not provide financial reports under U.S. GAAP within the reporting timeframe necessary for U.S. public entities. During the quarter ended September 30, 2008, this entity had a significant revenue realization event. Fortresss share of this revenue was $11.9 million, which will be recorded by Fortress in the fourth quarter of 2008. |
15
Newcastle Investment Corp. | Eurocastle Investment Ltd. | |||||||||||||||
September 30, |
December 31, |
September 30, |
December 31, |
|||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Assets
|
$ | 5,785,226 | $ | 8,037,770 | $ | 9,302,638 | $ | 10,713,687 | ||||||||
Liabilities
|
(6,125,327 | ) | (7,590,145 | ) | (8,036,326 | ) | (8,865,921 | ) | ||||||||
Minority interest
|
| | (8 | ) | (8 | ) | ||||||||||
Equity
|
$ | (340,101 | ) | $ | 447,625 | $ | 1,266,304 | $ | 1,847,758 | |||||||
Ownership, basic(A)
|
1.9 | % | 1.9 | % | 1.7 | % | 1.6 | % | ||||||||
Ownership, diluted(A)(B)
|
4.8 | % | 4.7 | % | 10.3 | % | 9.8 | % | ||||||||
Ownership by Fortress and affiliates, diluted(B)
|
15.1 | % | 15.5 | % | 31.3 | % | 29.3 | % | ||||||||
Market value of shares owned(A)(C)
|
$ | 6,513 | $ | 13,293 | $ | 4,150 | $ | 24,561 | ||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues and gains (losses) on investments
|
$ | 361,461 | $ | 543,369 | $ | 589,854 | $ | 552,586 | ||||||||
Expenses
|
(268,053 | ) | (505,690 | ) | (656,097 | ) | (542,100 | ) | ||||||||
Other income (loss)
|
(355,968 | ) | | 47,911 | 65,846 | |||||||||||
Discontinued operations
|
(8,724 | ) | (2 | ) | | | ||||||||||
Preferred dividends
|
(10,126 | ) | (9,265 | ) | | | ||||||||||
Net Income (Loss)
|
$ | (281,410 | ) | $ | 28,412 | $ | (18,332 | ) | $ | 76,332 | ||||||
Fortresss equity in net income (loss)
|
N/A | $ | 777 | N/A | $ | 1,398 | ||||||||||
(A) | Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. | |
(B) | Fully diluted ownership represents the percentage of outstanding common shares assuming that all options are exercised. Currently, all of the options are out of the money (that is, their strike price is below the current market price per share). | |
(C) | Based on the closing price of the related shares and, if applicable, the foreign currency exchange rate on the last day of trading in the applicable period. |
Liquid Hedge Funds | Hybrid Hedge Funds | |||||||||||||||
September 30, |
December 31, |
September 30, |
December 31, |
|||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Assets
|
$ | 9,761,791 | $ | 8,358,378 | $ | 12,674,623 | $ | 12,098,175 | ||||||||
Liabilities
|
(1,012,898 | ) | (67,483 | ) | (4,606,119 | ) | (4,493,901 | ) | ||||||||
Minority Interest
|
| | (30,299 | ) | (26,834 | ) | ||||||||||
Equity
|
$ | 8,748,893 | $ | 8,290,895 | $ | 8,038,205 | $ | 7,577,440 | ||||||||
Fortresss Investment
|
$ | 32,535 | $ | 73,748 | $ | 232,165 | $ | 371,310 | ||||||||
Ownership(A)
|
0.4 | % | 0.9 | % | 2.9 | % | 4.9 | % | ||||||||
16
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues and gains (losses) on investments
|
$ | (716,901 | ) | $ | 1,092,573 | $ | (485,557 | ) | $ | 720,455 | ||||||
Expenses
|
(490,442 | ) | (710,854 | ) | (312,522 | ) | (255,716 | ) | ||||||||
Net Income
|
$ | (1,207,343 | ) | $ | 381,719 | $ | (798,079 | ) | $ | 464,739 | ||||||
Fortresss equity in net income (loss)
|
$ | (3,117 | ) | $ | 192 | $ | (36,715 | ) | $ | 12,984 | ||||||
(B | ) | (B | ) |
(A) | Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. | |
(B) | The revenues and expenses of these entities were consolidated through March 31, 2007, the effective date of the deconsolidation (Note 1). As a result, the amounts shown for Fortresss equity in net income of these entities relate to the period subsequent to March 31, 2007. |
September 30, |
December 31, |
|||||||||||
2008 | 2007 |
Accounting Treatment
|
||||||||||
Newcastle options
|
$ | 33 | $ | 5 | Recorded at fair value | |||||||
Eurocastle options
|
104 | 15,996 | Recorded at fair value | |||||||||
$ | 137 | $ | 16,001 | |||||||||
Fortress is not Primary Beneficiary | ||||||||||||
Business Segment
|
Gross Assets | Fortress Investment(A) | Notes | |||||||||
Private Equity Funds
|
$ | 1,154,601 | $ | 8,013 | (B | ) | ||||||
Liquid Hedge Funds
|
$ | 315,747 | $ | 85 |
(A) | Represents Fortresss maximum exposure to loss with respect to these entities, which includes direct and indirect investments in the funds. | |
(B) | Fortress investment includes $0.1 million of management fees receivable from the Private Equity Funds. |
17
September 30, |
||||||
2008 Fair Value |
Valuation Method
|
|||||
Assets Carried at Fair Value
|
||||||
Newcastle and Eurocastle common shares
|
$ | 10,663 | Level 1 Quoted prices in active markets for identical assets | |||
Newcastle and Eurocastle options
|
$ | 137 | Level 2 Lattice-based option valuation models using significant observable inputs |
4. | DEBT OBLIGATIONS |
September 30, 2008 | ||||||||||||||||||||||||||||
Face Amount and |
Weighted |
Weighted |
||||||||||||||||||||||||||
Carrying Value |
Contractual |
Final |
Average |
Average |
||||||||||||||||||||||||
Month |
September 30, |
December 31, |
Interest |
Stated |
Funding |
Maturity |
||||||||||||||||||||||
Debt Obligation
|
Issued | 2008 | 2007 | Rate | Maturity | Cost(A) | (Years) | |||||||||||||||||||||
Credit agreement(B)
|
||||||||||||||||||||||||||||
Revolving debt(C)
|
May 2007 | $ | | $ | 185,000 | LIBOR + 0.85 | %(D) | May 2012 | 0.00 | % | N/A | |||||||||||||||||
Term loan
|
May 2007 | 350,000 | 350,000 | LIBOR + 0.85 | % | May 2012 | 4.52 | % | 3.61 | |||||||||||||||||||
Delayed term loan
|
May 2007 | 400,000 | | LIBOR + 0.85 | % | May 2012 | 4.55 | % | 1.47 | |||||||||||||||||||
Total
|
$ | 750,000 | $ | 535,000 | 4.54 | % | 2.47 | |||||||||||||||||||||
(A) | The weighted average funding cost is calculated based on the contractual interest rate (utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing costs. The most recently reset LIBOR rate was 3.19%. | |
(B) | Collateralized by substantially all of Fortress Operating Groups assets as well as Fortress Operating Groups rights to fees from the Fortress Funds and its equity interests therein. | |
(C) | Approximately $189 million was undrawn under the revolving debt facility as of September 30, 2008, including a $25 million letter of credit subfacility of which $11 million was utilized. However, as a result of the amendments described in Note 11, the aggregate amount of revolving credit facility commitments has been reduced from $200 million to $125 million. In addition, Lehman Brothers Commercial Paper, Inc., which is committed to fund $11.9 million of the $125 million revolving credit facility, has filed for bankruptcy protection, and it is reasonably possible that it will not fund its portion of the commitments. As a result, approximately $102 million of the undrawn amount is currently available. | |
(D) | Subject to unused commitment fees of 0.25% per annum. |
18
5. | INCOME TAXES AND TAX RELATED PAYMENTS |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Current
|
||||||||||||||||
Federal income tax
|
$ | (3,310 | ) | $ | 5,016 | $ | (1,316 | ) | $ | 10,071 | ||||||
Foreign income tax
|
891 | 620 | 2,090 | 1,686 | ||||||||||||
State and local income tax
|
1,646 | 1,688 | 7,190 | 11,794 | ||||||||||||
(773 | ) | 7,324 | 7,964 | 23,551 | ||||||||||||
Deferred
|
||||||||||||||||
Federal income tax expense (benefit)
|
(2,506 | ) | (12,716 | ) | (2,526 | ) | (1,648 | ) | ||||||||
Foreign income tax expense (benefit)
|
(281 | ) | (57 | ) | (101 | ) | (790 | ) | ||||||||
State and local income tax expense (benefit)
|
(2,076 | ) | (6,770 | ) | (5,670 | ) | (13,876 | ) | ||||||||
(4,863 | ) | (19,543 | ) | (8,297 | ) | (16,314 | ) | |||||||||
Total expense (benefit)
|
$ | (5,636 | ) | $ | (12,219 | ) | $ | (333 | ) | $ | 7,237 | |||||
19
September 30, |
December 31, |
|||||||
2008 | 2007 | |||||||
Deferred tax assets
|
$ | 517,578 | $ | 511,204 | ||||
Deferred tax liabilities(A)
|
$ | 644 | $ | 891 | ||||
(A) | Included in Other Liabilities |
6. | RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES |
Private Equity |
Liquid Hedge |
Hybrid Hedge |
||||||||||||||||||||||
Funds | Castles | Funds | Funds | Other | Total | |||||||||||||||||||
September 30, 2008
|
||||||||||||||||||||||||
Management fees and incentive income
|
$ | 15,794 | $ | 6,401 | $ | 418 | $ | 2,350 | $ | | $ | 24,963 | ||||||||||||
Expense reimbursements
|
4,324 | 3,782 | 3,899 | 3,460 | | 15,465 | ||||||||||||||||||
Dividends and distributions
|
| 257 | | | | 257 | ||||||||||||||||||
Other
|
6,583 | | | 273 | 1,888 | 8,744 | ||||||||||||||||||
Total
|
$ | 26,701 | $ | 10,440 | $ | 4,317 | $ | 6,083 | $ | 1,888 | $ | 49,429 | ||||||||||||
Private Equity |
Liquid Hedge |
Hybrid Hedge |
||||||||||||||||||||||
Funds | Castles | Funds | Funds | Other | Total | |||||||||||||||||||
December 31, 2007
|
||||||||||||||||||||||||
Management fees and incentive income
|
$ | 1,733 | $ | 45,004 | $ | 40,751 | $ | 98,197 | $ | | $ | 185,685 | ||||||||||||
Expense reimbursements
|
1,307 | 2,051 | 3,074 | 3,487 | | 9,919 | ||||||||||||||||||
Dividends and distributions
|
| 739 | | | | 739 | ||||||||||||||||||
Other
|
| | | 1 | 2,325 | 2,326 | ||||||||||||||||||
Total
|
$ | 3,040 | $ | 47,794 | $ | 43,825 | $ | 101,685 | $ | 2,325 | $ | 198,669 | ||||||||||||
20
September 30, |
December 31, |
|||||||
2008 | 2007 | |||||||
Principals
|
||||||||
Tax receivable agreement Note 5
|
$ | 393,595 | $ | 393,265 | ||||
Distributions payable on Fortress Operating Group units
|
| 60,176 | ||||||
Other
|
1,913 | 2,293 | ||||||
$ | 395,508 | $ | 455,734 | |||||
September 30, |
December 31, |
|||||||
2008 | 2007 | |||||||
Principals Fortress Operating Group units
|
$ | 139,489 | $ | 232,826 | ||||
Employee interests in majority owned and controlled fund advisor
and general partner entities
|
35,189 | 75,062 | ||||||
Other
|
176 | 135 | ||||||
Total
|
$ | 174,854 | $ | 308,023 | ||||
21
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 Actual | 2007 Actual | 2008 Actual | 2007 Actual | |||||||||||||
Principals Fortress Operating Group units
|
$ | (208,169 | ) | $ | (154,893 | ) | $ | (611,760 | ) | $ | (402,294 | ) | ||||
Employee interests in majority owned and controlled fund advisor
and general partner entities
|
(1,843 | ) | 2,359 | (1,401 | ) | 8,359 | ||||||||||
Third party investors in Fortress Funds(A)
|
| | | (460,615 | ) | |||||||||||
Other
|
| | 469 | | ||||||||||||
Total
|
$ | (210,012 | ) | $ | (152,534 | ) | $ | (612,692 | ) | $ | (854,550 | ) | ||||
(A) | Prior to the deconsolidation (Note 1) on March 31, 2007. |
7. | EQUITY-BASED AND OTHER COMPENSATION |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Equity-based compensation, per below
|
$ | 57,755 | $ | 36,570 | $ | 139,152 | $ | 100,870 | ||||||||
Profit-sharing expense, per below
|
8,158 | 9,857 | 49,866 | 234,868 | ||||||||||||
Discretionary bonuses
|
35,737 | 29,838 | 109,793 | 82,897 | ||||||||||||
Other payroll, taxes and benefits
|
33,124 | 25,438 | 100,442 | 88,368 | ||||||||||||
$ | 134,774 | $ | 101,703 | $ | 399,253 | $ | 507,003 | |||||||||
RSUs |
Restricted Shares |
RPUs | ||||||||||||||||||||||||||||||
Employees | Non-Employees | Issued to Directors | Employees | |||||||||||||||||||||||||||||
Number | Value(A) | Number | Value(A) | Number | Value(A) | Number | Value(A) | |||||||||||||||||||||||||
Outstanding as of December 31, 2007
|
43,215,535 | $ | 16.74 | 9,318,968 | $ | 15.22 | 97,296 | $ | 18.50 | | $ | | ||||||||||||||||||||
Issued
|
2,175,184 | 10.57 | 394,404 | 9.38 | 11,878 | 11.72 | 31,000,000 | 13.75 | ||||||||||||||||||||||||
Forfeited
|
(1,874,192 | ) | 17.47 | (753,412 | ) | 14.54 | | | | | ||||||||||||||||||||||
Outstanding as of September 30, 2008(B)
|
43,516,527 | $ | 16.40 | 8,959,960 | $ | 15.02 | 109,174 | $ | 17.76 | 31,000,000 | $ | 13.75 | ||||||||||||||||||||
22
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Expense incurred(B)
|
||||||||||||||||
Employee RSUs
|
$ | 29,088 | $ | 28,265 | $ | 82,997 | $ | 82,280 | ||||||||
Non-Employee RSUs
|
3,970 | 5,300 | 9,381 | 13,778 | ||||||||||||
Restricted Shares
|
151 | 152 | 450 | 385 | ||||||||||||
LTIP
|
1,733 | 2,853 | 5,162 | 4,427 | ||||||||||||
RPUs
|
22,813 | | 41,162 | | ||||||||||||
Total equity-based compensation expense
|
$ | 57,755 | $ | 36,570 | $ | 139,152 | $ | 100,870 | ||||||||
(A) | Represents the weighted average grant date estimated fair value per share or unit. The weighted average estimated fair value per unit as of September 30, 2008 for RSU awards granted to non-employees was $9.78. | |
(B) | In future periods, Fortress will recognize compensation expense on its non-vested equity based awards of $968.2 million, with a weighted average recognition period of 4.4 years. This does not include amounts related to the Principals Agreement. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Private equity funds(A)
|
$ | (5,412 | ) | $ | 1,556 | $ | (2,868 | ) | $ | 94,001 | ||||||
Castles
|
1,248 | 1,155 | 3,589 | 8,029 | ||||||||||||
Liquid hedge funds
|
5,455 | 1,629 | 38,572 | 89,075 | ||||||||||||
Hybrid hedge funds
|
6,867 | 5,517 | 10,573 | 43,763 | ||||||||||||
Total
|
$ | 8,158 | $ | 9,857 | $ | 49,866 | $ | 234,868 | ||||||||
(A) | Negative amounts reflect the reversal of previously accrued profit sharing expense resulting from the determination that this expense is no longer probable of being incurred. |
23
8. | EARNINGS PER SHARE AND DISTRIBUTIONS |
January 1 through January 16, 2007 | ||||||||
Basic | Diluted | |||||||
Weighted average units outstanding
|
||||||||
Fortress Operating Group units outstanding
|
367,143,000 | 367,143,000 | ||||||
Total weighted average units outstanding
|
367,143,000 | 367,143,000 | ||||||
Net income per unit is calculated as follows:
|
||||||||
Net income
|
$ | 133,397 | $ | 133,397 | ||||
Dilution in earnings of certain equity method investees
|
| | ||||||
Net income available to Fortress Operating Group unitholders
|
$ | 133,397 | $ | 133,397 | ||||
Weighted average units outstanding
|
367,143,000 | 367,143,000 | ||||||
Net income per unit
|
$ | 0.36 | $ | 0.36 | ||||
24
January 17 |
||||||||||||||||
Three Months Ended September 30, 2007 | through September 30, 2007 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Weighted average shares outstanding
|
||||||||||||||||
Class A shares outstanding
|
94,500,350 | 94,500,350 | 90,971,694 | 90,971,694 | ||||||||||||
Fully vested restricted Class A share units with dividend
equivalent rights
|
394,286 | 394,286 | 283,825 | 283,825 | ||||||||||||
Fortress Operating Group units exchangeable into Fortress
Investment Group LLC Class A shares(1)
|
| 312,071,550 | | | ||||||||||||
Class A restricted shares and Class A restricted share
units granted to employees and directors (eligible for dividend
and dividend equivalent payments)(2)
|
| | | | ||||||||||||
Class A restricted share units granted to employees (not
eligible for dividend and dividend equivalent payments)(3)
|
| | | | ||||||||||||
Total weighted average shares outstanding
|
94,894,636 | 406,966,186 | 91,255,519 | 91,255,519 | ||||||||||||
Basic and diluted net income (loss) per Class A share
|
||||||||||||||||
Net income (loss)
|
$ | (37,557 | ) | $ | (37,557 | ) | $ | (163,942 | ) | $ | (163,942 | ) | ||||
Dividend equivalents declared on non-vested restricted
Class A share units
|
(1,125 | ) | (1,125 | ) | (2,742 | ) | (2,742 | ) | ||||||||
Dilution in earnings of certain equity method investees
|
| | | | ||||||||||||
Add back Principals and others interests in loss of
Fortress Operating Group, net of assumed corporate income tax at
enacted rates, attributable to Fortress Operating Group units
exchangeable into Fortress Investment Group LLC Class A
shares(1)
|
| (173,093 | ) | | | |||||||||||
Net income (loss) available to Class A shareholders
|
$ | (38,682 | ) | $ | (211,775 | ) | $ | (166,684 | ) | $ | (166,684 | ) | ||||
Weighted average shares outstanding
|
94,894,636 | 406,966,186 | 91,255,519 | 91,255,519 | ||||||||||||
Basic and diluted net income (loss) per Class A share
|
$ | (0.41 | ) | $ | (0.52 | ) | $ | (1.83 | ) | $ | (1.83 | ) | ||||
25
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2008 | September 30, 2008 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Weighted average shares outstanding
|
||||||||||||||||
Class A shares outstanding
|
94,500,351 | 94,500,351 | 94,500,351 | 94,500,351 | ||||||||||||
Fully vested restricted Class A share units with dividend
equivalent rights
|
394,286 | 394,286 | 394,286 | 394,286 | ||||||||||||
Fully vested restricted Class A shares
|
43,797 | 43,797 | 21,029 | 21,029 | ||||||||||||
Fortress Operating Group units exchangeable into Fortress
Investment Group LLC Class A shares(1)
|
| 312,071,550 | | 312,071,550 | ||||||||||||
Class A restricted shares and Class A restricted share
units granted to employees and directors (eligible for dividend
and dividend equivalent payments)(2)
|
| | | | ||||||||||||
Class A restricted share units granted to employees (not
eligible for dividend and dividend equivalent payments)(3)
|
| | | | ||||||||||||
Total weighted average shares outstanding
|
94,938,434 | 407,009,984 | 94,915,666 | 406,987,216 | ||||||||||||
Basic and diluted net income (loss) per Class A share
|
||||||||||||||||
Net income (loss)
|
$ | (57,440 | ) | $ | (57,440 | ) | $ | (181,913 | ) | $ | (181,913 | ) | ||||
Dilution in earnings due to RPUs treated as a participating
security of Fortress Operating Group and fully vested restricted
Class A share units with dividend equivalent rights treated
as outstanding Fortress Operating Group units(4)
|
(298 | ) | (298 | ) | (2,071 | ) | (2,071 | ) | ||||||||
Dividend equivalents declared on non-vested restricted
Class A shares and restricted Class A share units
|
| | (2,276 | ) | (2,276 | ) | ||||||||||
Add back Principals and others interests in loss of
Fortress Operating Group, net of assumed corporate income taxes
at enacted rates, attributable to Fortress Operating Group units
exchangeable into Fortress Investment Group LLC Class A
shares(1)
|
| (210,477 | ) | | (613,553 | ) | ||||||||||
Net income (loss) available to Class A shareholders
|
$ | (57,738 | ) | $ | (268,215 | ) | $ | (186,260 | ) | $ | (799,813 | ) | ||||
Weighted average shares outstanding
|
94,938,434 | 407,009,984 | 94,915,666 | 406,987,216 | ||||||||||||
Basic and diluted net income (loss) per Class A share
|
$ | (0.61 | ) | $ | (0.66 | ) | $ | (1.96 | ) | $ | (1.97 | ) | ||||
(1) | The Fortress Operating Group units not held by Fortress (that is, those held by the Principals) are exchangeable into Class A shares on a one-to-one basis. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per Class A share when the effect is dilutive using the if-converted method. | |
(2) | Restricted Class A shares granted to directors and certain restricted Class A share units granted to employees are eligible to receive dividend or dividend equivalent payments when dividends are declared and paid on our Class A shares and therefore participate fully in the results of our operations from the date they are granted. They are included in the computation of both basic and diluted earnings per Class A share using the two-class method for participating securities, except during periods of net losses. |
26
(3) | Certain restricted Class A share units granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities. These units are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method. As a result of the net loss incurred for the period, the effect of the units on the calculation is anti-dilutive for the periods. The weighted average restricted Class A share units which are not entitled to receive dividend or dividend equivalent payments outstanding were: |
Period
|
Share Units | |||
Three months ended:
|
||||
September 30, 2008
|
28,063,543 | |||
September 30, 2007
|
26,087,366 | |||
Nine months ended September 30, 2008
|
27,841,459 | |||
Period from January 17, 2007 to September 30, 2007
|
23,462,014 |
(4) | Fortress Operating Group RPUs are eligible to receive partnership distribution equivalent payments when distributions are declared and paid on Fortress Operating Group units. The RPUs represent a participating security of Fortress Operating Group and the resulting dilution in Fortress Operating Group earnings available to Fortress is reflected in the computation of both basic and diluted earnings per Class A share using the method prescribed for securities issued by a subsidiary. For purposes of the computation of basic and diluted earnings per Class A share, the fully vested restricted Class A share units with dividend equivalent rights are treated as outstanding Class A shares of Fortress and as outstanding partnership units of Fortress Operating Group. |
Weighted Average | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Class A shares
|
94,500,351 | 94,500,350 | 94,500,351 | 85,640,019 | ||||||||||||
Restricted Class A shares
|
108,661 | 97,296 | 103,411 | 83,396 | ||||||||||||
Restricted Class A share units(A)
|
394,286 | 394,286 | 394,286 | 267,190 | ||||||||||||
Restricted Class A share units(B)
|
24,101,891 | 23,730,308 | 23,840,819 | 20,430,657 | ||||||||||||
Fortress Operating Group units
|
312,071,550 | 312,071,550 | 312,071,550 | 315,299,181 | ||||||||||||
Fortress Operating Group RPUs
|
31,000,000 | | 18,781,022 | | ||||||||||||
Total
|
462,176,739 | 430,793,790 | 449,691,439 | 421,720,443 | ||||||||||||
27
As of September 30, |
As of December 31, |
|||||||
2008 | 2007 | |||||||
Class A shares
|
94,500,351 | 94,500,350 | ||||||
Restricted Class A shares
|
109,174 | 97,296 | ||||||
Restricted Class A share units(A)
|
394,286 | 394,286 | ||||||
Restricted Class A share units(B)
|
24,040,462 | 23,906,779 | ||||||
Fortress Operating Group units
|
312,071,550 | 312,071,550 | ||||||
Fortress Operating Group RPUs
|
31,000,000 | | ||||||
Total
|
462,115,823 | 430,970,261 | ||||||
(A) | Represents fully vested restricted Class A share units which are entitled to dividend equivalent payments. | |
(B) | Represents nonvested restricted Class A share units which are entitled to dividend equivalent payments. |
Declared in Prior |
Current Year | |||||||||||||||
Year, Paid |
Declared and |
Declared but |
||||||||||||||
Current Year | Paid | Not Yet Paid | Total | |||||||||||||
Dividends on Class A Shares
|
$ | 21,285 | $ | 42,572 | $ | | $ | 42,572 | ||||||||
Dividend equivalents on restricted Class A share units(A)
|
5,428 | 10,914 | | 10,914 | ||||||||||||
Distributions to Fortress Operating Group unit holders
(Principals)
|
60,176 | 143,462 | | 143,462 | ||||||||||||
Distributions to Fortress Operating Group RPU holders
(Note 7)
|
| 6,975 | | 6,975 | ||||||||||||
Total distributions
|
$ | 86,889 | $ | 203,923 | $ | | $ | 203,923 | ||||||||
(A) | A portion of these dividend equivalents, related to RSUs expected to be forfeited, is included as compensation expense in the consolidated statement of operations and is therefore considered an operating cash flow. |
9. | COMMITMENTS AND CONTINGENCIES |
28
October 1 to December 31, 2008
|
$ | 4,606 | ||
2009
|
19,223 | |||
2010
|
21,890 | |||
2011
|
12,369 | |||
2012
|
11,785 | |||
2013
|
11,587 | |||
Thereafter
|
34,164 | |||
Total
|
$ | 115,624 | ||
10. | SEGMENT REPORTING |
29
30
31
32
Fortress |
Fortress |
% Below |
Sep 30, 2008 |
|||||||||||||||||||||||||
Share of |
Cost |
Cost |
Periods in |
DE Impairment |
||||||||||||||||||||||||
Fund
|
NAV | Basis | Deficit | Basis | Deficit | Recorded | Notes | |||||||||||||||||||||
Main Funds
|
||||||||||||||||||||||||||||
Fund III
|
$ | 6,929 | $ | 9,150 | $ | (2,221 | ) | (24 | )% | 2 Quarters | $ | | (A | ) | ||||||||||||||
Fund IV and Fund IV CO
|
104,092 | 113,566 | (9,474 | ) | (8 | )% | 4 Quarters | | (A | ) | ||||||||||||||||||
Fund V and Fund V CO
|
49,119 | 101,363 | (52,244 | ) | (52 | )% | 4 Quarters | | (A | ) | ||||||||||||||||||
Single Investment Funds (combined)
|
||||||||||||||||||||||||||||
GAGFAH (XETRA: GFJ)
|
45,289 | 66,315 | (21,026 | ) | (32 | )% | 2 Quarters | (21,026 | ) | (B | ) | |||||||||||||||||
Brookdale (NYSE: BKD)
|
31,067 | 46,603 | (15,536 | ) | (33 | )% | 4 Quarters | (15,536 | ) | (B | ) | |||||||||||||||||
Private investment #1
|
58,216 | 63,874 | (5,658 | ) | (9 | )% | 2 Quarters | | (C | ) | ||||||||||||||||||
Private investment #2
|
4,223 | 8,455 | (4,232 | ) | (50 | )% | 3 Quarters | (4,232 | ) | (D | ) | |||||||||||||||||
Private investment #3
|
270,220 | 273,449 | (3,229 | ) | (1 | )% | 4 Quarters | | (C | ) | ||||||||||||||||||
Castles
|
||||||||||||||||||||||||||||
Eurocastle (EURONEXT: ECT)
|
4,150 | 13,011 | (8,861 | ) | (68 | )% | 2 Quarters | (8,861 | ) | (B | ) | |||||||||||||||||
Newcastle (NYSE: NCT)
|
6,513 | 7,190 | (677 | ) | (9 | )% | 1 Quarter | | (C | ) | ||||||||||||||||||
Total
|
$ | 579,818 | $ | 702,976 | $ | (123,158 | ) | $ | (49,655 | ) | ||||||||||||||||||
(A) | These funds are diversified private equity main funds with multiple underlying investments and fund lives extending to between 2014 and 2017. The CODM anticipates a sufficient recovery in value of a number of the underlying investments to cause each of the funds as a whole to recover to at least Fortresss cost basis within the period of the funds respective lives. Fortress has the intent and ability to hold these investments until such recovery and therefore has not recorded DE impairment with respect to them. | |
(B) | These are single asset coinvestment funds which have investments in public equity securities (or, in the case of Eurocastle, a direct investment in a public equity security). These public equity securities have traded significantly below Fortresss cost basis for a substantial period and Fortresss CODM has determined that these declines in value meet the definition of other than temporary impairment for DE purposes at this time. | |
(C) | These investments have reported NAVs less than 10% below Fortresss cost basis. The CODM anticipates a recovery in value to at least Fortresss cost basis. Fortress has the intent and ability to hold these investments until such recovery and therefore has not recorded DE impairment with respect to them. | |
(D) | This is a single asset coinvestment fund which has an investment in a private operating company. This private operating company has experienced liquidity issues as a result of the recent credit crisis and the CODM has determined that the resulting decline in value meets the definition of other than temporary impairment for DE purposes at this time. |
33
Sep 30, 2008 |
||||||||||||||||||||||||||||||||||||
Incentive |
No Longer |
Intrinsic |
Employee |
Periods in |
Gross |
|||||||||||||||||||||||||||||||
Income |
Subject to |
Subject to |
Clawback |
Portion |
Net |
Intrinsic |
DE Reserve |
|||||||||||||||||||||||||||||
Fund
|
Received | Clawback | Clawback | (A) | (B) | Clawback | Clawback | Recorded | Notes | |||||||||||||||||||||||||||
Fund I
|
$ | 308,633 | $ | 296,882 | $ | 11,751 | $ | | $ | | $ | | N/A | $ | | (C | ) | |||||||||||||||||||
Fund II
|
254,688 | 178,286 | 76,402 | | | | N/A | | (C | ) | ||||||||||||||||||||||||||
Fund III
|
72,483 | | 72,483 | 72,483 | 27,068 | 45,415 | 3 Quarters | | (D | ) | ||||||||||||||||||||||||||
Fortress Residential Inv. Deutschland
|
16,447 | | 16,447 | 16,447 | 6,406 | 10,041 | 5 Quarters | (16,447 | ) | (E | ) | |||||||||||||||||||||||||
Total
|
$ | 652,251 | $ | 475,168 | $ | 177,083 | $ | 88,930 | $ | 33,474 | $ | 55,456 | $ | (16,447 | ) | |||||||||||||||||||||
(A) | Intrinsic clawback is the maximum amount of clawback that would be required to be repaid to the fund if the fund were liquidated at its NAV as of the reporting date. | |
(B) | Employees who have received profit sharing payments in connection with private equity incentive income are liable to repay Fortress for their share of any clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees (or former employees). | |
(C) | These funds had significant unrealized gains at September 30, 2008. As a result, the CODM determined that no reserve for clawback was required. | |
(D) | This fund is a diversified main fund with multiple underlying investments and a fund life extending to 2014. Management believes that the primary reason for its drop in unrealized gains and the incurrence of unrealized losses, which moved the fund into an intrinsic clawback position, is the current confidence and liquidity crisis. Based on the criteria determined by the CODM which are described above, the CODM expects that the likelihood of a clawback with respect to Fund III is remote and has not recorded a reserve for such clawback. If this fund continues to be in an intrinsic clawback position, management will consider this factor (length of time in an intrinsic clawback position), as well as its updated base case scenario, in relation to the criteria described above and may come to a different conclusion at a future reporting date. | |
(E) | This is a single asset fund which is invested in a publicly traded equity security. As described above, Fortresss investment in this fund has been deemed to be other than temporarily impaired as of September 30, 2008. This fund has been in an intrinsic clawback position for a period in excess of 6-9 months. As a result, the CODM has determined that the likelihood of clawback based on the criteria described above is greater than remote and has recorded a reserve for this potential clawback. |
34
Private |
Liquid |
Hybrid |
||||||||||||||||||||||||||
Equity |
Hedge |
Hedge |
Principal |
Fortress |
||||||||||||||||||||||||
September 30, 2008 and the Nine Months Then Ended | Funds | Castles | Funds | Funds | Investments | Unallocated | Subtotal | |||||||||||||||||||||
Segment revenues
|
||||||||||||||||||||||||||||
Management fees
|
$ | 128,514 | $ | 41,320 | $ | 169,965 | $ | 111,483 | $ | | $ | | $ | 451,282 | ||||||||||||||
Incentive income
|
12,294 | 12 | 17,125 | 14,128 | | | 43,559 | |||||||||||||||||||||
Segment revenues total
|
$ | 140,808 | $ | 41,332 | $ | 187,090 | $ | 125,611 | $ | | $ | | $ | 494,841 | ||||||||||||||
Pre-tax distributable earnings
|
$ | 100,461 | $ | 12,033 | $ | 70,662 | $ | 26,099 | $ | (113,506 | ) | $ | 21 | $ | 95,770 | |||||||||||||
Total segment assets
|
$ | 26,673 | $ | 11,986 | $ | 4,317 | $ | 5,809 | $ | 1,241,117 | $ | 596,826 | $ | 1,886,728 | ||||||||||||||
(A | ) |
Fortress |
Reconciliation |
Fortress |
||||||||||
Subtotal | to GAAP | Consolidated | ||||||||||
Revenues
|
$ | 494,841 | $ | 79,271 | $ | 574,112 | ||||||
Pre-tax distributable earnings/net income
|
$ | 95,770 | $ | (277,683 | ) | $ | (181,913 | ) | ||||
Total assets
|
$ | 1,886,728 | $ | (31,851 | ) | $ | 1,854,877 | |||||
(A) | Unallocated assets include deferred tax assets of $517.6 million. |
Private |
Liquid |
Hybrid |
||||||||||||||||||||||||||
Three Months Ended |
Equity |
Hedge |
Hedge |
Principal |
Fortress |
|||||||||||||||||||||||
September 30, 2008 | Funds | Castles | Funds | Funds | Investments | Unallocated | Subtotal | |||||||||||||||||||||
Segment revenues
|
||||||||||||||||||||||||||||
Management fees
|
$ | 44,184 | $ | 13,665 | $ | 59,640 | $ | 38,028 | $ | | $ | | $ | 155,517 | ||||||||||||||
Incentive income
|
(16,447 | ) | | 85 | 13,256 | | | (3,106 | ) | |||||||||||||||||||
Segment revenues total
|
$ | 27,737 | $ | 13,665 | $ | 59,725 | $ | 51,284 | $ | | $ | | $ | 152,411 | ||||||||||||||
Pre-tax distributable earnings
|
$ | 18,575 | $ | 3,829 | $ | 25,236 | $ | 14,820 | $ | (82,850 | ) | $ | 14 | $ | (20,376 | ) | ||||||||||||
Fortress |
Reconciliation |
Fortress |
||||||||||
Subtotal | to GAAP | Consolidated | ||||||||||
Revenues
|
$ | 152,411 | $ | 32,725 | $ | 185,136 | ||||||
Pre-tax distributable earnings/net income
|
$ | (20,376 | ) | $ | (37,064 | ) | $ | (57,440 | ) | |||
35
September 30, 2008 and |
Three Months Ended |
|||||||
the Nine Months Then Ended | September 30, 2008 | |||||||
Adjustments from segment revenues to GAAP revenues
|
||||||||
Adjust management fees*
|
$ | 488 | $ | 163 | ||||
Adjust incentive income
|
26,390 | 16,956 | ||||||
Adjust income from the receipt of options
|
| | ||||||
Other revenues*
|
||||||||
Adjust management fees from non-affiliates
|
(3,842 | ) | (1,414 | ) | ||||
Adjust incentive income from non-affiliates
|
(13,787 | ) | (13,132 | ) | ||||
Adjust other revenues
|
70,022 | 30,152 | ||||||
52,393 | 15,606 | |||||||
Total adjustments
|
$ | 79,271 | $ | 32,725 | ||||
* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings. | ||||||||
Adjustments from pre-tax distributable earnings to GAAP net
income
|
||||||||
Adjust incentive income
|
||||||||
Incentive income received from private equity funds, subject to
contingent repayment
|
$ | (26,077 | ) | $ | | |||
Incentive income accrued from private equity funds, no longer
subject to contingent repayment
|
36,003 | 509 | ||||||
Incentive income received from private equity funds, not subject
to contingent repayment
|
17 | | ||||||
Incentive income received from hedge funds, subject to annual
performance achievement
|
| | ||||||
Reserve for clawback, gross (see discussion above)
|
16,447 | 16,447 | ||||||
26,390 | 16,956 | |||||||
Adjust other income
|
||||||||
Distributions of earnings from equity method investees**
|
(367 | ) | | |||||
Earnings (losses) from equity method investees**
|
(80,297 | ) | (12,814 | ) | ||||
Gains (losses) on options in equity method investees
|
(16,160 | ) | (734 | ) | ||||
Unrealized gains (losses) on Castles
|
(27,192 | ) | (6,217 | ) | ||||
Impairment of investments (see discussion above)
|
59,162 | 49,655 | ||||||
Adjust income from the receipt of options
|
| | ||||||
(64,854 | ) | 29,890 |
36
September 30, 2008 and |
Three Months Ended |
|||||||
the Nine Months Then Ended | September 30, 2008 | |||||||
Adjust employee compensation
|
||||||||
Adjust employee equity-based compensation expense (including
Castle options assigned)
|
(146,246 | ) | (57,739 | ) | ||||
Adjust employee portion of incentive income from private equity
funds, accrued prior to the realization of incentive income
|
9,648 | | ||||||
Adjust employee portion of incentive income from one private
equity fund, not subject to contingent repayment
|
(4 | ) | | |||||
(136,602 | ) | (57,739 | ) | |||||
Adjust Principals equity-based compensation expense
|
(714,710 | ) | (239,976 | ) | ||||
Adjust Principals interests related to Fortress Operating
Group units
|
611,760 | 208,169 | ||||||
Adjust income taxes
|
333 | 5,636 | ||||||
Total adjustments
|
$ | (277,683 | ) | $ | (37,064 | ) | ||
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. | ||||||||
Adjustments from total segment assets to GAAP assets
|
||||||||
Adjust equity investments from fair value
|
$ | | ||||||
Adjust equity investments from cost
|
(64,890 | ) | ||||||
Adjust investments gross of employee portion
|
32,902 | |||||||
Adjust option investments from intrinsic value
|
137 | |||||||
Total adjustments
|
$ | (31,851 | ) | |||||
Private |
Liquid |
Hybrid |
Fortress |
|||||||||||||||||||||||||
Equity |
Hedge |
Hedge |
Principal |
Unconsolidated |
||||||||||||||||||||||||
Nine Months Ended September 30, 2007 | Funds | Castles | Funds | Funds | Investments | Unallocated | Subtotal | |||||||||||||||||||||
Segment revenues
|
||||||||||||||||||||||||||||
Management fees
|
$ | 97,749 | $ | 34,877 | $ | 113,692 | $ | 94,096 | $ | | $ | | $ | 340,414 | ||||||||||||||
Incentive income
|
273,890 | 18,596 | 157,989 | 93,832 | | | 544,307 | |||||||||||||||||||||
Segment revenues total
|
$ | 371,639 | $ | 53,473 | $ | 271,681 | $ | 187,928 | $ | | $ | | $ | 884,721 | ||||||||||||||
Pre-tax distributable earnings
|
$ | 249,116 | $ | 24,101 | $ | 129,203 | $ | 55,882 | $ | 25,531 | $ | (10,244 | ) | $ | 473,589 | |||||||||||||
Fortress |
Consolidation |
|||||||||||||||||||
Unconsolidated |
of Fortress |
Reconciliation |
Fortress |
|||||||||||||||||
Subtotal | Funds | Eliminations | to GAAP | Consolidated | ||||||||||||||||
Revenues
|
$ | 884,721 | $ | 317,114 | $ | (269,607 | ) | $ | (497 | ) | $ | 931,731 | ||||||||
Pre-tax distributable earnings/net income
|
$ | 473,589 | $ | (326,375 | ) | $ | 326,375 | $ | (504,134 | ) | $ | (30,545 | ) | |||||||
37
Private |
Liquid |
Hybrid |
Fortress |
|||||||||||||||||||||||||
Equity |
Hedge |
Hedge |
Principal |
Unconsolidated |
||||||||||||||||||||||||
Three Months Ended September 30, 2007 | Funds | Castles | Funds | Funds | Investments | Unallocated | Subtotal | |||||||||||||||||||||
Segment revenues
|
||||||||||||||||||||||||||||
Management fees
|
$ | 35,133 | $ | 12,131 | $ | 44,351 | $ | 33,376 | $ | | $ | | $ | 124,991 | ||||||||||||||
Incentive income
|
83,592 | 691 | (210 | ) | 9,463 | | | 93,536 | ||||||||||||||||||||
Segment revenues total
|
$ | 118,725 | $ | 12,822 | $ | 44,141 | $ | 42,839 | $ | | $ | | $ | 218,527 | ||||||||||||||
Pre-tax distributable earnings
|
$ | 82,273 | $ | 5,163 | $ | 23,815 | $ | 6,569 | $ | (4,110 | ) | $ | (2,958 | ) | $ | 110,752 | ||||||||||||
Fortress |
||||||||||||
Unconsolidated |
Reconciliation |
Fortress |
||||||||||
Subtotal | to GAAP | Consolidated | ||||||||||
Revenues
|
$ | 218,527 | $ | 28,755 | $ | 247,282 | ||||||
Pre-tax distributable earnings/net income
|
$ | 110,752 | $ | (148,309 | ) | $ | (37,557 | ) | ||||
Nine Months Ended |
Three Months Ended |
|||||||
September 30, 2007 | September 30, 2007 | |||||||
Adjustments from segment revenues to GAAP revenues
|
||||||||
Adjust management fees*
|
$ | 488 | $ | 163 | ||||
Adjust incentive income
|
(48,316 | ) | 13,477 | |||||
Adjust income from the receipt of options
|
2,006 | | ||||||
Other revenues*
|
||||||||
Adjust management fees from non-affiliates
|
(2,879 | ) | (163 | ) | ||||
Adjust incentive income from non-affiliates
|
(431 | ) | (323 | ) | ||||
Adjust other revenues
|
48,635 | 15,601 | ||||||
45,325 | 15,115 | |||||||
Total adjustments
|
$ | (497 | ) | $ | 28,755 | |||
* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings. |
38
Nine Months Ended |
Three Months Ended |
|||||||
September 30, 2007 | September 30, 2007 | |||||||
Adjustments from pre-tax distributable earnings to GAAP net
income
|
||||||||
Adjust incentive income
|
||||||||
Incentive income received from private equity funds, subject to
contingent repayment
|
$ | (191,948 | ) | $ | (53,126 | ) | ||
Incentive income accrued from private equity funds, no longer
subject to contingent repayment
|
309,275 | 97,333 | ||||||
Incentive income received from private equity funds, not subject
to contingent repayment
|
(73,644 | ) | (22,168 | ) | ||||
Incentive income received from hedge funds, subject to annual
performance achievement
|
(91,999 | ) | (8,562 | ) | ||||
Reserve for clawback
|
| | ||||||
(48,316 | ) | 13,477 | ||||||
Adjust other income
|
||||||||
Distributions of earnings from equity method investees**
|
(13,741 | ) | (1,415 | ) | ||||
Earnings (losses) from equity method investees**
|
(49,762 | ) | (30,514 | ) | ||||
Gains (losses) on options in equity method investees, treated as
derivatives
|
(82,810 | ) | (58,354 | ) | ||||
Adjust income from the receipt of options
|
2,006 | | ||||||
(144,307 | ) | (90,283 | ) | |||||
Adjust employee compensation
|
||||||||
Adjust employee equity-based compensation expense (including
Castle options assigned)
|
(99,014 | ) | (31,651 | ) | ||||
Adjust employee portion of incentive income from private equity
funds, accrued prior to the realization of incentive income
|
| 19,657 | ||||||
Adjust employee portion of incentive income from one private
equity fund, not subject to contingent repayment
|
5,427 | 5,427 | ||||||
(93,587 | ) | (6,567 | ) | |||||
Adjust Principals equity-based compensation expense
|
(612,981 | ) | (232,048 | ) | ||||
Adjust Principals interests related to Fortress Operating
Group units
|
402,294 | 154,893 | ||||||
Adjust income taxes
|
(7,237 | ) | 12,219 | |||||
Total adjustments
|
$ | (504,134 | ) | $ | (148,309 | ) | ||
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. On an unconsolidated basis, each of these funds is accounted for under the equity method. |
39
Private Equity |
Liquid Hedge |
Hybrid Hedge |
||||||||||||||||||||||
Funds | Castles | Funds | Funds | Unallocated | Total | |||||||||||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2008
|
$ | 841 | $ | 538 | $ | 2,302 | $ | 2,195 | $ | 1,433 | $ | 7,309 | ||||||||||||
2007
|
$ | 747 | $ | 633 | $ | 1,860 | $ | 1,926 | $ | 1,257 | $ | 6,423 | ||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||
2008
|
$ | 294 | $ | 165 | $ | 808 | $ | 709 | $ | 461 | $ | 2,437 | ||||||||||||
2007
|
$ | 265 | $ | 207 | $ | 649 | $ | 697 | $ | 412 | $ | 2,230 |
11. | SUBSEQUENT EVENTS |
40
12. | PRO FORMA FINANCIAL INFORMATION |
Nine Months Ended September 30, 2007 | ||||||||||||
Deconsolidation |
Pro Forma |
|||||||||||
Consolidated | Adjustments | Deconsolidated | ||||||||||
Revenues
|
||||||||||||
Management fees from affiliates
|
$ | 286,956 | $ | 53,072 | $ | 340,028 | ||||||
Incentive income from affiliates
|
283,879 | 211,682 | 495,561 | |||||||||
Other revenues
|
51,866 | (3,232 | ) | 48,634 | ||||||||
Interest and dividend income investment company
holdings
|
309,030 | (309,030 | ) | | ||||||||
931,731 | (47,508 | ) | 884,223 | |||||||||
Expenses
|
||||||||||||
Interest expense
|
||||||||||||
Investment company holdings
|
132,620 | (132,620 | ) | | ||||||||
Other
|
26,016 | | 26,016 | |||||||||
Compensation and benefits
|
507,003 | (9,805 | ) | 497,198 | ||||||||
Principals agreement compensation
|
612,981 | | 612,981 | |||||||||
General, administrative and other
|
80,320 | (22,024 | ) | 58,296 | ||||||||
Depreciation and amortization
|
6,423 | | 6,423 | |||||||||
1,365,363 | (164,449 | ) | 1,200,914 | |||||||||
41
Nine Months Ended September 30, 2007 | ||||||||||||
Deconsolidation |
Pro Forma |
|||||||||||
Consolidated | Adjustments | Deconsolidated | ||||||||||
Other income
|
||||||||||||
Gains (losses) from investments
|
||||||||||||
Investment company holdings
|
(647,477 | ) | 647,477 | | ||||||||
Other investments
|
||||||||||||
Net realized gains
|
831 | | 831 | |||||||||
Net realized gains from affiliate investments
|
143,017 | | 143,017 | |||||||||
Net unrealized gains (losses)
|
(2,597 | ) | | (2,597 | ) | |||||||
Net unrealized gains (losses) from affiliate investments
|
(221,745 | ) | | (221,745 | ) | |||||||
Earnings (losses) from equity method investees
|
(23,289 | ) | 3,231 | (20,058 | ) | |||||||
(751,260 | ) | 650,708 | (100,552 | ) | ||||||||
Income (loss) before Deferred Incentive Income,
Principals and Others Interests in Income of
Consolidated Subsidiaries and Income Taxes
|
(1,184,892 | ) | 767,649 | (417,243 | ) | |||||||
Deferred incentive income
|
307,034 | (307,034 | ) | | ||||||||
Principals and others interests in loss (income) of
consolidated subsidiaries
|
854,550 | (460,615 | ) | 393,935 | ||||||||
Income (Loss) Before Income Taxes
|
(23,308 | ) | | (23,308 | ) | |||||||
Income tax expense
|
(7,237 | ) | | (7,237 | ) | |||||||
Net Income (Loss)
|
$ | (30,545 | ) | $ | | $ | (30,545 | ) | ||||
Total comprehensive income for this period was calculated as
follows:
|
||||||||||||
Comprehensive income
|
||||||||||||
Net income (loss)
|
$ | (30,545 | ) | |||||||||
Foreign currency translation
|
(24 | ) | ||||||||||
Net unrealized (loss) on derivatives designated as cash flow
hedges
|
(8 | ) | ||||||||||
Net unrealized gain on securities available for sale
|
749 | |||||||||||
Comprehensive income (loss) from equity method investees
|
(9,299 | ) | ||||||||||
Allocation to Principals and others interests un
equity of consolidated subsidiaries
|
5,082 | |||||||||||
Total comprehensive income
|
$ | (34,045 | ) | |||||||||
42
Nine Months Ended September 30, 2007 | ||||||||||||
Deconsolidation |
Pro Forma |
|||||||||||
Consolidated | Adjustments | Deconsolidation | ||||||||||
Cash Flows From Operating Activities
|
||||||||||||
Net income (loss)
|
$ | (30,545 | ) | $ | | $ | (30,545 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
|
||||||||||||
Depreciation and amortization
|
6,423 | | 6,423 | |||||||||
Other amortization and accretion
|
1,876 | (483 | ) | 1,393 | ||||||||
(Earnings) losses from equity method investees
|
23,289 | (3,231 | ) | 20,058 | ||||||||
Distributions of earnings from equity method investees
|
9,765 | 3,231 | 12,996 | |||||||||
(Gains) losses from investments
|
727,971 | (647,477 | ) | 80,494 | ||||||||
Recognition of deferred incentive income
|
| (156,326 | ) | (156,326 | ) | |||||||
Deferred incentive income
|
(355,381 | ) | 307,034 | (48,347 | ) | |||||||
Principals and others interests in income of
consolidated subsidiaries
|
(854,550 | ) | 460,615 | (393,935 | ) | |||||||
Deferred tax expense
|
(16,775 | ) | | (16,775 | ) | |||||||
Options received from affiliates
|
(2,006 | ) | | (2,006 | ) | |||||||
Assignments of options to employees
|
4,627 | | 4,627 | |||||||||
Equity-based compensation
|
713,850 | | 713,850 | |||||||||
Cash flows due to changes in
|
||||||||||||
Cash held at consolidated subsidiaries and restricted cash
|
(166,199 | ) | 166,199 | | ||||||||
Due from affiliates
|
214,558 | 65,445 | 280,003 | |||||||||
Receivables from brokers and counterparties and other assets
|
(23,024 | ) | 32,131 | 9,107 | ||||||||
Accrued compensation and benefits
|
92,475 | (144 | ) | 92,331 | ||||||||
Due to affiliates
|
(6,392 | ) | 8,594 | 2,202 | ||||||||
Deferred incentive income
|
| 142,041 | 142,041 | |||||||||
Due to brokers and counterparties and other liabilities
|
118,098 | (87,935 | ) | 30,163 | ||||||||
Investment company holdings
|
||||||||||||
Purchases of investments
|
(5,105,865 | ) | 5,105,865 | | ||||||||
Proceeds from sale of investments
|
3,398,739 | (3,398,739 | ) | | ||||||||
Net cash provided by (used in) operating activities
|
(1,249,066 | ) | 1,996,820 | 747,754 | ||||||||
43
Nine Months Ended September 30, 2007 | ||||||||||||
Deconsolidation |
Pro Forma |
|||||||||||
Consolidated | Adjustments | Deconsolidation | ||||||||||
Cash Flows From Investing Activities
|
||||||||||||
Purchase of other loan and security investments
|
(10,578 | ) | | (10,578 | ) | |||||||
Proceeds from sale of other loan and security investments
|
317 | | 317 | |||||||||
Contributions to equity method investees
|
(410,447 | ) | (148,812 | ) | (559,259 | ) | ||||||
Distributions of capital from equity method investees
|
115,190 | 22,685 | 137,875 | |||||||||
Proceeds from sale of equity method investments
|
29,071 | | 29,071 | |||||||||
Cash received on settlement of derivatives
|
132 | | 132 | |||||||||
Purchase of fixed assets
|
(8,907 | ) | 125 | (8,782 | ) | |||||||
Proceeds from disposal of fixed assets
|
2,532 | | 2,532 | |||||||||
Net cash used |