Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33294
Fortress Investment Group LLC
(Exact name of registrant as specified in its charter)
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Delaware
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20-5837959 |
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.) |
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1345 Avenue of the Americas, New York, NY
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10105 |
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(Address of principal executive offices)
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(Zip Code) |
(212) 798-6100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the last practicable date.
Class A Shares: 94,638,415 outstanding as of May 6, 2009.
Class B Shares: 312,071,550 outstanding as of May 6, 2009.
FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:
Management Fee Paying Assets Under Management, or AUM, refers to the management fee paying
assets we manage, including, as applicable, capital we have the right to call from our investors
pursuant to their capital commitments to various funds. Our AUM equals the sum of:
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the capital commitments or invested capital (or NAV, if lower) of our private equity
funds and hybrid PE funds, depending on which measure management fees are being calculated
upon at a given point in time, which in connection with funds raised after March 2006
includes the mark-to-market value of public securities held within the funds, |
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(ii) |
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the contributed capital of our publicly traded alternative investment vehicles, which
we refer to as our Castles, |
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(iii) |
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the net asset value, or NAV, of our hedge funds; and |
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(iv) |
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the NAV of our managed accounts, to the extent management fees are charged. |
For each of the above, the amounts exclude assets under management for which we charge either no or
nominal fees, generally related to our principal investments in funds as well as investments in
funds by our principals, directors and employees.
Our calculation of AUM may differ from the calculations of other asset managers and, as a result,
this measure may not be comparable to similar measures presented by other asset managers. Our
definition of AUM is not based on any definition of assets under management contained in our
operating agreement or in any of our Fortress Fund management agreements.
Fortress, we, us, our, and the company refer, collectively, to Fortress Investment Group
LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries.
Fortress Funds and our funds refers to the private investment funds and alternative asset
companies that are managed by the Fortress Operating Group.
Fortress Operating Group refers to the combined entities, which were wholly-owned by the
principals prior to January 2007, and in each of which Fortress Investment Group LLC acquired an
indirect controlling interest in January 2007.
principals or Principals refers to Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone
and Michael Novogratz, collectively, who prior to the completion of our initial public offering and
related transactions directly owned 100% of the Fortress Operating Group units and following
completion of our initial public offering and related transactions own a majority of the Fortress
Operating Group units and of the Class B shares, representing a majority of the total combined
voting power of all of our outstanding Class A and Class B shares. The principals ownership
percentage is subject to change based on, among other things, equity offerings and grants by
Fortress and dispositions by the principals.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Part II, Item 1A, Risk Factors, Part I, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 3,
Quantitative and Qualitative Disclosures About Market Risk and elsewhere in this Quarterly Report
on Form 10-Q may contain forward-looking statements which reflect our current views with respect
to, among other things, future events and financial performance. Readers can identify these
forward-looking statements by the use of forward-looking words such as outlook, believes,
expects, potential, continues, may, will, should, seeks, approximately, predicts,
intends, plans, estimates, anticipates or the negative version of those words or other
comparable words. Any forward-looking statements contained in this report are based upon the
historical performance of us and our subsidiaries and on our current plans, estimates and
expectations. The inclusion of this forward-looking information should not be regarded as a
representation by us or any other person that the future plans, estimates or expectations
contemplated by us will be achieved. Such forward-looking statements are subject to various risks
and uncertainties and assumptions relating to our operations, financial results, financial
condition, business prospects, growth strategy and liquidity. If one or more of these or other
risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our
actual results may vary materially from those indicated in these statements. Accordingly, you
should not place undue reliance on any forward-looking statements. These factors should not be
construed as exhaustive and should be read in conjunction with the other cautionary statements that
are included in this report. We do not undertake any obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future developments or
otherwise.
SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q,
please remember they are included to provide you with information regarding their terms and
are not intended to provide any other factual or disclosure information about the Company or the
other parties to the agreements. The agreements contain representations and warranties by each of
the parties to the applicable agreement. These representations and warranties have been made
solely for the benefit of the other parties to the applicable agreement and:
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should not in all instances be treated as categorical statements of fact, but rather as
a way of allocating the risk to one of the parties if those statements prove to be
inaccurate; |
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have been qualified by disclosures that were made to the other party in connection with
the negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement; |
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may apply standards of materiality in a way that is different from what may be viewed as
material to you or other investors; and |
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were made only as of the date of the applicable agreement or such other date or dates as
may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as
of the date they were made or at any other time. Additional information about the Company may be
found elsewhere in this Quarterly Report on Form 10-Q and the Companys other public filings, which
are available without charge through the SECs website at http://www.sec.gov.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
43,308 |
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$ |
263,337 |
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Due from affiliates |
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64,188 |
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38,504 |
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Investments |
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Equity method investees |
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759,980 |
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774,382 |
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Options in affiliates |
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72 |
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39 |
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Deferred tax asset |
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411,656 |
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408,066 |
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Other assets |
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93,299 |
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93,407 |
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$ |
1,372,503 |
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$ |
1,577,735 |
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Liabilities and Shareholders Equity |
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Liabilities |
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Accrued compensation and benefits |
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$ |
42,679 |
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$ |
158,033 |
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Due to affiliates |
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350,380 |
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346,265 |
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Deferred incentive income |
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163,635 |
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163,635 |
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Debt obligations payable |
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604,041 |
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729,041 |
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Other liabilities |
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59,333 |
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26,741 |
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1,220,068 |
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1,423,715 |
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Commitments and Contingencies |
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Equity |
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Class A shares, no par value, 1,000,000,000 shares authorized, 94,638,415
and 94,609,525 shares issued and outstanding at March 31, 2009
and December 31, 2008, respectively |
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Class B shares, no par value, 750,000,000 shares authorized, 312,071,550
shares issued and outstanding |
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Paid-in capital |
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663,848 |
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596,803 |
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Retained earnings (accumulated deficit) |
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(580,538 |
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(513,379 |
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Accumulated other comprehensive income (loss) |
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(939 |
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(866 |
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Total Fortress shareholders equity |
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82,371 |
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82,558 |
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Principals and others interests in equity of consolidated subsidiaries Note 6 |
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70,064 |
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71,462 |
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Total equity |
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152,435 |
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154,020 |
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$ |
1,372,503 |
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$ |
1,577,735 |
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See notes to consolidated financial statements
1
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
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Three Months Ended March 31, |
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2009 |
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2008 |
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Revenues |
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Management fees from affiliates |
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$ |
105,652 |
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$ |
144,057 |
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Incentive income from affiliates |
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37,144 |
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Expense reimbursements from affiliates |
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13,047 |
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14,270 |
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Other revenues (affiliate portion disclosed in Note 6) |
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3,597 |
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5,409 |
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122,296 |
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200,880 |
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Expenses |
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Interest expense |
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8,186 |
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10,336 |
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Compensation and benefits |
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109,236 |
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127,019 |
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Principals agreement compensation |
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234,759 |
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237,367 |
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General, administrative and other |
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17,185 |
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16,570 |
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Depreciation and amortization |
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2,641 |
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2,436 |
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372,007 |
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393,728 |
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Other Income (Loss) |
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Gains (losses) from investments |
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Net realized gains (losses) |
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(396 |
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1,613 |
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Net realized gains (losses) from affiliate investments |
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(248 |
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247 |
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Net unrealized gains (losses) |
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Net unrealized gains (losses) from affiliate investments |
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(1,829 |
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(29,817 |
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Tax receivable agreement liability reduction |
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(55 |
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Earnings (losses) from equity method investees |
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(34,849 |
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(49,129 |
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(37,377 |
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(77,086 |
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Income (Loss) Before Income Taxes |
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(287,088 |
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(269,934 |
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Income tax benefit (expense) |
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407 |
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(7,252 |
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Net Income (Loss) |
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$ |
(286,681 |
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$ |
(277,186 |
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Principals and Others Interests in Income (Loss) of
Consolidated Subsidiaries |
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$ |
(219,522 |
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$ |
(208,269 |
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Net Income (Loss) Attributable to Class A Shareholders Note 6 |
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$ |
(67,159 |
) |
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$ |
(68,917 |
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Dividends declared per Class A share |
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$ |
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$ |
0.225 |
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Earnings Per Class A share Fortress Investment Group |
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Net income (loss) per Class A share, basic |
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$ |
(0.71 |
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$ |
(0.74 |
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Net income (loss) per Class A share, diluted |
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$ |
(0.71 |
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$ |
(0.74 |
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Weighted average number of Class A shares outstanding, basic |
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95,202,243 |
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94,894,636 |
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Weighted average number of Class A shares outstanding, diluted |
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95,202,243 |
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406,966,186 |
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See notes to consolidated financial statements
2
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(dollars in thousands)
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Principals and |
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Retained |
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Accumulated |
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Others Interests in |
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Earnings |
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Other |
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Total Fortress |
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Equity of |
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Paid-In |
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(Accumulated |
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Comprehensive |
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Shareholders |
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Consolidated |
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Class A Shares |
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Class B Shares |
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Capital |
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Deficit) |
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Income (Loss) |
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Equity |
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Subsidiaries |
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Total Equity |
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Equity December 31, 2008 |
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94,609,525 |
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312,071,550 |
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$ |
596,803 |
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$ |
(513,379 |
) |
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$ |
(866 |
) |
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$ |
82,558 |
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$ |
71,462 |
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$ |
154,020 |
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Contributions from principals and others interests in equity |
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3,117 |
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3,117 |
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Distributions to principals and others interests in equity (net of tax) |
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9 |
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9 |
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(5,225 |
) |
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(5,216 |
) |
Director restricted share grant |
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28,890 |
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99 |
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99 |
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113 |
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212 |
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Capital increase related to equity-based compensation |
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66,937 |
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66,937 |
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220,718 |
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|
287,655 |
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Comprehensive income (loss) (net of tax) |
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Net income (loss) |
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(67,159 |
) |
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(67,159 |
) |
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(219,522 |
) |
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|
(286,681 |
) |
Foreign currency translation |
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(2 |
) |
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(2 |
) |
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(244 |
) |
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(246 |
) |
Comprehensive income (loss) from equity method investees |
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(71 |
) |
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(71 |
) |
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(355 |
) |
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(426 |
) |
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Total comprehensive income (loss) |
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(287,353 |
) |
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Equity March 31, 2009 |
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94,638,415 |
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312,071,550 |
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$ |
663,848 |
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$ |
(580,538 |
) |
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$ |
(939 |
) |
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$ |
82,371 |
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$ |
70,064 |
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$ |
152,435 |
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See notes to consolidated financial statements
3
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
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Three Months Ended March 31, |
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2009 |
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2008 |
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Cash Flows From Operating Activities |
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Net income (loss) |
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$ |
(286,681 |
) |
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$ |
(277,186 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
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|
|
|
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
2,436 |
|
Other amortization and accretion |
|
|
3,414 |
|
|
|
628 |
|
(Earnings) losses from equity method investees |
|
|
34,849 |
|
|
|
49,129 |
|
Distributions of earnings from equity method investees |
|
|
11 |
|
|
|
3,252 |
|
(Gains) losses from investments |
|
|
2,473 |
|
|
|
27,957 |
|
Deferred incentive income |
|
|
|
|
|
|
(31,959 |
) |
Deferred tax (benefit) expense |
|
|
(3,759 |
) |
|
|
279 |
|
Tax receivable agreement liablity reduction |
|
|
55 |
|
|
|
|
|
Equity-based compensation |
|
|
287,803 |
|
|
|
265,792 |
|
Cash flows due to changes in |
|
|
|
|
|
|
|
|
Due from affiliates |
|
|
(25,932 |
) |
|
|
104,038 |
|
Other assets |
|
|
(1,257 |
) |
|
|
5,839 |
|
Accrued compensation and benefits |
|
|
(108,216 |
) |
|
|
(164,335 |
) |
Due to affiliates |
|
|
(1,367 |
) |
|
|
11,446 |
|
Deferred incentive income |
|
|
|
|
|
|
26,077 |
|
Other liabilities |
|
|
32,657 |
|
|
|
28,462 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(63,309 |
) |
|
|
51,855 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Contributions to equity method investees |
|
|
(31,792 |
) |
|
|
(70,215 |
) |
Distributions of capital from equity method investees |
|
|
10,538 |
|
|
|
155,006 |
|
Purchase of fixed assets |
|
|
(1,110 |
) |
|
|
(2,248 |
) |
Proceeds from disposal of fixed assets |
|
|
6 |
|
|
|
53 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(22,358 |
) |
|
|
82,596 |
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Borrowings under debt obligations |
|
|
|
|
|
|
450,000 |
|
Repayments of debt obligations |
|
|
(125,000 |
) |
|
|
(185,000 |
) |
Payment of deferred financing costs |
|
|
(4,162 |
) |
|
|
(61 |
) |
Dividends and dividend equivalents paid |
|
|
|
|
|
|
(26,381 |
) |
Principals and others interests in equity of consolidated subsidiaries contributions |
|
|
25 |
|
|
|
|
|
Principals and others interests in equity of consolidated subsidiaries distributions |
|
|
(5,225 |
) |
|
|
(100,740 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(134,362 |
) |
|
|
137,818 |
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(220,029 |
) |
|
|
272,269 |
|
Cash and Cash Equivalents, Beginning of Period |
|
|
263,337 |
|
|
|
100,409 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
43,308 |
|
|
$ |
372,678 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
3,730 |
|
|
$ |
9,462 |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
3,008 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
Employee compensation invested directly in subsidiaries |
|
$ |
1,701 |
|
|
$ |
16,743 |
|
|
|
|
|
|
|
|
Investments of receivable amounts into Fortress Funds |
|
$ |
|
|
|
$ |
42,782 |
|
|
|
|
|
|
|
|
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid |
|
$ |
|
|
|
$ |
96,657 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
4
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
Fortress Investment Group LLC (the Registrant, or, together with its subsidiaries, Fortress) is
a global alternative asset management firm whose predecessor was founded in 1998. Its primary
business is to sponsor the formation of, and provide investment management services for, various
investment funds and companies (the Fortress Funds). Fortress generally makes principal
investments in these funds.
Fortress has three primary sources of income from the Fortress Funds: management fees, incentive
income, and investment income on its principal investments in the funds. The Fortress Funds fall
into the following business segments in which Fortress operates:
|
a) |
|
Private equity funds which make significant, control-oriented investments in
debt and equity securities of public or privately held entities in North America and
Western Europe, with a focus on acquiring and building assets-based businesses with
significant cash flows; and |
|
|
b) |
|
Publicly traded alternative investment vehicles, which Fortress refers to as
Castles, which are companies that invest primarily in real estate and real estate
related debt investments. |
|
2) |
|
Liquid hedge funds, which invest globally in fixed income, currency, equity and
commodity markets, and related derivatives to capitalize on imbalances in the financial
markets. |
|
|
3) |
|
Hybrid funds: |
|
a) |
|
Hybrid hedge funds, which make highly diversified investments globally in
assets, opportunistic lending situations and securities throughout the capital
structure with a value orientation, as well as in investment funds managed by external
managers; and |
|
|
b) |
|
Hybrid private equity (PE) funds which are comprised of a family of credit
opportunities funds focused on investing in distressed and undervalued assets, a
family of ''long dated value funds focused on investing in undervalued assets with
limited current cash flows and long investment horizons, and a family of real assets
funds focused on investing in tangible and intangible assets in four principal
categories (real estate, capital assets, natural resources and intellectual property). |
|
4) |
|
Principal investments in the above described funds. |
2007 Reorganization of Fortress Operating Group
Fortress Investment Group LLC was formed on November 6, 2006 for the purpose of becoming the
general partner of Fortress Operating Group, completing the Nomura Transaction (described below),
and effecting a public offering of shares and related transactions (the Transactions) in order to
carry on the business of its predecessor, Fortress Operating Group, as a publicly traded entity.
The Registrant is a limited liability company and its members are not responsible for any of its
liabilities beyond the equity they have invested. Fortresss formation documents allow for an
indefinite life.
On January 17, 2007, Nomura Investment Managers U.S.A Inc. (Nomura) completed a transaction (the
Nomura Transaction) whereby it purchased 55,071,450 Class A shares of the Registrant and the
Registrant, in turn, purchased 55,071,450 Fortress Operating Group units, which then represented
15% of Fortress Operating Groups economic interests, from the Principals. On February 8, 2007, the
Registrant completed an initial public offering (IPO) of 39,428,900 of its Class A shares.
Financial Statement Guide
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
Reference |
|
Explanation |
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Affiliates
|
|
|
6 |
|
|
Generally, management
fees, expense
reimbursements and
incentive income earned
from Fortress Funds
which are expected to be
received in the short
term. |
|
|
|
|
|
|
|
Investments in Equity Method
Investees
|
|
|
3 |
|
|
The carrying value of
Fortresss principal
investments in the
Fortress Funds. |
5
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
Reference |
|
Explanation |
|
|
|
|
|
|
|
Options in Affiliates
|
|
|
3 |
|
|
The fair value of common stock options received
from the Castles. |
|
|
|
|
|
|
|
Due to Affiliates
|
|
|
6 |
|
|
Generally, amounts due to the Principals
related to their interests in Fortress
Operating Group and the tax receivable
agreement. |
|
|
|
|
|
|
|
Deferred Incentive Income
|
|
|
2 |
|
|
Incentive income already received from certain
Fortress Funds based on past performance, which
is subject to contingent repayment based on
future performance. |
|
|
|
|
|
|
|
Debt Obligations Payable
|
|
|
4 |
|
|
The balance outstanding on the credit agreement. |
|
|
|
|
|
|
|
Principals and Others
Interests in Equity of
Consolidated Subsidiaries
|
|
|
6 |
|
|
The GAAP basis of the Principals ownership
interests in Fortress Operating Group as well
as employees ownership interests in certain
subsidiaries. |
|
|
|
|
|
|
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees from Affiliates
|
|
|
2 |
|
|
Fees earned for managing Fortress Funds,
generally determined based on the size of such
funds. |
|
|
|
|
|
|
|
Incentive Income from Affiliates
|
|
|
2 |
|
|
Income earned from Fortress Funds, based on the
performance of such funds. |
|
|
|
|
|
|
|
Compensation and Benefits
|
|
|
7 |
|
|
Includes equity-based, profit-sharing and other
compensation to employees. |
|
|
|
|
|
|
|
Principals Agreement
Compensation
|
|
|
N/A |
|
|
As a result of the principals agreement, the
value of a significant portion of the
Principals equity in Fortress prior to the
Nomura Transaction is being recorded as an
expense over a five year period. Fortress is
not a party to this agreement. It is an
agreement between the Principals to further
incentivize them to remain with Fortress. This
GAAP expense has no economic effect on Fortress
or its shareholders. |
|
|
|
|
|
|
|
Gains (Losses) from Other
Investments
|
|
|
N/A |
|
|
Subsequent to the IPO, the result of asset
dispositions or changes in the fair value of
assets which are marked to market (primarily
the Castles and GAGFAH). |
|
|
|
|
|
|
|
Tax Receivable Agreement
Liability Reduction
|
|
|
5 |
|
|
Represents a change in the amount due to the Principals
under the tax receivable agreement. |
|
|
|
|
|
|
|
Earnings (Losses) from Equity
Method Investees
|
|
|
3 |
|
|
Fortresss share of the net earnings (losses) of Fortress
Funds resulting from its principal investments. |
|
|
|
|
|
|
|
6
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
Selected Financial Statement |
|
Note |
|
|
Captions |
|
Reference |
|
Explanation |
|
|
|
|
|
|
|
Income Tax Benefit (Expense)
|
|
|
5 |
|
|
The net tax result related to
the current period. Certain of
Fortresss revenues are not
subject to taxes because they
do not flow through taxable
entities. Furthermore,
Fortress has significant
permanent differences between
its GAAP and tax basis
earnings. |
|
|
|
|
|
|
|
Principals and Others
Interests in (Income) Loss of
Consolidated Subsidiaries
|
|
|
6 |
|
|
Primarily the Principals and employees share of Fortresss
earnings based on their ownership interests in subsidiaries,
including Fortress Operating Group. This amount is
disclosed in order to provide a net income (loss) which
relates only to Fortresss Class A shareholders. |
Earnings Per Share
|
|
|
8 |
|
|
GAAP earnings per Class A share based
on Fortresss capital
structure, which is comprised
of outstanding and unvested
equity interests, including
interests which participate in
Fortresss earnings, at both
the Fortress and subsidiary
levels. |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
8 |
|
|
A summary of dividends and
distributions, and the related
outstanding shares and units,
is provided. |
|
|
|
|
|
|
|
Distributable Earnings
|
|
|
10 |
|
|
A presentation of our
financial performance by
segment (fund type) is
provided, on the basis of the
operating performance measure
used by Fortresss management
committee. |
The accompanying consolidated and combined financial statements and related notes of Fortress have
been prepared in accordance with accounting principles generally accepted in the United States for
interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in financial statements
prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the
opinion of management, all adjustments considered necessary for a fair presentation of Fortresss
financial position, results of operations and cash flows have been included and are of a normal and
recurring nature. The operating results presented for interim periods are not necessarily
indicative of the results that may be expected for any other interim period or for the entire year.
These financial statements should be read in conjunction with Fortresss consolidated and combined
financial statements for the year ended December 31, 2008 and notes thereto included in Fortresss
annual report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms
used herein, and not otherwise defined, are defined in Fortresss consolidated and combined
financial statements for the year ended December 31, 2008.
7
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS
Management Fees, Incentive Income and Related Profit Sharing Expense
Fortress has two principal sources of income from its agreements with the Fortress Funds:
contractual management fees, which are generally based on a percentage of fee paying assets under
management, and related incentive income, which is generally based on a percentage of profits
subject to the achievement of performance criteria. Substantially all of Fortresss net assets,
after deducting the portion attributable to principals and others interests, are a result of
principal investments in, or receivables from, these funds.
The Fortress Funds are divided into segments and Fortresss agreements with each are detailed
below.
Fortress recognized management fees and incentive income as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Private Equity |
|
|
|
|
|
|
|
|
Private Equity Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
$ |
37,669 |
|
|
$ |
39,808 |
|
Incentive income affil. |
|
|
|
|
|
|
34,640 |
|
|
|
|
|
|
|
|
|
|
Castles |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
11,390 |
|
|
|
12,937 |
|
Incentive income affil. |
|
|
|
|
|
|
12 |
|
Management fees non-affil. (A) |
|
|
646 |
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
22,604 |
|
|
|
52,647 |
|
Incentive income affil. |
|
|
|
|
|
|
2,492 |
|
Management fees non-affil. (A) |
|
|
25 |
|
|
|
72 |
|
Incentive income non-affil. (A) |
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
Hybrid Funds |
|
|
|
|
|
|
|
|
Hybrid Hedge Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
27,908 |
|
|
|
36,656 |
|
Incentive income affil. |
|
|
|
|
|
|
|
|
Management fees non-affil. (A) |
|
|
215 |
|
|
|
189 |
|
Incentive income non-affil. (A) |
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid PE Funds |
|
|
|
|
|
|
|
|
Management fees affil. |
|
|
6,081 |
|
|
|
2,009 |
|
Incentive income affil. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Management fees affil. |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
Incentive income affil. (B) |
|
$ |
|
|
|
$ |
37,144 |
|
Management fees non-affil. (A) |
|
$ |
886 |
|
|
$ |
1,143 |
|
Incentive income non-affil. (A) |
|
$ |
822 |
|
|
$ |
203 |
|
|
|
|
(A) |
|
Included in Other Revenues on the statement of operations.
|
|
(B) |
|
See Deferred Incentive Income below. |
Deferred Incentive Income
Incentive income from certain Fortress Funds, primarily private equity funds and hybrid PE funds,
is received when such funds realize profits, based on the related agreements. However, this
incentive income is subject to contingent repayment by Fortress to the funds until certain overall
fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income
as revenue until the related contingencies are resolved. Until such time, this incentive income is
recorded on the balance sheet as deferred incentive income and is included as
distributed-unrecognized deferred incentive income in the table below. Incentive income from
such funds, based on their net asset value, which has not yet been received is not recorded on the
balance sheet and is included as undistributed deferred incentive income in the table below.
8
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Incentive income from certain Fortress Funds, primarily hybrid hedge funds, as well as liquid hedge
funds beginning in the second quarter of 2009, is earned based on achieving annual performance
criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth
quarter of each year), is generally received subsequent to year end, and has not been recognized
for these funds during the three months ended March 31, 2009 and 2008. As a result of not achieving
incentive income thresholds, if the amount of incentive income contingent on achieving annual
performance criteria was not contingent on the results of the subsequent quarters, no additional
incentive income from affiliates would have been recognized during the three months ended March 31,
2009 or 2008. Incentive income based on achieving annual performance criteria that has not yet been
recognized, if any, is not recorded on the balance sheet and is included as undistributed
deferred incentive income in the table below.
Deferred incentive income from the Fortress Funds, subject to contingent repayment, was comprised
of the following, on an inception to date basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net of |
|
|
|
Distributed- |
|
|
Distributed- |
|
|
Distributed- |
|
|
intrinsic clawback |
|
|
|
Gross |
|
|
Recognized (A) |
|
|
Unrecognized (B) |
|
|
(C) (D) |
|
Deferred incentive income as of December 31, 2008 |
|
$ |
470,798 |
|
|
$ |
(307,163 |
) |
|
$ |
163,635 |
|
|
$ |
(89,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of income (loss) of Fortress Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of previously deferred
incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred incentive income as of March 31, 2009 |
|
$ |
470,798 |
|
|
$ |
(307,163 |
) |
|
$ |
163,635 |
|
|
$ |
(104,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
All related contingencies have been resolved. |
|
(B) |
|
Reflected on the balance sheet. |
|
(C) |
|
At March 31, 2009, the undistributed incentive income is comprised of $25.3 million of
gross undistributed incentive income, net of $129.4 million of previously distributed
incentive income that would be returned by Fortress to the related funds if such funds were
liquidated on March 31, 2009 at their net asset values. |
|
(D) |
|
From inception to March 31, 2009, Fortress has paid $137.7 million of compensation expense
under its employee profit sharing arrangements (Note 7) in connection with distributed
incentive income, of which $19.5 million has not been expensed because management has
determined that it is not probable of being incurred as an expense and will be recovered from
the related employees. If the $25.3 million of gross undistributed incentive income were
realized, Fortress would recognize and pay an additional $10.0 million of compensation
expense. |
Private Equity Funds and Hybrid PE Funds
During the three months ended March 31, 2009, Fortress did not form any new private equity funds or
hybrid PE funds.
Unrealized losses in a significant portion of Fortresss private equity funds and hybrid PE funds
have resulted in higher future returns being required before Fortress earns incentive income from
such funds.
In February 2009, one of the private equity Fortress Funds issued notes in the amount of $80
million. These notes bear interest at 20% per annum, payable at maturity, and mature in January
2014. The notes were offered to existing investors in proportion to their ownership of the funds
equity and Fortress consequently subscribed to and received $0.5 million of these notes, which are
recorded as part of Fortresss investment in such fund. In addition, the Principals concurrently
acquired $4.7 million of these notes.
In March 2009, one of the private equity Fortress Funds which was formed as a coinvestment fund to
invest solely in GAGFAH (XETRA: GFJ), was liquidated and distributed all of its shares in GAGFAH to
its investors, including Fortress. As a result, Fortress received 5.7 million shares of GAGFAH
valued at $28.2 million as of March 31, 2009. Fortress elected to account for these shares at fair
value pursuant to SFAS 159.
Liquid Hedge Funds and Hybrid Hedge Funds
During the three months ended March 31, 2009, Fortress did not form any new hedge funds.
Historical redemptions during the periods, including affiliates, have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
Hybrid Hedge Funds |
|
|
|
Redemption Notices |
|
|
|
|
|
|
Redemption Notices |
|
|
|
|
Three Months Ended March 31, |
|
Received |
|
|
Redemptions Paid |
|
|
Received |
|
|
Redemptions Paid |
|
2009 |
|
$ |
582,785 |
|
|
$ |
2,801,035 |
|
|
$ |
|
|
|
$ |
141,092 |
|
2008 |
|
$ |
8,587 |
|
|
$ |
138,862 |
|
|
$ |
|
|
|
$ |
549,315 |
|
9
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The differences between notices received and redemptions paid are a result of timing (notices
received prior to quarter end, paid afterwards) and the contractual agreements regarding
redemptions, which in some cases allow for delayed payment.
As a result of not meeting the incentive income thresholds with respect to current investors, the
incentive income from a significant portion of the capital invested in Fortresss liquid and hybrid
hedge funds has been discontinued for an indeterminate period of time. Returns earned on capital
from new investors continue to be incentive income eligible.
3. INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS
Investments consist primarily of investments in equity method investees and options in these
investees. The investees are primarily Fortress Funds.
Investments in Equity Method Investees
Fortress holds investments in certain Fortress Funds which are recorded based on the equity method
of accounting. Fortresss maximum exposure to loss with respect to these entities is generally
equal to its investment plus its basis in any options received from such entities as described
below, plus any receivables from such entities as described in Note 6. In addition, unconsolidated
affiliates also hold ownership interests in certain of these entities. Summary financial
information related to these investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss Investment |
|
|
Fortresss Equity in Net Income (Loss) |
|
|
|
March 31, |
|
|
December 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Private equity funds,
excluding NIH (A) |
|
$ |
450,578 |
|
|
$ |
455,691 |
|
|
$ |
(32,308 |
) |
|
$ |
(41,459 |
) |
NIH |
|
|
3,382 |
|
|
|
3,666 |
|
|
|
(279 |
) |
|
|
1,059 |
|
Castles (B) |
|
|
1,027 |
|
|
|
1,171 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity |
|
|
454,987 |
|
|
|
460,528 |
|
|
|
(32,587 |
) |
|
|
(40,400 |
) |
|
|
Liquid hedge funds (C) |
|
|
28,777 |
|
|
|
29,338 |
|
|
|
1,012 |
|
|
|
963 |
|
|
|
Hybrid hedge funds |
|
|
183,527 |
|
|
|
185,676 |
|
|
|
(2,149 |
) |
|
|
(10,823 |
) |
Hybrid PE funds |
|
|
88,516 |
|
|
|
96,610 |
|
|
|
(1,528 |
) |
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hybrid funds |
|
|
272,043 |
|
|
|
282,286 |
|
|
|
(3,677 |
) |
|
|
(9,693 |
) |
|
|
Other |
|
|
4,173 |
|
|
|
2,230 |
|
|
|
403 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
759,980 |
|
|
$ |
774,382 |
|
|
$ |
(34,849 |
) |
|
$ |
(49,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 million direct investment in GAGFAH (XETRA:GFJ) common stock (a
private equity portfolio company). |
|
(B) |
|
Fortress elected to record these investments, as well as its direct investment in GAGFAH,
at fair value pursuant to SFAS 159. |
|
(C) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009. |
10
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
A summary of the changes in Fortresss investments in equity method investees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Private Equity |
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
NIH |
|
|
Other Funds (A) |
|
|
Castles (B) |
|
|
Hedge Funds |
|
|
Hedge Funds |
|
|
PE Funds |
|
|
Other |
|
|
Total |
|
Investment, beginning |
|
$ |
3,666 |
|
|
$ |
455,691 |
|
|
$ |
1,171 |
|
|
$ |
29,338 |
|
|
$ |
185,676 |
|
|
$ |
96,610 |
|
|
$ |
2,230 |
|
|
$ |
774,382 |
|
Earnings from equity
method investees |
|
|
(279 |
) |
|
|
(32,308 |
) |
|
|
N/A |
|
|
|
1,012 |
|
|
|
(2,149 |
) |
|
|
(1,528 |
) |
|
|
403 |
|
|
|
(34,849 |
) |
Other comprehensive income
from equity method investees |
|
|
(5 |
) |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
(467 |
) |
Contributions to equity
method investees |
|
|
|
|
|
|
29,102 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
3,986 |
|
|
|
1,560 |
|
|
|
34,648 |
|
Distributions of earnings
from equity method investees |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Distributions of capital
from equity method investees |
|
|
|
|
|
|
(198 |
) |
|
|
N/A |
|
|
|
(1,573 |
) |
|
|
|
|
|
|
(10,090 |
) |
|
|
(9 |
) |
|
|
(11,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions from equity
method investees |
|
|
|
|
|
|
(198 |
) |
|
|
N/A |
|
|
|
(1,573 |
) |
|
|
|
|
|
|
(10,090 |
) |
|
|
(20 |
) |
|
|
(11,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark to fair value during
period (C) |
|
|
N/A |
|
|
|
(981 |
) |
|
|
(132 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(1,113 |
) |
Translation adjustment |
|
|
|
|
|
|
(728 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment, ending (D) |
|
$ |
3,382 |
|
|
$ |
450,578 |
|
|
$ |
1,027 |
|
|
$ |
28,777 |
|
|
$ |
183,527 |
|
|
$ |
88,516 |
|
|
$ |
4,173 |
|
|
$ |
759,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of undistributed
earnings |
|
$ |
776 |
|
|
$ |
|
|
|
|
N/A |
|
|
$ |
87 |
|
|
$ |
301 |
|
|
|
5,859 |
|
|
$ |
392 |
|
|
$ |
7,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 million direct investment in GAGFAH (XETRA:GFJ) common stock (a
private equity portfolio company). |
|
(B) |
|
Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to SFAS 159. |
|
(C) |
|
Recorded to Other Investments Net Unrealized Gains (Losses) from Affiliate Investments. |
|
(D) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009 from the liquid hedge fund. |
The ownership percentages presented in the following tables are reflective of the ownership
interests held as of the end of the respective periods. For tables which include more than one
Fortress Fund, the ownership percentages are based on a weighted average by total equity of the
funds as of period end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newcastle Investment Holdings LLC |
|
|
|
Private Equity Funds excluding NIH |
|
|
(NIH) |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
8,693,410 |
|
|
$ |
9,362,237 |
|
|
$ |
268,891 |
|
|
$ |
278,161 |
|
Liabilities |
|
|
(856,169 |
) |
|
|
(1,058,392 |
) |
|
|
(212,065 |
) |
|
|
(215,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
7,837,241 |
|
|
$ |
8,303,845 |
|
|
$ |
56,826 |
|
|
$ |
62,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss Investment (A) |
|
$ |
450,578 |
|
|
$ |
455,691 |
|
|
$ |
3,382 |
|
|
$ |
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership (B) |
|
|
5.7 |
% |
|
|
5.5 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues and gains (losses)
on investments |
|
$ |
(767,348 |
) |
|
$ |
(1,178,032 |
) |
|
$ |
(1,021 |
) |
|
$ |
30,363 |
|
Expenses |
|
|
(121,035 |
) |
|
|
(103,852 |
) |
|
|
(4,474 |
) |
|
|
(7,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(888,383 |
) |
|
$ |
(1,281,884 |
) |
|
$ |
(5,495 |
) |
|
$ |
22,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss equity in net income (loss) |
|
$ |
(32,308 |
) |
|
$ |
(41,459 |
) |
|
$ |
(279 |
) |
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes Fortresss $28.2 million direct investment in GAGFAH (XETRA:GFJ) common stock (a
private equity portfolio company). GAGFAHs summary financial information is not included in
this table. |
|
(B) |
|
Excludes ownership interests held by other Fortress Funds, the Principals, employees and
other affiliates. |
11
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
Hybrid Hedge Funds |
|
|
Hybrid PE Funds (C) |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
5,099,120 |
|
|
$ |
7,819,859 |
|
|
$ |
10,518,758 |
|
|
$ |
10,803,738 |
|
|
$ |
4,486,562 |
|
|
$ |
4,103,809 |
|
Liabilities |
|
|
(634,141 |
) |
|
|
(540,204 |
) |
|
|
(4,153,920 |
) |
|
|
(4,407,170 |
) |
|
|
(2,187,367 |
) |
|
|
(1,517,607 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
(38,242 |
) |
|
|
(29,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
4,464,979 |
|
|
$ |
7,279,655 |
|
|
$ |
6,326,596 |
|
|
$ |
6,366,646 |
|
|
$ |
2,299,195 |
|
|
$ |
2,586,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss Investment (A) |
|
$ |
28,777 |
|
|
$ |
29,338 |
|
|
$ |
183,527 |
|
|
$ |
185,676 |
|
|
$ |
88,516 |
|
|
$ |
96,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership (B) |
|
|
0.6 |
% |
|
|
0.4 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
|
|
3.8 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues and gains (losses)
on investments |
|
$ |
158,965 |
|
|
$ |
106,405 |
|
|
$ |
172,679 |
|
|
$ |
(123,468 |
) |
|
$ |
(18,429 |
) |
|
$ |
23,413 |
|
Expenses |
|
|
(48,119 |
) |
|
|
(156,539 |
) |
|
|
(77,849 |
) |
|
|
(109,619 |
) |
|
|
(31,590 |
) |
|
|
(6,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
110,846 |
|
|
$ |
(50,134 |
) |
|
$ |
94,830 |
|
|
$ |
(233,087 |
) |
|
$ |
(50,019 |
) |
|
$ |
16,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortresss equity in net
income (loss) |
|
$ |
1,012 |
|
|
$ |
963 |
|
|
$ |
(2,149 |
) |
|
$ |
(10,823 |
) |
|
$ |
(1,528 |
) |
|
$ |
1,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Of this amount, $15.0 million was redeemed on April 1, 2009 from the liquid hedge funds. |
|
(B) |
|
Excludes ownership interests held by other Fortress Funds, the Principals, employees and
other affiliates. |
|
(C) |
|
Includes one entity which is recorded on a one quarter lag (i.e. the balances reflected for
this entity are for December 31, 2008 and 2007, respectively, and the periods then ended). It
is recorded on a lag because it is a German entity and does not provide financial reports
under U.S. GAAP within the reporting timeframe necessary for U.S. public entities. |
Investments in Variable Interest Entities
Fortress is not considered the primary beneficiary of, and therefore does not consolidate, any of
the variable interest entities in which it holds an interest. No reconsideration events occurred
during the three months ended March 31, 2009 which caused a change in Fortresss accounting.
The following table presents information as of March 31, 2009 regarding entities formed during the
three months ended March 31, 2009 that were determined to be VIEs in which Fortress holds a
variable interest. The amounts presented below are included in, and not in addition to, the equity
method investment tables above. The only VIE formed during this period was not yet capitalized as
of quarter end and therefore had no assets or liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortress is not Primary Beneficiary |
|
Business Segment |
|
Gross Assets |
|
|
Financial Obligations |
|
|
Fortress Investment (A) |
|
Hybrid PE Funds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(A) |
|
Represents Fortresss maximum exposure to loss with respect to these entities, which includes
direct and indirect investments in these funds, which in this case is zero. In addition to the
table above, Fortress is exposed to potential changes in cash flow and revenues attributable
to the incentive income Fortress earns from these entities. |
Fair Value of Financial Instruments
The following table presents information regarding Fortresss financial instruments which are
recorded at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Valuation Method |
Assets Carried at Fair Value |
|
|
|
|
|
|
|
|
|
|
Newcastle, Eurocastle and GAGFAH common shares
|
|
$ |
29,249 |
|
|
$ |
1,171 |
|
|
Level 1 Quoted prices in active markets for identical assets |
Newcastle and Eurocastle options
|
|
$ |
72 |
|
|
$ |
39 |
|
|
Level 2 Lattice-based option valuation models using
significant observable inputs |
12
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
4. DEBT OBLIGATIONS
The following table presents summarized information regarding Fortresss debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Face Amount and |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
Carrying Value |
|
|
Contractual |
|
Final |
|
Average |
|
|
Average |
|
|
|
March 31, |
|
|
December 31, |
|
|
Interest |
|
Stated |
|
Funding |
|
|
Maturity |
|
Debt Obligation |
|
2008 |
|
|
2008 |
|
|
Rate |
|
Maturity |
|
Cost (A) |
|
|
(Years) |
|
Credit agreement (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt (C) |
|
$ |
54,041 |
|
|
$ |
104,041 |
|
|
LIBOR + 2.50% (D) |
|
May 2012 |
|
|
3.04 |
% |
|
|
3.11 |
|
Term loan |
|
|
350,000 |
|
|
|
350,000 |
|
|
LIBOR + 2.50% |
|
May 2012 |
|
|
3.20 |
% |
|
|
2.40 |
|
Delayed term loan (C) |
|
|
200,000 |
|
|
|
275,000 |
|
|
LIBOR + 2.50% |
|
May 2012 |
|
|
3.11 |
% |
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
$ |
729,041 |
|
|
|
|
|
|
|
3.16 |
% |
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The weighted average funding cost is calculated based on the contractual interest rate
(utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing
costs. The most recently reset LIBOR rate was 0.48%. |
|
(B) |
|
Collateralized by substantially all of Fortress Operating Groups assets as well as Fortress
Operating Groups rights to fees from the Fortress Funds and its equity interests therein. |
|
(C) |
|
Approximately $11.4 million was undrawn on the revolving debt facility as of March 31, 2009.
The revolving debt facility includes a $25 million letter of credit subfacility of which $9.6
million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2
million (including $1.0 million of the outstanding letters of credit) of the $75 million
revolving credit facility, has filed for bankruptcy protection, did not fund its pro rata
portion of the last borrowing under this facility, and it is reasonably possible that it will
not fund its portion of the commitments. As a result, $5.2 million of the undrawn amount was
available. |
|
(D) |
|
Subject to unused commitment fees of 0.50% per annum. |
On March 12 and March 13, 2009, Fortress entered into amendments to its credit agreement. The
amendments, among other things: (i) modified the financial covenants by (a) amending the amount of
required management fee earning assets to $22 billion as of the end of each fiscal quarter through
December 31, 2009 and $20 billion as of the end of each fiscal quarter thereafter; (b) reducing the
amount of investment assets required as of any point in time to an amount equal to the term loans
and revolving loans (including outstanding letters of credit) then outstanding; (c) changing the
required Consolidated Leverage Ratio to 3.5 to 1.0 for the remainder of the term of the credit
agreement; (ii) increased the rate on LIBOR loans to LIBOR + 2.50 (and Base Rate loans to the prime
rate plus 1.50%); (iii) reduced the revolving credit facility commitments to $75 million; (iv)
established an annual requirement, beginning in 2010, that outstanding loans be prepaid in an
amount equal to 75% of Free Cash Flow (as defined in the agreement) generated during the previous
year; (v) increased the amount of Fortresss scheduled amortization payments (the amortization
schedule now requires the following payments: $50 million in July 2009, $25 million in each of
October 2009 and January, April, July and October 2010, and $75 million in January 2011); (vi)
established a requirement that 50% of the net proceeds from any equity issuance by the Fortress
Operating Group be applied to prepay outstanding term loans; (vii) reduced the amount of certain
types of distributions Fortress can make to equity holders of the Fortress Operating Group and, in
turn, Fortresss Class A shareholders, and (viii) provided that the dissolution or termination of
specified material funds would not constitute an event of default. In connection with the
amendment, Fortress prepaid $75 million of outstanding term loans and $50 million of outstanding
revolving facility loans.
To managements knowledge, there have not been any market transactions in Fortresss debt
obligations. However, management believes the fair value of this debt was between 55% and 60% of
face value at March 31, 2009.
Fortress was in compliance with all of its debt covenants as of March 31, 2009. The following table
sets forth the financial covenant requirements as of March 31, 2009 (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
Requirement |
|
|
Actual |
|
AUM |
|
≥ $ |
22,000 |
|
|
$ |
26,538 |
|
|
|
|
|
|
|
|
|
|
Consolidated Leverage Ratio |
|
≤ |
3.50 |
|
|
|
1.98 |
|
|
|
|
|
|
|
|
|
|
Required Investment Assets |
|
≥ $ |
614 |
|
|
$ |
731 |
|
|
|
|
|
|
|
|
|
|
Fortress Fund Investments |
|
≥ $ |
245 |
|
|
$ |
394 |
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
≥ $ |
368 |
|
|
$ |
521 |
|
13
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
5. INCOME TAXES AND TAX RELATED PAYMENTS
For the three months ended March 31, 2009, an estimated annual effective tax rate of 0.62% was used
to compute the tax provision. Fortress incurred a loss before income taxes for financial reporting
purposes, after deducting the compensation expense arising from the Principals forfeiture
agreement. However, this compensation expense is not deductible for income tax purposes. Also,
a portion of Fortresss income is not subject to U.S. federal income tax, but is allocated directly
to Fortresss shareholders.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
Federal income tax |
|
$ |
814 |
|
|
$ |
2,654 |
|
Foreign income tax |
|
|
411 |
|
|
|
637 |
|
State and local income tax |
|
|
2,127 |
|
|
|
3,682 |
|
|
|
|
|
|
|
|
|
|
|
3,352 |
|
|
|
6,973 |
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(1,518 |
) |
|
|
1,291 |
|
Foreign income tax expense (benefit) |
|
|
(96 |
) |
|
|
166 |
|
State and local income tax expense
(benefit) |
|
|
(2,145 |
) |
|
|
(1,178 |
) |
|
|
|
|
|
|
|
|
|
|
(3,759 |
) |
|
|
279 |
|
|
|
|
|
|
|
|
Total expense (benefit) |
|
$ |
(407 |
) |
|
$ |
7,252 |
|
|
|
|
|
|
|
|
The tax effects of temporary differences have resulted in deferred income tax assets and
liabilities as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Total deferred tax assets |
|
$ |
507,723 |
|
|
$ |
504,017 |
|
Valuation allowance |
|
|
(96,067 |
) |
|
|
(95,951 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
411,656 |
|
|
$ |
408,066 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities (A) |
|
$ |
482 |
|
|
$ |
592 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Included in Other Liabilities. |
For the three months ended March 31, 2009, a deferred income tax provision of $0.11 million was
credited to other comprehensive income, primarily related to the equity method investees. A current
income tax benefit of $0.01 million was credited to additional paid in capital, related to (i)
dividend equivalent payments on RSUs (Note 7), and (ii) distributions to Fortress Operating Group
restricted partnership unit holders (Note 7), which are currently deductible for income tax
purposes.
Tax Receivable Agreement
Although the tax receivable agreement payments are calculated based on annual tax savings, for the
three months ended March 31, 2009, the payments which would have been made pursuant to the tax
receivable agreement, if such period was calculated by itself, were estimated to be $3.9 million.
14
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES
Affiliate Receivables and Payables
Due from affiliates was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
|
|
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Other |
|
|
Total |
|
Management fees and incentive income |
|
$ |
28,014 |
|
|
$ |
3,933 |
|
|
$ |
127 |
|
|
$ |
1,300 |
|
|
$ |
6,080 |
|
|
$ |
|
|
|
$ |
39,454 |
|
Expense reimbursements |
|
|
7,957 |
|
|
|
2,960 |
|
|
|
2,708 |
|
|
|
3,371 |
|
|
|
3,726 |
|
|
|
|
|
|
|
20,722 |
|
Dividends and distributions |
|
|
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
Other |
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
1,828 |
|
|
|
2,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,646 |
|
|
$ |
6,893 |
|
|
$ |
2,835 |
|
|
$ |
4,671 |
|
|
$ |
10,315 |
|
|
$ |
1,828 |
|
|
$ |
64,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
|
|
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Other |
|
|
Total |
|
Management fees and incentive income |
|
$ |
7,833 |
|
|
$ |
4,094 |
|
|
$ |
329 |
|
|
$ |
1,285 |
|
|
$ |
6,907 |
|
|
$ |
|
|
|
$ |
20,448 |
|
Expense reimbursements |
|
|
6,289 |
|
|
|
2,734 |
|
|
|
1,211 |
|
|
|
2,115 |
|
|
|
3,536 |
|
|
|
|
|
|
|
15,885 |
|
Dividends and distributions |
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
Other |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,081 |
|
|
|
2,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,123 |
|
|
$ |
6,917 |
|
|
$ |
1,540 |
|
|
$ |
3,400 |
|
|
$ |
10,443 |
|
|
$ |
2,081 |
|
|
$ |
38,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliates was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Principals |
|
|
|
|
|
|
|
|
- Tax receivable agreement Note 5 (A) |
|
$ |
338,765 |
|
|
$ |
338,649 |
|
- Distributions payable on Fortress Operating Group units |
|
|
|
|
|
|
|
|
Other |
|
|
11,615 |
|
|
|
7,616 |
|
|
|
|
|
|
|
|
|
|
$ |
350,380 |
|
|
$ |
346,265 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes $17.4 million due currently with respect to the tax return filed for the tax year
ended December 31, 2007. |
Other Related Party Transactions
For the three months ended March 31, 2009 and 2008, Other Revenues included approximately $1.7
million and $0.7 million, respectively, of revenues from affiliates.
Fortress has entered into cost sharing arrangements with the Fortress Funds, including market data
services and subleases of certain of its office space. Expenses borne by the Fortress Funds under
these agreements are generally paid directly by those entities (i.e. they are generally not paid by
Fortress and reimbursed). For the three months ended March 31, 2009 and 2008, these expenses,
mainly related to subscriptions to market data services, approximated $2.9 million and $5.3
million, respectively.
In February 2007, we entered into an agreement with two employees who were departing from Fortress
to form their own investment management company. We received a minority ownership interest in the
management company, which receives management fees and incentive income from all funds formed by
such company, and as part of the transaction a Fortress Fund received certain rights to invest at
discounted fee rates in the fund being formed by the departing employees, and committed to invest
$200 million in that fund subject to certain conditions (of which that Fortress Fund has invested
approximately $100 million as of April 2009). In December 2008, the Fortress Fund agreed to
eliminate its $100 million unfunded commitment and provide that fund with a $25 million revolving
credit facility.
In March 2009, a private equity Fortress Fund repaid in full the remaining $14.4 million of
non-dividend bearing preferred equity it had issued to three of the Principals.
15
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Principals and Others Interests in Consolidated Subsidiaries
These amounts relate to equity interests in Fortresss consolidated, but not wholly owned,
subsidiaries, which are held by the Principals, employees and others.
This balance sheet caption was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Principals Fortress Operating Group units |
|
$ |
46,950 |
|
|
$ |
47,305 |
|
Employee interests in majority owned
and controlled fund advisor and
general partner entities |
|
|
22,285 |
|
|
|
23,981 |
|
Other |
|
|
829 |
|
|
|
176 |
|
|
|
|
|
|
|
|
Total |
|
$ |
70,064 |
|
|
$ |
71,462 |
|
|
|
|
|
|
|
|
This statement of operations caption was comprised of shares of consolidated net income (loss)
related to the following, on a pre-tax basis:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Principals Fortress Operating Group units |
|
$ |
(219,623 |
) |
|
$ |
(208,877 |
) |
Employee interests in majority owned
and controlled fund advisor and
general partner entities |
|
|
28 |
|
|
|
139 |
|
Other |
|
|
73 |
|
|
|
469 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(219,522 |
) |
|
$ |
(208,269 |
) |
|
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 160 Accounting for Noncontrolling Interests. SFAS 160
clarifies the classification of non-controlling interests in consolidated statements of financial
position and the accounting for and reporting of transactions between the reporting entity and
holders of such non-controlling interests. SFAS 160 applies to reporting periods beginning after
December 15, 2008. SFAS 160 had the following effects on Fortresss financial statements: (i)
reclassification of Principals and Others Interests in Equity of Consolidated Subsidiaries from
the mezzanine section of the balance sheet (between liabilities and equity) to equity, (ii)
removal of Principals and Others Interests in Income of Consolidated Subsidiaries from the
calculation of Net Income (Loss) on the statement of operations, and disclosure thereof below Net
Income (Loss), and (iii) with respect to potential future transactions in which Fortress could
acquire Fortress Operating Group units from the Principals pursuant to their exchange (along with
Class B shares) for Class A shares (or otherwise), these transactions would be accounted for as
equity transactions rather than as a step acquisition of Fortress Operating Group (as would be
required under prior accounting principles). There is no effect from adoption of SFAS 160 on the
equity which pertains to Class A shareholders, or net income (loss) allocable to Class A
shareholders, or on Fortresss liquidity.
16
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
7. EQUITY-BASED AND OTHER COMPENSATION
Fortresss total compensation and benefits expense, excluding Principals Agreement compensation, is
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Equity-based compensation, per below |
|
$ |
53,045 |
|
|
$ |
28,425 |
|
Profit-sharing expense, per below |
|
|
3,605 |
|
|
|
21,818 |
|
Discretionary bonuses |
|
|
22,859 |
|
|
|
44,457 |
|
Other payroll, taxes and benefits |
|
|
29,727 |
|
|
|
32,319 |
|
|
|
|
|
|
|
|
|
|
$ |
109,236 |
|
|
$ |
127,019 |
|
|
|
|
|
|
|
|
Equity-Based Compensation
The following tables set forth information regarding equity-based compensation activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
Restricted Shares |
|
|
RPUs |
|
|
|
Employees |
|
|
Non-Employees |
|
|
Issued to Directors |
|
|
Employees |
|
|
|
Number |
|
|
Value (A) |
|
|
Number |
|
|
Value (A) |
|
|
Number |
|
|
Value (A) |
|
|
Number |
|
|
Value (A) |
|
Outstanding as of
December 31, 2008 |
|
|
40,865,316 |
|
|
$ |
16.53 |
|
|
|
8,600,867 |
|
|
$ |
14.84 |
|
|
|
109,174 |
|
|
$ |
17.76 |
|
|
|
31,000,000 |
|
|
$ |
13.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,890 |
|
|
|
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(196,759 |
) |
|
|
14.54 |
|
|
|
(705,885 |
) |
|
|
14.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
March 31, 2009 (B) |
|
|
40,668,557 |
|
|
$ |
16.54 |
|
|
|
7,894,982 |
|
|
$ |
14.83 |
|
|
|
138,064 |
|
|
$ |
14.52 |
|
|
|
31,000,000 |
|
|
$ |
13.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Expense incurred (B) |
|
|
|
|
|
|
|
|
Employee RSUs |
|
$ |
24,423 |
|
|
$ |
26,572 |
|
Non-Employee RSUs |
|
|
4,461 |
|
|
|
(10 |
) |
Restricted Shares |
|
|
148 |
|
|
|
149 |
|
LTIP |
|
|
1,696 |
|
|
|
1,714 |
|
RPUs |
|
|
22,317 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense |
|
$ |
53,045 |
|
|
$ |
28,425 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the weighted average grant date estimated fair value per share or unit. The
weighted average estimated fair value per unit as of March 31, 2009 for awards granted to
non-employees was $2.51, which is equal to the closing trading price per share of Fortresss
Class A shares on such date. |
|
(B) |
|
In future periods, Fortress will recognize compensation expense on its non-vested equity
based awards of $800.8 million, with a weighted average recognition period of 3.87 years. This
does not include amounts related to the Principals Agreement. |
When Fortress records equity-based compensation expense, including that related to the Principals
Agreement, it records a corresponding increase in capital.
17
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Profit Sharing Expense
Recognized profit sharing compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Private equity funds (A) |
|
$ |
(15 |
) |
|
$ |
4,971 |
|
Castles (A) |
|
|
(137 |
) |
|
|
1,128 |
|
Liquid hedge funds |
|
|
2,564 |
|
|
|
13,425 |
|
Hybrid hedge funds |
|
|
1,193 |
|
|
|
2,055 |
|
Other |
|
|
|
|
|
|
239 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,605 |
|
|
$ |
21,818 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Negative amounts reflect the reversal of previously accrued profit sharing expense resulting
from the determination that this expense is no longer probable of being incurred. |
8. EARNINGS PER SHARE AND DISTRIBUTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A shares outstanding |
|
|
94,500,351 |
|
|
|
94,500,351 |
|
|
|
94,500,350 |
|
|
|
94,500,350 |
|
Fully vested restricted Class A share units with dividend equivalent rights |
|
|
631,260 |
|
|
|
631,260 |
|
|
|
394,286 |
|
|
|
394,286 |
|
Fully vested restricted Class A shares |
|
|
70,632 |
|
|
|
70,632 |
|
|
|
|
|
|
|
|
|
Fortress Operating Group units exchangeable into Fortress Investment
Group LLC Class A shares (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312,071,550 |
|
Class A restricted shares and Class A restricted share units granted to
employees and directors (eligible for dividend and dividend equivalent
payments) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A restricted share units granted to employees (not eligible for
dividend
and dividend equivalent payments) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding |
|
|
95,202,243 |
|
|
|
95,202,243 |
|
|
|
94,894,636 |
|
|
|
406,966,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A shareholders |
|
$ |
(67,159 |
) |
|
$ |
(67,159 |
) |
|
$ |
(68,917 |
) |
|
$ |
(68,917 |
) |
Dilution in earnings due to RPUs treated as a participating security of
Fortress
Operating Group and fully vested restricted Class A share units with
dividend
equivalent rights treated as outstanding Fortress Operating Group units
(4) |
|
|
(359 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
|
Dividend equivalents declared on non-vested restricted Class A share units |
|
|
|
|
|
|
|
|
|
|
(1,117 |
) |
|
|
(1,117 |
) |
Dilution in earnings of certain equity method investees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back Principals and others interests in loss of Fortress Operating
Group,
net of assumed corporate income taxes at enacted rates, attributable to
Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Class A shareholders |
|
$ |
(67,518 |
) |
|
$ |
(67,518 |
) |
|
$ |
(70,034 |
) |
|
$ |
(303,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
95,202,243 |
|
|
|
95,202,243 |
|
|
|
94,894,636 |
|
|
|
406,966,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A share |
|
$ |
(0.71 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Fortress Operating Group units not held by Fortress (that is, those held by the
Principals) are exchangeable into Class A shares on a one-to-one basis. These units are not
included in the computation of basic earnings per share. These units enter into the
computation of diluted net income (loss) per Class A share when the effect is dilutive using
the if-converted method. To the extent charges, particularly tax related charges, are incurred
by the Registrant (i.e. not at the Fortress Operating Group level), the effect may be
anti-dilutive. |
|
(2) |
|
Restricted Class A shares granted to directors and certain restricted Class A share
units granted to employees are eligible to receive dividend or dividend equivalent payments when
dividends are declared and paid on Fortresss Class A shares and therefore participate fully in the
results of Fortresss operations from the date they are granted. They are included in the
computation of both basic and diluted earnings per Class A share using the two-class method for
participating securities, except during periods of net losses. |
18
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
|
|
|
(3) |
|
Certain restricted Class A share units granted to employees are not entitled to
dividend or dividend equivalent payments until they are vested and are therefore
non-participating securities. These units are not included in the computation of basic
earnings per share. They are included in the computation of diluted earnings per share when
the effect is dilutive using the treasury stock method. As a result of the net loss
incurred in the periods presented, the effect of the units on the calculation is
anti-dilutive for each of the periods. The weighted average restricted Class A share units
which are not entitled to receive dividend or dividend equivalent payments outstanding
were: |
|
|
|
|
|
Period |
|
Share Units |
|
Three months ended: |
|
|
|
|
March 31, 2009 |
|
|
25,347,250 |
|
March 31, 2008 |
|
|
27,817,295 |
|
|
|
|
(4) |
|
Fortress Operating Group RPUs are eligible to receive partnership distribution equivalent
payments when distributions are declared and paid on Fortress Operating Group units. The RPUs
represent a participating security of Fortress Operating Group and the resulting dilution in
Fortress Operating Group earnings available to Fortress is reflected in the computation of
both basic and diluted earnings per Class A share using the method prescribed for securities
issued by a subsidiary. For purposes of the computation of basic and diluted earnings per
Class A share, the fully vested restricted Class A share units with dividend equivalent rights
are treated as outstanding Class A shares of Fortress and as outstanding partnership units of
Fortress Operating Group. |
The Class B shares have no net income (loss) per share as they do not participate in Fortresss
earnings (losses) or distributions. The Class B shares have no dividend or liquidation rights.
Each Class B share, along with one Fortress Operating Group unit, can be exchanged for one Class A
share, subject to certain limitations. The Class B shares have voting rights on a pari passu basis
with the Class A shares. The number of Class B shares outstanding did not change subsequent to the
IPO.
Fortresss dividend paying shares and units were as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Class A shares (public shareholders) |
|
|
94,500,351 |
|
|
|
94,500,350 |
|
Restricted Class A shares (directors) |
|
|
135,496 |
|
|
|
97,296 |
|
Restricted Class A share units (employees) (A) |
|
|
631,260 |
|
|
|
394,286 |
|
Restricted Class A share units (employees) (B) |
|
|
22,955,132 |
|
|
|
23,765,492 |
|
Fortress Operating Group units (Principals) |
|
|
312,071,550 |
|
|
|
312,071,550 |
|
Fortress Operating Group RPUs (senior employee) |
|
|
31,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
461,293,789 |
|
|
|
430,828,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
As of December 31, 2008 |
|
Class A shares (public shareholders) |
|
|
94,500,351 |
|
|
|
94,500,351 |
|
Restricted Class A shares (directors) |
|
|
138,064 |
|
|
|
109,174 |
|
Restricted Class A share units (employees) (A) |
|
|
631,260 |
|
|
|
631,260 |
|
Restricted Class A share units (employees) (B) |
|
|
22,955,132 |
|
|
|
22,955,132 |
|
Fortress Operating Group units (Principals) |
|
|
312,071,550 |
|
|
|
312,071,550 |
|
Fortress Operating Group RPUs (senior employee) |
|
|
31,000,000 |
|
|
|
31,000,000 |
|
|
|
|
|
|
|
|
Total |
|
|
461,296,357 |
|
|
|
461,267,467 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents fully vested restricted Class A share units which are entitled to dividend
equivalent payments. |
|
(B) |
|
Represents nonvested restricted Class A share units which are entitled to dividend
equivalent payments. |
Dividends and distributions during the three months ended March 31, 2009 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Year |
|
|
|
Declared in Prior Year, |
|
|
Declared and |
|
|
Declared but not |
|
|
|
|
|
|
Paid Current Year |
|
|
Paid |
|
|
yet Paid |
|
|
Total |
|
Dividends on Class A Shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Dividend equivalents on restricted Class A share units (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Fortress Operating Group unit holders (Principals) (B) |
|
|
|
|
|
|
963 |
|
|
|
|
|
|
|
963 |
|
Distributions to Fortress Operating Group RPU holders (Note 7) (B) |
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions |
|
$ |
|
|
|
$ |
1,059 |
|
|
$ |
|
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
A portion of these dividend equivalents, if any, related to RSUs expected to be forfeited, is
included as compensation expense in the consolidated statement of operations and is therefore
considered an operating cash flow. |
|
(B) |
|
Fortress Operating Group made distributions to the principals and RPU holders in connection
with distributions made to FIG Corp. to pay Fortresss income taxes. |
19
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The following table summarizes our comprehensive income (loss) (net of taxes) for the three
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to Principals |
|
|
|
|
|
|
Impact to Total |
|
|
and Others Interests |
|
|
|
|
|
|
Fortress |
|
|
in Equity of |
|
|
|
|
|
|
Shareholders |
|
|
Consolidated |
|
|
Impact to |
|
|
|
Equity |
|
|
Subsidiaries |
|
|
Total Equity |
|
Net income (loss) |
|
$ |
(68,917 |
) |
|
$ |
(208,269 |
) |
|
$ |
(277,186 |
) |
Foreign currency translation |
|
|
533 |
|
|
|
(138 |
) |
|
|
395 |
|
Comprehensive income (loss) from
equity method investees |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(68,385 |
) |
|
$ |
(208,411 |
) |
|
$ |
(276,796 |
) |
|
|
|
|
|
|
|
|
|
|
9. COMMITMENTS AND CONTINGENCIES
Other than as described below, Fortresss commitments and contingencies remain materially unchanged
from December 31, 2007.
Private Equity Fund and Hybrid PE Fund Capital Commitments Fortress has remaining capital
commitments to certain of the Fortress Funds which aggregated $132.4 million as of March 31, 2009.
These commitments can be drawn by the funds on demand.
Minimum Future Rentals Fortress is a lessee under a number of operating leases for office space.
Minimum future rent payments under these leases is as follows:
|
|
|
|
|
April 1 to December 31, 2009 |
|
$ |
13,763 |
|
2010 |
|
|
21,332 |
|
2011 |
|
|
11,530 |
|
2012 |
|
|
10,893 |
|
2013 |
|
|
10,874 |
|
2014 |
|
|
10,311 |
|
Thereafter |
|
|
21,691 |
|
|
|
|
|
Total |
|
$ |
100,394 |
|
|
|
|
|
Rent expense recognized on a straight-line basis during the three months ended March 31, 2009 and
2008 was $4.9 million and $4.8 million, respectively, and was included in General, Administrative
and Other Expense.
Litigation Fortress is, from time to time, a defendant in legal actions from transactions
conducted in the ordinary course of business. Management, after consultation with legal counsel,
believes the ultimate liability arising from such actions that existed as of March 31, 2009, if
any, will not materially affect Fortresss results of operations, liquidity or financial position.
20
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
10. SEGMENT REPORTING
Fortress conducts its management and investment business through the following six primary
segments: (i) private equity funds, (ii) Castles, (iii) liquid hedge funds, (iv) hybrid hedge
funds, (v) hybrid private equity (PE) funds, and (vi) principal investments in these funds as
well as cash that is available to be invested. Due to the increased significance of the hybrid PE
funds segment, it has been disaggregated from the private equity fund segment in this period and
for all periods presented.
Distributable earnings is a measure of operating performance used by management in analyzing its
segment and overall results. For the existing Fortress businesses it is equal to net income (loss)
attributable to Fortresss Class A shareholders adjusted as follows:
Incentive Income
|
(i) |
|
a. |
for Fortress Funds which are private equity funds and hybrid PE
funds, adding (a) incentive income paid (or declared as a distribution) to
Fortress, less an applicable reserve for potential future clawbacks if the
likelihood of a clawback is deemed greater than remote by Fortresss chief
operating decision maker as described below (net of the reversal of any prior such
reserves that are no longer deemed necessary), minus (b) incentive income recorded
in accordance with GAAP, |
|
b. |
|
for other Fortress Funds, at interim periods, adding (a) incentive
income on an accrual basis as if the incentive income from these funds were
payable on a quarterly basis, minus (b) incentive income recorded in accordance
with GAAP, |
Other Income
|
(ii) |
|
with respect to income from certain principal investments and certain
other interests that cannot be readily transferred or redeemed: |
|
a. |
|
for equity method investments in the private equity funds and hybrid
PE funds as well as indirect equity method investments in hedge fund special
investment accounts (which generally have investment profiles similar to
private equity funds), treating these investments as cost basis investments by
adding (a) realizations of income, primarily dividends, from these funds, minus
(b) impairment with respect to these funds, if necessary, minus (c) equity
method earnings (or losses) recorded in accordance with GAAP, |
|
|
b. |
|
subtracting gains (or adding losses) on stock options held in the
Castles, |
|
c. |
|
subtracting unrealized gains (or adding unrealized losses) from
consolidated private equity funds and hybrid PE funds, |
|
d. |
|
subtracting unrealized gains (or adding unrealized losses) on direct
investments in publicly traded portfolio companies and in the Castles, |
|
(iii) |
|
adding (a) proceeds from the sale of shares received pursuant to the
exercise of stock options in certain of the Castles, in excess of their strike
price, minus (b) management fee income recorded in accordance with GAAP in
connection with the receipt of these options, |
21
Expenses
|
(iv) |
|
adding or subtracting, as necessary, the employee profit sharing in
incentive income described in (i) above to match the timing of the expense with
the revenue, |
|
(v) |
|
adding back equity-based compensation expense (including Castle options
assigned to employees, RSUs and RPUs (including the portion of related dividend
and distribution equivalents recorded as compensation expense), restricted shares
and the LTIP), |
|
(vi) |
|
adding back compensation expense recorded in connection with the
forfeiture arrangements entered into among the principals, |
|
(vii) |
|
adding the income (or subtracting the loss) allocable to the interests in
consolidated subsidiaries attributable to Fortress Operating Group units, and |
|
(viii) |
|
adding back income tax benefit or expense and any expense recorded in connection
with the tax receivable agreement (Note 5). |
Total segment assets are equal to total GAAP assets adjusted for:
|
(i) |
|
the difference between the GAAP carrying amount of equity method
investments and their carrying amount for segment reporting purposes, which is
generally fair value for publicly traded investments and cost for nonpublic
investments, |
|
(ii) |
|
employee portions of investments, which are reported gross for GAAP
purposes (as assets offset by Principals and others interests in equity of
consolidated subsidiaries) but net for segment reporting purposes, and |
|
|
(iii) |
|
the difference between the GAAP carrying amount for options owned in certain of the Castles
and their carrying amount for segment reporting purposes, which is intrinsic value. |
22
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Distributable Earnings Impairment
Investment Impairment for DE purposes
Fortress had the following direct and indirect investments in private equity funds, Castles and
hybrid PE funds as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
% Below |
|
|
Periods |
|
|
Mar 31, 2009 |
|
|
|
|
|
|
Share of |
|
|
Cost |
|
|
|
|
|
|
Cost |
|
|
in |
|
|
DE Impairment |
|
|
|
|
Fund |
|
NAV |
|
|
Basis (A) |
|
|
Deficit |
|
|
Basis |
|
|
Deficit |
|
|
Recorded |
|
|
Notes |
|
Main Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund I |
|
$ |
159 |
|
|
$ |
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
$ |
|
|
|
|
|
|
Fund II |
|
|
2,317 |
|
|
|
2,565 |
|
|
|
(248 |
) |
|
|
(10 |
%) |
|
2 Quarters |
|
|
(248 |
) |
|
|
(B |
) |
Fund III and Fund III CO |
|
|
4,798 |
|
|
|
5,030 |
|
|
|
(232 |
) |
|
|
(5 |
%) |
|
4 Quarters |
|
|
(232 |
) |
|
|
(B |
) |
Fund IV and Fund IV CO |
|
|
98,747 |
|
|
|
104,931 |
|
|
|
(6,184 |
) |
|
|
(6 |
%) |
|
6 Quarters |
|
|
(6,184 |
) |
|
|
(B |
) |
Fund V and Fund V CO |
|
|
34,926 |
|
|
|
40,479 |
|
|
|
(5,553 |
) |
|
|
(14 |
%) |
|
6 Quarters |
|
|
(5,553 |
) |
|
|
(B |
) |
Mortgage Opportunities Funds |
|
|
3,097 |
|
|
|
3,615 |
|
|
|
(518 |
) |
|
|
(14 |
%) |
|
4 Quarters |
|
|
(518 |
) |
|
|
(B |
) |
Long Dated Value Funds |
|
|
19,277 |
|
|
|
17,792 |
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Real Assets Funds |
|
|
17,264 |
|
|
|
12,586 |
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Credit Opportunities Funds |
|
|
11,157 |
|
|
|
11,747 |
|
|
|
(590 |
) |
|
|
(5 |
%) |
|
4 Quarters |
|
|
(562 |
) |
|
|
(B |
) |
Single Investment Funds and Investments (combined) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAGFAH (XETRA: GFJ) |
|
|
33,866 |
|
|
|
39,682 |
|
|
|
(5,816 |
) |
|
|
(15 |
%) |
|
4 Quarters |
|
|
(6,588 |
) |
|
|
(B |
) |
Brookdale (NYSE: BKD) |
|
|
9,637 |
|
|
|
10,386 |
|
|
|
(749 |
) |
|
|
(7 |
%) |
|
6 Quarters |
|
|
(749 |
) |
|
|
(B |
) |
Aircastle (NYSE: ACT) |
|
|
318 |
|
|
|
366 |
|
|
|
(48 |
) |
|
|
(13 |
%) |
|
2 Quarters |
|
|
|
|
|
|
|
|
Private investment #1 |
|
|
43,064 |
|
|
|
53,066 |
|
|
|
(10,002 |
) |
|
|
(19 |
%) |
|
4 Quarters |
|
|
(10,002 |
) |
|
|
(B |
) |
Private investment #2 |
|
|
590 |
|
|
|
1,273 |
|
|
|
(683 |
) |
|
|
(54 |
%) |
|
5 Quarters |
|
|
(683 |
) |
|
|
(B |
) |
Private investment #3 |
|
|
242,945 |
|
|
|
275,705 |
|
|
|
(32,760 |
) |
|
|
(12 |
%) |
|
6 Quarters |
|
|
|
|
|
|
(C |
) |
Other |
|
|
25,473 |
|
|
|
35,028 |
|
|
|
(9,555 |
) |
|
|
(27 |
%) |
|
Various |
|
|
(760 |
) |
|
|
(D |
) |
Castles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurocastle (EURONEXT: ECT) |
|
|
360 |
|
|
|
309 |
|
|
|
N/A |
|
|
|
|
|
|
4 Quarters |
|
|
|
|
|
|
|
|
Newcastle (NYSE: NCT) |
|
|
667 |
|
|
|
862 |
|
|
|
(195 |
) |
|
|
(23 |
%) |
|
3 Quarters |
|
|
(195 |
) |
|
|
(B |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
548,662 |
|
|
$ |
615,422 |
|
|
$ |
(73,133 |
) |
|
|
|
|
|
|
|
|
|
$ |
(32,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Before impairment taken at March 31, 2009. |
|
(B) |
|
The investments in these funds were impaired in prior quarters. Further downward
movement in underlying estimated fair values has resulted in additional required
impairment. |
|
(C) |
|
This fund is a single asset fund invested in a railroad and commercial real estate
company. The net asset value of this investment is only 13% below Fortresss basis and the
funds life extends to 2017. Fortress anticipates that this value will recover during the
funds life and has the intent and ability to hold its investment until recovery. As a
result, Fortresss CODM has determined that this decline in value does not meet the
definition of other than temporary impairment at this time. |
|
(D) |
|
This primarily represents indirect investments in funds through hedge fund special
investment accounts, including Fortress Funds not represented individually in the table as
well as funds managed by third parties. Fortresss CODM has analyzed each of these
investments individually and recorded other than temporary impairment where it was deemed
appropriate. |
23
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Clawback Reserve on Incentive Income for DE Purposes
Fortress had recognized incentive income for DE purposes from the following private equity funds
and hybrid PE funds, which are subject to contingent clawback, as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Incentive |
|
|
No Longer |
|
|
Subject to |
|
|
Intrinsic |
|
|
Employee |
|
|
|
|
|
|
Prior Net |
|
|
Periods |
|
|
March 31, 2009 |
|
|
|
|
|
|
Income |
|
|
Subject to |
|
|
Clawback |
|
|
Clawback |
|
|
Portion |
|
|
Net |
|
|
DE Reserves |
|
|
in Intrinsic |
|
|
Gross DE Reserve |
|
|
|
|
Fund |
|
Received |
|
|
Clawback |
|
|
(A) |
|
|
(B) |
|
|
(C) |
|
|
Clawback |
|
|
Taken (D) |
|
|
Clawback |
|
Recorded (D) |
|
|
Notes |
|
|
|
Fund I |
|
$ |
308,633 |
|
|
$ |
296,882 |
|
|
$ |
11,751 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
N/A |
|
$ |
|
|
|
|
(E) |
|
Fund II |
|
|
254,688 |
|
|
|
113,872 |
|
|
|
140,816 |
|
|
|
46,742 |
|
|
|
17,312 |
|
|
|
29,430 |
|
|
|
(25,842 |
) |
|
2 Quarters |
|
|
|
|
|
|
(F) |
|
Fund III |
|
|
72,483 |
|
|
|
|
|
|
|
72,483 |
|
|
|
72,483 |
|
|
|
27,375 |
|
|
|
45,108 |
|
|
|
(45,108 |
) |
|
5 Quarters |
|
|
|
|
|
|
(G) |
|
FRID |
|
|
16,739 |
|
|
|
|
|
|
|
16,739 |
|
|
|
16,739 |
|
|
|
6,698 |
|
|
|
10,041 |
|
|
|
(10,041 |
) |
|
7 Quarters |
|
|
|
|
|
|
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
652,543 |
|
|
$ |
410,754 |
|
|
$ |
241,789 |
|
|
$ |
135,964 |
|
|
$ |
51,385 |
|
|
$ |
84,579 |
|
|
$ |
(80,991 |
) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes deferred incentive income from the consolidated balance sheet plus the maximum
payment under the guarantee, in both cases gross of promote related to non-fee paying
investors (affiliates). |
|
(B) |
|
Intrinsic clawback is the maximum amount of clawback that would be required to be
repaid to the fund if the fund were liquidated at its NAV as of the reporting date. It has
not been reduced for any tax related effects. |
|
(C) |
|
Employees who have received profit sharing payments in connection with private equity
or hybrid PE incentive income are liable to repay Fortress for their share of any clawback.
Fortress remains liable to the funds for these amounts even if it is unable to collect the
amounts from employees (or former employees). |
|
(D) |
|
Net of promote related to non-fee paying investors (affiliates). |
|
(E) |
|
This fund had significant unrealized gains at March 31, 2009. As a result, the CODM
determined that no reserve for clawback was required. |
|
(F) |
|
The net intrinsic clawback in this fund, after the employee portion, in excess of
previously recorded reserves was approximately $3.6 million at March 31, 2009. Increases in
the values of underlying investments have reversed this excess subsequent to March 31,
2009. As a result, no further reserve was deemed necessary. |
|
(G) |
|
The potential clawback on these funds has been fully reserved in prior quarters. |
Impairment Determination
Fortress has recorded a total of approximately $32.3 million of impairment and reserves for DE
purposes on certain private equity funds and hybrid PE funds as described above for DE purposes
during the three months ended March 31, 2009. Fortress expects aggregate returns on its other
private equity funds and hybrid PE funds that are in an unrealized investment loss or intrinsic
clawback position to ultimately exceed their carrying amount or breakeven point, as applicable. If
such funds were liquidated at their March 31, 2009 NAV (although Fortress has no current intention
of doing so), the result would be additional impairment losses and reserves for DE purposes of
approximately $45.2 million.
Summary financial data on Fortresss segments is presented on the following pages, together with a
reconciliation to revenues, assets and net income (loss) for Fortress as a whole. Fortresss
investments in, and earnings (losses) from, its equity method investees by segment are presented in
Note 3.
24
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
March 31, 2009 and the Three Months Then Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
PE |
|
|
Principal |
|
|
|
|
|
|
Fortress |
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Investments |
|
|
Unallocated |
|
|
Subtotal |
|
Segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
37,631 |
|
|
$ |
11,911 |
|
|
$ |
22,629 |
|
|
$ |
28,123 |
|
|
$ |
6,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
106,375 |
|
Incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
37,631 |
|
|
$ |
11,911 |
|
|
$ |
22,629 |
|
|
$ |
28,945 |
|
|
$ |
6,081 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
107,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
29,289 |
|
|
$ |
3,989 |
|
|
$ |
5,975 |
|
|
$ |
2,904 |
|
|
$ |
2,233 |
|
|
$ |
(35,034 |
) |
|
$ |
(151 |
) |
|
$ |
9,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
36,137 |
|
|
$ |
6,910 |
|
|
$ |
2,860 |
|
|
$ |
4,800 |
|
|
$ |
10,315 |
|
|
$ |
804,208 |
|
|
$ |
493,696 |
|
|
$ |
1,358,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
|
Fortress |
|
|
Reconciliation |
|
|
Fortress |
|
|
Principals |
|
|
Net Income |
|
|
|
Subtotal |
|
|
to GAAP |
|
|
Consolidated* |
|
|
and Others |
|
|
(Loss) |
|
Revenues |
|
$ |
107,197 |
|
|
$ |
15,099 |
|
|
$ |
122,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings / net income (loss) |
|
$ |
9,205 |
|
|
$ |
(76,364 |
) |
|
$ |
(67,159 |
) |
|
$ |
(219,522 |
) |
|
$ |
(286,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,358,926 |
|
|
$ |
13,577 |
|
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Unallocated assets include deferred tax assets of $411.7 million.
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
PE |
|
|
Principal |
|
|
|
|
|
|
Fortress |
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Investments |
|
|
Unallocated |
|
|
Subtotal |
|
Segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
$ |
39,771 |
|
|
$ |
13,694 |
|
|
$ |
52,719 |
|
|
$ |
36,844 |
|
|
$ |
2,009 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
145,037 |
|
Incentive income |
|
|
28,741 |
|
|
|
12 |
|
|
|
2,695 |
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
68,512 |
|
|
$ |
13,706 |
|
|
$ |
55,414 |
|
|
$ |
37,269 |
|
|
$ |
2,009 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
176,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable
earnings |
|
$ |
50,056 |
|
|
$ |
4,276 |
|
|
$ |
14,731 |
|
|
$ |
2,048 |
|
|
$ |
(112 |
) |
|
$ |
(13,330 |
) |
|
$ |
38 |
|
|
$ |
57,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
|
Fortress |
|
|
Reconciliation |
|
|
Fortress |
|
|
Principals |
|
|
Net Income |
|
|
|
Subtotal |
|
|
to GAAP |
|
|
Consolidated* |
|
|
and Others |
|
|
(Loss) |
|
Revenues |
|
$ |
176,910 |
|
|
$ |
23,970 |
|
|
$ |
200,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
distributable
earnings / net
income (loss) |
|
$ |
57,707 |
|
|
$ |
(126,624 |
) |
|
$ |
(68,917 |
) |
|
$ |
(208,269 |
) |
|
$ |
(277,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Net income (loss) presented herein represents net income (loss) attributable to
Fortresss Class A shareholders.
25
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Reconciling items between segment measures and GAAP measures:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 and |
|
|
|
|
|
|
the Three Months then |
|
|
Three Months Ended |
|
|
|
Ended |
|
|
March 31, 2008 |
|
Adjustments from segment revenues to GAAP revenues |
|
|
|
|
|
|
|
|
Adjust management fees* |
|
$ |
163 |
|
|
$ |
163 |
|
Adjust incentive income |
|
|
|
|
|
|
5,899 |
|
Adjust income from the receipt of options |
|
|
|
|
|
|
|
|
|
|
Other revenues* |
|
|
|
|
|
|
|
|
Adjust management fees from non-affiliates |
|
|
(886 |
) |
|
|
(1,143 |
) |
Adjust incentive income from non-affiliates |
|
|
(822 |
) |
|
|
(628 |
) |
Adjust other revenues (including expense reimbursements) |
|
|
16,644 |
|
|
|
19,679 |
|
|
|
|
|
|
|
|
|
|
|
14,936 |
|
|
|
17,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
15,099 |
|
|
$ |
23,970 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment revenues do not include GAAP other revenues, except to the extent they represent
management fees or incentive income; such revenues are
included elsewhere in the calculation of distributable earnings. |
|
|
|
|
|
|
|
|
|
Adjustments from pre-tax distributable earnings to GAAP net income (loss)** |
|
|
|
|
|
|
|
|
Adjust incentive income |
|
|
|
|
|
|
|
|
Incentive income received from private equity funds and hybrid |
|
|
|
|
|
|
|
|
PE funds, subject to contingent repayment |
|
$ |
|
|
|
$ |
(26,077 |
) |
Incentive income accrued from private equity funds and hybrid |
|
|
|
|
|
|
|
|
PE funds, no longer subject to contingent repayment |
|
|
|
|
|
|
31,959 |
|
Incentive income received from private equity funds and hybrid |
|
|
|
|
|
|
|
|
PE funds, not subject to contingent repayment |
|
|
|
|
|
|
17 |
|
Incentive income received from hedge funds, subject
to annual performance achievement |
|
|
|
|
|
|
|
|
Reserve for clawback, gross (see discussion above) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,899 |
|
Adjust other income |
|
|
|
|
|
|
|
|
Distributions of earnings from equity method investees*** |
|
|
|
|
|
|
(365 |
) |
Earnings (losses) from equity method investees*** |
|
|
(38,921 |
) |
|
|
(40,642 |
) |
Gains (losses) on options in equity method investees |
|
|
24 |
|
|
|
(12,493 |
) |
Unrealized gains (losses) on publicly traded investments |
|
|
(1,853 |
) |
|
|
(17,324 |
) |
Impairment of investments (see discussion above) |
|
|
32,274 |
|
|
|
|
|
Adjust income from the receipt of options |
|
|
|
|
|
|
|
|
|
|
|
(8,476 |
) |
|
|
(70,824 |
) |
Adjust employee compensation |
|
|
|
|
|
|
|
|
Adjust employee equity-based compensation expense
(including Castle options assigned) |
|
|
(53,044 |
) |
|
|
(35,601 |
) |
Adjust employee portion of incentive income from private equity
funds, accrued prior to the realization of incentive income |
|
|
|
|
|
|
9,648 |
|
Adjust employee portion of incentive income from one private
equity fund, not subject to contingent repayment |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(53,044 |
) |
|
|
(25,957 |
) |
Adjust Principals equity-based compensation expense |
|
|
(234,759 |
) |
|
|
(237,367 |
) |
Adjust Principals interests related to Fortress Operating Group units |
|
|
219,623 |
|
|
|
208,877 |
|
Adjust tax receivable agreement liability |
|
|
(55 |
) |
|
|
|
|
Adjust income taxes |
|
|
347 |
|
|
|
(7,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
(76,364 |
) |
|
$ |
(126,624 |
) |
|
|
|
|
|
|
|
|
|
|
** |
|
Net income (loss) presented herein represents net income (loss) attributable to Fortresss Class
A shareholders. |
|
*** |
|
This adjustment relates to all of the Castles, private equity and hybrid PE Fortress Funds and
hedge fund special investment accounts in which Fortress has an investment. |
|
|
|
|
|
Adjustments from total segment assets to GAAP assets |
|
|
|
|
Adjust equity investments from fair value |
|
$ |
|
|
Adjust equity investments from cost |
|
|
(11,135 |
) |
Adjust investments gross of employee portion |
|
|
24,640 |
|
Adjust option investments from intrinsic value |
|
|
72 |
|
|
|
|
|
Total adjustments |
|
$ |
13,577 |
|
|
|
|
|
26
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
Fortresss depreciation expense by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid |
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Hedge |
|
|
Hedge |
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Funds |
|
|
PE Funds |
|
|
Unallocated |
|
|
Total |
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
284 |
|
|
$ |
169 |
|
|
$ |
611 |
|
|
$ |
696 |
|
|
$ |
107 |
|
|
$ |
774 |
|
|
$ |
2,641 |
|
2008 |
|
$ |
229 |
|
|
$ |
192 |
|
|
$ |
728 |
|
|
$ |
772 |
|
|
$ |
30 |
|
|
$ |
485 |
|
|
$ |
2,436 |
|
11. SUBSEQUENT EVENTS
These financial statements include a discussion of material events which have occurred subsequent
to March 31, 2009 (referred to as subsequent events) through May 11, 2009. Events subsequent to
that date have not been considered in these financial statements.
On May 5, 2009, consolidated affiliates of Fortress executed several agreements to become the
investment manager of certain investment funds currently managed by D.B. Zwirn & Co., L.P. (the
Zwirn Funds) and to effect other related transactions. Consummation of these transactions is
currently anticipated to occur in the second quarter of 2009 subject to the satisfaction of various
conditions, including the approval of investors in certain of the Zwirn funds. As of May 5, 2009,
the Zwirn Funds managed approximately $2 billion of assets.
27
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
NOTE 12 CONSOLIDATING FINANCIAL INFORMATION
The consolidating financial information presents the balance sheet, statement of operations and
statement of cash flows for Fortress Operating Group (on a combined basis) and Fortress Investment
Group LLC (including its consolidated subsidiaries other than those within Fortress Operating
Group) on a deconsolidated basis, as well as the related eliminating entries for intercompany
balances and transactions, which sum to Fortress Investment Groups consolidated financial
statements as of, and for the three months ended, March 31, 2009.
Fortress Operating Group includes all of Fortresss operating and investing entities. The upper
tier Fortress Operating Group entities are the obligors on Fortresss credit agreement (Note 4).
Segregating the financial results of this group of entities provides a more transparent view of the
capital deployed in Fortresss businesses and the relevant ratios for borrowing entities.
The consolidating balance sheet information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Combined |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
42,541 |
|
|
$ |
767 |
|
|
$ |
|
|
|
$ |
43,308 |
|
Due from affiliates |
|
|
64,188 |
|
|
|
|
|
|
|
|
|
|
|
64,188 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investees |
|
|
759,980 |
|
|
|
20,320 |
|
|
|
(20,320 |
) |
|
|
759,980 |
|
Options in affiliates |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Deferred tax asset |
|
|
10,280 |
|
|
|
401,376 |
|
|
|
|
|
|
|
411,656 |
|
Other assets |
|
|
88,733 |
|
|
|
4,566 |
|
|
|
|
|
|
|
93,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
965,794 |
|
|
$ |
427,029 |
|
|
$ |
(20,320 |
) |
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits |
|
$ |
42,679 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42,679 |
|
Due to affiliates |
|
|
11,615 |
|
|
|
338,765 |
|
|
|
|
|
|
|
350,380 |
|
Deferred incentive income |
|
|
163,635 |
|
|
|
|
|
|
|
|
|
|
|
163,635 |
|
Debt obligations payable |
|
|
604,041 |
|
|
|
|
|
|
|
|
|
|
|
604,041 |
|
Other liabilities |
|
|
59,333 |
|
|
|
|
|
|
|
|
|
|
|
59,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,303 |
|
|
|
338,765 |
|
|
|
|
|
|
|
1,220,068 |
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
1,918,740 |
|
|
|
663,848 |
|
|
|
(1,918,740 |
) |
|
|
663,848 |
|
Retained earnings (accumulated deficit) |
|
|
(1,850,576 |
) |
|
|
(580,538 |
) |
|
|
1,850,576 |
|
|
|
(580,538 |
) |
Accumulated other comprehensive income (loss) |
|
|
(6,787 |
) |
|
|
(939 |
) |
|
|
6,787 |
|
|
|
(939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fortress shareholders equity (B) |
|
|
61,377 |
|
|
|
82,371 |
|
|
|
(61,377 |
) |
|
|
82,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principals and others interests in equity of
consolidated subsidiaries |
|
|
23,114 |
|
|
|
5,893 |
|
|
|
41,057 |
|
|
|
70,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
84,491 |
|
|
|
88,264 |
|
|
|
(20,320 |
) |
|
|
152,435 |
|
|
|
$ |
965,794 |
|
|
$ |
427,029 |
|
|
$ |
(20,320 |
) |
|
$ |
1,372,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group. |
(B) |
|
Includes the Principals members equity in the
Fortress Operating Group column, which is eliminated in consolidation. |
28
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The consolidating statement of operations information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Consolidated |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
105,652 |
|
Incentive income from affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
|
|
|
|
|
|
|
|
13,047 |
|
Other revenues |
|
|
3,594 |
|
|
|
3 |
|
|
|
|
|
|
|
3,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,293 |
|
|
|
3 |
|
|
|
|
|
|
|
122,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,125 |
|
|
|
61 |
|
|
|
|
|
|
|
8,186 |
|
Compensation and benefits |
|
|
109,236 |
|
|
|
|
|
|
|
|
|
|
|
109,236 |
|
Principals agreement compensation |
|
|
234,759 |
|
|
|
|
|
|
|
|
|
|
|
234,759 |
|
General, administrative and other |
|
|
17,185 |
|
|
|
|
|
|
|
|
|
|
|
17,185 |
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,946 |
|
|
|
61 |
|
|
|
|
|
|
|
372,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
(396 |
) |
Net realized gains (losses) from affiliate investments |
|
|
(248 |
) |
|
|
|
|
|
|
|
|
|
|
(248 |
) |
Net unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) from affiliate investees |
|
|
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
(1,829 |
) |
Tax
receivable agreements liability reduction |
|
|
|
|
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(66,606 |
) |
|
|
66,606 |
|
|
|
(34,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,322 |
) |
|
|
(66,661 |
) |
|
|
66,606 |
|
|
|
(37,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
(286,975 |
) |
|
|
(66,719 |
) |
|
|
66,606 |
|
|
|
(287,088 |
) |
Income tax benefit (expense) |
|
|
847 |
|
|
|
(440 |
) |
|
|
|
|
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(286,128 |
) |
|
$ |
(67,159 |
) |
|
$ |
66,606 |
|
|
$ |
(286,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principals and Others Interests in Income (Loss) of Consolidated
Subsidiaries |
|
$ |
101 |
|
|
$ |
|
|
|
$ |
(219,623 |
) |
|
$ |
(219,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to Class A Shareholders (B) |
|
$ |
(286,229 |
) |
|
$ |
(67,159 |
) |
|
$ |
286,229 |
|
|
$ |
(67,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group.
|
(B) |
|
Includes net income (loss) attributable to the
Principals interests in the Fortress Operating Group column,
which is eliminated in consolidation.
|
29
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)
The consolidating statement of cash flows information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Fortress |
|
|
Fortress |
|
|
|
|
|
|
Fortress |
|
|
|
Operating |
|
|
Investment |
|
|
|
|
|
|
Investment |
|
|
|
Group |
|
|
Group LLC |
|
|
Intercompany |
|
|
Group LLC |
|
|
|
Consolidated |
|
|
Consolidated (A) |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(286,128 |
) |
|
$ |
(67,159 |
) |
|
$ |
66,606 |
|
|
$ |
(286,681 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
2,641 |
|
Other amortization and accretion |
|
|
3,414 |
|
|
|
|
|
|
|
|
|
|
|
3,414 |
|
(Earnings) losses from equity method investees |
|
|
34,849 |
|
|
|
66,606 |
|
|
|
(66,606 |
) |
|
|
34,849 |
|
Distributions of earnings from equity method investees |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
(Gains) losses from investments |
|
|
2,473 |
|
|
|
|
|
|
|
|
|
|
|
2,473 |
|
Deferred incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense |
|
|
(2,937 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
(3,759 |
) |
Tax receivable agreement liability reduction |
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Equity-based compensation |
|
|
287,803 |
|
|
|
|
|
|
|
|
|
|
|
287,803 |
|
Cash flows due to changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from affiliates |
|
|
(25,932 |
) |
|
|
|
|
|
|
|
|
|
|
(25,932 |
) |
Other assets |
|
|
(3,317 |
) |
|
|
2,060 |
|
|
|
|
|
|
|
(1,257 |
) |
Accrued compensation and benefits |
|
|
(108,216 |
) |
|
|
|
|
|
|
|
|
|
|
(108,216 |
) |
Due to affiliates |
|
|
(1,428 |
) |
|
|
61 |
|
|
|
|
|
|
|
(1,367 |
) |
Deferred incentive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
33,857 |
|
|
|
(1,200 |
) |
|
|
|
|
|
|
32,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(62,910 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
(63,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to equity method investees |
|
|
(31,792 |
) |
|
|
|
|
|
|
|
|
|
|
(31,792 |
) |
Distributions of capital from equity method investees |
|
|
10,538 |
|
|
|
292 |
|
|
|
(292 |
) |
|
|
10,538 |
|
Purchase of fixed assets |
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
|
|
(1,110 |
) |
Proceeds from disposal of fixed assets |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(22,358 |
) |
|
|
292 |
|
|
|
(292 |
) |
|
|
(22,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under debt obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt obligations |
|
|
(125,000 |
) |
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
Payment of deferred financing costs |
|
|
(4,162 |
) |
|
|
|
|
|
|
|
|
|
|
(4,162 |
) |
Dividends and dividend equivalents paid |
|
|
(292 |
) |
|
|
|
|
|
|
292 |
|
|
|
|
|
Principals and others interests in equity of consolidated subsidiaries distributions |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Principals and others interests in equity of consolidated subsidiaries contributions |
|
|
(5,225 |
) |
|
|
|
|
|
|
|
|
|
|
(5,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(134,654 |
) |
|
|
|
|
|
|
292 |
|
|
|
(134,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(219,922 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
(220,029 |
) |
Cash and Cash Equivalents, Beginning of Period |
|
|
262,463 |
|
|
|
874 |
|
|
|
|
|
|
|
263,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
42,541 |
|
|
$ |
767 |
|
|
$ |
|
|
|
$ |
43,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Other than Fortress Operating Group. |
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(tables in thousands except as otherwise indicated and per share data)
The following discussion should be read in conjunction with Fortress Investment Groups
consolidated financial statements and the related notes (referred to as consolidated financial
statements or historical consolidated financial statements) included within this Quarterly
Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known
and unknown risks and uncertainties. Actual results and the timing of events may differ
significantly from those expressed or implied in such forward-looking statements due to a number of
factors, including those included in Part II, Item 1A, Risk Factors and elsewhere in this
Quarterly Report on Form 10-Q.
General
Our Business
Fortress is a leading global alternative asset manager with approximately $26.5 billion in AUM as
of March 31, 2009. We raise, invest and manage private equity funds, liquid hedge funds and hybrid
funds. We earn management fees based on the size of our funds, incentive income based on the
performance of our funds, and investment income from our principal investments in those funds. We
invest capital in each of our businesses.
As of March 31, 2009, we managed alternative assets in three core businesses:
Private Equity a business that manages approximately $13.2 billion of AUM comprised of two
business segments: (i) private equity funds that primarily make significant, control-oriented
investments in debt and equity securities of public or privately held entities in North America and
Western Europe, with a focus on acquiring and building asset-based businesses with significant cash
flows; and (ii) publicly traded alternative investment vehicles, which we refer to as Castles,
that invest primarily in real estate and real estate related debt investments.
Liquid Hedge Funds a business that manages approximately $4.8 billion of AUM. These funds invest
globally in fixed income, currency, equity and commodity markets and related derivatives to
capitalize on imbalances in the financial markets.
Hybrid Funds a business that manages approximately $8.5 billion of AUM comprised of two business
segments: (i) hybrid hedge funds which make highly diversified investments globally in assets,
opportunistic lending situations and securities throughout the capital structure with a value
orientation, as well as in investment funds managed by external managers; and (ii) hybrid private
equity (PE) funds which are comprised of a family of credit opportunities funds focused on
investing in distressed and undervalued assets, a family of ''long dated value funds focused on
investing in undervalued assets with limited current cash flows and long investment horizons, and a
family of real assets funds focused on investing in tangible and intangible assets in four
principal categories (real estate, capital assets, natural resources and intellectual property).
In addition, we treat our principal investments in these funds as a distinct business segment.
Managing Business Performance
We conduct our management and investment business through the following six primary segments: (i)
private equity funds, (ii) Castles (iii) liquid hedge funds, (iv) hybrid hedge funds, (v) hybrid
private equity (PE) funds, and (vi) principal investments in those funds as well as cash that is
available to be invested. These segments are differentiated based on the varying investment
strategies of the funds we manage in each segment.
The amounts not allocated to a segment consist primarily of certain general and administrative
expenses. Where applicable, portions of the general and administrative expenses have been allocated
between the segments.
Management assesses our segments on a Fortress Operating Group and pre-tax basis, and therefore
adds back the interests in consolidated subsidiaries related to Fortress Operating Group units
(held by the principals) and income tax expense.
Management assesses the net performance of each segment based on its distributable earnings.
Distributable earnings is not a measure of cash generated by operations which is available for
distribution. Rather distributable earnings is a supplemental measure of operating performance used
by management in analyzing its segment and overall results. Distributable earnings should not be
considered as an alternative to cash flow in accordance with GAAP or as a measure of our liquidity,
and is not necessarily indicative of cash available to fund cash needs (including dividends and
distributions).
We believe that the presentation of distributable earnings enhances a readers understanding of the
economic operating performance of our segments. For a more detailed discussion of distributable
earnings and how it reconciles to our GAAP net income (loss), see Results of Operations
Segments Analysis below.
31
Market Considerations
Our revenues consist primarily of (i) management fees based generally on the size of our funds,
(ii) incentive income based on the performance of our funds and (iii) investment income from our
investments in those funds. Our ability to maintain and grow our revenues both at Fortress and
within our funds depends on our ability to attract new capital and investors, secure investment
opportunities, obtain financing for transactions, consummate investments and deliver attractive
risk-adjusted returns. Our ability to execute this investment strategy depends upon a number of
market conditions, including:
The strength and liquidity of U.S. and global financial institutions and the financial system.
Many market participants have become increasingly uncertain about the health of a number of
financial institutions as well as the financial system in general. Continuing write-downs and
capital related issues in the financial services industry have contributed to the recent wave of
significant events affecting financial institutions, including the insolvency of Lehman Brothers,
the governments placing of Fannie Mae, Freddie Mac and AIG under its supervision, the governments
increasing its equity investment in Citigroup, and the announced distressed sales of all or
portions of Bear Stearns, Merrill Lynch, Wachovia and Washington Mutual. These events have
impacted the credit and equity markets and global economy in a number of ways (some of which are
discussed in more detail below under -The strength and liquidity of the U.S. and global equity and
debt markets). In addition, certain of these institutions serve as key counterparties for a
tremendous number of derivatives and other financial instruments held by Fortress and our funds.
The consolidation and elimination of counterparties has increased our concentration of counterparty
risk, decreased the universe of potential counterparties and reduced our ability to obtain
competitive financing rates. Moreover, the insolvency of Lehman Brothers affected some of our
funds in various ways. For example, some of our hedge funds had prime brokerage accounts with
Lehman Brothers, and Lehman Brothers was the counterparty on a number of these funds derivatives,
repurchase agreements and other financial instruments. These funds are working to close out such
arrangements, and we do not currently expect losses as a result of the Lehman insolvency to have a
material effect on the net asset value of any Fortress Fund or on Fortress. However, due to the
sudden nature of Lehmans insolvency, the complexity and ambiguity of both the contractual
arrangements and applicable regulations, this process will take time, may be expensive and may
result in one or more funds receiving only a portion of the amount they are owed (or potentially
receiving nothing at all). Additional failures of financial institutions, particularly those who
serve as counterparties to our financing arrangements, would have a meaningfully negative impact on
the financial markets in which we operate and could have a meaningfully negative impact on Fortress
and one or more of our funds.
The strength and liquidity of the U.S. and global equity and debt markets.
Strong equity market conditions enable our private equity funds and hybrid PE funds to increase the
value, and effect realizations, of their portfolio company investments. In addition, strong equity
markets make it generally easier for our funds that invest in equities to generate positive
investment returns. The condition of debt markets also has a meaningful impact on our business.
Several of our funds make investments in debt instruments, which are assisted by a strong and
liquid debt market. In addition, our funds borrow money to make investments. Our funds utilize
leverage in order to increase investment returns, which ultimately drive the performance of our
funds. Furthermore, we utilize debt to finance our investments in our funds and for working capital
purposes.
Although equity and debt market conditions had been favorable for a number of years, the debt
market conditions began to deteriorate in mid-2007, as the United States experienced considerable
turbulence in the housing and sub-prime mortgage markets, which negatively affected other fixed
income markets. The difficult conditions in the fixed income markets prompted lenders to cease
committing to new senior loans and other debt, which, in turn, made it extremely difficult to
finance new and pending private equity acquisitions or to refinance existing debt. Recently
announced private equity-led acquisitions have been smaller, less levered, and subject to more
restrictive debt covenants than acquisitions done prior to the disruption.
As the turbulence continued and its intensity increased, equity market conditions also began to
deteriorate in the latter part of 2007 as concerns of an economic slowdown began to affect equity
valuations. The resulting reduction in liquidity and increase in volatility caused several
commercial and investment banks, hedge funds and other financial institutions to reduce the
carrying value of a significant amount of their fixed income holdings, which further reduced the
liquidity of debt and, to a lesser extent, equity instruments. Although the United States and
other governments took a number of significant steps to improve market conditions, such efforts to
date have not brought stability or liquidity to the capital markets, and we cannot predict the
future conditions of these markets or the impact of such conditions on our business.
The current market conditions have negatively impacted our business in several ways:
|
|
|
There currently is less debt and equity capital available in the market relative to the
levels available in recent years, which, coupled with additional margin collateral
requirements imposed by lenders on some types of investments, debt and derivatives, has
increased the importance of maintaining sufficient liquidity without relying upon additional
infusions of capital from the debt and equity markets. Based on cash balances, committed
financing and short-term operating cash flows, in the judgment of management we have
sufficient liquidity in the current market environment. However, maintaining this liquidity
rather than investing available capital, and the reduced availability of attractive
financing, has reduced our returns. Furthermore, we expect that our ability to access
liquidity through the raising of equity capital or the issuance of debt obligations has been
limited by the current market environment. This, in turn, may
limit our ability to make investments, distributions, or engage in other strategic
transactions. The dislocation of values and associated decreased liquidity in the global
equity and debt markets have caused a material depreciation in equity and fixed income asset
values, greater price volatility and weaker economic conditions around the globe. This has
resulted in a significant reduction in the value of our investments, which in turn impacts our
management fees, incentive income and investment income as described below. |
32
|
|
|
There has been a prolonged reduction in market trading activity. This reduction and
concern over market conditions have resulted in significant reductions in valuations by third
party brokers and pricing agents. |
|
|
|
The per share market prices of the investments held by our private equity funds in public
companies have decreased substantially. This, in turn, has contributed to a significant
decrease in our public company surplus. A decrease in this surplus hinders our ability to
realize gains within these funds and therefore our ability to earn incentive income.
Furthermore, the disruptions in the debt and equity markets have made exit strategies for
private investments more difficult to execute as potential buyers have difficulty obtaining
attractive financing and the demand for IPOs has been greatly reduced. |
|
|
|
These conditions have made it more difficult to generate positive investment returns and
have contributed to increased redemption requests from investors throughout the hedge fund
industry, and a number of our funds have been affected by this trend. |
|
|
|
As a result of the above factors: |
|
|
|
We did not pay a dividend on our Class A shares for the third quarter of 2008
through the first quarter of 2009. The decision to pay a dividend, as well as the amount
of any dividends paid, is subject to change at the discretion of our board of directors
based upon a number of factors, including actual and projected distributable earnings. If
current conditions persist or deteriorate, we may be unable to pay any dividends. |
|
|
|
Our share of the NAV of certain fund investments, including certain investments on
which we have received incentive returns, has declined below their related carrying
amounts for distributable earnings purposes. During the three months ended March 31,
2009, we have taken $32.3 million of impairments and reserves related to such funds for
distributable earnings purposes. While we expect aggregate returns on our other private
equity fund and hybrid PE fund investments to ultimately exceed their carrying amount, if
such funds were liquidated at their current NAV (although we have no present intention of
doing so), the result would be additional impairment and reserves of approximately $45.2
million. Declines in the NAV of our fund investments have also caused us to record GAAP
losses from equity method investees of $34.8 million in 2009. Furthermore, such declines
impact our future management fees, generally at an annual rate of between 1% 3% of the
decline in aggregate fund NAV. See - Fee Paying Assets Under Management below for a
table summarizing our AUM. |
|
|
|
Our liquid hedge funds received a total of $0.6 billion in redemption requests,
including affiliates, for the three months ended March 31, 2009. These redemptions will
directly impact the management fees we receive in 2009 from such funds (which pay
management fees of between 2% 3% of AUM). Investors in our hybrid hedge funds are
permitted to request that their capital be returned on an annual basis, and such returns
of capital are paid over time as the underlying investments are liquidated, in accordance
with the governing documents of the applicable funds. During this period, such amounts
continue to be subject to management fees and, as applicable, incentive income. The 2009
notice date for the hybrid hedge funds has not yet occurred. |
|
|
|
As a result of not meeting the incentive income thresholds with respect to such
funds current investors, the incentive income from substantially all of our liquid and
hybrid hedge funds has been discontinued for an indefinite period of time. Returns earned
on capital from new investors continue to be incentive income eligible. Unrealized losses
in substantially all of our private equity funds and hybrid PE funds have resulted in
significantly higher future returns being required before we earn incentive income from
such funds. The returns required are subject to a number of variables including: the
amount of loss incurred, the amount of outstanding capital in the fund, the amount and
timing of future capital draws and distributions, the rate of preferential return earned
by investors, and others. We do not expect to earn a substantial amount of incentive
income in 2009. |
|
|
|
The current ratio of our distributable earnings to our AUM is lower than it has
been historically, and it is reasonably likely that the future ratios may also be below
historic levels for an indeterminate period of time. |
|
|
|
Decreases in revenues and in the value of our principal investments could
potentially affect our ability to comply with our debt covenants in the future. See
Covenants below. |
|
|
|
We are currently focused on preserving capital and liquidity rather than making
investments. |
The strength of, and competitive dynamics within, the alternative asset management industry,
including the amount of capital invested in, and withdrawn from, alternative investments.
The strength of the alternative asset management industry, and our competitive strength relative to
our peers, are dependent upon several factors, including, among other things, (1) the investment
returns alternative asset managers can provide relative
to other investment options, (2) the amount of capital investors allocate to alternative asset
managers and (3) our performance relative to our competitors and the related impact on our ability
to attract new capital.
33
First, the strength of the alternative asset management industry is dependent upon the investment
returns alternative asset managers can provide relative to other investment options. This factor
depends, in part, on the interest rate and credit spreads (which represent the yield demanded on
financial instruments by the market in comparison to a benchmark rate, such as the relevant U.S.
treasury rate or LIBOR) available on other investment products because as interest rates rise
and/or spreads widen, returns available on such investments would tend to increase and, therefore,
become more attractive relative to the returns offered by investment products offered by
alternative asset managers. We have benefited in the past from relatively tight spreads, which
have allowed us and the funds we manage to obtain financing for investments at attractive rates and
made our investment products attractive relative to many other products. Over the past two years,
spreads have widened significantly. In addition to potentially reducing the relative
attractiveness of our investment products, this widening will typically increase our costs when
financing our investments using debt, which, in turn, reduces the net return we can earn on those
investments. Furthermore, wider spreads reduce the value of investments currently owned by our
funds. A reduction in the value of our funds investments directly impacts our management fees and
incentive income from such funds. As a result, this dynamic could slow capital flow to the
alternative investment sector.
A second and related factor is the amount of capital invested with such managers. Over the past
several years, institutions, high net worth individuals and other investors (including sovereign
wealth funds) have increased their allocations of capital to the alternative investment sector.
However, investors have recently begun reducing the amount of capital they are allocating to
certain alternative asset investment products, particularly hedge funds, for three reasons. First,
as discussed above, challenging market conditions have reduced the returns generated by hedge
funds, with many funds posting negative returns in 2008. Second, the lack of available credit has
prompted many investors to maximize their cash holdings. Because the terms of many hedge funds
allow investors to redeem their capital periodically (as opposed to most private equity funds,
which do not allow redemptions), investors have begun redeeming their investments at rates that are
generally higher than redemptions rates in previous years. This wave of redemptions may affect the
investment decisions, and impair the viability, of many hedge funds who may not have sufficient
cash on hand to satisfy redemption requests and may thus be forced either to sell assets at
distressed prices in order to generate cash or take other measures. Certain of our hedge funds have
recently received higher levels of redemption requests than those received in previous years.
Third, negative investment performance has significantly reduced the amount of capital held by
university endowments, pension funds, insurance companies and other traditionally significant
investors in the alternative assets sector. As a result, many of these investors are decreasing the
amount of capital they will allocate to alternative assets.
The third factor, which most directly impacts our results, is our investment performance relative
to other investment alternatives, including products offered by other alternative asset managers.
As a historical leader in the alternative asset management sector based on the size, diversity and
historical performance of our funds, we have been able to attract a significant amount of new
capital. However, as noted above, current market conditions have reduced the flow of new capital
into the alternative asset management sector, and we have recently experienced stronger headwinds
in our capital raising efforts, and we expect to continue to experience these trends during 2009.
These factors have prompted us to reduce our expectations regarding future management fees and
potential incentive income.
Market Considerations Summary
While short-term disruptions in the markets, with respect to equity prices, interest rates, credit
spreads or other market factors, including market liquidity, may adversely affect our existing
positions, we believe such disruptions generally present significant new opportunities for
investment, particularly in distressed asset classes. Our ability to take advantage of these
opportunities will depend on our ability to access debt and equity capital, both at Fortress and
within the funds. No assurance can be given that future trends will not be disadvantageous to us,
particularly if current challenging conditions persist or intensify.
We do not currently know the full extent to which this disruption will affect us or the markets in
which we operate. If the disruption continues, or results in a permanent, fundamental change in
the credit markets, we and the funds we manage may experience further tightening of liquidity,
reduced earnings and cash flow, impairment charges, increased margin requirements, as well as
challenges in maintaining our reputation, raising additional capital, maintaining compliance with
debt covenants, obtaining investment financing and making investments on attractive terms, and may
need to make corresponding fundamental changes in our investment practices. However, to date we
have been able to continue raising capital for our funds, on a net basis, both through new and
existing funds, which serves both to increase our AUM and our management fee income and to give us
a significant amount of capital available to be invested at a time when we believe attractive
returns in distressed and other asset classes are available.
34
Results of Operations
The following is a discussion of our results of operations as reported under GAAP. For a detailed
discussion of distributable earnings and revenues from each of our segments, see Segment
Analysis below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
|
$ |
(38,405 |
) |
Incentive income from affiliates |
|
|
|
|
|
|
37,144 |
|
|
|
(37,144 |
) |
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
14,270 |
|
|
|
(1,223 |
) |
Other revenues |
|
|
3,597 |
|
|
|
5,409 |
|
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
122,296 |
|
|
|
200,880 |
|
|
|
(78,584 |
) |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,186 |
|
|
|
10,336 |
|
|
|
(2,150 |
) |
Compensation and benefits |
|
|
109,236 |
|
|
|
127,019 |
|
|
|
(17,783 |
) |
Principals agreement compensation |
|
|
234,759 |
|
|
|
237,367 |
|
|
|
(2,608 |
) |
General, administrative and other expense (including
depreciation and amortization) |
|
|
19,826 |
|
|
|
19,006 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372,007 |
|
|
|
393,728 |
|
|
|
(21,721 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) other investments |
|
|
(2,473 |
) |
|
|
(27,957 |
) |
|
|
25,484 |
|
Tax receivable agreement liability reduction |
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(49,129 |
) |
|
|
14,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,377 |
) |
|
|
(77,086 |
) |
|
|
39,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
(287,088 |
) |
|
|
(269,934 |
) |
|
|
(17,154 |
) |
Income tax benefit (expense) |
|
|
407 |
|
|
|
(7,252 |
) |
|
|
7,659 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(286,681 |
) |
|
$ |
(277,186 |
) |
|
$ |
(9,495 |
) |
|
|
|
|
|
|
|
|
|
|
Factors Affecting Our Business
During the periods discussed herein, the following are significant factors which have affected our
business and materially impacted our results of operations:
|
|
|
level of performance of our funds; and |
|
|
|
growth of our fund management and investment platform and our compensation
structure to sustain that growth. |
Fee Paying Assets Under Management
We measure AUM by reference to the fee paying assets we manage, including the capital we have the
right to call from our investors due to their capital commitments. As a result of raising new funds
and increases in the NAVs of our hedge funds from new investor capital, our AUM has increased over
the periods discussed. Recently, lower performance in our funds, coupled with redemptions in our
liquid hedge funds, have caused offsetting reductions in our AUM.
35
Our AUM has changed for the three months ended March 31, 2009 as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid |
|
|
|
|
|
|
Funds |
|
|
Castles |
|
|
Funds |
|
|
Hedge Funds |
|
|
PE Funds |
|
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM December 31, 2008 |
|
$ |
10,307 |
|
|
$ |
3,182 |
|
|
$ |
7,169 |
|
|
$ |
6,494 |
|
|
$ |
2,302 |
|
|
$ |
29,454 |
|
Capital raised (A) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Increase in invested capital |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376 |
|
|
|
436 |
|
Redemptions (B) |
|
|
|
|
|
|
|
|
|
|
(2,494 |
) |
|
|
(152 |
) |
|
|
|
|
|
|
(2,646 |
) |
Return of capital distributions |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(565 |
) |
|
|
(577 |
) |
Adjustment for reset date (C) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystallized incentive income (D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) and foreign exchange (E) |
|
|
(201 |
) |
|
|
(104 |
) |
|
|
125 |
|
|
|
116 |
|
|
|
(74 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM March 31, 2009 |
|
$ |
10,161 |
|
|
$ |
3,078 |
|
|
$ |
4,809 |
|
|
$ |
6,451 |
|
|
$ |
2,039 |
|
|
$ |
26,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes offerings of shares by the Castles, if any. |
|
(B) |
|
Excludes redemptions which reduced AUM subsequent to March 31, 2009. See - Market
Considerations above. |
|
(C) |
|
The reset date is the date on which a private equity fund or hybrid PE fund stops paying
management fees based on commitments and starts paying such fees based on invested capital,
which therefore changes fee paying AUM. |
|
(D) |
|
Represents the transfer of value from investors (fee paying) to Fortress (non-fee paying)
related to realized hedge fund incentive income. |
|
(E) |
|
Represents the change in fee-paying NAV resulting from realized and unrealized changes in the
reported value of the fund. |
Average Fee Paying AUM
Average fee paying AUM represents the reference amounts upon which our management fees are based.
The reference amounts for management fee purposes are: (i) capital commitments or invested capital
(or NAV, on an investment by investment basis, if lower) for the private equity funds and hybrid PE
funds, which in connection with funds raised after March 2006 includes the mark-to-market value on
public securities held within the fund, (ii) contributed capital for the Castles, or (iii) the NAV
for hedge funds.
Management Fees
Changes in our average AUM have an effect on our management fee revenues. Depending on the timing
of capital contributions in a given period, the full economic benefits of a change in AUM may not
be recognized until the following period.
36
Performance of Our Funds
The performance of our funds has been as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM |
|
|
|
|
|
|
Inception |
|
|
March 31, |
|
|
Returns (A) |
|
Name of Fund |
|
Date |
|
|
2009 |
|
|
2008 |
|
|
Inception to March 31, 2009 |
|
Private Equity Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund I |
|
Nov-99 |
|
$ |
36 |
|
|
$ |
36 |
|
|
|
25.6 |
% |
Fund II |
|
Jul-02 |
|
|
328 |
|
|
|
143 |
|
|
|
34.3 |
% |
Fund III |
|
Sep-04 |
|
|
880 |
|
|
|
1,084 |
|
|
|
(16.0 |
)% |
Fund III Coinvestment |
|
Nov-04 |
|
|
106 |
|
|
|
162 |
|
|
|
(9.1 |
)% |
Fund IV |
|
Mar-06 |
|
|
1,780 |
|
|
|
2,408 |
|
|
|
(21.3 |
)% |
Fund IV Coinvestment |
|
Apr-06 |
|
|
412 |
|
|
|
643 |
|
|
|
(20.9 |
)% |
Fund V |
|
May-07 |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
(C |
) |
Fund V Coinvestment |
|
Jun-07 |
|
|
938 |
|
|
|
553 |
|
|
|
(C |
) |
FRID |
|
Mar-05 |
|
|
293 |
|
|
|
860 |
|
|
|
(29.3 |
)% |
FECI |
|
Jun-07 |
|
|
532 |
|
|
|
532 |
|
|
|
(8.8 |
)% |
GAGACQ Fund |
|
Sep-04 |
|
|
|
|
|
|
|
|
|
|
2.1 |
% |
GAGACQ Coinvestment Fund |
|
Sep-04 |
|
|
9 |
|
|
|
25 |
|
|
|
14.2 |
% |
RIC Coinvestment Fund LP |
|
May-06 |
|
|
30 |
|
|
|
143 |
|
|
|
(45.5 |
)% |
FICO |
|
Aug-06 |
|
|
113 |
|
|
|
606 |
|
|
|
(74.1 |
)% |
FHIF |
|
Dec-06 |
|
|
626 |
|
|
|
1,028 |
|
|
|
(19.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
(B) |
|
Other Private Equity Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Opportunities Funds I, II and III |
|
Apr-08 |
|
|
78 |
|
|
|
|
|
|
|
(C |
) |
|
|
N/A |
|
|
|
(C |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newcastle Investment Corp. |
|
Jun-98 |
|
|
1,165 |
|
|
|
1,192 |
|
|
|
N/A |
|
|
|
(22.2 |
)% |
|
|
N/A |
|
Eurocastle Investment Limited |
|
Oct-03 |
|
|
1,913 |
|
|
|
2,311 |
|
|
|
(20.6 |
)% |
|
|
6.2 |
% |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drawbridge Global Macro Funds |
|
Jul-02 |
|
|
3,771 |
|
|
|
8,567 |
|
|
|
5.2 |
% |
|
|
(0.2 |
)% |
|
|
8.6 |
% |
Fortress Commodities Fund |
|
Jan-08 |
|
|
1,028 |
|
|
|
657 |
|
|
|
(0.5 |
)% |
|
|
(C |
) |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drawbridge Special Opportunities Fund LP (D) |
|
Aug-02 |
|
|
4,383 |
|
|
|
5,668 |
|
|
|
3.1 |
% |
|
|
(1.6 |
)% |
|
|
6.3 |
% |
Drawbridge Special Opportunities Fund LTD (D) |
|
Aug-02 |
|
|
449 |
|
|
|
644 |
|
|
|
3.5 |
% |
|
|
(1.9 |
)% |
|
|
5.6 |
% |
Fortress Partners Fund LP |
|
Jul-06 |
|
|
862 |
|
|
|
1,126 |
|
|
|
(2.0 |
)% |
|
|
(4.6 |
)% |
|
|
(7.7 |
)% |
Fortress Partners Offshore Fund LP |
|
Nov-06 |
|
|
674 |
|
|
|
605 |
|
|
|
(1.4 |
)% |
|
|
(4.0 |
)% |
|
|
(8.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to March 31, 2009 |
|
Hybrid PE Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Opportunities Fund |
|
Jan-08 |
|
|
914 |
|
|
|
133 |
|
|
(C) |
|
Long Dated Value Fund I |
|
Apr-05 |
|
|
201 |
|
|
|
191 |
|
|
(C) |
|
Long Dated Value Fund II |
|
Nov-05 |
|
|
207 |
|
|
|
202 |
|
|
0.0% |
|
Long Dated Value Fund III |
|
Feb-07 |
|
|
115 |
|
|
|
103 |
|
|
(C) |
|
Long Dated Value Patent Fund |
|
Nov-07 |
|
|
14 |
|
|
|
21 |
|
|
(C) |
|
Real Assets Fund |
|
Jun-07 |
|
|
126 |
|
|
|
91 |
|
|
(C) |
|
Assets Overflow Fund |
|
Jul-08 |
|
|
82 |
|
|
|
|
|
|
(C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal all funds |
|
|
|
|
|
|
26,065 |
|
|
|
33,734 |
|
|
|
|
|
|
|
|
|
Managed accounts |
|
|
|
|
|
|
473 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
26,538 |
|
|
$ |
34,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the following: |
|
|
|
For private equity funds, other than the Mortgage Opportunities Funds, and hybrid PE funds,
returns represent net internal rates of return to limited partners after management fees and
incentive allocations, and are computed on an inception to date basis consistent with industry
standards. Incentive allocations are computed based on a hypothetical liquidation of net
assets of each fund as of the balance sheet date. Returns are calculated for the investors as
a whole. The computation of such returns for an individual investor may vary from these
returns based on different management fee and incentive arrangements, and the timing of
capital transactions. |
|
|
|
For Castles, returns represent the return on invested equity (ROE) as reported by such
entities. ROE is not reported on an inception to date basis. Newcastles 2009 ROE is not
meaningful because Newcastle incurred a loss and had negative book equity. Eurocastles 2009
ROE is estimated as they have not yet finalized their first quarter results. |
|
|
|
For liquid and hybrid hedge funds, as well as the Mortgage Opportunities Funds, returns
represent net returns after taking into account any fees borne by the funds for a new issue
eligible, single investor class as of the close of business on the last date of the relevant
period. Specific performance may vary based on, among other things, whether fund investors are
invested in one or more special investments. |
37
|
|
|
(B) |
|
For liquid hedge funds, hybrid hedge funds and the Mortgage Opportunities Funds, reflects a
composite of monthly returns presented on an annualized net return basis. |
|
(C) |
|
These funds were in their investment periods, or less than one year had elapsed from their
inception, through the end of these years. In some cases, particularly the Mortgage
Opportunities Funds, Fund V, Fund V Coinvestment and Credit Opportunities Fund, returns during
these periods were significantly negative. |
|
(D) |
|
The returns for the Drawbridge Special Opportunities Funds reflect the performance of each
fund excluding the performance of the redeeming capital accounts which relate to December 31,
2008 redemptions. |
Incentive Income
Incentive income is calculated as a percentage of profits earned by the Fortress Funds. Incentive
income that is not subject to contingent repayment is recorded as earned. Incentive income received
from funds that continue to be subject to contingent repayment is deferred and recorded as a
deferred incentive income liability until the related contingency is resolved. The contingencies
related to a portion of the incentive income we have received from certain private equity Fortress
Funds have been resolved.
Fund Management and Investment Platform
In order to accommodate the demands of our funds growing investment portfolios, we have created
investment platforms, which are comprised primarily of our people, financial and operating systems
and supporting infrastructure. Expansion of our investment platform historically required increases
in headcount, consisting of newly hired investment professionals and support staff, as well as
leases and associated improvements to corporate offices to house the increased number of employees,
and related augmentation of systems and infrastructure. Our headcount decreased from 833 employees
as of March 31, 2008 to 819 employees as of March 31, 2009. This resulted in net decreases in our
compensation, office related and other personnel related expenses, although there were increases in
certain businesses.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management fees from affiliates |
|
$ |
105,652 |
|
|
$ |
144,057 |
|
|
$ |
(38,405 |
) |
Incentive income from affiliates |
|
|
|
|
|
|
37,144 |
|
|
|
(37,144 |
) |
Expense reimbursements from affiliates |
|
|
13,047 |
|
|
|
14,270 |
|
|
|
(1,223 |
) |
Other revenues |
|
|
3,597 |
|
|
|
5,409 |
|
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
122,296 |
|
|
$ |
200,880 |
|
|
$ |
(78,584 |
) |
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total revenues decreased as a result of the following:
Management fees from affiliates decreased by $38.4 million primarily due to the net effect of
increases (decreases) in average AUM of ($0.4) billion, ($0.5) billion, ($4.2) billion, ($1.9)
billion and $1.1 billion in our private equity funds, our Castles, our liquid hedge funds, our
hybrid hedge funds, and our hybrid PE funds, respectively. The combined net decrease to average
AUM generated a reduction in the amount of $31.9 million in management fees. In addition,
management fees from affiliates decreased by $6.3 million as a result of a decrease in the average
management fee percentage earned and by $1.5 million as a result of changes in foreign currency
exchange rates.
Incentive income from affiliates decreased by $37.1 million as a result of a decrease in
performance in our funds that resulted in no incentive income being recognized for the three months
ended March 31, 2009, compared to $37.1 million of incentive income recognized from our funds for
the three months ended March 31, 2008.
Expense reimbursements from affiliates decreased by $1.2 million primarily due to a decrease in
compensation and benefits expenses that we have incurred for the three months ended March 31, 2009,
as compared to the three months ended March 31, 2008.
Other revenues decreased by $1.8 million primarily due to a decrease in interest income of $2.5
million and a net decrease of $0.2 million in fees from non-affiliates, offset by a net increase of
$0.8 million in dividend income earned primarily from our direct investment in GAGFAH common stock
compared to dividends earned from the Castles in the prior period.
38
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Interest expense |
|
$ |
8,186 |
|
|
$ |
10,336 |
|
|
$ |
(2,150 |
) |
Compensation and benefits |
|
|
109,236 |
|
|
|
127,019 |
|
|
|
(17,783 |
) |
Principals agreement compensation |
|
|
234,759 |
|
|
|
237,367 |
|
|
|
(2,608 |
) |
General, administrative and other
(including depreciation and amortization) |
|
|
19,826 |
|
|
|
19,006 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
$ |
372,007 |
|
|
$ |
393,728 |
|
|
$ |
(21,721 |
) |
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total expenses decreased as a result of the following:
Interest expense decreased by $2.2 million primarily due to a combined decrease of $4.7 million due
to a decrease in average interest rates and a decrease in average borrowings from the first quarter
of 2008, offset by an increase of $2.8 million due to write-offs and increased amortization of
deferred financing costs.
Compensation and benefits decreased by $17.8 million primarily due to a decrease in profit sharing
compensation of $18.2 million and a decrease of $21.6 million in discretionary bonuses, offset by
an increase in equity based compensation of $24.6 million primarily due to the 31 million FOG RPUs
granted in April 2008 (see discussion below). Profit-sharing compensation decreased due largely to
decreased profit from our liquid and hybrid hedge funds.
Principals agreement compensation is being amortized on a straight-line basis over the term of the
agreement.
General, administrative and other expenses increased by $0.8 million, primarily as a result of an
increase in professional fees and consulting fees of $2.5 million, offset by a net decrease of $1.7
million in other general expenses.
Future Compensation Expense
In future periods, we will further recognize non-cash compensation expense on our non-vested
equity-based awards of $800.8 million with a weighted average recognition period of 3.87 years.
This does not include amounts related to the Principals Agreement, which is discussed above.
In April 2008, we granted 31 million Fortress Operating Group (FOG) restricted partnership units
(RPUs) to a senior employee. In connection with the grant of these interests, the employee
receives partnership distribution equivalent payments on such units with economic effect as from
January 1, 2008. The interests will vest into full capital interests in FOG units in three equal
portions on the first business day of 2011, 2012 and 2013, respectively, subject to continued
employment with Fortress. In connection with this grant, we have reduced the employees profit
sharing interests in various Fortress Funds.
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Net gains (losses) other investments |
|
$ |
(2,473 |
) |
|
$ |
(27,957 |
) |
|
$ |
25,484 |
|
Tax
receivable agreement liability reduction |
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
Earnings (losses) from equity method investees |
|
|
(34,849 |
) |
|
|
(49,129 |
) |
|
|
14,280 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Loss) |
|
$ |
(37,377 |
) |
|
$ |
(77,086 |
) |
|
$ |
39,709 |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 compared with the three months ended March 31, 2008,
total other income (loss) decreased as a result of the following:
Net (losses) other investments decreased by $25.5 million primarily due to the recognition of an
unrealized loss of $1.9 million for the three months ended March 31, 2009 on our investments in
GAGFAH and in our Castles, as compared to the recognition of an unrealized loss of $15.5 million on
our investments in our Castles and other securities and an unrealized loss of $12.7 million on our
options in our Castles as a result of a decline in the relative performance of their underlying
stock price for the three months ended March 31, 2008. Our investments in GAGFAH and the Castles
are held at fair value pursuant to the provisions of SFAS 159.
39
Losses from equity method investees decreased by $14.3 million primarily due to the net effect of
(i) the recognition of a $34.8 million net loss from equity method investees in 2009 as a result of
losses attributable to investments in our private equity funds, liquid hedge funds, hybrid hedge
funds and hybrid PE funds, compared to (ii) the recognition of a $49.1 million loss on our equity
method investments for the three months ended March 31, 2008. The overall decrease in loss was
primarily a result of slightly improved returns within the funds.
Income Tax Benefit (Expense)
Fortress has recorded a significant deferred tax asset, primarily in connection with the Nomura
Transaction and IPO. A substantial portion of this asset is offset by a liability associated with
the tax receivable agreement with our Principals. This deferred tax asset is further discussed
under - Critical Accounting Policies below.
For the three months ended March 31, 2009, Fortress recognized income tax expense (benefit) of
($0.4 million). For the three months ended March 31, 2008, Fortress recognized income tax expense
(benefit) of $7.3 million. The primary reasons for the increase in income tax benefit for the three
months ended March 31, 2009 compared to the three months ended March 31, 2008 are (i) changes in
the mix of business segments producing income, which may be subject to tax at different rates, and
(ii) changes in the forecasts of annual taxable income which are used to calculate the tax
provision.
Segment Analysis
Fortress conducts its management and investment business through the following six primary
segments: (i) private equity funds, (ii) Castles, (iii) liquid hedge funds, (iv) hybrid hedge
funds, (v) hybrid private equity (PE) funds, and (vi) principal investments in these funds as
well as cash that is available to be invested. These segments are differentiated based on their
varying investment strategies. Due to the increased significance of the hybrid PE funds segment,
it has been disaggregated from the private equity funds segment in this period and for all periods
presented.
Discussed below are our results of operations for each of our reportable segments. They represent
the separate segment information available and utilized by our management committee, which consists
of our principals and certain key officers, and which functions as our chief operating decision
maker to assess performance and to allocate resources. Management evaluates the performance of each
segment based on its distributable earnings.
Management assesses our segments on a Fortress Operating Group and pre-tax basis, and therefore
adds back the non-controlling interests in consolidated subsidiaries related to Fortress Operating
Group units (held by the principals) and income tax expense.
Distributable earnings is defined in Note 10 to Part I, Item 1, Financial Statements Segment
Reporting. Furthermore, a complete discussion of distributable earnings basis impairment and
reserves, including the methodology used in estimating the amounts as well as the amounts incurred
in the relevant periods, is disclosed therein.
Private Equity Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
37,631 |
|
|
$ |
39,771 |
|
|
$ |
(2,140 |
) |
Incentive Income |
|
|
|
|
|
|
28,741 |
|
|
|
(28,741 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
37,631 |
|
|
$ |
68,512 |
|
|
$ |
(30,881 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
29,289 |
|
|
$ |
50,056 |
|
|
$ |
(20,767 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $20.8 million primarily due to:
|
|
|
a $0.9 million net decrease in management fees. Management fees decreased by $2.1 million
due to a decrease of $4.6 million primarily as a result of the net asset value of certain
portfolio companies of Fund III, FRID, and special investments declining below their invested
capital, partially offset by an increase of $2.5 million primarily generated by capital
called for Fund V Coinvestment and Fund II after March 31, 2008. The management fee decrease
of $2.1 million was partially offset by a corresponding reduction of $1.2 million in the
employees percentage share of management fees; |
|
|
|
a $18.4 million net decrease in incentive income. The decrease in incentive income is
primarily attributable to a decrease in performance in the private equity funds that resulted
in no incentive income (and no employees share of incentive income) recognized for the three
months ended March 31, 2009 as compared to $28.7 million in incentive income (reduced by the
employees share of incentive income of $10.3 million) for the three months ended March 31,
2008; and |
|
|
|
a $1.4 million net increase in operating expenses primarily related to an increase in
general and administrative expenses. |
40
Publicly Traded Alternative Investment Vehicles (Castles)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
11,911 |
|
|
$ |
13,694 |
|
|
$ |
(1,783 |
) |
Incentive Income |
|
|
|
|
|
|
12 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
11,911 |
|
|
$ |
13,706 |
|
|
$ |
(1,795 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
3,989 |
|
|
$ |
4,276 |
|
|
$ |
(287 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $0.3 million primarily due to:
|
|
|
a $0.6 million net decrease in management fees. Management fees decreased by $1.8 million
primarily due to a $1.5 million decrease as a result of changes in foreign currency exchange rates and a $0.3 million
decrease as a result of a decrease in average AUM. These decreases to management fees
were partially offset by a decrease in the employees share of management fees of $1.2
million; and |
|
|
|
a $0.3 million net decrease in operating expenses primarily due to a reduction in headcount
resulting in lower anticipated compensation expenses. |
Liquid Hedge Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
22,629 |
|
|
$ |
52,719 |
|
|
$ |
(30,090 |
) |
Incentive Income |
|
|
|
|
|
|
2,695 |
|
|
|
(2,695 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
22,629 |
|
|
$ |
55,414 |
|
|
$ |
(32,785 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
5,975 |
|
|
$ |
14,731 |
|
|
$ |
(8,756 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings decreased by $8.8 million primarily due to:
|
|
|
a $26.5 million net decrease in management fees. Management fees decreased $30.1 million
primarily due to a $29.3 million decrease resulting from a decline in average AUM due to
lower cumulative returns and investor redemptions from the Drawbridge Global Macro Funds
subsequent to March 31, 2008 and a $5.0 million decrease due to a reduction in the average
management fee percentage earned partially offset by (i) $3.0 million generated by the growth
in the average AUM of Fortress Commodities Fund and (ii) $0.6 million due to management fees
earned on a Drawbridge Global Macro fund raised in April 2008. The management fee decrease of
$30.1 million was offset primarily by a $3.6 million reduction in the employees share of
management fees; |
|
|
|
an $8.1 million net increase in incentive income. Incentive income decreased $2.7 million
primarily due to incentive income generated by special investments and the Fortress
Commodities Fund of $2.0 million and $0.5 million, respectively, for the three months ended
March 31, 2008 as compared to no incentive income recognized for the three months ended March
31, 2009. The $2.7 million decrease was offset by a $10.8 million net decrease in the
employees share of incentive income primarily as a result of (i) a $12.4 million decrease in
the accrual of the employees share of incentive income due to the decreased performance in
the Drawbridge Global Macro Funds partially offset by (ii) a $1.6 million increase in the
employees share of incentive income earned on the Fortress Commodities Fund; |
|
|
|
a $9.6 million net decrease in operating expenses primarily due to a decrease in average
headcount. |
41
Hybrid Hedge Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
28,123 |
|
|
$ |
36,844 |
|
|
$ |
(8,721 |
) |
Incentive Income |
|
|
822 |
|
|
|
425 |
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
28,945 |
|
|
$ |
37,269 |
|
|
$ |
(8,324 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
2,904 |
|
|
$ |
2,048 |
|
|
$ |
856 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings increased by $0.9 million primarily due to:
|
|
|
an $8.9 million net decrease in management fees. Management fees decreased by $8.7 million
and the employees share of management fees increased by $0.2 million (due to an increase in
management fees eligible for profit sharing). The $8.7 million decrease in management fees
was primarily a result of a decrease in average AUM, primarily due to negative fund returns
in 2008; |
|
|
|
a $1.7 million net increase in incentive income. Incentive income increased by $0.4 million
and the employees share of incentive income, reflected as profit sharing compensation
expense, decreased by $1.3 million. The $0.4 million increase in incentive income was
primarily attributable to a net increase of $0.4 million in incentive income primarily from
third party accounts we manage. The decrease of $1.3 million in profit sharing compensation
expense was primarily a result of a decline in the returns of our hybrid hedge funds; and |
|
|
|
an $8.3 million decrease in operating expenses primarily related to a decrease in average
headcount. |
Hybrid PE Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
Management Fees |
|
$ |
6,081 |
|
|
$ |
2,009 |
|
|
$ |
4,072 |
|
Incentive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues total |
|
$ |
6,081 |
|
|
$ |
2,009 |
|
|
$ |
4,072 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings |
|
$ |
2,233 |
|
|
$ |
(112 |
) |
|
$ |
2,345 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings increased by $2.3 million primarily due to:
|
|
|
a $4.1 million increase in management fees primarily due to $1.5 million of management fees
generated by the creation of new Hybrid PE Funds, most notably the Assets Overflow Fund and a
managed account, and an increase of $2.6 million in management fees primarily as a result of
growth in average AUM; and |
|
|
|
a $1.8 million increase in operating expenses primarily related to an increase in average
headcount primarily due to new funds. |
42
Principal Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) |
|
$ |
(35,034 |
) |
|
$ |
(13,330 |
) |
|
$ |
(21,704 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable loss increased by $21.7 million primarily due to:
|
|
|
a $12.6 million increase in net investment income due to higher returns on our investments
in our liquid hedge funds and hybrid hedge funds for the three months ended March 31, 2009 as
compared to the three months ended March 31, 2008; |
|
|
|
a $0.8 million increase in net investment income due to dividend income earned primarily
from our direct investment in GAGFAH common stock; |
|
|
|
a $32.3 million decrease in net investment income primarily as a result of impairments of
$28.4 million, $0.2 million, $0.1 million, $3.0 million and $0.6 million in our investments
in our private equity funds, Castles, liquid hedge funds, hybrid hedge funds and hybrid PE
funds, respectively; and |
|
|
|
a $2.4 million decrease in net investment income primarily due to (i) a $2.3 million
decrease in interest income as a result of lower interest rates and lower average cash
balances, (ii) a $2.2 million decrease due to foreign currency translation adjustments, (iii)
a net decrease of $0.2 million due to an increase in investment related expenses, offset by
(iv) a net decrease of $2.2 million in interest expense primarily due to a decrease in average
interest rates and a decrease in average borrowings during the three months ended March 31,
2009.
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) |
|
$ |
(151 |
) |
|
$ |
38 |
|
|
$ |
(189 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax distributable earnings (loss) decreased by $0.2 million. The decrease in earnings is
primarily due to an increase in general corporate expense.
43
Sensitivity
For an analysis of the sensitivity of segment revenues to changes in the estimated fair value of
the Fortress Fund investments, see Part I, Item 3, Quantitative and Qualitative Disclosures About
Market Risk.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing
commitments to repay borrowings, fund and maintain investments, including our capital commitments
to our funds, pay compensation, and satisfy our other general business needs including our
obligation to pay U.S. federal income tax. In addition, we may require cash to make distributions.
Our primary sources of funds for liquidity consist of cash flows provided by operating activities,
primarily the management fees and incentive income paid to us from the Fortress Funds, borrowings
under loans, and the potential issuance of debt and equity securities, as well as the investment
returns on our principal investments in these funds. Our primary uses of liquidity include
operating expenses (which include compensation, rent and interest among others), working capital
expenses, amortization payments under our credit agreement, capital commitments to our funds, and
tax and tax-related payments.
The receipt of management fees generally occurs on a fixed and fairly predictable schedule, subject
to changes in the NAV of the Fortress Funds (due to performance or capital transactions). From time
to time, we may elect, in our discretion, to defer the receipt of management or other fees, to
which we are legally entitled, in order to optimize the operations of the underlying managed funds.
The timing of receipt of cash flows from other operating activities is in large part dependent on
the timing of distributions from our private equity funds and hybrid PE funds, which are subject to
restrictions and to managements judgment regarding the optimal timing of the monetization of
underlying investments, as well as dates specified in our hedge funds operating documents, which
outline the determination and payment of our incentive income, if any. The timing of capital
requirements to cover fund commitments is subject to managements judgment regarding the
acquisition of new investments by the funds, as well as the ongoing liquidity requirements of the
respective funds. The timing of capital requirements and the availability of liquidity from
operating activities may not always coincide, and we may make short-term, lower-yielding
investments with excess liquidity or fund shortfalls with short-term debt or other sources of
capital.
We expect that our cash on hand and our cash flows from operating activities, capital receipts from
balance sheet investments and available financing will be sufficient to satisfy our liquidity needs
with respect to expected current commitments relating to investments and with respect to our debt
obligations over the next twelve months. We estimate that our expected management fee receipts over
the next twelve months, a portion of which may be deferred, will be sufficient (along with our cash
on hand of $43.3 million at March 31, 2009 and expected capital receipts from our balance sheet
investments) to meet our operating expenses (including compensation and lease obligations),
required debt amortization payments, and fund capital commitments, in each case expected to be
funded during the next twelve months (see obligation tables below). These uses of cash would not
(barring changes in other relevant variables) cause us to violate any of our debt covenants. We
believe that the compensation we will be able to pay from these available sources will be
sufficient to retain key employees and maintain an effective workforce. We may elect, if we deem it
appropriate, to defer certain payments due to our principals and affiliates or raise capital to
enable us to satisfy the amortization payments required under our credit agreement.
We expect to meet our long-term liquidity requirements, including the repayment of our debt
obligations and any new commitments or increases in our existing commitments relating to principal
investments, through the generation of operating income (including management fees, a portion of
which may be deferred), capital receipts from balance sheet investments and, potentially,
additional borrowings and equity offerings. As discussed above, we believe that we will generate
adequate operating cash flows to service our periodic debt payments, which will result in a gradual
reduction in our debt level. Our ability to execute our business strategy, particularly our ability
to form new funds and increase our AUM, depends on our ability to raise additional investor capital
within our funds and on our ability to monetize our balance sheet investments, each of which is
more challenging given current market conditions. Furthermore, strategic initiatives and the
ability to make principal investments in funds may be dependent on our ability to raise capital at
the Fortress level. Decisions by counterparties to enter into transactions with us will depend upon
a number of factors, such as our historical and projected financial performance and condition,
compliance with the terms of our current credit arrangements, industry and market trends and
performance, the availability of capital and our counterparties policies and rates applicable
thereto, the rates at which we are willing to borrow, and the relative attractiveness of
alternative investment or lending opportunities. Furthermore, given the current, depressed level of
the market price of our Class A shares as well as the illiquidity in the credit market (as
described above under Market Considerations), raising equity capital could be highly dilutive to
our current shareholders and issuing debt obligations could result in significant increases to
operating costs, if either were achieved in this market. The level of our share price also limits
our ability to use our equity as currency in the potential acquisition of businesses, other
companies or assets.
On February 8, 2007, we completed an initial public offering of 39,428,900 of our Class A shares.
We contributed the net proceeds from the offering to Fortress Operating Group in exchange for
39,428,900 limited partnership units. We are a publicly traded partnership and have established a
wholly owned corporate subsidiary (FIG Corp.). Accordingly, a substantial portion of our income
earned by the corporate subsidiary is subject to U.S. federal income taxation and taxed at
prevailing rates. The
remainder of our income is allocated directly to our shareholders and is not subject to any
corporate level of taxation.
44
As of March 31, 2009, our material cash commitments and contractual cash requirements were related
to our capital commitments to our funds, lease obligations and debt obligations. Our potential
liability for the contingent repayment of incentive income is discussed under - Contractual
Obligations below.
Capital Commitments
We determine whether to make capital commitments to our private equity funds and hybrid PE funds in
excess of the minimum required amounts based on a variety of factors, including estimates regarding
our liquidity over the estimated time period during which commitments will have to be funded,
estimates regarding the amounts of capital that may be appropriate for other funds which we are in
the process of raising or are considering raising, and our general working capital requirements.
We generally fund our principal investments in the Fortress Funds with cash, either from working
capital or borrowings, and not with carried interest. We do not hold any principal investments in
the funds other than through the Fortress Operating Group entities. Our principals do not own any
portion of the carried interest in any fund personally. Accordingly, their personal investments in
the funds are funded directly with cash.
Our capital commitments to our funds with outstanding commitments as of March 31, 2009 consisted of
the following (in thousands):
|
|
|
|
|
|
|
Outstanding |
|
Private Equity Funds |
|
Commitment |
|
Fund I |
|
$ |
12 |
|
Fund II |
|
|
566 |
|
Fund III Coinvestment |
|
|
2 |
|
Fund IV |
|
|
4,053 |
|
Fund IV Coinvestment |
|
|
3 |
|
Fund V |
|
|
45,292 |
|
Fund V Coinvestment |
|
|
4 |
|
Fund VI |
|
|
15,000 |
|
FRID |
|
|
796 |
|
FHIF |
|
|
11,446 |
|
FECI |
|
|
1,551 |
|
Karols Development Co |
|
|
5,153 |
|
|
|
Hybrid PE Funds |
|
|
|
|
Credit Opportunities Fund |
|
|
7,337 |
|
Long Dated Value Fund I |
|
|
460 |
|
Long Dated Value Fund II |
|
|
2,081 |
|
Long Dated Value Fund III |
|
|
453 |
|
Real Assets Fund |
|
|
37,521 |
|
Assets Overflow Fund |
|
|
19 |
|
FTS SIP L.P. |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
132,359 |
|
|
|
|
|
Lease Obligations
Minimum future rental payments under our operating leases are as follows (in thousands):
|
|
|
|
|
April 1, 2009 to December 31, 2009 |
|
$ |
13,763 |
|
2010 |
|
|
21,332 |
|
2011 |
|
|
11,530 |
|
2012 |
|
|
10,893 |
|
2013 |
|
|
10,874 |
|
2014 |
|
|
10,311 |
|
Thereafter |
|
|
21,691 |
|
|
|
|
|
Total |
|
$ |
100,394 |
|
|
|
|
|
45
Debt Obligations
As of March 31, 2009, our debt obligations consisted of the amount outstanding under our credit
agreement, as described below.
In May 2007, we entered into a new $1 billion credit agreement (as amended, the 2007 Credit
Agreement or our credit agreement) in order to refinance our then existing credit agreement,
reduce the amount of interest and other fees payable under our credit facilities and increase the
amount of funds available for investments. The credit facilities available under the 2007 Credit
Agreement include a $200 million revolving credit facility (including a $25 million letter of
credit subfacility) and an $800 million term loan facility. Borrowings and letters of credit
issued under the 2007 Credit Agreement bore interest at a rate equal to (i) with respect to LIBOR
loans, LIBOR plus 1.20%, or (ii) with respect to base rate loans, the base rate, as defined in the
agreement, plus 0.20%. On February 1, 2008, the rate on LIBOR loans was reduced to LIBOR + 0.65%
pursuant to the terms of the agreement. In addition, we were required to pay a commitment fee of
0.20% per annum on the unused portion of amounts available under our revolving credit facility.
On April 17, 2008, we entered into an amendment to the 2007 Credit Agreement. The amendment, among
other things, (i) permits us to issue an unlimited amount of subordinated indebtedness with
specified terms so long as 40% of the net proceeds are used to repay amounts outstanding under the
2007 Credit Agreement, (ii) increased the applicable rate on Eurodollar loans and letters of credit
by 20 basis points (making the current rate LIBOR plus 0.85%) and the undrawn commitment fee by 5
basis points (making the current fee 0.25%), (iii) added an amortization schedule requiring us to
repay $100 million of amounts outstanding under the agreement each year during the next three years
(with the first payment due on January 15, 2009), (iv) modified the financial covenants by (a)
replacing the EBITDA-based financial covenant with a Consolidated Leverage Ratio covenant, (b)
increasing the minimum amount of management fee earning assets by $3 billion to $21.5 billion
(which minimum amount increases annually by $500 million) and (c) eliminating the annual $50
million increase in required minimum investment assets, and (v) revised various definitions and
clarified terms with respect to swap providers who are lenders under the agreement. In addition, on
May 29, 2008, we entered into an amendment of our credit agreement to change from a co-borrower
structure to a single borrower structure.
On November 12, 2008, we entered into an additional amendment to the 2007 Credit Agreement. The
amendment, among other things: (i) modified the definition of EBITDA, which is used to calculate
our Consolidated Leverage Ratio, to exclude any realized or unrealized gains and losses on
investments and to reflect private equity fund and hybrid PE fund incentive income clawbacks on a
cash basis; (ii) modified the financial covenants by (a) reducing the amount of required investment
assets to $975 million (less any future term loan repayments) and (b) changing the required
Consolidated Leverage Ratios for the quarters ending June 30 and September 30, 2009 from 2.5 to 1.0
to 2.75 to 1.0; (iii) increased the rate on LIBOR loans to LIBOR + 2.00% (and Base Rate loans to
the prime rate + 1.00%) this rate is no longer subject to change pursuant to a ratings-based
pricing grid; (iv) established the commitment fee for the unused portion of the revolving credit
facility at 0.25% this rate is also no longer subject to change pursuant to a ratings-based
pricing grid; (v) reduced the revolving credit facility commitments to $125 million; (vi)
established a requirement that outstanding term loans be prepaid with 25% of the amount by which
EBITDA for any twelve-month period exceeds $370 million (unless and until the amount of outstanding
term loans equals or is less than $250 million); (vii) required $50 million of additional term loan
repayments ($25 million in July of 2009 and 2010); (viii) established a requirement that the
borrower cash collateralize the letter of credit obligations of distressed lenders under certain
circumstances, including lender non-funding or bankruptcy; and (ix) established an event of default
under certain circumstances if the borrower, any guarantor or certain of their subsidiaries are
required to make incentive income clawback payments in excess of $20 million during any calendar
year. In connection with the amendment, we prepaid $75 million of the outstanding term loans.
On March 12 and March 13, 2009, we entered into additional amendments to the 2007 Credit Agreement.
The amendments, among other things: (i) modified the financial covenants by (a) amending the
amount of required management fee earning assets to $22 billion as of the end of each fiscal
quarter through December 31, 2009 and $20 billion as of the end of each fiscal quarter thereafter;
(b) reducing the amount of investment assets required as of any point in time to an amount equal to
the term loans and revolving loans (including outstanding letters of credit) then outstanding; (c)
changing the required Consolidated Leverage Ratio to 3.5 to 1.0 for the remainder of the term of
the credit agreement; (ii) increased the rate on LIBOR loans to LIBOR + 2.50 (and Base Rate loans
to the prime rate plus 1.50%); (iii) reduced the revolving credit facility commitments to $75
million; (iv) established an annual requirement, beginning in 2010, that outstanding loans be
prepaid in an amount equal to 75% of Free Cash Flow (as defined in the agreement) generated during
the previous year; (v) increased the amount of our scheduled amortization payments (the
amortization schedule now requires the following payments: $50 million in July 2009, $25 million
in each of October 2009 and January, April, July and October 2010, and $75 million in January
2011); (vi) established a requirement that 50% of the net proceeds from any equity issuance by the
Fortress Operating Group be applied to prepay outstanding term loans; (vii) reduced the amount of
certain types of distributions we can make to equity holders of the Fortress Operating Group and,
in turn, our Class A shareholders, and (viii) provided that the dissolution or termination of
specified material funds would not constitute an event of default. In connection with the
amendment, we prepaid $75 million of outstanding term loans and $50 million of outstanding
revolving facility loans.
46
The foregoing description of the terms of the amendments is not complete and is qualified in its
entirety by the full text of both the amendments, and the 2007 Credit Agreement (including other
amendments thereto), each of which has been filed with the Securities and Exchange Commission.
Increases in the interest rate on our debt obligations, whether through amendments, refinancings,
or increases in LIBOR, result in a direct reduction in our earnings and cash flow from operations
and, therefore, our liquidity.
The following table presents information regarding our debt obligations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Final |
|
|
|
|
|
|
Average |
|
|
|
Face Amount and Carrying Value |
|
|
Stated |
|
|
Weighted Average |
|
|
Maturity |
|
Debt Obligation |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Maturity |
|
|
Funding Cost (1) |
|
|
(Years) |
|
Credit Agreement (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt (3) |
|
$ |
54,041 |
|
|
$ |
104,041 |
|
|
May 2012 |
|
|
3.04 |
% |
|
|
3.11 |
|
Term loan |
|
|
350,000 |
|
|
|
350,000 |
|
|
May 2012 |
|
|
3.20 |
% |
|
|
2.40 |
|
Delayed term loan |
|
|
200,000 |
|
|
|
275,000 |
|
|
May 2012 |
|
|
3.11 |
% |
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
$ |
729,041 |
|
|
|
|
|
|
|
3.16 |
% |
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average funding cost is calculated based on the contractual interest rate
(utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing
costs. The most recently reset LIBOR rate was 0.48%. |
|
(2) |
|
Collateralized by substantially all of Fortress Operating Groups assets as well as
Fortress Operating Groups rights to fees from the Fortress Funds and its equity interests
therein. |
|
(3) |
|
Approximately $11.4 million was undrawn under the revolving debt facility as of March 31,
2009. The revolving debt facility included a $25 million letter of credit subfacility of
which $9.6 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed
to fund $7.2 million (including $1.0 million of the outstanding letters of credit) of the $75
million revolving credit facility, has filed for bankruptcy protection, did not fund its
portion of the last borrowing under this facility, and it is reasonably possible that it will
not fund its portion of the commitments. As a result, $5.2 million of the undrawn amount was
available. |
Assuming no EBITDA-based required prepayments, our outstanding debt matures as follows as of March
31, 2009 (in thousands).
|
|
|
|
|
April 1 - December 31, 2009 |
|
$ |
75,000 |
|
2010 |
|
|
100,000 |
|
2011 |
|
|
75,000 |
|
2012 |
|
|
354,041 |
|
|
|
|
|
Total |
|
$ |
604,041 |
|
|
|
|
|
As a result of the Nomura transaction and our initial public offering, FIG Asset Co. LLC lent
excess proceeds of $215 million to FIG Corp. pursuant to a demand note. Since then, FIG Corp. has
repaid a portion of the demand note and, as of March 31, 2009, the outstanding balance was $125.3
million. This intercompany debt is eliminated in consolidation.
Covenants
Fortress Operating Group is required to prepay the 2007 Credit Agreement upon the occurrence of
certain events, including certain asset sales and other dispositions.
The events of default under the 2007 Credit Agreement are typical of such agreements and include
payment defaults, failure to comply with credit agreement covenants, cross-defaults to material
indebtedness, bankruptcy and insolvency, change of control, and adverse events (as defined in the
2007 Credit Agreement) with respect to our material funds. A default under this agreement would
likely have a material, adverse impact on our liquidity and, given the current lack of available
credit for refinancing in the market, could threaten our ability to continue as a going concern.
The 2007 Credit Agreement includes customary covenants. We were in compliance with all of these
covenants as of March 31, 2009. Among other things, we are prohibited from incurring additional
unsubordinated indebtedness or further encumbering our assets, subject to certain exceptions. In
addition, Fortress Operating Group must not:
|
|
|
Permit AUM to be less than $22.0 billion as of the end of each fiscal quarter through December
31, 2009 and $20.0 billion as of the end of each fiscal quarter thereafter; |
|
|
|
|
Permit the Consolidated Leverage Ratio, as defined in the 2007 Credit Agreement, to be greater
than 3.5 to 1.0 for the remainder of the term of the credit agreement; |
|
|
|
|
Permit the aggregate value of investments held, including certain cash, as of any point in time,
to be less than the amount equal to the sum of the term loans and the revolving loans (including
outstanding letters of credit) then outstanding (the Required Investment Assets); |
47
|
|
|
Permit the aggregate value of Fortress Fund Investments (generally defined in the 2007 Credit
Agreement as the stock of Newcastle, Eurocastle and any other publicly traded company pledged as
collateral (and any options in respect of such stock), and Fortress Operating Groups interest in
the Fortress private equity funds, liquid hedge funds and hybrid funds and certain other
investment funds) to be less than 40% of the Required Investment Assets; |
|
|
|
|
Permit the aggregate value of the sum of (i) the Fortress Fund Investments plus (ii) certain
investments in co-investment funds (in the aggregate, Total Investments) to be less than 60% of
the Required Investment Assets (with no single co-investment fund investment exceeding $75
million). |
|
|
|
|
Make incentive income clawback payments in excess of $20 million during a calendar year. To
date, no clawback payments have been required. See Note 10 to Part I, Item 1 Financial Statements
and Supplementary Data Segment Reporting for a further discussion of clawback. |
The following table sets forth the financial covenant requirements as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
Requirement |
|
|
Actual |
|
|
Notes |
|
AUM |
|
≥ $ |
22,000 |
|
|
$ |
26,538 |
|
|
|
(A |
) |
|
|
Consolidated Leverage Ratio |
|
≤ $ |
3.50 |
|
|
|
1.98 |
|
|
|
(B |
) |
|
|
Required Investment Assets |
|
≥ $ |
614 |
|
|
$ |
731 |
|
|
|
(C |
) |
|
|
Fortress Fund Investments |
|
≥ $ |
245 |
|
|
$ |
394 |
|
|
|
(C |
) |
|
|
Total Investments |
|
≥ $ |
368 |
|
|
$ |
521 |
|
|
|
(C |
) |
|
|
|
(A) |
|
Impacted by capital raised in funds, redemptions from funds, and valuations of fund
investments. |
|
(B) |
|
Impacted by EBITDA, as defined, which is impacted by the same factors as distributable
earnings, except EBITDA is not impacted by clawback reserves or the impairment of
investments. |
|
(C) |
|
Impacted by capital investments in funds and the valuation of such funds investments. |
Fortress expects to comply with these covenants as of the applicable testing dates. However, as a
result of recent market conditions and their impact on Fortress, it is possible that we may not be
able to comply with one or more of these covenants if conditions continue to worsen over time. As
a result of the amortization requirements, we may take steps to ensure that we are able to make the
required periodic cash amortization payments, including (i) deferring payments to our Principals
and affiliates in order to preserve cash, including payments to our Principals under the tax
receivable agreement, and (ii) considering potential capital raise transactions in order to
increase investments, reduce debt, or a combination of the two options.
This summary is qualified by reference to our 2007 Credit Agreement, a copy of which, including all
amendments thereto, has been filed with the SEC.
Dividends / Distributions
During the three months ended March 31, 2009, Fortress Operating Group made distributions of $1.1
million to the principals and RPU holders in connection with distributions made to FIG Corp. to pay
Fortresss income taxes.
Cash Flows
Our historical consolidated statements of cash flows reflect the cash flows of Fortress Operating
Group, for the three months ended March 31, 2009.
The primary cash flow activities of Fortress Operating Group are: (i) generating cash flow from
operations, (ii) making investments in Fortress Funds, (iii) meeting financing needs through, and
making required amortization payments under, our credit agreement, and (iv) distributing cash flow
to equity holders.
As described above in Results of Operations, our AUM has changed throughout the periods
reflected in our financial statements included in this Quarterly Report on Form 10-Q. This change
is a result of the Fortress Funds raising and investing capital, and generating gains from
investments, offset by redemptions and losses.
Our dividend policy has certain risks and limitations, particularly with respect to liquidity.
Although we may pay dividends in accordance with our stated dividend policy, we may not pay the
amount of dividends suggested by our policy, or at all, if, among other things, we do not have the
cash necessary to pay the intended dividends, or if our board of directors determines it would be
prudent to reduce or eliminate future dividend payments. To the extent we do not have cash on hand
sufficient to pay dividends, we may borrow funds to pay dividends, but we are not obligated to do
so. By paying cash dividends rather than investing that cash in our future growth, we risk slowing
the pace of our growth, or not having a sufficient amount of cash to fund our operations or
unanticipated capital expenditures, should the need arise.
48
Operating Activities
Our net cash flow provided by (used in) operating activities was ($63.3) million and $51.9 million
during the three months ended March 31, 2009 and 2008, respectively.
Operating Activities Comparative (First Quarter of 2009 vs. First Quarter of 2008)
Cash received for management fees decreased by $42.4 million from $139.1 million in 2008 to $96.7
million in 2009. Management fees are based on average fee paying AUM, which decreased from 2008 to
2009 (private equity funds decreased by $0.4 billion, Castles decreased by $0.5 billion, liquid
hedge funds decreased by $4.2 billion, hybrid hedge funds decreased by $1.9 billion, and hybrid PE
funds increased by $1.1 billion) as a result of capital raising, including new fund formation,
offset by redemptions and losses.
Incentive income is calculated as a percentage of profits earned by the Fortress Funds or is based
on profitable realization events within private equity funds and hybrid PE funds. Severe market
conditions have resulted in lower fund performance and reduced realizations and thus a decrease of
$164.7 million in cash received for incentive income from 2008 to 2009.
Despite an increase in average headcount from March 31, 2008 to March 31, 2009, cash paid for
compensation decreased by $65.0 million for the three month periods ended March 31, 2008 compared
to March 31, 2009. This decrease is mainly attributable to reduced profit sharing compensation, as
a result of lower performance within our funds.
Cash paid for interest decreased approximately $5.7 million due to a lower average debt balance of
$703.1 million in 2009 compared to $722.4 million in 2008. The weighted average interest rate also
decreased to 2.61% in 2009 as compared to 5.13% in 2008.
Investing Activities
Our net cash flow provided by (used in) investing activities was ($22.4) million and $82.6 million
during the three months ended March 31, 2009 and 2008, respectively. Our investing activities
primarily included: (i) contributions to equity method investees of ($31.8) million and ($70.2)
million during the three months ended March 31, 2009 and 2008, respectively, (ii) distributions of
capital from equity method investees of $10.5 million and $155.0 million during the three months
ended March 31, 2009 and 2008, respectively, and (iii) purchases of fixed assets, net of proceeds
from the disposal of fixed assets, of ($1.1) million and ($2.2) million during these periods,
respectively.
Financing Activities
Our net cash flow provided by (used in) financing activities was ($134.4) million and $137.8
million during the three months ended March 31, 2009 and 2008, respectively. Our financing
activities primarily included (i) distributions made to principals, including those classified
within principals and others interests in consolidated subsidiaries, of ($1.0) million and
($63.2) million during these periods, respectively, (ii) distributions to employees related to
their interests in consolidated subsidiaries of ($4.3) million and ($37.3) million during these
periods, respectively, (iii) dividends to our shareholders, and (iv) our net borrowing and
repayment activity.
Critical Accounting Policies
Consolidation
The analysis as to whether to consolidate an entity is subject to a significant amount of judgment.
Some of the criteria considered are the determination as to the degree of control over an entity by
its various equity holders, the design of the entity, how closely related the entity is to each of
its equity holders, the relation of the equity holders to each other and a determination of the
primary beneficiary in entities in which we have a variable interest. These analyses involve
estimates, probability weighting of subjectively determined cash flow scenarios, and other
estimates based on the assumptions of management.
49
Revenue Recognition on Incentive Income
Incentive income is calculated as a percentage of the profits earned by the Fortress Funds subject
to the achievement of performance criteria. Incentive income from certain of the private equity
funds and hybrid PE funds we manage is subject to contingent repayment (or clawback) and may be
paid to us as particular investments made by the funds are realized. If, however, upon liquidation
of a fund the aggregate amount paid to us as incentive income exceeds the amount actually due to us
based upon the aggregate performance of the fund, the excess is required to be returned by us (i.e.
''clawed back) to that fund. We have elected to adopt the preferred method of recording incentive
income subject to contingencies, Method 1 of Emerging Issues Task Force Topic D-96 Accounting for
Management Fees Based on a Formula. Under this method, we do not recognize incentive income
subject to contingent repayment until all of the related contingencies have been resolved. Deferred
incentive income related to a particular private equity fund or hybrid PE fund, each of which has a
limited life, would be recognized upon the termination of such fund, or when distributions from the
fund exceed the point at which a clawback of a portion or all of the historic incentive income
distributions could no longer occur. Recognition of incentive income allocated to us prior to that
date is deferred and recorded as a deferred incentive income liability. For GAAP purposes, the
determination of when incentive income is recognized as income is formulaic in nature, resulting
directly from each funds governing documents.
Profit Sharing Arrangements
Pursuant to employment arrangements, certain of Fortresss employees are granted profit sharing
interests and are thereby entitled to a portion of the incentive income realized from certain
Fortress Funds, which is payable upon a realization event within the respective funds. Accordingly,
incentive income resulting from a realization event within a fund gives rise to the incurrence of a
profit sharing obligation. Amounts payable under these profit sharing plans are recorded as
compensation expense when they become probable and reasonably estimable.
For profit sharing plans related to hedge funds, where incentive income is received on a quarterly
or annual basis, the related compensation expense is accrued during the period for which the
related payment is made.
For profit sharing plans related to private equity funds and hybrid PE funds, where incentive
income is received as investments are realized but is subject to clawback (see Revenue Recognition
on Incentive Income above), although Fortress defers the recognition of incentive income until all
contingencies are resolved, accruing expense for employee profit sharing is based upon when it
becomes probable and reasonably estimable that incentive income has been earned and therefore a
profit sharing liability has been incurred. Based upon this policy, the recording of an accrual for
profit sharing expense to employees generally precedes the recognition of the related incentive
income revenue. Furthermore, such profit sharing expense may be reversed upon determination that
the expense is no longer probable of being incurred based on the performance of the fund.
Our determination of the point at which it becomes probable and reasonably estimable that incentive
income will be earned and therefore a corresponding profit sharing expense should be recorded is
based upon a number of factors, the most significant of which is the level of realized gains
generated by the underlying funds that may ultimately give rise to incentive income payments.
Accordingly, profit sharing expense is generally recorded upon realization events within the
underlying funds. A realization event has occurred when an investment within a fund generates
proceeds in excess of its related invested capital, such as when an investment is sold at a gain.
Changes in the judgments and estimates made in arriving at the appropriate amount of profit sharing
expense accrual could materially impact net income.
For further information on amounts paid and payable in the future under our profit sharing
arrangements, please see Note 2 to Part I, Item 1, Financial Statements Management Agreements
and Fortress Funds.
Valuation of Investments
Our investments in the Fortress Funds are recorded based on the equity method of accounting. The
Fortress Funds themselves apply specialized accounting principles specified by the AICPA Audit and
Accounting Guide Investment Companies. As such, our results are based on the reported fair value
of the investments held by the funds as of the reporting date with our pro rata ownership interest
(based on our principal investment) in the changes in each funds NAV reflected in our results of
operations. Fair value generally represents the amount at which an investment could be exchanged in
a current transaction between willing parties, other than in a forced or liquidation sale. We are
the manager of these funds and in certain cases participate in the valuation of underlying
investments, many of which are illiquid and/or without a public market. The fair value of these
investments is generally estimated based on either values provided by independent valuation agents,
who use their own proprietary valuation models, or proprietary models developed by us, which
include discounted cash flow analyses, public market comparables, and other techniques and may be
based, at least in part, on independently sourced market parameters. The material estimates and
assumptions used in these models include the timing and expected amount of cash flows, the
appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and
estimated proceeds from expected financings. Significant judgment and estimation goes into the
selection of an appropriate valuation methodology as well as the assumptions which generate these
models, and the actual values realized with respect to investments could be materially different
from values obtained based on the use of those estimates. The valuation methodologies applied
impact the reported value of our investments in the Fortress Funds in our consolidated financial
statements.
50
Private Equity Funds
Under the valuation policies and guidelines of our private equity funds, investments are
categorized into two types of securities: those for which there is a market quotation and those
for which there is no market quotation. Securities for which there is a market quotation are valued
at their quoted market price. A discount may be applied to those securities with sale restrictions.
Securities for which there is no market quotation are referred to as private securities and are
valued at fair value. Our guidelines state that the fair values of private securities are generally
based on the following methods:
|
1. |
|
Public market transactions of similar securities |
|
|
2. |
|
Private market transactions of similar or identical securities |
|
|
3. |
|
Analytical methods |
Our private equity funds have never based a valuation of a private security upon public or private
market transactions in a similar security. There have been no circumstances to date in which a
security in a public market transaction, or a private market transaction of which we were aware,
has been considered to be sufficiently similar to a private security owned by one of our private
equity funds to be used as a measure of valuation for such private security investment.
Our private equity funds have used the price of private market transactions in identical securities
as a valuation method for investments. In cases in which there has been a significant private
transaction in a private security held by our private equity funds, the value of private equity
fund investments in the private security are based upon the price of such recent private
transaction in that security and no sensitivity analysis is used.
If the fair value of private security investments held by our private equity funds cannot be valued
by reference to a public or private market transaction, then the primary analytical methods used to
estimate the fair value of such private securities are the discounted cash flow method, by
reference to performance statistics of similar public companies (for example, EBITDA multiples) or
the use of third party valuations. Sensitivity analysis is applied to the estimated future cash
flows using various factors depending on the investment, including assumed growth rates (in cash
flows), capitalization rates (for determining terminal values) and appropriate discount rates based
on the investment to determine a range of reasonable values. The valuation based on the inputs
determined to be the most probable is used as the fair value of the investment.
Liquid Hedge Funds
The majority of the investments in our liquid hedge funds are valued based on quoted market prices,
including broker quotations in illiquid or inactive markets which include disclaimers stating they
are not actionable and are therefore included in level 3A as described below. Investments valued
based on other observable market parameters in our liquid hedge funds include (i) interest rate
swaps and swaptions, equity swaps and foreign exchange swaps which are valued by the independent
fund administrator using models with significant observable market parameters, and (ii) funds
managed by third parties for which we receive value information from the fund managers. The fair
value of interest rate swaps and swaptions is calculated using the current market yield of the
relevant interest rate durations and an appropriate discount rate to determine a present value. The
fair value of equity swaps and foreign exchange swaps is calculated using the market price of the
underlying stock or foreign exchange pair, plus the financing cost of carrying the transaction. The
fair value of these investments is also confirmed independently with the counterparty to the
transaction. Investments valued using methods, including internal models, with significant
unobservable market parameters consist primarily of investments in other funds and certain illiquid
securities. Counterparty risk is also considered.
Hybrid Hedge Funds
In our hybrid hedge funds, investments are valued using quoted market prices, to the extent
available. Independent valuation agents are used by our hybrid hedge funds to provide estimates of
the fair value of investments, other than investments in other funds, for which quoted market
prices are not available. For these investments, we understand that the independent valuation
agents use some or all of the following methods and techniques to estimate the fair value of the
relevant type of investments:
Private loans The most common method used to value private loans is a discounted cash flow
analysis. In this method, the estimated future payments to be made by the borrower under the loan
agreement are discounted to the present using a discount rate appropriate to the risk level of the
borrower and current market interest rates.
If it is likely that a borrower will not be able to repay a loan in full, the loan may be valued by
estimating how much the borrower will be able to repay based on obtaining refinancing from a new
lender. Under this method, the borrowers business must be examined in detail, and then compared to
known loans in the market to estimate how much the borrower will likely be able to borrow, and
therefore repay under the existing loan. If the amount likely to be able to be refinanced is less
than the total payments due under the loan, the fair value of the loan will be reduced.
Another method used to value loans that may not be repaid in full is to value the total amount of
assets of the borrower that might be sold to raise proceeds to repay the loan (and debt, if any,
that has a higher claim against assets) if necessary. Under this method, all assets of the borrower
must be analyzed and valued. If the total value is less than the total payments due under the loan
(and debt, if any, that has a higher claim against assets), the fair value of the loan will be
reduced.
51
Asset-backed securities and collateralized debt obligations for which there are no quoted market
prices are valued using a discounted cash flow analysis based on the estimated cash flows to be
generated by the relevant underlying assets and the appropriate interest rate based on the nature
of the underlying assets.
Real estate is usually valued based on sales of comparable property. The value of real estate which
is net leased is also influenced by the credit quality of major tenants, as their ability to make
lease payments is relevant to the value of the property under lease.
Investments in other funds are valued primarily based on the net asset values provided by the fund
managers of those funds. Adjustments to such net asset values are made for liquidity or to other
factors if deemed material and necessary.
Investments valued using methods, including internal models, with significant unobservable market
parameters consist primarily of investments in other funds and certain illiquid investments.
Hybrid PE Funds
Investments held within these funds are valued in a consistent manner with either the private
equity funds or hybrid hedge funds, as applicable depending on the nature of the investment.
Sensitivity
Changes in the fair value of our funds investments would impact our results of operations as
described in Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk.
As discussed above, the determination of investment fair values involves managements judgments and
estimates. The degree of judgment involved is dependent upon the availability of quoted market
prices or observable market parameters. The following table summarizes the investments held by the
Fortress Funds by valuation methodology as of March 31, 2009.
The categories displayed below correspond directly with the disclosures which are required under
SFAS 157. Note that negative percentages represent net short positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid Hedge |
|
|
Hybrid PE |
|
|
Total Investment |
|
Basis for Determining Fair Value |
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Funds |
|
|
Company Holdings |
|
1. Quoted market prices (A) |
|
|
6 |
% |
|
|
13 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Other observable market parameters |
|
|
2 |
% |
|
|
33 |
% |
|
|
1 |
% |
|
|
0 |
% |
|
|
4 |
% |
|
|
3A. Third party pricing sources with
significant unobservable market
parameters (B) |
|
|
3 |
% |
|
|
52 |
% |
|
|
93 |
% |
|
|
87 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3B. Internal models with significant
unobservable market parameters |
|
|
89 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
12 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
For liquid hedge funds, includes gross long positions of 23% and short positions of (10%). |
|
(B) |
|
Primarily represents valuations based on third party pricing services, certain broker
quotes, and third party fund managers. The result is skewed for the liquid hedge funds due to
the offsetting net short positions in Level 1 and net long positions in Level 2. |
As of March 31, 2009, $7.1 billion of investments in our private equity funds, $0.04 billion of
investments in our liquid hedge funds, $0.6 billion of investments in our hybrid hedge funds, and
$0.5 billion of investments in our hybrid PE funds are valued by internal models with significant
unobservable market parameters. A 10% increase or decrease in the value of investments held by the
Fortress Funds valued at level 3 (A or B) would have had the following effects on our results of
operations on an unconsolidated basis for the three months ended March 31, 2009, consistent with
the table above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Liquid Hedge |
|
|
Hybrid Hedge |
|
|
Hybrid PE |
|
|
|
Funds |
|
Funds |
|
Funds |
|
Funds |
|
Management fees, per annum on a prospective basis |
|
$3.2 million or |
|
$2.0 million |
|
$15.7 million |
|
$1.0 million or |
|
|
($3.3 million) (A) |
|
|
|
|
|
|
|
|
|
($1.3 million) (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive income |
|
|
N/A (B) |
|
|
$0.0 million |
|
|
N/A (C) |
|
|
|
N/A (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investees |
|
$40.9 million |
|
$0.5 million |
|
$23.0 million |
|
$7.0 million |
Note: The tables above exclude non-investment assets and liabilities of the funds, which are not
classified in the fair value hierarchy. Such net assets may be material, particularly within the
hedge funds.
52
|
|
|
(A) |
|
Private equity fund and hybrid PE fund management fees would be generally unchanged as, for
investments in non-publicly traded securities, they are not based on the value of the funds,
but rather on the amount of capital invested in the funds. However, if the NAV of a portfolio
company of certain private equity funds or hybrid PE funds is reduced below its invested
capital, there would be a reduction in management fees. As of March 31, 2009, $3.1 billion of
such private equity fund or hybrid PE fund portfolio companies valued at level 3 (A or B)
were carried at or below their invested capital and are in funds which are no longer in their
commitment period. Management fees are generally calculated as of certain reset dates. The
amounts disclosed show what the estimated effects would be to management fees over the next
year assuming March 31, 2009 is the current reset date. |
|
(B) |
|
Private equity fund and hybrid PE fund incentive income would be unchanged as it is not
recognized until received and all contingencies are resolved. Furthermore, incentive income
would be based on the actual price realized in a transaction, not based on a valuation. |
|
(C) |
|
Hybrid hedge fund incentive income would be unchanged as it is not recognized until all
contingencies are resolved in the fourth quarter. Incentive income is generally not charged
on amounts invested by hybrid hedge funds in funds managed by external managers. |
Income Taxes
FIG Corp. has recorded a significant deferred tax asset, primarily in connection with the Nomura
transaction and the IPO. These transactions resulted in the basis of Fortress Operating Groups net
assets being in excess of its book basis, which will result in future tax deductions. A substantial
portion of this asset is offset by a liability associated with the tax receivable agreement with
our Principals.
The realization of the deferred tax assets is dependent on the amount of our future taxable income
before deductions related to the establishment of the deferred tax asset. The deferred tax asset is
comprised of a portion that would be realized in connection with future ordinary income and a
portion that would be realized in connection with future capital gains.
We project that we will have sufficient future taxable ordinary income in the normal course of
business without any projected significant change in circumstances to fully realize the portion of
the deferred tax asset that would be realized in connection with future ordinary income. Our
projections do not include material changes in AUM or incentive income from the current levels
which, due to the market crisis, have declined from historical levels. However, the projections do
contain an estimated marginal growth assumption in years beyond 2009. Based on our historical and
projected taxable income, we have concluded that the realization of the portion of the deferred tax
asset that would be realized in connection with future taxable ordinary income is more likely than
not. If our estimates change in the future and it is determined that it is more likely than not
that some portion, or all, of this portion of the deferred tax asset will not be realized, a
valuation allowance would be recorded for that portion. However, in most cases, any tax expense
recorded in connection with the establishment of a valuation allowance or the reversal of a
deferred tax asset would be partially offset by other income recorded in connection with a
corresponding reduction of a portion of the tax receivable agreement liability (see below). The
following table sets forth our estimated federal taxable ordinary income for 2007 and 2008 before
deductions relating to the establishment of the deferred tax assets, excluding deferred tax assets
arising from equity-based compensation, as well as the average of such amount needed over the
approximate period of the deductibility (approximately 15 years from the date of establishment,
based on the amortization period of the tax basis intangible assets recorded) in order to fully
realize the portion of the deferred tax asset that would be realized in connection with future
ordinary income (in millions):
|
|
|
|
|
2007 |
|
$ |
74.9 |
|
|
|
2008: Estimated |
|
$ |
47.9 |
|
|
|
2009 - 2015: Average Required |
|
$ |
55.4 |
|
|
|
2016 - 2021: Average Required |
|
$ |
79.1 |
|
As of December 31, 2008, based on the effects of the continuing credit crisis, particularly the
fourth quarter declines in equity investment values, we revised our assessment of the realizability
of the portion of the deferred tax asset that would only be realized in connection with future
capital gains. We have established a full valuation allowance for this portion of the deferred tax
asset as management does not believe that the projected generation of material taxable capital
gains is sufficiently assured in the foreseeable future. In addition, the establishment of the
valuation allowance resulted in a reduction of the obligations associated with the tax receivable
agreement and a corresponding reduction of the deferred tax asset.
For further information on our effective tax rate, and the tax receivable agreement, see Note 5 to
our financial statements in Part I, Item 1, Financial Statements Income Taxes and Tax Related
Payments.
Our effective tax rate for GAAP reporting purposes may be subject to significant variation from
period to period.
The amount of income taxes that we may be required to pay could increase significantly if
legislation introduced in Congress is passed in its proposed form. For more information on the
proposed legislation, see Part II, Item 1A, Risk Factors -Risks Related to Taxation Legislation
has been introduced that would, if enacted, preclude us from qualifying for treatment as a
partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our
structure also is subject to potential judicial or administrative change and differing
interpretations, possibly on a retroactive basis.
53
Equity-Based Compensation
We currently have several categories of equity-based compensation which are described in Note 7 to
Part I, Item 1, Financial Statements Equity-Based Compensation. The aggregate fair value of
each of the RSU grants that are subject to service conditions is reduced by an estimated forfeiture
factor (that is, the estimated amount of awards which will be forfeited prior to vesting). The
estimated forfeiture factor is based upon historic turnover rates within our company adjusted for
the expected effects of the grants on turnover, if any, and other factors in the judgment of
management. The estimated forfeiture factor is updated at each reporting date.
The volatility assumption used in valuing certain awards, as described below, was based on
five-year historical stock price volatilities observed for a group of comparable companies, since
we do not have sufficient historical share performance to use our own historical volatility,
adjusted for managements judgment regarding our expected volatility. Since our IPO in February
2007, our actual volatility has exceeded the volatility assumption used. To the extent that this
trend continues, and managements judgment concerning volatility is changed, we would adjust the
volatility assumption used. The risk-free discount rate assumptions used in valuing certain awards
were based on the applicable U.S. treasury rate of like term. The dividend yield assumptions used
in valuing certain awards were based on our actual dividend rate at the time of the award; the
dividend growth rate used with respect to one type of award was based on managements judgment and
expectations.
The following elements of the accounting for equity-based compensation are subject to significant
judgment and estimation:
|
|
|
the estimated forfeiture factor; |
|
|
|
|
the discount related to RSUs which do not entitle the recipients to dividend equivalents
prior to the delivery of Class A shares. This discount was based on the estimated present
value of dividends to be paid during the service period, which in turn was based on an
estimated initial dividend rate, an estimated dividend growth rate and a risk-free discount
rate of like term; |
|
|
|
|
the discount related to RSUs with no service conditions which are subject to the delayed
delivery of Class A shares, which occurs in periods subsequent to the grant date. This
discount was based on the estimated value of a put option on such shares over the delayed
delivery period since essentially this would be the value of owning, and being able to trade,
those shares during the delayed delivery period rather than having to wait for delivery. This
estimated value was in turn derived from a binomial option pricing model based on the
following assumptions: volatility, term, dividend rate and risk-free discount rate; and |
|
|
|
|
the estimated fair value of the LTIP awards, which was estimated using a Monte Carlo
simulation valuation model, with the following assumptions: volatility, term, dividend rate,
and risk-free discount rate. |
Each of these elements, particularly the forfeiture factor and the volatility assumptions used in
valuing certain awards, are subject to significant judgment and variability and the impact of
changes in such elements on equity-based compensation expense could be material. Increases in the
assumed forfeiture factor would decrease compensation expense. Increases in the volatility
assumption would (i) decrease compensation expense related to RSUs with no service conditions since
the discount for delayed delivery would have increased, and (ii) increase compensation expense
related to the LTIP since the value of the LTIP would have increased. Increases in the assumed
risk-free rate would (i) decrease compensation expense related to RSUs which do not entitle
recipients to dividend equivalents since the estimated value of the foregone dividends would have
increased, thereby increasing the discount related to their non-receipt, (ii) decrease compensation
expense related to RSUs with no service conditions since the discount for delayed delivery would
have increased, and (iii) increase compensation expense related to the LTIP since the value of the
LTIP would have increased. Except for the forfeiture factor, changes in these assumptions will only
affect awards made in the future and awards whose accounting is impacted by changes in their fair
value (generally those to non-employees, known as liability awards).
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160 Accounting for Noncontrolling Interests. SFAS 160
clarifies the classification of non-controlling interests in consolidated statements of financial
position and the accounting for and reporting of transactions between the reporting entity and
holders of such non-controlling interests. SFAS 160 applies to reporting periods beginning after
December 15, 2008. SFAS 160 had the following effects on Fortresss financial statements: (i)
reclassification of Principals and Others Interests in Equity of Consolidated Subsidiaries from
the mezzanine section of the balance sheet (between liabilities and equity) to equity, (ii)
removal of Principals and Others Interests in Income of Consolidated Subsidiaries from the
calculation of Net Income (Loss) on the statement of operations, and disclosure thereof below Net
Income (Loss), and (iii) with respect to potential future transactions in which Fortress could
acquire Fortress Operating Group units from the Principals pursuant to their exchange (along with
Class B shares) for Class A shares (or otherwise), these transactions would be accounted for as
equity transactions rather than as a step acquisition of Fortress Operating Group (as would be
required under prior accounting principles). There is no effect from the adoption of SFAS 160 on
the equity which pertains to Class A shareholders, or net income (loss) allocable to Class A
shareholders, or on Fortresss liquidity.
54
In September 2008, the FASB issued exposure drafts of two proposed standards, Accounting for
Transfers of Financial Assets, an amendment of FASB Statement No. 140, and Amendments to FASB
Interpretation No. 46(R). These proposed standards would fundamentally change the requirements to
consolidate (or deconsolidate) special purpose and variable interest
entities and would be effective for us in 2010. We are currently evaluating the potential impact of
these proposed standards on us. To the extent they result in changes to the entities included in
our consolidated financial statements, the impact could be material to our gross assets,
liabilities, revenues and expenses but would not be material to our net income or equity.
In April 2009, the FASB issued three FSPs related to fair value and impairment, FSP FAS 107-1 and
APB 28-1 Interim Disclosures about Fair Value of Financial Instruments, FSP FAS 115-2 and FAS
124-2 Recognition and Presentation of Other-Than-Temporary Impairments, and FSP FAS 157-4
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly. These FSPs (i) require
disclosures about the fair value of financial instruments on an interim basis, (ii) change the
guidance for determining, recording and disclosing other-than-temporary impairment, and (iii)
provide additional guidance for estimating fair value when the volume or level of activity for an
asset or liability have significantly decreased. These FSPs will be effective for Fortress in the
second quarter of 2009. We anticipate that they will have a small impact on our disclosures, a
potential impact on future impairment determinations for distributable earnings purposes (if any),
but no material impact on our financial condition, liquidity, or results of operations upon
adoption.
Market Risks
Our predominant exposure to market risk is related to our role as investment manager for the
Fortress Funds and the sensitivities to movements in the fair value of their investments on
management fee and incentive income revenue, as well as on returns on our principal investments in
such funds. For a discussion of the impact of market risk factors on our financial instruments
refer to Part I, Item 3 Quantitative and Qualitative Disclosures About Market Risk and
Critical Accounting Policies Valuation of Investments above.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
As of March 31, 2009, our material contractual obligations are our capital commitments to our
funds, our lease obligations and our debt obligations as described above. Furthermore, we have
potential clawback obligations with respect to our private equity deferred incentive income
received to date.
Our future contractual obligations decreased from $1.5 billion as of December 31, 2008 to $1.4
billion as of March 31, 2009.
Our debt obligations payable decreased from $777.7 million as of December 31, 2008 to $646.4
million as of March 31, 2009, including estimates for interest payments. This decrease was
primarily attributable to our March 13, 2009 amendment to our credit agreement. In connection with
the amendment, we repaid (i) $50.0 million of outstanding revolving debt and (ii) $75.0 million of
outstanding term loans.
Our outstanding capital commitments, including our commitments to our funds, have decreased from
$140.9 million as of December 31, 2008 to $132.4 million as of March 31, 2009. The decrease is
primarily attributable to a $14.4 million contribution we have made to Fund V in the three months
ended March 31, 2009. This decrease in outstanding capital commitments was partially offset by the
net effect of recallable capital distributions from the Real Assets Fund and the Credit
Opportunities Fund, which increased our outstanding commitments by $6.5 million.
The amount of clawback that would be due based on a liquidation of the related Fortress Funds at
their net recorded asset value as of March 31, 2009, which we refer to as intrinsic clawback, was
$136.0 million as compared to $130.3 million at December 31, 2008.
55
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our predominant exposure to market risk is related to our role as investment manager for the
Fortress Funds and the sensitivities to movements in the fair value of their investments on
management fee and incentive income revenue and investment income (loss).
The fair value of the financial assets and liabilities of the Fortress Funds may fluctuate in
response to changes in the value of securities, foreign exchange, commodities and interest rates.
Fluctuations in the fair value of the Fortress Funds will continue to directly affect the carrying
value of our investments in the Fortress Funds and thereby our earnings (losses) from equity method
investees, as well as the management fees and incentive income we record, to the extent that they
are earned based on fair value or NAV.
Risks are analyzed across funds from the bottom up and from the top down with a particular
focus on asymmetric risk. Management gathers and analyzes data, monitors investments and markets in
detail, and constantly strives to better quantify, qualify and circumscribe relevant risks.
Although the Fortress Funds share many common themes, each segment within the investment companies
runs their own investment and risk management process subject to the companys overall risk
tolerance and philosophy:
|
|
|
the investment process of our private equity funds involves a detailed analysis of
potential acquisitions, and asset management teams assigned to oversee the strategic development,
financing and capital deployment decisions of each portfolio investment; |
|
|
|
|
our hybrid funds and Castles perform credit and cash-flow analysis of borrowers, tenants
and credit-based assets, and have asset management teams that monitor covenant compliance by, and
relevant financial data of, borrowers, tenants and other obligors, asset pool performance
statistics, tracking of cash payments relating to investments, and ongoing analysis of the credit
status of investments; and |
|
|
|
|
our liquid hedge funds continuously monitor a variety of markets for attractive trading
opportunities, applying a number of traditional and customized risk management metrics to analyze
risk related to specific assets or portfolios, as well as fund-wide risks. |
Each segment has an institutional risk management process and related infrastructure to address
these risks. The following table summarizes our financial assets and liabilities that may be
impacted by various market risks such as equity prices, interest rates and exchange rates as of
March 31, 2009 (in thousands):
|
|
|
|
|
Assets |
|
|
|
|
Equity method investees |
|
$ |
759,980 |
|
Options in affiliates |
|
|
72 |
|
|
|
|
|
|
|
$ |
760,052 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Debt obligations payable |
|
$ |
604,041 |
|
|
|
|
|
Since Fortresss investments in the various Fortress Funds are not equal, Fortresss risks from a
management fee and incentive income perspective (which mirror the funds investments) and its risks
from an investment perspective are not proportional.
Fortress Funds Market Risk Impact on GAAP Management Fees
Our management fees are based on either: (i) capital commitments to a Fortress Fund, (ii) capital
invested in a Fortress Fund, or (iii) the NAV of a Fortress Fund, as described in our historical
consolidated financial statements. Management fees will only be impacted by changes in market risk
factors to the extent they are based on NAV. These management fees will be increased (or reduced)
in direct proportion to the impact of changes in market risk factors on our investments in the
related funds and would occur only in periods subsequent to the change, as opposed to having an
immediate impact. The proportion of our management fees that are based on NAV is dependent on the
number and types of Fortress Funds in existence and the current stage of each funds life cycle. As
of March 31, 2009, approximately 49% of our management fees earned were based on the NAV of the
applicable funds.
|
|
|
For private equity funds and hybrid PE funds, management fees are charged on committed
capital during the investment period of a new fund, and then generally on invested capital
after the investment period, with the exception of funds formed after March 2006. For funds
formed after March 2006 that are no longer in the investment period, management fees are
earned on the NAV of investments in publicly traded entities. Reductions in net asset value
below invested capital for any fund investment will also cause reductions in management fees. |
|
|
|
|
For Castles, management fees are not calculated based on NAV but instead a fee is charged
based on the funds contributed capital. |
|
|
|
|
For hedge funds, management fees are based on their NAV, which in turn is dependent on the
estimated fair values of their investments. |
56
Changes in values of investments could indirectly affect future management fees by, among other
things, reducing the funds access to capital or liquidity and their ability to currently pay the
management fees.
Fortress Funds Market Risk Impact on GAAP Incentive Income
Our incentive income is generally based on a percentage of profits of the various Fortress Funds
subject to the achievement of performance criteria. Our incentive income will be impacted by
changes in market risk factors. However, several major factors will influence the degree of impact:
(i) the performance criteria for each individual fund in relation to how that funds results of
operations are impacted by changes in market risk factors, (ii) whether such performance criteria
are annual or over the life of the fund, (iii) to the extent applicable, the previous performance
of each fund in relation to its performance criteria, and (iv) whether each funds incentive income
is subject to contingent repayment. As a result, the impact of changes in market risk factors on
incentive income will vary widely from fund to fund, as summarized below, and is heavily dependent
on the prior performance of each fund, and is therefore not readily predicted or estimated.
|
|
|
Incentive income from our private equity funds and hybrid PE funds is not recorded as
revenue but instead is deferred under GAAP until the related clawback contingency is
resolved. Deferred incentive income, which is subject to contingencies, will be recognized as
revenue to the extent it is received and all the associated contingencies are resolved.
Assuming that the deferred incentive income earned to date would be equal to what would be
recognized when all contingencies are resolved, a 10% increase or decrease in the fair values
of investments held by all of the private equity funds and hybrid PE funds where incentive
income is subject to contingencies at March 31, 2009 would increase or decrease future
incentive income by $21.3 million or ($8.8 million), respectively; however, this would have
no effect on our current reported financial condition or results of operations. |
|
|
|
|
Incentive income from the Castles is not impacted by changes in the fair values of their
investments, except to the extent they represent impairment, since these changes do not
impact the measure of current operating results (i.e. FFO in excess of specified returns to
the companys shareholders) upon which the incentive income is calculated. The definition of
FFO excludes unrealized changes in the values of the Castles investments (primarily real
estate, loans and securities), except for minor items (for example, the unrealized gain or
loss on non-hedge derivatives which make up only an immaterial portion of their assets). |
|
|
|
|
Incentive income from our hedge funds is directly impacted by changes in the fair value of
their investments. Incentive income from certain of our hedge funds is earned based on
achieving quarterly or annual performance criteria. For the hedge funds with quarterly
performance criteria, a 10% decrease to the NAV of the fund on March 31, 2009 would have
resulted in a loss to investors for the quarter. In future quarters, this loss would create
or cause the fund to fall further below a high water mark (minimum future return to recover
the loss to the investors) for our funds performance which would need to be achieved prior
to any incentive income being earned by us. For the hedge funds with annual performance
criteria, a 10% decrease to the NAV of the fund on March 31, 2009, assuming that NAV is
constant for the rest of the current year, would result in no incentive income recorded as
revenue at year end (in the fourth quarter of the year). |
Fortress Funds Market Risk Impact on GAAP Investment Income
Our investments in the Fortress Funds, other than the Castles, are accounted for under the equity
method. To the extent they are investment companies, our investments are directly affected by the
impact of changes in market risk factors on the investments held by such funds, which could vary
significantly from fund to fund.
57
Market Risk Quantitative Analysis
The following table presents information on the impact to Fortress of a 10% change in the fair
values of all of the investments held by the Fortress Funds at March 31, 2009 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Positive Change |
|
|
|
GAAP Revenues |
|
|
Segment Revenues (A) |
|
|
|
|
|
|
|
|
|
|
|
Earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Incentive |
|
|
Equity Method |
|
|
Management |
|
|
Incentive |
|
|
Investment |
|
|
|
Fees (B) |
|
|
Income |
|
|
Investees (C) |
|
|
Fees (B) |
|
|
Income |
|
|
Income |
|
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
$ |
3.9 |
|
|
$ |
N/A |
(E) |
|
$ |
42.5 |
|
|
$ |
3.9 |
|
|
$ |
N/A |
(E) |
|
$ |
N/A |
|
Castles (D) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Liquid Hedge Funds |
|
|
7.1 |
|
|
|
0.6 |
|
|
|
1.9 |
|
|
|
7.1 |
|
|
|
0.6 |
|
|
|
1.7 |
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds |
|
|
9.4 |
|
|
|
N/A |
(G) |
|
|
17.0 |
|
|
|
9.4 |
|
|
|
|
|
|
|
9.0 |
|
PE Funds |
|
|
1.1 |
|
|
|
N/A |
(E) |
|
|
8.9 |
|
|
|
1.1 |
|
|
|
N/A |
(E) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21.5 |
|
|
$ |
0.6 |
|
|
$ |
70.3 |
|
|
$ |
21.5 |
|
|
$ |
0.6 |
|
|
$ |
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Negative Change |
|
|
|
GAAP Revenues |
|
|
Segment Revenues (A) |
|
|
|
|
|
|
|
|
|
|
|
Earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
Management |
|
|
Incentive |
|
|
Equity Method |
|
|
Management |
|
|
Incentive |
|
|
Investment |
|
|
|
Fees (B) |
|
|
Income |
|
|
Investees (C) |
|
|
Fees (B) |
|
|
Income |
|
|
Income |
|
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
$ |
(4.0 |
) |
|
$ |
N/A |
(E) |
|
$ |
(42.5 |
) |
|
$ |
(4.0 |
) |
|
$ |
N/A |
(E) (F) |
|
$ |
N/A |
(F) |
Castles (D) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
(F) |
Liquid Hedge Funds |
|
|
(7.1 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
(7.1 |
) |
|
|
|
|
|
|
(1.7 |
) |
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds |
|
|
(9.4 |
) |
|
|
N/A |
(G) |
|
|
(17.0 |
) |
|
|
(9.4 |
) |
|
|
|
|
|
|
(9.0 |
) |
PE Funds |
|
|
(1.3 |
) |
|
|
N/A |
(E) |
|
|
(8.9 |
) |
|
|
(1.3 |
) |
|
|
N/A |
(E) (F) |
|
|
N/A |
(F) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(21.8 |
) |
|
$ |
|
|
|
$ |
(70.3 |
) |
|
$ |
(21.8 |
) |
|
$ |
|
|
|
$ |
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations -
Segment Analysis for a discussion of the differences between GAAP and segment basis revenues. |
|
(B) |
|
Changes in management fees represent an annual change for the one year period following the
measurement date assuming there is no change to the investments held by the funds during that
period. For private equity funds and hybrid PE funds, it assumes that the management fees
reset as of the reporting date. Private equity fund and hybrid PE fund management fees would
be generally unchanged as, for investments in non-publicly traded securities, they are not
based on the value of the funds, but rather on the amount of capital invested in the funds.
However, if the NAV of a portfolio company of certain private equity funds or hybrid PE funds
is reduced below its invested capital, there would be a reduction in management fees. As of
the reporting date, $3.5 billion of such private equity fund or hybrid PE fund portfolio
companies were carried at or below their invested capital and are in funds which are no longer
in their commitment period. |
|
(C) |
|
Presented on a gross basis, before Principals and others interests in income of
consolidated subsidiaries. The changes presented do not include any effect related to our
direct investment in GAGFAH common stock. A 10% increase (decrease) in the equity price of
GAGFAHs common shares would affect our unrealized gains and losses by $2.8 million. |
|
(D) |
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Our investments in the Castles are held at fair value, based on the market value of the
shares we own. Gains (losses) on our shares in the Castles and options granted to us by the
Castles are affected by movements in the equity price of the shares. A 10% increase (decrease)
in the equity price of the shares would affect unrealized gains and losses by $0.1 million.
Furthermore, the Castles management fees and incentive income are not directly impacted by
changes in the fair value of their investments (unless the changes are deemed to be
impairment, which would impact incentive income). |
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(E) |
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For GAAP Revenues, private equity fund and hybrid PE fund incentive income would be unchanged
as it is not recognized until received and all contingencies are resolved. Furthermore,
incentive income would be based on the actual price realized in a transaction, not based on a
valuation. For Segment Revenues, private equity fund and hybrid PE fund incentive income is
based on realizations. |
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(F) |
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A reduction in the fair value of investments could impact our conclusion regarding the
potential impairment of our investments or a potential segment basis incentive income reserve
for funds which are subject to clawback. |
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(G) |
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For GAAP Revenues, hybrid hedge fund incentive income would be unchanged as it is not
recognized until all contingencies are resolved in the fourth quarter. Incentive income is
generally not charged on amounts invested by hybrid hedge funds in funds managed by external
managers. |
Interest Rate Risk
Fortress Operating Group has debt obligations payable that accrue interest at variable rates.
Interest rate changes may therefore impact the amount of interest payments, future earnings and
cash flows. Based on debt obligations payable as of March 31, 2009, we estimate that interest
expense relating to variable rate debt obligations payable would increase $6.0 million on an annual
basis in the event interest rates were to increase by one percentage point.
Exchange Rate Risk
Our investments in Eurocastle and GAGFAH are directly exposed to foreign exchange risk. As of March
31, 2009, we had a $0.4 million investment in Eurocastle and a $28.2 million investment in GAGFAH
which are accounted for at fair value. In the event of a 10% change in the applicable foreign
exchange rate against the U.S. dollar on March 31, 2009, we estimate the gains and losses for the
three months ended March 31, 2009 in relation to the value of the shares and options would increase
or decrease by $2.9 million.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
The Companys disclosure controls and procedures are designed to provide reasonable assurance that
information is recorded, processed, summarized and reported accurately and on a timely basis.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures were
effective.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent
fiscal quarter to which this report relates that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may from time to time be involved in litigation and claims incidental to the conduct of our
business. Our industry is always subject to scrutiny by government regulators, which could result
in litigation related to regulatory compliance matters. As a result, we maintain insurance policies
in amounts and with the coverage and deductibles we believe are adequate, based on the nature and
risks of our business, historical experience and industry standards. We believe that the cost of
defending any pending or future litigation or challenging any pending or future regulatory
compliance matter will not have a material adverse effect on our business. However, increased
regulatory scrutiny of hedge fund trading activities combined with extensive trading in our liquid
hedge funds may cause us to re-examine our beliefs regarding the likelihood that potential
investigation and defense-related costs could have a material adverse effect on our business.
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Item 1A. Risk Factors
We face a variety of significant and diverse risks, many of which are inherent in our business.
Described below are certain risks that we currently believe could materially affect us. Other
risks and uncertainties that we do not presently consider to be material or of which we are not
presently aware may become important factors that affect us in the future. The occurrence of any of
the risks discussed below could materially and adversely affect our business, prospects, financial
condition, results of operations or cash flow.
Risks Related to the Financial Services Industry and Financial Markets
We do not know what impact the U.S. governments various plans to attempt to stabilize the economy
and the financial markets will have on our business.
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, the U.S. government enacted
the Emergency Economic Stabilization Act of 2008, or EESA, on October 3, 2008. Pursuant to the
EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of
mortgage-backed and other securities from financial institutions for the purpose of stabilizing the
financial markets. In addition, the U.S. government also made preferred equity
investments in a number of the largest financial institutions, including Citigroup, Bank of America
and AIG. In addition, on March 3, 2009, the U.S. Department of the Treasury and the Federal
Reserve announced the launch of the Term Asset-Backed Securities Loan Facility, or TALF, which
provides up to $200 billion (which may be increased to up to $1 trillion) of financing to certain
U.S. entities to purchase qualifying AAA-rated asset-backed securities. Such financing is subject
to various conditions, has a term of three years and accrues interest at specified rates. It is
not clear what impact the various plans to attempt to stabilize the
economy and the
financial markets will have on our business.
In March
2009, the US Treasury announced plans for the Public Private
Investment Partnership Program (or PPIP) for legacy
assets, which is intended to generate purchasing power to help
facilitate the purchase of various loans and securities held by
financial institutions. As part of the PPIP, the Treasury accepted
applications from investment managers to become pre-qualified to
manage assets of to-be-formed investment funds that would invest in
legacy securities on behalf of the government and private investors.
We applied in April of this year to be pre-qualified as an
investment manager under this program, and have not yet been informed
of whether we have been selected as one of the managers by the
Treasury. We do not currently anticipate that the PPIP will have a
material impact on our business irrespective of whether we are
selected as a manager. The details of the TALF, PPIP and other
initiatives are subject to change, and it is unclear whether we
and/or our funds will be eligible to participate directly in these
programs (whether as an investment manager, as a recipient of
financing
or otherwise) and, therefore, these
initiatives may not directly benefit us. If any of our competitors are able to benefit from these
programs, they may gain a competitive advantage over us. In addition, the government
may decide to implement these programs in unanticipated ways that have a more direct impact on our
funds or our businesses. For example, the government may decide that
it will not purchase or finance certain
types of loans or securities, which may adversely affect the price of those securities. If we own such
securities in our funds, such price impacts may have an adverse impact on the liquidity and/or
performance of such funds.
Risks Related To Our Business
The terms of our credit agreement may restrict our current and future operations, particularly our
ability to respond to certain changes or to take future actions.
Our credit agreement contains a number of restrictive covenants and requires significant
amortization payments over the next several years, which collectively impose significant operating
and financial restrictions on us, including restrictions that may limit our ability to engage in
acts that may be in our long-term best interests. Although we recently amended our credit agreement
to, among other things, make the financial covenants less restrictive, the terms of our credit
agreement still impose significant operating and financial restrictions on us. Our credit agreement
includes financial covenants that we:
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not exceed a total leverage ratio; |
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maintain a minimum AUM; and |
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maintain a minimum amount of investment assets (and maintain specific amounts of
certain types of investments). |
The leverage ratio covenant is tested as of the end of each fiscal quarter while the AUM and
investment asset covenants are applicable at all times. We have amended these and other covenants
several times in the last year in order to provide sufficient flexibility to ensure compliance with
the terms of our credit agreement. Our ability to comply with these and other covenants is
dependent upon a number of factors, some of which are beyond our control but could nonetheless
result in noncompliance. For example, our leverage ratio fluctuates depending upon the amount of
cash flow that we generate, and the value of our AUM and investment assets fluctuates due to a
variety of factors, including mark-to-market valuations of certain assets and other market factors.
The ongoing global economic recession has negatively impacted the cash flow that we have generated
and expect to generate in the future as well as the current and expected value of our investment
assets and current and expected AUM. These negative conditions, in turn, negatively affect our
ability to comply with these covenants. For example, the investment assets on our balance sheet
include a limited number of concentrated positions in companies or other ventures whose liquidity,
operating results and financial condition have been adversely affected by the ongoing recession.
Our largest on-balance sheet investment relates to a portfolio
company that has a large amount of debt that must be refinanced in
the summer of 2009. The failure of the portfolio company to
successfully refinance its debt (or a material default by any other
portfolio company in which we have a material direct or indirect
investment) would likely cause us
to lose all, or nearly all, of the value of our investment, which
would, in turn, decrease the amount of our investment assets and could result in our failure to
comply with the investment asset covenant in our credit agreement. Our credit agreement also
contains other covenants that restrict our operations as well as a number of events that, if they
occurred, would constitute an event of default under the agreement.
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In addition, our credit agreement requires that we make the
following amortization payments during the following time periods: $50 million in July 2009, $25
million in October 2009, an additional $100 million during 2010, an additional $75 million by
January 2011, and the remaining balance at the maturity of the facilities in May 2012. Making
these payments will require a significant amount of our available cash flow that could otherwise be
applied to other purposes such as making investments.
A failure by us to comply with the covenants or amortization requirements or upon the occurrence
of other defaults or events of default specified in our credit agreement could result in an event
of default under the agreement, which would give the lenders under the agreement the right to
terminate their commitments to provide additional loans under our revolving credit facility, to
declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be
immediately due and payable. In addition, the lenders would have the right to proceed against the
collateral we granted to them, which consists of substantially all our assets. If the debt under
our credit agreement were to be accelerated, we may not have sufficient cash on hand or be able to
sell sufficient collateral to repay this debt, which would have an immediate material adverse
affect on our business, results of operations and financial condition. For more detail regarding
our credit agreement, its terms and the current status of our compliance with the agreement, please
see Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources and Debt Obligations, and Covenants.
We depend on Messrs. Briger, Edens, Kauffman, Nardone and Novogratz, and the loss of any of their
services would have a material adverse effect on us.
The success of our business depends on the efforts, judgment and personal reputations of our
principals, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone and Michael Novogratz. Our
principals reputations, expertise in investing, relationships with our investors and relationships
with members of the business community on whom our funds depend for investment opportunities and
financing, are each critical elements in operating and expanding our businesses. We believe our
performance is strongly correlated to the performance of these individuals. Accordingly, the
retention of our principals is crucial to our success. In addition, if any of our principals were
to join or form a competitor, some of our investors could choose to invest with that competitor
rather than in our funds. The loss of the services of any of our principals would have a material
adverse effect on us, including our ability to retain and attract investors and raise new funds,
and the performance of our funds. Two or more of our principals occasionally fly together, which
concentrates the potential impact of an accident on our company. We do not carry any key man
insurance that would provide us with proceeds in the event of the death or disability of any of our
principals.
Each of our principals has entered into an employment agreement with us. The initial term of these
agreements is five years from the date of our initial public offering in February 2007, with
automatic one-year renewals until a non-renewal notice is given by us or the principal. If a
principal terminates his employment voluntarily or we terminate his employment for cause (as
defined in the agreement), the principal will be subject to eighteen-month post-employment
covenants requiring him not to compete with us. However, if we terminate a principals employment
without cause, the principal will not be subject to the non-competition provisions.
The principals have also entered into an agreement among themselves, which provides that, in the
event a principal voluntarily terminates his employment with us for any reason prior to the fifth
anniversary of the consummation of our initial public offering, the principal may be required to
forfeit a portion of his Fortress Operating Group units (and the corresponding Class B shares) to
the other principals who continue to be employed by the Fortress Operating Group. However, this
agreement may be amended by the principals who are then employed by the Fortress Operating Group.
We, our shareholders and the Fortress Operating Group have no ability to enforce any provision of
this agreement or to prevent the principals from amending the agreement or waiving any of its
obligations.
There is no guarantee that our principals will not resign, join our competitors or form a competing
company, or that the non-competition provisions in the employment agreements would be upheld by a
court. If any of these events were to occur, our business, prospects, financial condition and
results of operation would be materially adversely affected.
Several of our funds have key person provisions pursuant to which the failure of one or more of
our senior employees to be actively involved in the business provides investors with the right to
redeem from the funds or otherwise limits our rights to manage the funds. The loss of the services
of any one of such senior employees could have a material adverse effect on certain of our funds to
which such key person provisions relate and in some circumstances on us.
Investors in most of our hedge funds may generally redeem their investment without paying
redemption fees if the relevant key person ceases to perform his functions with respect to the fund
for 90 consecutive days. In addition, the terms of certain of our
hedge funds financing arrangements contain key person provisions, which may result, under
certain circumstances, in the acceleration of such funds debt or the inability to continue funding
certain investments if the relevant employee ceases to perform his functions with respect to the
fund and a replacement has not been approved.
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The loss or inability of Mr. Novogratz to perform his services for 90 days could result in
substantial withdrawal requests from investors in our Drawbridge Global Macro funds and, in the
event that a replacement is not approved, the termination of a substantial portion of the funds
financing arrangements. Such withdrawals and terminations would have a material adverse effect on
the Drawbridge Global Macro funds by reducing our management fees from those funds. Further, such
withdrawals and terminations could lead possibly to the liquidation of the funds and a
corresponding elimination of our management fees and potential to earn incentive income from those
funds. The loss of Mr. Novogratz could, therefore, ultimately result in a loss of a material
portion of our earnings attributable to our liquid hedge fund business segment.
The loss or inability of Mr. Briger to perform his services for 90 days could result in substantial
withdrawal requests from investors in our Drawbridge Special Opportunities funds and, in the event
that a replacement for him is not approved, the termination of a substantial portion of the funds
financing arrangements. Such withdrawals and terminations would have a material adverse effect on
the Drawbridge Special Opportunities funds by reducing our management fees from those funds.
Further, such withdrawals and terminations could lead possibly to the eventual liquidation of the
funds and a corresponding elimination of our management fees and potential to earn incentive income
from those funds. The loss or inability of Mr. Briger to perform his services or devote an
appropriate portion of his business time to the long dated value funds for 90 days would (unless
approved by a majority of fund investors) prevent some of the Drawbridge long dated value funds
from making additional investments. This could have a material adverse effect on such long dated
value funds, resulting in us receiving reduced management fees. The loss of Mr. Briger could,
therefore, ultimately result in a loss of a material portion of our earnings attributable to our
hybrid hedge fund and hybrid PE fund business segments.
If either Mr. Edens or both of Mr. Kauffman and Mr. Nardone cease to devote certain minimum
portions of their business time to the affairs of certain of our private equity funds, the funds
will not be permitted to make further investments, and then-existing investments may be liquidated
if investors vote to do so. Our ability to earn management fees and realize incentive income from
our private equity funds therefore would be adversely affected if we cannot make further
investments or if we are required to liquidate fund investments at a time when market conditions
result in our obtaining less for investments than could be obtained at later times. In addition, we
may be unable to raise additional private equity funds if existing private equity fund key-man
provisions are triggered. The loss of either Mr. Edens or both of Mr. Kauffman and Mr. Nardone
could, therefore, ultimately result in a loss of substantially all of our earnings attributable to
our private equity funds.
In addition, the terms of certain of our existing funds may be amended over time to add additional
key persons, and senior employees (including but not limited to Fortress principals) may also be
deemed as key persons for funds that are formed in the future.
Any such events would potentially have a direct material adverse effect on our revenues and
earnings (depending on the size of the particular fund to which a key person event relates), and
would likely harm our ability to maintain or grow management fee paying assets under management in
existing funds or raise additional funds in the future.
Our ability to retain our managing directors is critical to our success and our ability to grow
depends on our ability to attract additional key personnel.
Our success depends on our ability to retain our managing directors and the other members of our
investment management team and recruit additional qualified personnel. We collectively refer to
these key employees (other than our principals) as our investment professionals. Our investment
professionals possess substantial experience and expertise in investing, are responsible for
locating and executing our funds investments, have significant relationships with the institutions
which are the source of many of our funds investment opportunities, and in certain cases have
strong relationships with our investors. Therefore, if our investment professionals join
competitors or form competing companies it could result in the loss of significant investment
opportunities and certain existing investors. As a result, the loss of even a small number of our
investment professionals could jeopardize the performance of our funds, which could have a material
adverse effect on our results of operations as well as our ability to retain and attract investors
and raise new funds. Also, while we have non-competition and non-solicitation agreements with
certain investment professionals, there is no guarantee that the agreements to which our investment
professionals are subject, together with our other arrangements with them, will prevent them from
leaving us, joining our competitors or otherwise competing with us or that these agreements will be
enforceable in all cases. In addition, these agreements will expire after a certain period of time,
at which point each of our investment professionals would be free to compete against us and solicit
investors in our funds, clients and employees.
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Efforts to retain or attract investment professionals may result in significant additional
expenses, which could adversely affect our profitability, and changes in law could hamper our
recruitment and retention efforts. For example, we might not be able, or may elect not, to provide
future investment professionals with equity interests in our business to the same extent or with
the same tax consequences as our existing investment professionals. Therefore, in order to recruit
and retain existing and future investment professionals, we may need to increase the level of cash
compensation that we pay to them. Accordingly, as we promote or hire new investment professionals
over time, we may increase the level of cash compensation we pay to our investment professionals,
which would cause our total employee compensation and benefits expense as a percentage of our
total revenue to increase and adversely affect our profitability. In addition, we may deem it
necessary to maintain compensation levels to retain employees even during periods when we generate
less revenues than in previous periods, which would reduce our profit margins. Also, if proposed
legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income
rather than as capital gain for U.S. federal income tax purposes, such legislation would materially
increase the amount of taxes that we and our investment professionals that are compensated in part
with carried interest would be required to pay, thereby adversely affecting our ability to recruit,
retain and motivate our current and future professionals. See Our structure involves complex
provisions of U.S. federal income tax law for which no clear precedent or authority may be
available. Our structure also is subject to potential legislative, judicial or administrative
change and differing interpretations, possibly on a retroactive basis. Lastly, issuance of
certain equity interests in our business to current or future investment professionals would dilute
Class A shareholders.
Certain of our funds face particular retention issues with respect to investment professionals
whose compensation is tied, often in large part, to performance thresholds, or high water marks.
For example, several investment professionals receive performance-based compensation at the end of
each year based upon their annual investment performance, and this performance-based compensation
represents substantially all of the compensation the professional is entitled to receive during the
year. If the investment professionals annual performance is negative, the professional will not
be entitled to receive any performance-based compensation for the year. Alternatively, certain
other investment professionals are compensated in part based upon the performance fees earned by
the fund during each quarter. The funds positive quarterly investment performance represents a
high water mark, and neither the fund nor the investment professional is entitled to receive future
performance-based compensation until the funds cumulative performance at the end of a subsequent
quarter is greater than the previously set mark. In either compensation scenario, if the
investment professional or fund, as the case may be, does not produce investment results sufficient
to merit performance-based compensation, any affected investment professional may be incentivized
to join a competitor because doing so would allow the professional to eliminate the burden of
having to satisfy the high water mark before earning performance-based compensation. Similarly,
many of our investment professionals in our private equity and hybrid PE fund businesses are
compensated with grants of carried interest in our funds. During periods of economic volatility
such as what we are currently experiencing, realization events in our private equity and hybrid PE
fund businesses may be delayed, and it may therefore take significantly longer for investments to
result in payments to such professionals. In addition, in the event that overall returns for any of
our private equity funds or hybrid PE funds result in the generation of less incentive income than
might have otherwise been anticipated, such professionals grants of carried interest in such fund
will have similarly decreased value. To retain such professionals, the funds manager may elect to
compensate the professional using a portion of the management fees earned by the manager, which
would, in turn, reduce the amount of cash available to the public company, thereby reducing the
amount available for distribution to our Class A shareholders or other liquidity needs. This
retention risk is heightened during periods similar to those we are currently experiencing where
market conditions make it more difficult to generate positive investment returns.
We have experienced rapid growth, which may be difficult to sustain and which may place significant
demands on our administrative, operational and financial resources.
Our rapid growth in recent years has created significant demands on our legal, accounting and
operational infrastructure, and increased expenses. The complexity of these demands, and the
expense required to address them, is a function not simply of the amount by which our fee paying
assets under management have grown, but of significant differences in the investing strategies of
our different funds. In addition, we are required to continuously develop our systems and
infrastructure in response to the increasing sophistication of the investment management market and
legal, accounting and regulatory developments. Moreover, the strains upon our resources caused by
our growth are compounded by the additional demands imposed upon us as a public company with
shares listed on the New York Stock Exchange and, thus, subject to an extensive body of regulations
that did not apply to us prior to our initial public offering.
Our future growth will depend, among other things, on our ability to maintain an operating platform
and management system sufficient to address our growth and will require us to incur significant
additional expenses and to commit additional senior management and operational resources. As a
result, we face significant challenges:
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in maintaining adequate accounting, financial, compliance, trading and other
business controls, |
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implementing new or updated information, financial and disclosure systems and
procedures, and |
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in recruiting, training, managing and appropriately sizing our work force and other
components of our business on a timely and cost-effective basis. |
There can be no assurance that we will be able to manage our expanding operations effectively or
that we will be able to continue to grow, and any failure to do so could adversely affect our
ability to generate revenue and control our expenses.
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Operational risks may disrupt our businesses, result in losses or limit our growth.
We face operational risk from errors made in the negotiation, execution, confirmation or settlement
of transactions. We also face operational risk from transactions not being properly recorded,
evaluated or accounted for in our funds. In particular, our liquid hedge and hybrid fund businesses
are highly dependent on our ability to process and evaluate, on a daily basis, transactions across
markets and geographies in a time-sensitive, efficient and accurate manner. Consequently, we rely
heavily on our financial, accounting and other data processing systems. In addition, new investment
products we introduce create (and recently introduced products created) a significant risk that our
existing systems may not be adequate to identify or control the relevant risks in the investment
strategies employed by such new investment products. If any of these systems do not operate
properly, are inadequately designed or are disabled, we could suffer financial loss, a disruption
of our businesses, liability to our funds, regulatory intervention and reputational damage.
In addition, we operate in an industry that is highly dependent on its information systems and
technology. We believe that we have designed, purchased and installed high-quality information
systems to support our business. There can be no assurance, however, that our information systems
and technology will continue to be able to accommodate our operations, or that the cost of
maintaining such systems will not increase from its current level. Such a failure to accommodate
our operations, or a material increase in costs related to such information systems, could have a
material adverse effect on us.
Furthermore, we depend on our headquarters, which is located in New York City, for the operation of
our business. A disaster or a disruption in the infrastructure that supports our businesses,
including a disruption involving electronic communications or other services used by us or third
parties with whom we conduct business, or directly affecting our headquarters, may have an adverse
impact on our ability to continue to operate our business without interruption, which could have a
material adverse effect on us. Although we have disaster recovery programs in place, there can be
no assurance that these will be sufficient to mitigate the harm that may result from such a
disaster or disruption. In addition, insurance and other safeguards might only partially reimburse
us for our losses.
Finally, we rely on third party service providers for certain aspects of our business, including
certain financial operations of our hedge funds. In particular, we rely heavily on the services of
third party administrators in our hedge fund businesses and on the general ledger software provider
for a number of our funds. Any interruption or deterioration in the performance of these third
parties could impair the quality of the funds operations and could impact our reputation and
adversely affect our business and limit our ability to grow.
Our removal as the investment manager, or the liquidation, of one or more of our funds could have a
material negative effect on our business, results of operations and financial condition.
We derive a substantial portion of our revenues from funds managed pursuant to management
agreements that may be terminated or fund partnership agreements that permit investors to request
liquidation of investments in our funds on short notice. The termination of certain management
agreements or commencement of the dissolution of certain funds would constitute an event of default
under our credit agreement.
The terms of our funds generally give either the general partner of the fund or the funds board of
directors the right to terminate our investment management agreement with the fund. However,
insofar as we control the general partner of our funds which are limited partnerships, the risk of
termination of investment management agreement for such funds is limited, subject to our fiduciary
or contractual duties as general partner. This risk is more significant for our offshore hedge
funds where we do not serve as the general partner, which represent a significant portion of our
hedge fund AUM.
With respect to our private equity funds formed as registered investment companies, each funds
investment management agreement must be approved annually by the independent members of such funds
board of directors and, in certain cases, by its members, as required by law. Termination of these
agreements would reduce the fees we earn from the relevant funds, which could have a material
adverse effect on our results of operations.
In addition, investors in any private equity fund or hybrid PE fund and certain hedge funds have
the ability to act, without cause, to accelerate the date on which the fund must be wound down. We
will cease earning management fees on the assets of any such fund that is wound down. In addition,
the winding down of a material fund or group of funds within a short period of time could trigger
an event of default under certain debt covenants in our credit facility. Our ability to realize
incentive income from such funds therefore would be adversely affected if we are required to
liquidate fund investments at a time when market conditions result in our obtaining less for
investments than could be obtained at later times.
In addition, management agreements of our funds that are registered investment companies under the
Investment Company Act of 1940 would terminate if we were to experience a change of control without
obtaining investor consent. Such a change of control could be deemed to occur in the event our
principals exchange enough of their interests in the Fortress Operating Group into our Class A
shares such that our principals no longer own a controlling interest in us. We cannot be certain
that consents required for the assignment of our investment management agreements will be obtained
if such a deemed change of control occurs. In addition, the board of directors of certain hedge
funds have the right under certain circumstances to terminate the investment management agreements
with the applicable fund. Termination of these agreements would affect the fees we earn from the
relevant funds, which could have a material adverse effect on our results of operations.
Under the terms of our credit agreement, if, subject to certain exceptions, we cease to serve as
the investment manager of any fund that generates management and incentive fees during the previous
twelve months or which we expect to generate such fees within the next twelve months in an
aggregate amount of at least $25 million, such termination would constitute an event of default
under our credit agreement. In addition, if any such fund commenced a process to dissolve,
liquidate or otherwise wind-up the fund, such commencement would also constitute an event of
default under our credit agreement. If either event of
default occurred, it would give our lenders the right to terminate their commitments to lend us
funds under our revolving credit facility and to require us to repay all outstanding term loans
immediately (in addition to other remedies available under the credit agreement). If our lenders
exercised their rights upon the occurrence of an event of default, doing so would likely have an
immediate material adverse effect on our business, results of operations and financial condition.
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We are subject to third-party litigation risk that could result in significant liabilities and
reputational harm, which could materially adversely affect our results of operations, financial
condition and liquidity.
In general, we will be exposed to risk of litigation by our fund investors if our management of any
fund is alleged to constitute gross negligence or willful misconduct. Investors could sue us to
recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss.
Further, we may be subject to litigation arising from investor dissatisfaction with the performance
of our funds or from allegations that we improperly exercised control or influence over companies
in which our funds have large investments. By way of example, we, our funds and certain of our
employees, are each exposed to the risks of litigation relating to investment activities in our
funds and actions taken by the officers and directors (some of whom may be Fortress employees) of
portfolio companies, such as risks relating to a portfolio companys mortgage servicing activities
and the risk of shareholder litigation by other shareholders of public companies in which our funds
have large investments. The stock prices of several of our publicly traded portfolio companies and
Castles have decreased significantly over the past two years (resulting in the delisting of
one of our portfolio companies from the NYSE), which decreases may lead to securities class action
claims or other suits against us. In addition, we are exposed to risks of litigation or
investigation relating to transactions that presented conflicts of interest that were not properly
addressed. In such actions we would be obligated to bear legal, settlement and other costs (which
may be in excess of available insurance coverage). In addition, although we are indemnified by the
funds we manage, our rights to indemnification may be challenged. If we are required to incur all
or a portion of the costs arising out of litigation or investigations as a result of inadequate
insurance proceeds or failure to obtain indemnification from our funds, our results of operations,
financial condition and liquidity could be materially adversely affected. As a general matter, the
litigation environment in the investment management business tends to become worse in times of
extreme market volatility such as what we are currently experiencing. We have experienced negative
performance over the past several months in several of our investment funds, which increases the
likelihood that we will be sued by one or more of our investors.
In our liquid hedge funds, we are exposed to the risk of litigation if the funds suffer
catastrophic losses due to the failure of a particular investment strategy or due to the trading
activity of an employee who has violated market rules and regulations. Any litigation arising in
such circumstances is likely to be protracted, expensive and surrounded by circumstances which are
materially damaging to our reputation and our business. In addition, we face the risk of litigation
from investors in our private equity funds, hybrid hedge funds and hybrid PE funds if we violate
restrictions in such funds organizational documents (for example, by failing to seek approval for
related party transactions requiring approval or by exceeding the mandate of such funds).
Our liquid hedge funds, our offshore hybrid hedge fund and many of our private equity funds and
hybrid PE funds are incorporated or formed under the laws of the Cayman Islands. Cayman Islands
laws, particularly with respect to shareholder rights, partner rights and bankruptcy, may differ
from the laws of the United States. Cayman Islands laws could change, possibly to the detriment of
our funds and investment management subsidiaries. In November 2008, our flagship liquid hedge
funds, the Drawbridge Global Macro Funds, temporarily suspended redemptions from the funds due to
the heavy volume of redemption requests received during the fourth quarter of 2008. The suspensions
were based, in large part, on the need to renegotiate the terms of various financing arrangements
to which one or more of the funds were party. In addition, the Drawbridge Global Macro Funds announced their intention to engage in a significant
restructuring of their business, including the planned bifurcation of
the funds assets into liquid and illiquid pools, revisions to certain of the fees charged to the
funds investors, payment of redemption proceeds in a
combination of cash and in-kind distributions in the form of
interests in an entity that holds interests in the illiquid pool and
a plan to allow non-redeeming investors to exchange their interests
in the liquid pool of assets into a newly-formed fund. Since the time
of such announcements, the Drawbridge Global Macro Funds have successfully renegotiated the terms
of their financing arrangements, lifted the suspension of
redemptions and paid cash redemptions for the liquid portion of the redeemed investments (in the amount of $2.1
billion), and have also proceeded with the formation and launch of the new fund as of
May 1, 2009. On May 7, 2009, a suit was filed in the
Grand Court Cayman Islands by an investor in the Drawbridge Global Macro
Fund Ltd challenging the payment of redemption proceeds partially in
kind as described above;
however, the fund
believes that the suit is without merit. There can be no assurances
that additional investors will not file similar or other litigation at a later date based on claims stemming from the transactions.
Also, as a public company, we are subject to the risk of investigation or litigation by regulators
or our public shareholders arising from an array of possible claims, including investor
dissatisfaction with the performance of our businesses or our share price, allegations of
misconduct by our officers and directors or claims that we have inappropriately dealt with
conflicts of interest or investment allocations. It is also likely that the public company would
be brought into any lawsuit that is filed involving any of the fund-related litigation risks
described above. As with the funds, while the public company maintains insurance, there can be no
assurance that its insurance will prove to be adequate. If the public company is required to incur
all or a portion of the costs arising out of litigation or investigations, our results of
operations could be materially adversely affected. Furthermore, any such litigation or
investigation could be protracted, expensive and highly damaging to the public companys
reputation, even if the underlying claims are without merit. In addition, we may participate in
transactions that involve litigation (including the enforcement of property rights) from time to time, and such
transactions may expose us to reputational risk and increased risk from countersuits.
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In addition, with a workforce consisting of many very highly paid investment professionals, we face
the risk of lawsuits relating to claims for compensation, which may individually or in the
aggregate be significant in amount. Such claims are more likely to occur in the current environment
where individual employees may experience significant volatility in their year-to-year compensation
due to trading performance or other issues and in situations where previously highly compensated
employees were terminated for performance or efficiency reasons. The cost of settling such claims
could adversely affect our results of operations.
Our reputation, business and operations could be adversely affected by regulatory compliance
failures, the potential adverse effect of changes in laws and regulations applicable to our
business and effects of negative publicity surrounding the alternative asset management industry in
general.
Potential regulatory action poses a significant risk to our reputation and thereby to our business.
Our business is subject to extensive regulation in the United States and in the other countries in
which our investment activities occur. The Securities and Exchange Commission, or SEC, oversees our
activities as a registered investment adviser under the Investment Advisers Act of 1940. In
addition, we are subject to regulation under the Investment Company Act of 1940, the Securities
Exchange Act of 1934, and various other statutes. We are subject to regulation by the Department of
Labor under the Employee Retirement Income Security Act of 1974 or ERISA. We and our Castles, as
public companies, are subject to applicable stock exchange regulations, and both we and Newcastle
are subject to the Sarbanes-Oxley Act of 2002. A number of portfolio companies in our private
equity funds are also publicly traded and/or are subject to significant regulatory oversight (such
as our senior living and railroad investments). A number of our investing activities, such as our
lending business, are subject to regulation by various U.S. state regulators. In the United
Kingdom, we are subject to regulation by the U.K. Financial Services Authority. Our other European
operations, and our investment activities around the globe, are subject to a variety of regulatory
regimes that vary country by country.
Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many
aspects of financial services, including the authority to grant, and in specific circumstances to
cancel, permissions to carry on particular businesses. A failure to comply with the obligations
imposed by the Investment Advisers Act of 1940 on investment advisers, including record-keeping,
advertising and operating requirements, disclosure obligations and prohibitions on fraudulent
activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and
reputational damage. Our liquid hedge fund business, and, to a lesser degree, our hybrid fund
business, are involved regularly in trading activities which implicate a broad number of U.S. and
foreign securities law regimes, including laws governing trading on inside information, market
manipulation and a broad number of technical trading requirements that implicate fundamental market
regulation policies. Violation of such laws could result in severe restrictions on our activities
and in damage to our reputation.
Some of our private equity funds currently qualify as venture capital operating companies, or VCOC,
and therefore are not subject to the fiduciary requirements of ERISA with respect to their assets.
However, it is possible that the U.S. Department of Labor may amend the relevant regulations or the
characteristics of our funds may change. If these funds fail to qualify as VCOCs or otherwise
satisfy the requirements of ERISA, including the requirement of investment prudence and
diversification or the prohibited transaction rules, it could materially interfere with our
activities in relation to these funds or expose us to risks related to our failure to comply with
such requirements.
Our failure to comply with applicable laws or regulations could result in fines, censure,
suspensions of personnel or investing activities or other sanctions, including revocation of our
registration as an investment adviser. The regulations to which our businesses are subject are
designed primarily to protect investors in our funds and to ensure the integrity of the financial
markets. They are not designed to protect our Class A shareholders. Even if a sanction imposed
against us or our personnel by a regulator is for a small monetary amount, the adverse publicity
related to such sanction against us by regulators could harm our reputation, result in redemptions
by investors from our funds and impede our ability to raise additional capital or new funds.
As a result of recent highly-publicized financial scandals as well as the ongoing financial
turmoil and related recently enacted government bailout measures, investors, regulators and the
general public have exhibited concerns over the integrity of both the U.S. financial markets and
the regulatory oversight of these markets. As a result, the regulatory environment in which we
operate is subject to heightened scrutiny. With respect to alternative asset management funds, in
recent years, there has been debate in both the U.S. and foreign governments about new rules or
regulations to be applicable to hedge funds or other alternative investment products. For example,
certain officials in Germany have called for implementing additional regulations, which, if
enacted, could potentially apply to our business activities throughout the European Union. In
April 2008, the U.S. Department of the Treasury released a blueprint for modernizing financial
regulations that called for, among other things, the regulation of hedge funds and private equity
funds. In January 2009, members of the Senate introduced the Hedge Fund Transparency Act, which,
among other things, proposes to require private equity funds and hedge funds to register with the
SEC. Moreover, as calls for additional regulation have increased, there may be a related increase
in regulatory investigations of the trading and other investment activities of alternative asset
management funds, including our funds. Such investigations may impose additional expenses on us,
may require the attention of senior management and may result in fines if any of our funds are
deemed to have violated any regulations.
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In addition, the financial industry will likely become more highly regulated in the near future in
response to recent events. The chairman of the SEC and the president of the Federal Reserve Bank
of New York have recently commented about the perceived need for additional regulation of financial
industry firms. Also, the chairman of the Senate committee that regulates the Commodities Futures
Trading Commission recently announced his intention to introduce legislation to require credit
default swaps and other derivatives to be traded exclusively on regulated exchanges.
We may be adversely affected if new or revised legislation or regulations are enacted, or by
changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC,
other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that
supervise the financial markets. Such changes could place limitations on the type of investor that
can invest in alternative asset funds or on the conditions under which such investors may invest.
Further, such changes may limit the scope of investing activities that may be undertaken by
alternative asset managers as well as their funds and portfolio companies. For example, the SECs
recent temporary ban on short sales of certain securities restricted the investment tools that some
of our funds have used previously, and it is possible that the ban may be re-instituted in the
future. It is impossible to determine the extent of the impact of any new laws, regulations or
initiatives that may be proposed, or whether any of the proposals will become law. Compliance with
any new laws or regulations could make compliance more difficult and expensive and affect the
manner in which we conduct business.
Our results of operations may also be negatively impacted if certain proposed tax legislation is
enacted. If legislation were to be enacted by the U.S. Congress to treat carried interest as
ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation
would materially increase the amount of taxes that we and possibly our equityholders are required
to pay, thereby reducing the value of our Class A shares and adversely affecting our ability to
recruit, retain and motivate our current and future professionals. President Obama has publicly
stated that he supports similar changes to the tax code. See Our structure involves complex
provisions of U.S. federal income tax law for which no clear precedent or authority may be
available. Our structure also is subject to potential legislative, judicial or administrative
change and differing interpretations, possibly on a retroactive basis and Legislation has been
introduced that would, if enacted, preclude us from qualifying for treatment as a partnership for
U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is
subject to potential judicial or administrative change and differing interpretations, possibly on a
retroactive basis. Any such changes could increase our costs of doing business or materially
adversely affect our profitability.
Congress
and foreign regulators have proposed legislation that would require
essentially all of our funds to register with the SEC and become
subject to full SEC oversight and additional requirements (or in the
case of foreign jurisdictions would impose a number of other new
regulatory requirements), which would increase our costs.
Members of the Senate recently proposed the Hedge Fund Transparency Act, which would apply to
private equity funds, venture capital funds, real estate funds and other private investment
vehicles with at least $50 million in assets under management. If enacted, the bill would require
that such funds in order to remain exempt from the substantive provisions of the Investment
Company Act to register with the SEC, maintain books and records in accordance with SEC
requirements, and become subject to SEC examinations and information requests. In addition, the
Act would require each fund to file annual disclosures, which would be made public, containing
detailed information about the fund, most notably including the names of all beneficial owners of
the fund, an explanation of the funds ownership structure and the current value of the funds
assets under management. Also, the Act would require each fund to establish anti-money laundering
programs. We cannot predict whether this Act will be enacted or, if enacted, what the final terms
of the Act would require or the impact of such new regulations on our funds. If enacted, this Act
would likely negatively impact our funds in a number of ways, including increasing the funds
regulatory costs, imposing additional burdens on the funds staff, and potentially requiring the
disclosure of sensitive information.
On
April 30, 2009, the European Commission published the draft of a
proposed EU Directive on Alternative Investment Fund Managers. The
Directive, if adopted in the form proposed, would impose significant
new regulatory requirements on investment managers operating within
the EU, including with respect to conduct of business, regulatory
capital, valuations, disclosures and marketing. Such rules could
potentially impose significant additional costs on the operation of
our business in the EU and could limit our operating flexibility
within that jurisdiction.
Our failure to deal appropriately with conflicts of interest could damage our reputation and
adversely affect our business.
As we have expanded the number and scope of our businesses, we increasingly confront potential
conflicts of interest relating to our funds investment activities. Certain of our funds have
overlapping investment objectives, including funds which have different fee structures, and
potential conflicts may arise with respect to our decisions regarding how to allocate investment
opportunities among those funds. For example, a decision to acquire material non-public information
about a company while pursuing an investment opportunity for a particular fund gives rise to a
potential conflict of interest when it results in our having to restrict the ability of other funds
to take any action. In addition, holders of Class A shares may perceive conflicts of interest
regarding investment decisions for funds in which our principals, who have and may continue to make
significant personal investments in a variety of Fortress Funds, are personally invested.
Similarly, conflicts of interest may exist or develop regarding decisions about the allocation of
specific investment opportunities between Fortress and the Fortress Funds. In addition, because
the Operating Entities are held, in part, by FIG Corp., which is subject to tax, conflicts of
interest may exist regarding decisions about which of Fortresss holdings should be held by
Operating Entities and which by Principal Holdings. We have historically extended loans and other
forms of credit support from time to time to various of our investment funds in order to support
funding and liquidity needs. In addition, our principals have sometimes extended similar credit
support to our funds in their individual capacities. The existence and the repayment of such
obligations by the funds to us and our principals creates the potential for claims of conflicts of
interest by our fund investors.
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Pursuant to the terms of our operating agreement, whenever a potential conflict of interest exists
or arises between any of the principals, one or more directors or their respective affiliates, on
the one hand, and the company, any subsidiary of the
company or any member other than a principal, on the other, any resolution or course of action by
our board of directors shall be permitted and deemed approved by all shareholders if the resolution
or course of action (i) has been specifically approved by a majority of the members of a committee
composed entirely of two or more independent directors, or it is deemed approved because it
complies with rules or guidelines established by such committee, (ii) has been approved by a
majority of the total votes that may be cast in the election of directors that are held by
disinterested parties, (iii) is on terms no less favorable to the company or shareholders (other
than a principal) than those generally being provided to or available from unrelated third parties
or (iv) is fair and reasonable to the company taking into account the totality of the relationships
between the parties involved. Notwithstanding the foregoing, it is possible that potential or
perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory
enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and
our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or
more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection
with, conflicts of interest would have a material adverse effect on our reputation, which would
materially adversely affect our business in a number of ways, including as a result of redemptions
by our investors from our hedge funds, an inability to raise additional funds and a reluctance of
counterparties to do business with us.
Employee misconduct could harm us by impairing our ability to attract and retain investors and by
subjecting us to significant legal liability, regulatory scrutiny and reputational harm.
Our reputation is critical to maintaining and developing relationships with the investors in our
funds, potential investors and third-parties with whom we do business. In recent years, there have
been a number of highly-publicized cases involving fraud, conflicts of interest or other misconduct
by individuals in the financial services industry in general and the hedge fund industry in
particular. There is a risk that our employees could engage in misconduct that adversely affects
our business. For example, if an employee were to engage in illegal or suspicious activities (such
as improper trading, disclosure of confidential information or breach of fiduciary duties), we
could be subject to regulatory sanctions and suffer serious harm to our reputation, financial
position, investor relationships and ability to attract future investors. It is not always possible
to deter employee misconduct, and the precautions we take to detect and prevent this activity may
not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations,
could result in a material adverse effect on our reputation and our business.
The alternate investment management business is intensely competitive, and the industry is in a
state of flux.
Due to the global economic recession, the general state of distress in the financial markets and
the generally poor returns in the alternative asset management business over the last 18 months,
the alternative asset management industry is generally perceived to be in a state of transition.
The industry has been marked over this period by increasing anxiety on the part of institutional
fund investors as those investors have suffered from decreasing returns, liquidity pressure,
increased volatility and difficulty maintaining targeted asset allocations, and a significant
number of investors have materially decreased or temporarily stopped making new fund investments
during this period. Market commentators and analysts have expressed the belief that as the economy
begins to recover and such investors begin to increase the pace of new investments, those investors
are likely to concentrate their holdings in a smaller overall group of managers that have
relatively long-term track records, and that such factors are likely to result in a period of
significant industry consolidation, especially in the hedge fund sector. In addition, it is
possible that such investors may elect to reduce their overall portfolio allocations to alternative
investments such as private equity and hedge funds, resulting in a smaller overall pool of
available capital in our sector.
In the event all or part of this analysis proves true, when trying to raise new capital the Company
will be competing for fewer total available assets in an increasingly competitive environment, and
there can be no assurance that we will be successful in continuing to raise capital at our
historical growth rates. Depending on industry dynamics, we and our competitors may be compelled to
offer investors improved terms (such as lower fees or improved liquidity) in order to continue to
attract significant amounts of fresh investment capital. Such changes would adversely affect our
revenues and profitability. As has historically been the case, competition in our industry is based
on a number of factors, including:
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investment performance; |
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investors liquidity and willingness to invest; |
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investor perception of investment managers drive, focus and alignment of interest; |
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actual or perceived financial condition, liquidity and stability of the Company; |
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quality of service provided to and duration of relationship with investors; |
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business reputation; and |
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level of fees and expenses charged for services. |
We compete in all aspects of our business with a large number of investment management firms,
private equity fund sponsors, hedge fund sponsors and other financial institutions. A number of
factors serve to increase our competitive risks:
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investors may develop concerns that we will allow a business to grow to the
detriment of its performance; |
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investors may reduce their investments with us or not make additional investments
with us based upon current market conditions, their available capital or their perception of
the health of our business; |
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some of our competitors have greater capital, a lower cost of capital, better access
to financing, lower targeted returns or greater sector or investment strategy specific
expertise than we do, which creates competitive disadvantages with respect to
investment opportunities; |
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some of our competitors may have greater technical, marketing and other resources
than we possess; |
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some of our competitors may perceive risk differently than we do, which could allow
them either to outbid us for investments in particular sectors or, generally, to
consider a wider variety of investments; |
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some of our funds may not perform as well as competitor funds or other available
investment products; |
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our competitors that are corporate buyers may be able to achieve synergistic cost
savings in respect of an investment, which may provide them with a competitive
advantage in bidding for an investment, particularly if conditions in the debt markets
increase our financing costs or make debt financing generally unavailable or cost
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some investors may prefer to invest with an investment manager that is not publicly
traded; and |
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other industry participants continuously seek to recruit our investment
professionals, particularly our best and brightest, away from us. |
These and other factors could reduce our earnings and revenues and materially adversely affect our
business. In addition, if we are forced to compete with other alternative asset managers on the
basis of price, we may not be able to maintain our current management and performance fee
structures. We have historically competed primarily on the performance of our funds, and not on the
level of our fees relative to those of our competitors.
The due diligence process that we undertake in connection with investments by our investment funds
may not reveal all facts that may be relevant in connection with an investment.
Before making investments, we conduct due diligence that we deem reasonable and appropriate based
on the facts and circumstances applicable to each investment. When conducting due diligence, we may
be required to evaluate important and complex business, financial, tax, accounting, environmental
and legal issues. Outside consultants, legal advisors, accountants and investment banks may be
involved in the due diligence process in varying degrees depending on the type of investment.
Nevertheless, when conducting due diligence and making an assessment regarding an investment, we
rely on the resources available to us, including information provided by the target of the
investment and, in some circumstances, third-party investigations. In
addition, if investment opportunities are scarce or the process for
selecting bidders is competitive, our ability to conduct a due
diligence investigation may be limited, and we would be required to
make investment decisions based upon imperfect information. The due diligence investigation
that we will carry out with respect to any investment opportunity may not reveal or highlight all
relevant facts that may be necessary or helpful in evaluating such investment opportunity,
including, among other things, the existence of fraud or other illegal or improper behavior.
Moreover, such an investigation will not necessarily result in the investment being successful.
Failure to maintain effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
As a public company, we are required to maintain effective internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. While management has
certified that our internal controls over financial reporting were effective as of December 31,
2008 and 2007, because internal control over financial reporting is complex and may be revised over
time to adapt to changes in our business, we cannot assure you that our internal control over
financial reporting will be effective in the future. If we are not able to maintain effective
internal control over financial reporting, our independent registered public accounting firm may
not be able to certify as to the effectiveness of our internal control over financial reporting as
of the required dates. Matters impacting our internal controls may cause us to be unable to report
our financial information on a timely basis and thereby subject us to adverse regulatory
consequences, including sanctions or investigations by the SEC, or violations of applicable stock
exchange listing rules, and result in a breach of the covenants under our credit agreement. There
could also be a negative reaction in the financial markets due to a loss of investor confidence in
us and the reliability of our financial statements. Confidence in the reliability of our financial
statements is also likely to suffer if we or our independent registered public accounting firm
reports a material weakness in our internal control over financial reporting. This could materially
adversely affect us and lead to a decline in our share price and impair our ability to raise
capital.
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Our organizational documents do not limit our ability to enter into new lines of businesses, and we
may enter into new businesses, make future strategic investments or acquisitions or enter into
joint ventures, each of which may result in additional risks and uncertainties in our business.
We intend, to the extent that market conditions warrant, to grow our business by increasing
management fee paying assets under management in existing businesses and creating new investment
products. Our organizational documents, however, do not limit us to the investment management
business. Accordingly, we may pursue growth through strategic investments, acquisitions or joint
ventures, which may include entering into new lines of business, such as the insurance,
broker-dealer or financial advisory industries, and which may involve assuming responsibility for the actual
operation of assets or entire companies. In addition, we expect opportunities will arise to acquire
other alternative or traditional asset managers. To the extent we make strategic investments or
acquisitions, enter into joint ventures, or enter into a new line of business, we will face
numerous risks and uncertainties, including risks associated with (i) the required investment of
capital and other resources, (ii) the possibility that we have insufficient expertise to engage in
such activities profitably or without incurring inappropriate amounts of risk, and (iii) combining
or integrating operational and management systems and controls. Entry into certain lines of
business may subject us to new laws and regulations with which we are not familiar, or from which
we are currently exempt, and may lead to increased litigation and regulatory risk and negative
publicity. If a new business generates insufficient revenues or if we are unable to efficiently
manage our expanded operations, our results of operations will be adversely affected. In the case
of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent
upon, and subject to liability, losses or reputational damage relating to, systems, controls and
personnel that are not under our control.
Our revenue and profitability fluctuate, particularly inasmuch as we cannot predict the timing of
realization events in our private equity and hybrid PE businesses, which may make it difficult for
us to achieve steady earnings growth on a quarterly basis and may cause volatility in the price of
our Class A shares.
We experience significant variations in revenues and profitability during the year and among years
because we are paid incentive income from certain funds only when investments are realized, rather
than periodically on the basis of increases in the funds net asset values. The timing and receipt
of incentive income generated by our private equity funds and hybrid PE funds is event driven and
thus highly variable, which contributes to the volatility of our segment revenue, and our ability
to realize incentive income from our private equity funds and hybrid PE funds may be limited. It
takes a substantial period of time to identify attractive investment opportunities, to raise all
the funds needed to make an investment and then to realize the cash value (or other proceeds) of an
investment through a sale, public offering, recapitalization or other exit. Even if an investment
proves to be profitable, it may be several years before any profits can be realized. We cannot predict when, or if, any realization of investments will occur, and the
current challenging conditions in the financing markets have made it more difficult for potential
buyers to finance purchases with third-party funds on favorable terms, thereby reducing the
likelihood of investment realizations at favorable prices in the near term. If we were to have a
realization event in a particular quarter, it may have a significant impact on our segment revenues
and profits for that particular quarter which may not be replicated in subsequent quarters. In
addition, our private equity fund and hybrid PE fund investments are adjusted for accounting
purposes to fair value at the end of each quarter, resulting in revenue (loss) attributable to our
principal investments, even though we receive no cash distributions from our private equity funds
and hybrid PE funds, which could increase the volatility of our quarterly earnings. The terms of
the operating documents of our private equity funds and hybrid PE funds generally require that if
any investment in a particular fund has been marked down below its initial cost basis, the
aggregate amount of any such markdowns (plus the amount of the accrued preferred return on the
capital used to make such investments) be factored into the computation of the amount of any
incentive income we would otherwise collect on the realization of other investments within the same
fund. This provision generally will result in an overall lower level of incentive income being
collected by the Company in the near term for any private equity fund or hybrid PE fund that has
investments that are carried both above and below their cost basis. To the extent that our
principal investments in our private equity funds or hybrid PE funds (or direct investments in
private equity transactions) are marked down, such mark downs will flow through our statements of
operations as a GAAP loss, even in circumstances where we have a long investment horizon and have
no present intention of selling the investment.
With respect to our hedge funds, our incentive income is paid annually or quarterly if the net
asset value of a fund has increased for the period. The amount (if any) of the incentive income we
earn from our hedge funds depends on the increase in the net asset value of the funds, which is
subject to market volatility. Our liquid hedge funds have historically experienced significant
fluctuations in net asset value from month to month. Certain of our hedge funds also have high
water marks whereby we do not earn incentive income for a particular period even though the fund
had positive returns in such period if the fund had greater losses in prior periods. Therefore, if
a hedge fund experiences losses in a period, we will likely not be able to earn incentive income from that
fund until it surpasses the previous high water mark.
The investment performance of our flagship liquid hedge fund, Drawbridge Global Macro, and our
flagship hybrid hedge fund, Drawbridge Special Opportunities, are down approximately 17.8% and
24.2%, respectively, from the date on which such funds last earned incentive income. Each fund must
generate earnings, on an investor by investor basis, equal to the amount lost as a result of negative performance before it will
generate additional incentive income for Fortress from existing fund investors. In addition, no private equity fund or
hybrid PE fund will earn incentive income on any particular investment in the
event that the aggregate carrying value of the other investments contained in
the same fund is lower than the invested and unreturned capital in such fund
plus any preferred return relating to such fund, which amount is referred to as
a fund’s “high water mark.” The net asset values of
some of these funds as of March 31, 2009, were below the funds’
applicable high water mark and, thus, these funds will not be able to earn
incentive income until their respective net asset value exceeds their high
water marks. The aggregate amount by which the high water marks for all
such funds exceeded the funds’ respective net asset values as of
March 31, 2009 was approximately $10.7 billion.
These quarterly fluctuations in our revenues and profits in any of our businesses could lead to
significant volatility in the price of our Class A shares.
70
An increase in our borrowing costs may adversely affect our earnings and liquidity.
Under our credit agreement, we have a $75 million revolving credit facility and a $550 million term
loan facility. As of May 6, 2009, we had a $550 million term loan outstanding and $54 million
outstanding under our revolving credit facility (in addition to $9.7 million of letters of credit
that were outstanding under a letter of credit subfacility). One of the lenders under this
facility, representing approximately $7 million of outstanding commitments, has filed for
bankruptcy protection and thus is unlikely to fulfill any borrowing requests. Borrowings under the
credit agreement mature on May 10, 2012. As our facilities mature, we will be required to either
refinance them by entering into new facilities or issuing new debt, which could result in higher
borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay
them by using cash on hand (if available) or cash from the sale of our assets. No assurance can be
given that we will be able to enter into new facilities, issue new debt or issue equity in the
future on attractive terms, or at all.
Our credit facility loans are typically LIBOR-based floating-rate obligations and the interest
expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, an
increase in short-term interest rates will increase our interest costs and will reduce the spread
between the returns on our investments and the cost of our borrowings. An increase in interest
rates would adversely affect the market value of any fixed-rate debt investments and/or subject
them to prepayment or extension risk, which may adversely affect our earnings and liquidity.
We have previously participated in large-sized investments, which involve certain complexities and
risks that are not encountered in small- and medium-sized investments.
Our private equity funds have previously participated in several large transactions. The increased
size of these investments involves certain complexities and risks that may not be encountered in
small- and medium-sized investments. For example, larger transactions may be more difficult to
finance and complete, and exiting larger deals may present challenges in many cases. In addition,
larger transactions may entail greater scrutiny by regulators, labor unions, political bodies and
other third parties and greater risk of litigation. Recently, labor unions and members of Congress
have been more active in opposing and investigating certain larger investments by private equity
firms generally.
Larger transactions may be structured as consortium transactions due to the size of the
investment and the amount of capital required to be invested. A consortium transaction involves an
equity investment in which two or more private equity firms serve together or collectively as
equity sponsors. We may participate in a meaningful number of consortium transactions in the
future. Consortium transactions generally entail a reduced level of control by Fortress over the
investment because governance rights must be shared with the other private equity investors.
Accordingly, we may not be able to control decisions relating to the investment, including
decisions relating to the management and operation of the company and the timing and nature of any
exit, which could result in the risks described in Our investment funds make investments in
companies that we do not control.
Any of these factors could increase the risk that our larger investments could be unsuccessful. The
consequences to our investment funds of an unsuccessful larger investment could be more severe than
a small investment given the size of the investment.
Our investment funds often make investments in companies that we do not control.
Investments by most of our investment funds will include debt instruments and equity securities of
companies that we do not control. Such instruments and securities may be acquired by our investment
funds through trading activities or through purchases of securities from the issuer. In addition,
our private equity funds and hybrid PE funds may acquire debt investments or minority equity
interests (particularly in consortium transactions, as described in We have recently participated
in large-sized investments, which involve certain complexities and risks that are not encountered
in small- and medium-sized investments) and may also dispose of a portion of their majority equity
investments in portfolio companies over time in a manner that results in the investment funds
retaining a minority investment. Those investments will be subject to the risk that the company in
which the investment is made may make business, financial or management decisions with which we do
not agree or that the majority stakeholders or the management of the company may take risks or
otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur,
the values of investments by our investment funds could decrease and our financial condition,
results of operations and cash flow could suffer as a result.
Risks Related to Our Funds
Our results of operations are dependent on the performance of our funds. Poor fund performance will
result in reduced revenues, reduced returns on our principal investments in the funds and reduced
earnings. Poor performance of our funds will also make it difficult for us to retain or attract
investors to our funds and to grow our business. The performance of each fund we manage is subject
to some or all of the following risks.
The historical performance of our funds should not be considered as indicative of the future
results of our funds or of our future results or of any returns expected on our Class A shares.
The historical and potential future returns of the funds we manage are not directly linked to
returns on our Class A shares. Therefore, readers should not conclude that positive performance of
the funds we manage will necessarily result in positive
returns on our Class A shares. However, poor performance of the funds we manage will cause a
decline in our revenue from such funds, and will therefore have a negative effect on our
performance and the returns on our Class A shares.
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Moreover, with respect to the historical performance of our funds:
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the historical performance of our funds should not be considered indicative of the
future results that should be expected from such funds or from any future funds we may
raise, in part because the market conditions during previous periods were significantly
more favorable for generating positive performance, particularly in our private equity
business, than the market conditions we have experienced for the last year and may
continue to experience for the foreseeable future; |
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the performance of a number of our funds which is calculated on the basis of net
asset value of the funds investments, reflect unrealized gains that may never be
realized; |
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our funds returns have benefited from investment opportunities and general market
conditions that currently do not exist and may not repeat themselves, and there can be
no assurance that our current or future funds will be able to avail themselves of
profitable investment opportunities; and |
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several of our private equity portfolio companies have become public companies and
have experienced significant subsequent decreases in their public market value. There
can be no assurance that we will be able to realize such investments at profitable sale
prices, particularly if market conditions are weak or the market perceives that the
companies will perform less well when Fortress reduces its investment in them. |
Poor performance of our funds will cause a decline in our revenue and results of operations, may
obligate us to repay incentive income previously paid to us, and could adversely affect our ability
to raise capital for future funds.
Our revenue from the Fortress Funds is derived principally from three sources: (1) management fees,
based on the size of our funds; (2) incentive income, based on the performance of our funds; and
(3) investment income (loss) from our investments in the funds, which we refer to as our principal
investments. Our investors and potential investors continually assess our funds performance and
our ability to raise capital. In the event that any of our funds
perform poorly or suffer from liquidity constraints due to
operational or market forces, our funds may be unable to pay all or
part of the management fees that we are owed for an indeterminate
period of time or may require advances to cover expenses which would
negatively impact our revenues, liquidity and results of operations
and potentially make it more difficult for us to raise new capital.
In situations where we have deferred the receipt of management or
other fees in order to provide liquidity to one or more of our
managed funds, amounts that we have advanced to those funds may be
difficult to collect in the future (or may take longer than
anticipated to collect) if such funds have continued liquidity
problems or if fund investors raise objections to such collections.
As of the date of this filing, the aggregate amount of management fees that various of our managed funds currently owe but have not
yet paid is approximately $28.0 million. In addition, hedge
fund investors may redeem their investments in our funds, while
investors in private equity funds and hybrid PE funds may decline to
invest in future funds we raise, as result of poor performance of our
funds or otherwise. Our liquid hedge funds received redemption
requests for a total of $5.4 billion during 2008 and a total of
approximately $583 million year to date in 2009, and our hybrid hedge funds
received redemption requests for $1.5 billion during 2008. Losses in our funds also directly impact
our operating performance by decreasing the size of our assets under management, which results in
lower management fee revenues. Furthermore, if, as a result of poor performance of investments in a
private equity funds or hybrid PE funds life, the fund does not achieve total investment returns
that exceed a specified investment return threshold for the life of the fund, we will be obligated
to repay the amount by which incentive income that was previously distributed to us and our
Principals exceeds the amounts to which we are ultimately entitled. We have contractually agreed to
guarantee the payment in certain circumstances of such clawback obligations for our managed
investment funds that are structured as private equity funds and hybrid PE funds. If all of our
existing private equity funds and hybrid PE funds were liquidated at their NAV as of March 31,
2009, the cumulative clawback obligation to investors in these funds would be approximately $84.6
million (net of amounts that would be due back from employees pursuant to profit sharing
arrangements, and without regard to potential tax adjustments that would decrease our total
liability).
Difficult market conditions can adversely affect our funds in many ways, including by reducing the
value or performance of the investments made by our funds and reducing the ability of our funds to
raise or deploy capital, which could materially reduce our revenue and adversely affect results of
operations.
If economic and market conditions continue to be unfavorable, our funds may not perform well, and
we may not be able to raise money in existing or new funds. Our funds are materially affected by
conditions in the global financial markets and economic conditions
throughout the world. The global market and economic climate have
deteriorated and may continue to deteriorate because of many factors
beyond our control, including rising interest rates or accelerating
asset deflation or inflation, further deterioration in the credit and
finance markets, terrorism or political uncertainty. In the event of
a continued market downturn, each of our businesses could be affected
in different ways. Our private equity funds have faced reduced
opportunities to sell and realize value from their existing
investments, a continued lack of financing on acceptable terms, the
need to invest additional capital into existing investments or to
satisfy the terms of financing agreements and a lack of suitable
investments for the funds to make. In addition, adverse market or
economic conditions as well as the slowdown of activities in
particular sectors in which portfolio companies of these funds
operate (including real estate, gaming and senior living) have had an
adverse effect on the earnings and liquidity of such portfolio
companies which in some cases has negatively impacted the valuations
of our funds investments and, therefore, our actual and potential earnings
from management and incentive fees. A significant number of our
portfolio companies in our private equity funds have material
indebtedness which needs to be periodically paid down or refinanced
(including some which have maturity dates within the next
12 months) and some of which contains financial covenants. If
the credit markets continue to experience material stress for a
prolonged period, such companies may have difficulty refinancing such
indebtedness or may breach financial or operating covenants in their
credit agreements, which could result in an event of default or
bankruptcy at the portfolio company level. Such events would result
in a material diminution in value of our funds investment in
such company and would likely have a reputational impact on us as an
investment manager. In some cases our private equity funds have
guaranteed debt of their portfolio companies, and if such guarantees are called upon in the event
that the applicable portfolio company defaults on its debt, payment of amounts due under the
guarantee could have a material negative impact on the funds financial condition.
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The general market downturn that we have been experiencing has adversely affected our operating
performance in a number of ways, and if the downturn continues, it may cause our revenue, results
of operations and financial condition to further decline by causing:
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AUM to decrease, lowering management fees; |
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increases in costs of financial instruments; |
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adverse conditions for our portfolio companies (e.g., decreased revenues, liquidity
pressures, increased difficulty in obtaining access to financing and complying with the
terms of existing financings as well as increased financing costs); |
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lower investment returns, reducing incentive income or eliminating incentive income
for a period of time; |
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reduced demand to purchase assets held by our funds, which would negatively affect
the funds ability to realize value from such assets; |
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material reductions in the value of our private equity fund investments in portfolio
companies which reduce our ability to realize incentive income from these investments; |
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difficulty raising additional capital; |
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investor redemptions, resulting in lower fees and potential increased difficulty in
raising new capital; and |
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decreases in the carrying value of our principal investments. |
Furthermore, while difficult market conditions may increase opportunities to make certain
distressed asset investments, such conditions also increase the risk of default with respect to
investments held by our funds with debt investments, in particular the hybrid funds and the
Castles. Our liquid hedge funds may also be adversely affected by difficult market conditions if
they fail to predict the adverse effect of such conditions on particular investments, resulting in
a significant reduction in the value of those investments. Lastly, the recent significant decrease
in the price of our Class A shares and the amounts outstanding under, and terms of, our credit
facility have made capital raising more challenging for some of our funds.
Changes in the debt financing markets may negatively impact the ability of our investment funds and
their portfolio companies to obtain attractive financing for their investments, and may increase
the cost of such financing if it is obtained, leading to lower-yielding investments and potentially
decreasing our incentive income.
Over the past eighteen months, the markets for debt financing have contracted significantly,
particularly in the area of acquisition financings for private equity and leveraged buyout
transactions as well as real estate-related financings. Large commercial banks, which have
traditionally provided such financing, have demanded higher rates, more restrictive covenants and
generally more onerous terms (including posting additional margin) in order to provide such
financing, and in some cases will not provide any
financing for acquisitions which would have been readily financed under credit conditions present
for the past several years.
In the event that Fortress private equity funds or hybrid PE funds are unable to obtain committed
debt financing for potential acquisitions (including as a result of a default by our lenders on
financing commitments they have provided to us) or can only obtain debt at an increased rate, this
may prevent those funds from completing otherwise profitable acquisitions or may lower the profit
that the funds would otherwise have achieved from such transactions, either of which could lead to
a decrease in the incentive income earned by us. Similarly, the portfolio companies owned by the
Fortress private equity funds regularly utilize the debt markets in order to obtain
efficient financing for their operations. To the extent that the current credit markets have
rendered such financing difficult or more expensive to obtain, this may negatively impact the
operating performance of those portfolio companies and therefore the investment returns on our
funds. In addition, to the extent that the current markets make it difficult or impossible to
refinance debt that is maturing in the near term, the relevant portfolio company may face
substantial doubt as to its status as a going concern (which may result in an event of default
under various agreements) or be unable to repay such debt at maturity and may be forced to sell
assets, undergo a recapitalization or seek bankruptcy protection.
Our Castles have historically relied on the structured finance and mortgage markets in order to
obtain leverage and thereby increase the yield on substantially all of their investments. To the
extent that volatility in those credit markets leads to a situation where financing of that type is
unavailable or limited (as has been the case for Newcastle since mid 2007 and is currently the case
for both Castles), our Castles may be unable to make new investments on a basis that is as
profitable as during periods when such financing was available. Furthermore, it could significantly
reduce the yield available for reinvesting capital received from prior investments, thereby
reducing profits. As a result of impairments recorded in connection with this market disruption, we
do not expect to earn incentive income from the Castles for an indeterminate period of time.
Our hedge funds have historically relied on the structured finance markets in order to obtain
leverage and thereby increase the yield on certain of their investments. To the extent that
financing of that type continues to be unavailable or limited, our hedge funds may be unable to
make certain types of investments as the yield on those investments will be outside of the funds
target range without leverage. This could reduce the overall rate of return such funds obtain in
their investments and could lead to those hedge funds making fewer overall investments and slowing
the rate of growth of the fee paying assets under management in those funds, and a commensurate
decrease in the rate of growth of our management fees.
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We and our funds are subject to counterparty default and concentration risks.
Our funds enter into numerous types of financing arrangements with a wide array of counterparties
around the world, including loans, hedge contracts, swaps, repurchase agreements and other
derivative and non-derivative contracts. The terms of these contracts are often customized and
complex, and many of these arrangements occur in markets or relate to products that are not subject
to regulatory oversight. In particular, some of our funds utilize prime brokerage arrangements
with a relatively limited number of counterparties, which has the effect of concentrating the
transaction volume (and related counterparty default risk) of these funds with these
counterparties.
Our funds are subject to the risk that the counterparty to one or more of these contracts defaults,
either voluntarily or involuntarily, on its performance under the contract. Any such default may
occur rapidly and without notice to us. Moreover, if a counterparty defaults, we may be unable to
take action to cover our exposure, either because we lack the contractual ability or because market
conditions make it difficult to take effective action. This inability could occur in times of
market stress consistent with the conditions we are currently experiencing, which are precisely the
times when defaults may be most likely to occur.
In addition, our risk-management models may not accurately anticipate the impact of market stress
or counterparty financial condition, and as a result, we may not take sufficient action to reduce
our risks effectively. Although each of our funds monitors its credit exposures, default risk may
arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition,
concerns about, or a default by, one large participant could lead to significant liquidity problems
for other participants, which may in turn expose us to significant losses.
In the event of a counterparty default, particularly a default by a major investment bank, one or
more of our funds could incur material losses, and the resulting market impact of a major
counterparty default could harm our business, results of operation and financial condition. In the
event that one of our counterparties becomes insolvent or files for bankruptcy, our ability to
eventually recover any losses suffered as a result of that counterpartys default may be limited by
the liquidity of the counterparty or the applicable legal regime governing the bankruptcy
proceeding.
The counterparty risks that we face have increased in complexity and magnitude as a result of the
continued deterioration of conditions in the financial markets and weakening or insolvency of a
number of major financial institutions (such as Lehman Brothers and AIG) who serve as
counterparties for derivative contracts, insurance policies and other
financial instruments with us, our funds and our portfolio companies. For
example, the consolidation and elimination of counterparties has increased our concentration of
counterparty risk and decreased the universe of potential counterparties, and our funds are
generally not restricted from dealing with any particular counterparty or from concentrating any or
all of their transactions with one counterparty. In addition, counterparties have generally reacted
to the ongoing market volatility by tightening their underwriting standards and increasing their
margin requirements for all categories of financing, which has the result of decreasing the overall
amount of leverage available to our funds and increasing the costs of borrowing. For additional
detail on counterparty risks, please see We are subject to risks in using prime brokers and
custodians.
Because the public company is dependent on receiving cash from our funds, any loss suffered by a
fund as a result of a counterparty default would also affect the results of the public company. In
addition, the board of directors of the public company has no ability to influence any funds
choice of, or the amount of a funds exposure to, any given counterparty. As a result, our funds
may have concentrated exposure to one or more counterparties and thus be exposed to a heightened
risk of loss if that counterparty defaults. This may mean that the Company has a significant
concentration of risk with one or more particular counterparties at any particular time when
aggregate counterparty risk is measured across all of the various Fortress Funds.
Investors in our hedge funds may redeem their investments, and investors in our private equity
funds and hybrid PE funds may elect to dissolve the funds, at any time without cause. These events
would lead to a decrease in our assets under management (and, therefore, our revenues), which could
be substantial and lead, therefore, to a material adverse effect on our business.
Investors in our hedge funds may generally redeem their investments on an annual or quarterly
basis, subject to the applicable funds specific redemption provisions. Investors may decide to
move their capital away from us to other investments for any number of reasons in addition to poor
investment performance. Factors that could result in investors leaving our funds include the need
to increase available cash reserves or to fund other capital commitments, changes in interest rates
that make other investments more attractive, the publicly traded nature of the indirect parent of
their manager, changes in investor perception regarding our focus or alignment of interest,
unhappiness with changes in or broadening of a funds investment strategy, changes in our
reputation, and departures or changes in responsibilities of key investment professionals. In a
declining financial market, the pace of redemptions and consequent reduction in our fee paying
assets under management could accelerate. The decrease in our revenues that would result from
significant redemptions in our hedge fund business would have a material adverse effect on our
business.
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The recent decline in the financial markets, together with reduced liquidity in the credit markets
and negative performance of many hedge funds have led to an increase in redemption requests from
investors throughout the hedge fund industry, and a number of our funds have been affected by this
trend. Our liquid hedge funds received a total of $5.4 billion in redemption
requests, including affiliates, for the fiscal year ended December 31, 2008. Our flagship liquid
hedge fund temporarily suspended redemptions. Shares representing the funds interests in illiquid
investments were placed in special purpose entities whose interests were distributed to both
redeemers and non-redeemers. In February 2009, the redeemers portion, including affiliates, of the
liquid investments was $2.4 billion, of which $2.1 billion was paid, with the balance to be paid
within the first two quarters of 2009, subject to certain fees and holdbacks. In comparison, the
same liquid hedge funds received redemption requests, including affiliates, for a total of $0.3
billion related to the fiscal year ended December 31, 2007. Investors in our hybrid hedge funds are
permitted to request that their capital be returned on an annual basis, and such returns of capital
are paid over time as the underlying investments are liquidated, in accordance with the governing
documents of the applicable funds. Return of capital requests, including affiliates, for those
hybrid hedge funds totaled approximately $1.5 billion for the 2008 notice date. In comparison, the
same hybrid hedge fund received return of capital requests, including
from affiliates, for a total of
$0.6 billion for the 2007 notice date.
In addition, the investors in our private equity, hybrid PE and domestic hedge funds may, subject
to certain conditions, act at any time to accelerate the liquidation date of the fund without
cause, resulting in a reduction in management fees we earn from such funds, and a significant
reduction in the amounts of total incentive income we could earn from those funds. See Our removal
as the investment manager, or the liquidation, of one or more of our funds could have a material
negative effect on our business, results of operations and financial condition. Incentive income
could be significantly reduced as a result of our inability to maximize the value of a funds
investments in a liquidation. The occurrence of such an event with respect to any of our funds
would, in addition to the significant negative impact on our revenue and earnings, likely result in
significant reputational damage as well.
The hedge fund industry has become especially volatile in recent months, and many hedge funds may
face significant redemptions and liquidity issues.
As several press and industry reports have indicated over the last year, market conditions have
negatively affected the hedge fund industry. Challenging market conditions have made it difficult
to produce positive returns, and a significant number of hedge funds have posted negative results.
Poor investment performance, together with investors increased need for liquidity given the state
of the credit markets, has prompted relatively high levels of investor redemptions at a time when
many funds may not have sufficient liquidity to satisfy some or all of their investor redemption
requests. Our funds have various agreements that create debt or debt-like obligations (such as
repurchase arrangements, ISDAs, credit default swaps and total return swaps, among others) with a
material number of counterparties. Such agreements in many instances contain covenants or
triggers that require our funds to maintain specified amounts of assets under management.
Decreases in such funds AUM (whether due to performance, redemption, or both) that breach such
covenants may result in defaults under such agreements, and such defaults could permit the
counterparties to take various actions that would be adverse to the funds, including terminating
the financing arrangements, increasing the amount of margin or collateral that the funds are
required to post (so-called supercollateralization requirements) or decreasing the aggregate
amount of leverage that such counterparty is willing to provide to our funds. In particular, many
such covenants to which our hedge funds are party are designed to protect against sudden and
pronounced drops in AUM over specified periods, so if our funds were to receive
larger-than-anticipated redemption requests during a period of poor performance, such covenants may
be breached. Defaults under any such covenants would be likely to result in the affected funds
being forced to sell financed assets (which sales would presumably occur in suboptimal or
distressed market conditions) or otherwise raise cash by reducing other leverage, which would
reduce the funds returns and our opportunities to produce incentive income from the affected
funds.
If conditions continue or deteriorate, many funds may face additional redemption requests
throughout 2009, which would exacerbate the liquidity pressures on the affected funds. If they
cannot satisfy their current and future redemption requests, they may be forced to sell assets at
distressed prices or cease operations. Various measures taken by funds to improve their liquidity
profile (such as the implementation of gates or the suspension of redemptions) that reduce the
amounts that would otherwise be paid out in response to redemption requests may have the affect of
incentivizing investors to gross up or increase the size of the future redemption request they
make, thereby exacerbating the cycle of redemptions. The liquidity issues for such funds are often
further exacerbated by their fee structures, as a decrease in AUM decreases their management fees.
We cannot predict the effect that any conditions affecting the hedge fund industry may have on our
funds. For additional information on the impact of market conditions on our hedge funds, see
Risks Related to Our Funds.
Many of our funds invest in relatively high-risk, illiquid assets that often have significantly
leveraged capital structures, and we may fail to realize any profits from these activities for a
considerable period of time or lose some or all of the principal amount we invest in these
activities.
Many of our funds invest in securities that are not publicly traded. In many cases, our funds may
be prohibited by contract or by applicable securities laws from selling such securities for a
period of time. Our funds will generally not be able to sell these securities publicly unless their
sale is registered under applicable securities laws, or unless an exemption from such registration
requirements is available. Accordingly, our funds may be forced to sell securities at a loss under
certain conditions. The ability of many of our funds, particularly our private equity funds, to
dispose of investments is heavily dependent on the public equity markets, inasmuch as our ability
to realize any value from an investment may depend upon our ability to sell equity of the portfolio
company in the public equity markets through an initial public offering or secondary public
offering of shares of the portfolio company in which such investment is held.
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Furthermore, large holdings even of publicly traded equity securities can often be disposed of only
over a substantial period of time, exposing the investment returns to risks of downward movement in
market prices during the disposition period. The illiquid nature of many of our funds assets may
negatively affect a funds ability to retain sufficient liquidity to satisfy its obligations as
they become due. As a result, a fund with illiquid assets may be unable, for example, to generate
sufficient liquidity to pay the management fees or other amounts due to the manager, which would,
in turn, reduce the amounts we receive from our funds, thereby reducing the amount of funds
available to us to satisfy our obligations, including our obligations under our credit agreement.
In addition, many of our funds invest in businesses with capital structures that have significant
leverage. The large amount of borrowing in the leveraged capital structure of such businesses
increases the risk of losses due to factors such as rising interest rates, downturns in the economy
or deteriorations in the condition of the investment or its industry. In the event of defaults
under borrowings, the assets being financed would be at risk of foreclosure, and the fund could
lose its entire investment.
Our funds are subject to risks due to potential illiquidity of assets.
Our funds may make investments or hold trading positions in markets that are volatile and which may
become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased
trading volume, increased price volatility, concentrated trading positions, limitations on the
ability to transfer positions in highly specialized or structured transactions to which we may be a
party, and changes in industry and government regulations. When a fund holds a security or position
it is vulnerable to price and value fluctuations and may experience losses to the extent the value
of the position decreases and it is unable to timely sell, hedge or transfer the position.
Therefore, it may be impossible or costly for our funds to liquidate positions rapidly,
particularly if the relevant market is moving against a position or in the event of trading halts
or daily price movement limits on the market or otherwise. Alternatively, it may not be possible in
certain circumstances for a position to be purchased or sold promptly, particularly if there is
insufficient trading activity in the relevant market or otherwise.
The funds we manage may operate with a substantial degree of leverage. They may borrow, invest in
derivative instruments and purchase securities using borrowed money, so that the positions held by
the funds may in aggregate value exceed the net asset value of the funds. This leverage creates the
potential for higher returns, but also increases the volatility of a fund, including the risk of a
total loss of the amount invested. In addition, our private equity funds have historically
leveraged some of their investments in order to return capital to investors earlier than would have
otherwise been possible without a sale of the asset. In many such cases, such debt was secured by
publicly-traded stock of portfolio companies. To the extent that the value of such collateral
decreases due to decreases in the share price of such portfolio companies, our funds may be subject
to margin calls that require them to call additional capital from investors, sell assets or
otherwise take actions that decrease the overall return of the impacted funds. Such actions would
result in overall decreased revenues for us and a lower likelihood of generating incentive income
from the affected investments.
The risks identified above will be increased if a fund is required to rapidly liquidate positions
to meet redemption requests, margin requests, margin calls or other funding requirements on that
position or otherwise. The inability to rapidly sell positions due to a lack of liquidity has
historically been the cause of substantial losses in the hedge fund industry. The ability of
counterparties to force liquidations following losses or a failure to meet a margin call can result
in the rapid sale of highly leveraged positions in declining markets, which would likely subject
our hedge funds to substantial losses. We may fail to adequately predict the liquidity that our
funds require to address counterparty requirements due to falling values of fund investments being
financed by such counterparties, which could result not only in losses related to such investments,
but in losses related to the need to liquidate unrelated investments in order to meet the funds
obligations. Our funds may incur substantial losses in the event significant capital is invested in
highly leveraged investments or investment strategies. Such losses would result in a decline in
AUM, lead to investor requests to redeem remaining AUM (in the case of our hedge funds), and damage
our reputation, each of which would materially and adversely impact our earnings.
Valuation methodologies for certain assets in our funds can be subject to significant subjectivity
and the values of assets established pursuant to such methodologies may never be realized, which
could result in significant losses for our funds.
There are no readily-ascertainable market prices for a very large number of illiquid investments in
our private equity and, to a lesser extent, hybrid funds as well as a small number of so-called
sidepocket investments in our liquid hedge funds. The fair value of such investments of our funds
is determined periodically by us based on the methodologies described in the funds valuation
policies. These policies are based on a number of factors, including the nature of the investment,
the expected cash flows from the investment, bid or ask prices provided by third parties for the
investment, the length of time the investment has been held, the trading price of securities (in
the case of publicly traded securities), restrictions on transfer and other recognized valuation
methodologies. The methodologies we use in valuing individual investments are based on a variety of
estimates and assumptions specific to the particular investments, and actual results related to the
investment therefore often vary materially as a result of the inaccuracy of such assumptions or
estimates. In addition, because many of the illiquid investments held by our funds are in
industries or sectors which are unstable, in distress, or undergoing some uncertainty, such
investments are subject to rapid changes in value caused by sudden company-specific or
industry-wide developments. In addition, in many markets, transaction flow is limited due to
uncertainty about accurate asset valuations which may cause hedge fund investors to become
concerned about valuations of funds that have illiquid or hard-to-value assets. This concern may
lead to increased redemptions by investors irrespective of the performance of the funds. In
addition, uncertainty about asset values on redemptions from our investments in our hedge funds may
lead to an increased risk of litigation by investors over net asset values.
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Because there is significant uncertainty in the valuation of, or in the stability of the value of,
illiquid investments, the fair values of such investments as reflected in a funds net asset value
do not necessarily reflect the prices that would actually be obtained by us on behalf of the fund
when such investments are sold. Realizations at values significantly lower than the values at which
investments have been reflected in fund net asset values would result in losses for the applicable
fund, a decline in asset management fees and the loss of potential incentive income. Also, a
situation where asset values turn out to be materially different than values reflected in fund net
asset values could cause investors to lose confidence in us which would, in turn, result in
redemptions from our hedge funds or difficulties in raising additional private equity funds and
hybrid PE funds.
In some cases, the Fortress Funds realize value from an illiquid portfolio company when the
portfolio company is able to sell equity in the public markets through an IPO. An IPO of a
portfolio company increases the liquidity of the funds investment in the company and can create
significant value when the dividend yield on the companys shares after the IPO is lower than the
return being generated by the companys net assets, thereby increasing the value of its equity.
Certain of our funds utilize special situation, distressed debt and mortgage-backed investment
strategies that involve significant risks.
Our private equity and hybrid funds invest in obligors and issuers with weak financial conditions,
poor operating results, substantial financial needs, negative net worth, and/or special competitive
problems. These funds also invest in obligors and issuers that are involved in bankruptcy or
reorganization proceedings. With such investments, it may be difficult to obtain full information
as to the exact financial and operating conditions of these obligors and issuers. Additionally, the
fair values of such investments are subject to abrupt and erratic market movements and significant
price volatility if they are widely traded securities, and are subject to significant uncertainty
in general if they are not widely traded securities or may have no recognized market. A funds
exposure to such investments may be substantial in relation to the market for those investments,
and the assets are likely to be illiquid and difficult to sell or transfer. As a result, it may
take a number of years for the fair value of such investments to ultimately reflect their intrinsic
value as perceived by us. For example, several of our funds have significant investments in
mortgage backed securities and other investments that are directly or indirectly related to the
value of real estate in various locations around the world, particularly in the United States.
Several funds have increased their investments in this sector to take advantage of perceived
investment opportunities over the past few quarters, and we have recently raised and invested a
number of funds targeted specifically toward residential mortgage backed securities and similar
investments. As a result, the results of a number of our funds have been and may continue to be
affected, in some cases materially, by fluctuations in the value of real estate and real estate
related investments. Such fluctuations could have a meaningful impact on the performance of the
applicable fund and potentially on the operating results of the public company.
A central feature of our distressed investment strategy is our ability to successfully predict the
occurrence of events such as mortgage default rates, mortgage prepayment rates, the amounts of any
prepayments, maturity extensions, interest rates for mortgage-backed securities and similar
instruments as well as corporate events such as capital raises, restructurings, reorganizations,
mergers and other transactions. Predicting any of these data points is difficult, and if our
analyses are inaccurate, the actual results of such investments could be materially lower than
expected and the applicable funds investment results could decline sharply.
The U.S. government is evaluating a proposal by the current administration to modify the terms of a
significant number of residential and other loans to provide relief to borrowers. We
cannot predict whether any such proposals will be enacted into law or what the potential terms of
any such law would be. If instituted, it is possible that loan modifications could change the terms
of a tremendous number of mortgage-backed securities and other investments, including investments
held by a number of our funds. Any such modifications could lower the outstanding principal, reduce
the interest rate, extend the maturity or otherwise change the terms of the loan in ways that could
significantly impair or eliminate the value of the loan or cause the loan to become a loss to the
fund. As a result, any such loan modifications could have a significantly negative impact on the
affected funds business, results of operations and financial condition. Similarly, legislative
proposals that would permit judges to cram-down principal amounts on mortgage loans or would
indemnify servicers for actions to modify loans in ways that could otherwise breach the applicable
loan or securitization documentation have the potential to create significant value losses in our
funds investments in various mortgage-backed securities.
In addition, these investments could subject our private equity, hybrid and hedge funds to certain
potential additional liabilities that may exceed the value of their original investment. Under
certain circumstances, payments or distributions on certain investments may be reclaimed if any
such payment or distribution is later determined to have been a fraudulent conveyance, a
preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In
addition, under certain circumstances, a lender that has inappropriately exercised control of the
management and policies of a debtor may have its claims subordinated or disallowed, or may be found
liable for damages suffered by parties as a result of such actions. In the case where the
investment in securities of troubled companies is made in connection with an attempt to influence a
restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in
substantial litigation.
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If our risk management systems for our hedge fund business are ineffective, we may be exposed to
material unanticipated losses.
In our hedge fund business, we continue to refine our risk management techniques, strategies and
assessment methods. However, our risk management techniques and strategies do not fully mitigate
the risk exposure of our funds in all economic or
market environments, or against all types of risk, including risks that we might fail to identify
or anticipate. Some of our strategies for managing risk in our funds are based upon our use of
historical market behavior statistics. We apply statistical and other tools to these observations
to measure and analyze the risks to which our funds are exposed. Any failures in our risk
management techniques and strategies to accurately quantify such risk exposure could limit our
ability to manage risks in the funds or to seek adequate risk-adjusted returns. In addition, any
risk management failures could cause fund losses to be significantly greater than the historical
measures predict. Further, our mathematical modeling does not take all risks into account. Our more
qualitative approach to managing those risks could prove insufficient, exposing us to material
unanticipated losses.
Some of our funds invest in foreign countries and securities of issuers located outside of the
United States, which may involve foreign exchange, political, social and economic uncertainties and
risks.
Some of our funds invest a portion of their assets in the equity, debt, loans or other securities
of issuers located outside the United States. In addition to business uncertainties, such
investments may be affected by changes in exchange values as well as political, social and economic
uncertainty affecting a country or region. Many financial markets are not as developed or as
efficient as those in the U.S., and as a result, liquidity may be reduced and price volatility may
be higher. The legal and regulatory environment may also be different, particularly with respect to
bankruptcy and reorganization, and may afford us less protection as a creditor than we may be
entitled to under U.S. law. Financial accounting standards and practices may differ, and there may
be less publicly available information in respect of such companies.
Restrictions imposed or actions taken by foreign governments may adversely impact the value of our
fund investments. Such restrictions or actions could include exchange controls, seizure or
nationalization of foreign deposits and adoption of other governmental restrictions which adversely
affect the prices of securities or the ability to repatriate profits on investments or the capital
invested itself. Income received by our funds from sources in some countries may be reduced by
withholding and other taxes. Any such taxes paid by a fund will reduce the net income or return
from such investments. While our funds will take these factors into consideration in making
investment decisions, including when hedging positions, no assurance can be given that the funds
will be able to fully avoid these risks or generate sufficient risk-adjusted returns.
Investments by our hedge funds will frequently rank junior to investments made by others in the
same company.
In most cases, the companies in which our investment funds invest will have indebtedness or equity
securities, or may be permitted to incur indebtedness or to issue equity securities, that rank
senior to our investment. By their terms, such instruments may provide that their holders are
entitled to receive payments of dividends, interest or principal on or before the dates on which
payments are to be made in respect of our investment. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of a company in which an investment is made,
holders of securities ranking senior to our investment would typically be entitled to receive
payment in full before distributions could be made in respect of our investment. After repaying
senior security holders, the company may not have any remaining assets to use for repaying amounts
owed in respect of our funds investment. To the extent that any assets remain, holders of claims
that rank equally with our investment would be entitled to share on an equal and ratable basis in
distributions that are made out of those assets. Also, during periods of financial distress or
following an insolvency, the ability of our investment funds to influence a companys affairs and
to take actions to protect their investments may be substantially less than that of the senior
creditors.
Our hedge fund investments are subject to numerous additional risks.
Our hedge fund investments, including investments by our funds of hedge funds in other hedge funds,
are subject to numerous additional risks, including the following:
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Certain of the funds are newly established funds without any operating history or
are managed by management companies or general partners who do not have a significant
track record as an independent manager. |
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Generally, there are few limitations on the execution of our hedge funds investment
strategies, which are subject to the sole discretion of the management company or the
general partner of such funds. The execution of a particular funds strategy for
example a strategy involving the enforcement of property rights through litigation -
may negatively impact one or more other Fortress funds. |
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Hedge funds may engage in short-selling, which is subject to the theoretically
unlimited risk of loss because there is no limit on how much the price of a security
may appreciate before the short position is closed out. A fund may be subject to losses
if a security lender demands return of the lent securities and an alternative lending
source cannot be found or if the fund is otherwise unable to borrow securities that are
necessary to hedge its positions. |
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Hedge funds are exposed to the risk that a counterparty will not settle a
transaction in accordance with its terms and conditions because of a dispute over the
terms of the contract (whether or not bona fide) or because of a credit or liquidity
problem, thus causing the fund to suffer a loss. Counterparty risk is increased for
contracts with longer maturities where events may intervene to prevent settlement, or
where the fund has concentrated its transactions with a single or small group of
counterparties. Generally, hedge funds are not restricted from dealing with any
particular counterparty or from concentrating any or all of their transactions with one
counterparty. Moreover, the funds internal consideration of the creditworthiness of their counterparties may prove
insufficient. The absence of a regulated market to facilitate settlement may increase the
potential for losses. |
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Credit risk may arise through a default by one of several large institutions that
are dependent on one another to meet their liquidity or operational needs, so that a
default by one institution causes a series of defaults by the other institutions. This
systemic risk may adversely affect the financial intermediaries (such as clearing
agencies, clearing houses, banks, investment banks, securities firms and exchanges)
with which the hedge funds interact on a daily basis. |
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The efficacy of investment and trading strategies depend largely on the ability to
establish and maintain an overall market position in a combination of financial
instruments. A hedge funds trading orders may not be executed in a timely and
efficient manner due to various circumstances, including systems failures or human
error. In such event, the funds might only be able to acquire some but not all of the
components of the position, or if the overall position were to need adjustment, the
funds might not be able to make such adjustment. As a result, the funds would not be
able to achieve the market position selected by the management company or general
partner of such funds, and might incur a loss in liquidating their position. |
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Hedge fund investments are subject to risks relating to investments in commodities,
futures, options and other derivatives, the prices of which are highly volatile and may
be subject to the theoretically unlimited risk of loss in certain circumstances,
including if the fund writes a call option. Price movements of commodities, futures and
options contracts and payments pursuant to swap agreements are influenced by, among
other things, interest rates, changing supply and demand relationships, trade, fiscal,
monetary and exchange control programs and policies of governments and national and
international political and economic events and policies. The value of futures, options
and swap agreements also depends upon the price of the commodities underlying them. In
addition, hedge funds assets are subject to the risk of the failure of any of the
exchanges on which their positions trade or of their clearinghouses or counterparties.
Most U.S. commodities exchanges limit fluctuations in certain commodity interest prices
during a single day by imposing daily price fluctuation limits or daily limits, the
existence of which may reduce liquidity or effectively curtail trading in particular
markets. |
We may be engaged as investment manager of one or more existing third-party investment funds or
managed accounts in the future, which would expose us to a number of potential risks.
Changes within the alternative asset management industry may cause investors of some funds to
replace their existing fund or managed account managers or may cause certain such managers to
resign. In such instances, we may seek to be engaged as investment manager of these funds or
accounts. For example, in May 2009, we executed several agreements to become the investment
manager of certain investment funds and accounts currently managed by D.B. Zwirn & Co., L.P., which
had approximately $2 billion of assets as of that date, and to effect other related transactions.
Consummation of these transactions is currently anticipated to occur in the second quarter of 2009
subject to the satisfaction of various conditions, including the approval of investors in certain
of the Zwirn funds and accounts.
While being engaged as investment manager of existing third-party funds or accounts potentially
enables us to grow our business, it also entails a number of risks that could harm our reputation,
results of operations and financial condition. For example, we may
choose not to, or be unable to, conduct
significant due diligence of the fund and its investments, and any diligence we undertake may not
reveal all relevant facts that may be necessary or helpful in evaluating such investment
opportunity. We may be unable to complete such transactions, which could harm our reputation and
subject us to costly litigation. We may willingly or unknowingly assume actual or contingent
liability for significant expenses, we may become subject to new laws and regulations with which we
are not familiar, and we may become subject to increased risk of litigation, regulatory
investigation or negative publicity. Being engaged as investment manager may require us to invest
significant capital and other resources, which could detract from our existing funds or our ability
to capitalize on future opportunities. In addition, being engaged as investment manager may
require us to integrate complex technological, accounting and management systems, which may be
difficult, expensive and time-consuming and which we may not be successful in integrating into our
current systems. The occurrence of any of these problems could negatively affect our reputation,
financial condition and results of operations.
We are subject to risks in using prime brokers and custodians.
The funds in our liquid hedge funds business depend on the services of prime brokers and custodians
to carry out certain securities transactions. In the event of the insolvency of a prime broker
and/or custodian, the funds might not be able to recover equivalent assets in full as they will
rank among the prime broker and custodians unsecured creditors in relation to assets which the
prime broker or custodian borrows, lends or otherwise uses. In addition, the funds cash held with
a prime broker or custodian will not be segregated from the prime brokers or custodians own cash,
and the funds will therefore rank as unsecured creditors in relation to the cash they have
deposited.
Some of our funds had prime brokerage accounts with Lehman Brothers at the time it declared
insolvency. These funds are currently working to obtain any assets or funds that are owed by
Lehman Brothers to the fund. However, due to the sudden nature of Lehmans insolvency, the
complexity and ambiguity of both the contractual arrangements and applicable regulations, this
process will take time, may be expensive and may result in one or more funds receiving only a
portion of the amount they are owed (or potentially receiving nothing at all). Moreover, the
suddenness of Lehmans failure and resulting lack of complete information about the status of
certain trades made by our funds created uncertainty as to whether certain trades were
appropriately hedged. As our funds were forced to make investment decisions with imperfect
information, investment decisions may have resulted in certain positions being imperfectly hedged
or otherwise hedged in a manner that is inconsistent with the funds general investment guidelines.
Risks Related to Our Organization and Structure
Control by our principals of the combined voting power of our shares and holding their economic
interest through Fortress Operating Group may give rise to conflicts of interests.
Our principals control a majority of the combined voting power of our Class A and Class B shares.
Accordingly, our principals have the ability to elect all of the members of our board of directors,
subject to Nomuras right to nominate one designee, and thereby to control our management and
affairs. In addition, they are able to determine the outcome of all matters requiring shareholder
approval and are able to cause or prevent a change of control of our company or a change in the
composition of our board of directors, and could preclude any unsolicited acquisition of our
company. The control of voting power by our principals could deprive Class A shareholders of an
opportunity to receive a premium for their Class A shares as part of a sale of our company, and
might ultimately affect the market price of the Class A shares.
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In addition, the shareholders agreement among us and the principals provides the principals who are
then employed by the Fortress Operating Group holding shares greater than 50% of the total combined
voting power of all shares held by such principals, so long as the principals and their permitted
transferees continue to hold more than 40% of the total combined voting power of our outstanding
Class A and Class B shares, with approval rights over a variety of significant corporate actions,
including:
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ten percent indebtedness: any incurrence of indebtedness, in one transaction or a
series of related transactions, by us or any of our subsidiaries in an amount in excess
of approximately 10% of the then existing long-term indebtedness of us and our
subsidiaries; |
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ten percent share issuance: any issuance by us, in any transaction or series of
related transactions, of equity or equity-related securities which would represent,
after such issuance, or upon conversion, exchange or exercise, as the case may be, at
least 10% of the total combined voting power of our outstanding Class A and Class B
shares other than (1) pursuant to transactions solely among us and our wholly-owned
subsidiaries, or (2) upon conversion of convertible securities or upon exercise of
warrants or options, which convertible securities, warrants or options are either
outstanding on the date of, or issued in compliance with, the shareholders agreement; |
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investment of $250 million or greater: any equity or debt commitment or investment
or series of related equity or debt commitments or investments in an entity or related
group of entities in an amount greater than $250 million; |
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new business requiring investment in excess of $100 million: any entry by us or any
of our controlled affiliates into a new line of business that does not involve
investment management and that requires a principal investment in excess of $100
million; |
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the adoption of a shareholder rights plan; |
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any appointment of a chief executive officer or co-chief executive officer; or |
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the termination of the employment of a principal with us or any of our material
subsidiaries without cause. |
Furthermore, the principals have certain consent rights with respect to structural changes
involving our company.
In addition, our principals are entitled to a majority of our economic returns through their
holdings of Fortress Operating Group units. Because they hold their economic interest in our
business directly through Fortress Operating Group, rather than through the public company, our
principals may have conflicting interests with holders of Class A shares. For example, our
principals may have different tax positions from us which could influence their decisions regarding
whether and when to dispose of assets, and whether and when to incur new or refinance existing
indebtedness, especially in light of the existence of the tax receivable agreement. In addition,
the structuring of future transactions may take into consideration the principals tax
considerations even where no similar benefit would accrue to us. Moreover, any distribution by the
Fortress Operating Group to us to satisfy our tax obligations will result in a corresponding pro
rata distribution to our principals.
Our ability to pay regular dividends may be limited by our holding company structure; we are
dependent on distributions from the Fortress Operating Group to pay dividends, taxes and other
expenses. Our ability to pay dividends is significantly restricted by, and is also subject to not
defaulting on, our credit agreement.
As a holding company, our ability to pay dividends is subject to the ability of our subsidiaries to
provide cash to us. When we declare a dividend on our Class A shares, we expect to cause the
Fortress Operating Group to make distributions to its unitholders, including our wholly-owned
subsidiaries, pro rata in an amount sufficient to enable us to pay such dividends to our Class A
shareholders. However, no assurance can be given that such distributions will or can be made. Our
board can reduce or eliminate our dividend at any time, in its discretion, and our board determined
not to pay any dividend to our Class A shareholders from the third quarter of 2008 through the
first quarter of 2009. In addition, Fortress Operating Group is required to make minimum tax
distributions to its unitholders. See also Risks Related to TaxationThere can be no assurance
that amounts paid as dividends on Class A shares will be sufficient to cover the tax liability
arising from ownership of Class A shares. If Fortress Operating Group has insufficient funds, we
may have to borrow additional funds or sell assets, which could materially adversely affect our
liquidity and financial condition. In addition, Fortress Operating Groups earnings may be
insufficient to enable it to make required minimum tax distributions to unitholders.
We are also subject to certain contingent repayment obligations that may affect our ability to pay
dividends. We earn incentive income generally 20% of the profits from each of our private
equity funds and hybrid PE funds based on a percentage of the profits earned by the fund as a
whole, provided that the fund achieves specified performance criteria. We generally receive,
however, our percentage share of the profits on each investment in the fund as it is realized,
before it is known with certainty that the fund as a whole will meet the specified criteria. As a
result, the incentive income paid to us as a particular investment made by the funds is realized is
subject to contingent repayment (or clawback) if, upon liquidation of the fund, the aggregate
amount paid to us as incentive income exceeds the amount actually due to us based upon the
aggregate performance of the fund. If we are required to repay amounts to a fund in order to
satisfy a clawback obligation, any such repayment will reduce the amount of cash available to
distribute as a dividend to our Class A shareholders. While the principals have personally
guaranteed, subject to certain limitations, this clawback obligation, our shareholders
agreement with them contains our agreement to indemnify the principals for all amounts which the
principals pay pursuant to any of these personal guarantees in favor of our private equity funds
and hybrid PE funds. Consequently, any requirement to satisfy a clawback obligation could impair
our ability to pay dividends on our Class A shares.
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There may also be circumstances under which we are restricted from paying dividends under
applicable law or regulation (for example due to Delaware limited partnership or limited liability
company act limitations on making distributions if liabilities of the entity after the distribution
would exceed the value of the entitys assets). In addition, under our credit agreement, our
ability to pay dividends is restricted by the amortization requirements in our credit agreement and
the requirement that we use 75% of our free cash flow (as defined in the agreement) to make
amortization payments. Under our credit agreement, we are permitted to make cash distributions
subject to the following additional restrictions: (a) no event of default exists immediately prior
to or subsequent to the distribution and (b) after giving effect to the distribution, we have cash
on hand of not less than accrued but unpaid taxes (based on estimated entity level taxes due and
payable by the Fortress Operating Group entities, primarily New York City unincorporated business
tax) and amortization obligations (including scheduled principal payments) under the credit
agreement which are required in the next 90 days. The events of default under the credit agreement
are typical of such agreements and include payment defaults, failure to comply with credit
agreement covenants (including a leverage covenant that is negatively affected by realized losses),
cross-defaults to material indebtedness, bankruptcy and insolvency, change of control, and adverse
events with respect to our material funds. Our lenders may also attempt to exercise their security
interests over substantially all of the assets of the Fortress Operating Group upon the occurrence
of an event of default.
Tax consequences to the principals may give rise to conflicts of interests.
As a result of unrealized built-in gain attributable to the value of our assets held by the
Fortress Operating Group entities at the time of our initial public offering, upon the sale or,
refinancing or disposition of the assets owned by the Fortress Operating Group entities, our
principals will incur different and significantly greater tax liabilities as a result of the
disproportionately greater allocations of items of taxable income and gain to the principals upon a
realization event. As the principals will not receive a corresponding greater distribution of cash
proceeds, they may, subject to applicable fiduciary or contractual duties, have different
objectives regarding the appropriate pricing, timing and other material terms of any sale,
refinancing, or disposition, or whether to sell such assets at all. Decisions made with respect to
an acceleration or deferral of income or deductions or the sale or disposition of assets may also
influence the timing and amount of payments that are received by an exchanging or selling principal
under the tax receivable agreement. All other factors being equal, earlier disposition of assets
following a transaction will tend to accelerate such payments and increase the present value of the
tax receivable agreement, and disposition of assets before a transaction will increase a
principals tax liability without giving rise to any rights to receive payments under the tax
receivable agreement. Decisions made regarding a change of control also could have a material
influence on the timing and amount of payments received by the principals pursuant to the tax
receivable agreement.
We are required to pay our principals for most of the tax benefits we realize as a result of the
tax basis step-up we receive in connection with taxable exchanges by our principals of units held
in the Fortress Operating Group entities or our acquisitions of units from our principals.
At any time and from time to time, each principal has the right to exchange his Fortress Operating
Group units for our Class A shares in a taxable transaction. These taxable exchanges, as well as
our acquisitions of units from our principals, may result in increases in the tax depreciation and
amortization deductions, as well as an increase in the tax basis of other assets, of the Fortress
Operating Group that otherwise would not have been available. These increases in tax depreciation
and amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax
that FIG Corp. or FIG Asset Co. LLC and any other corporate taxpayers would otherwise be required
to pay in the future, although the IRS may challenge all or part of increased deductions and tax
basis increase, and a court could sustain such a challenge.
We have entered into a tax receivable agreement with our principals that provides for the payment
by the corporate taxpayers to our principals of 85% of the amount of tax savings, if any, that the
corporate taxpayers actually realize (or are deemed to realize in the case of an early termination
payment by the corporate taxpayers or a change of control, as discussed below) as a result of these
increases in tax deductions and tax basis of the Fortress Operating Group. The payments that the
corporate taxpayers may make to our principals could be material in
amount. As of the date of this filing, the aggregate amount due but not yet paid to our principals with respect to the tax receivable
agreement was approximately $17 million.
Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase,
our principals will not reimburse the corporate taxpayers for any payments that have been
previously made under the tax receivable agreement. As a result, in certain circumstances, payments
could be made to our principals under the tax receivable agreement in excess of the corporate
taxpayers cash tax savings. The corporate taxpayers ability to achieve benefits from any tax
basis increase, and the payments to be made under this agreement, will depend upon a number of
factors, including the timing and amount of our future income.
In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of
business combination or certain other changes of control, the corporate taxpayers (or their
successors) obligations with respect to exchanged or acquired units (whether exchanged or acquired
before or after such change of control) would be based on certain assumptions, including that the
corporate taxpayers would have sufficient taxable income to fully utilize the deductions arising
from the increased tax deductions and tax basis and other benefits related to entering into the tax
receivable agreement.
If we were deemed an investment company under the Investment Company Act of 1940, applicable
restrictions could make it impractical for us to continue our business as contemplated and could
have a material adverse effect on our business and the price of our Class A shares.
We do not believe that we are an investment company under the Investment Company Act of 1940
because the nature of our assets and the sources of our income exclude us from the definition of an
investment company pursuant to Rule 3a-1 under the Investment Company Act of 1940. In addition, we
believe the company is not an investment company under Section 3(b)(1) of the Investment Company
Act because it is primarily engaged in a non-investment company business. If one or more of the
Fortress Operating Group entities ceased to be a wholly-owned subsidiary of ours, our interests in
those subsidiaries could be deemed an investment security for purposes of the Investment Company
Act of 1940. Generally, a person is an investment company if it owns investment securities having
a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and
cash items) on an unconsolidated basis. We intend to conduct our operations so that we will not be
deemed an investment company. However, if we were to be deemed an investment company, restrictions
imposed by the Investment Company Act of 1940, including limitations on our capital structure and
our ability to transact with affiliates, could make it impractical for us to continue our business
as contemplated and would have a material adverse effect on our business and the price of our Class
A shares.
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Risks Related To Our Class A Shares
An active market for our Class A shares may not be sustained.
Our Class A shares are listed on the New York Stock Exchange under the symbol FIG. We are
required to comply with the NYSEs listing standards in order to maintain the listing of our Class
A shares on the exchange. The NYSE has the authority to delist our Class A shares if, during any
period of 30 consecutive trading days, the average closing share price falls below $1.00 (which
requirement has been temporarily suspended through June 30, 2009) or the average market
capitalization of our Class A shares falls below $75 million and we are unable to satisfy these
standards within the time periods specified under NYSE regulations. In addition, the NYSE has the
authority to delist our Class A shares immediately if, during any period of 30 consecutive trading
days, the average market capitalization of such shares falls below $25 million (which amount has
been temporarily reduced to $15 million through June 30, 2009) or if the NYSE determines that the
trading price of our shares is abnormally low or if the NYSE otherwise believes the Class A shares
should no longer be listed. As of May 6, 2009, during the previous 30 consecutive trading days,
the average closing share price of our Class A shares was $3.16 per share and the average market
capitalization of our Class A shares was $299.3 million. The average price of our Class A shares
and related market capitalization has fallen significantly over recent quarters. If this decline
continues, our Class A shares could be delisted from the NYSE. We cannot predict whether our Class
A shares will be delisted. Accordingly, we cannot provide any assurance that a regular trading
market of our Class A shares will be sustained on that exchange or elsewhere. Moreover, if our
Class A shares are delisted from the NYSE, this event would likely decrease the trading volume and
price of our Class A shares.
Accordingly, we cannot provide any assurance of the liquidity of any trading market, holders
ability to sell their Class A shares when desired, or at all, or the prices that they may obtain
for their Class A shares.
The market price and trading volume of our Class A shares may be volatile, which could result in
rapid and substantial losses for our shareholders.
The market price of our Class A shares recently has been, and in the future, may be highly volatile
and could be subject to wide fluctuations. In addition, the trading volume in our Class A shares
may fluctuate and cause significant price variations to occur, which may limit or prevent investors
from readily selling their Class A shares and may otherwise negatively affect the liquidity of our
Class A shares. If the market price of our Class A shares declines significantly, holders may be
unable to resell their Class A shares at or above their purchase price, if at all. We cannot
provide any assurance that the market price of our Class A shares will not fluctuate or decline
significantly in the future. Some of the factors that could negatively affect the price of our
Class A shares or result in fluctuations in the price or trading volume of our Class A shares
include:
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variations in our quarterly operating results or dividends, or a decision to
continue not paying a regular dividend; |
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failure to meet analysts earnings estimates; |
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difficulty in complying with the provisions in our credit agreement such as
financial covenants and amortization requirements; |
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publication of research reports or press reports about us, our investments or the
investment management industry or the failure of securities analysts to cover our Class
A shares; |
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additions or departures of our principals and other key management personnel; |
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adverse market reaction to any indebtedness we may incur or securities we may issue
in the future; |
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actions by shareholders; |
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changes in market valuations of similar companies; |
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speculation in the press or investment community; |
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changes or proposed changes in laws or regulations or differing interpretations
thereof affecting our business or enforcement of these laws and regulations, or
announcements relating to these matters; |
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litigation or governmental investigations; |
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fluctuations in the performance or share price of other alternative asset managers; |
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poor performance or other complications affecting our funds or current or proposed
investments; |
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adverse publicity about the asset management industry generally or individual
scandals, specifically; and |
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general market and economic conditions. |
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In addition, when the market price of a stock has been volatile in the past, holders of that stock
have, at times, instituted securities class action litigation against the issuer of the stock. If
any of our shareholders brought a lawsuit against us, we may be required to incur substantial costs
defending any such suit, even those without merit. Such a lawsuit could also divert the time and
attention of our management from our business and lower our Class A share price.
Our Class A share price may decline due to the large number of shares eligible for future sale and
for exchange into Class A shares.
The market price of our Class A shares could decline as a result of sales of a large number of our
Class A shares or the perception that such sales could occur. These sales, or the possibility that
these sales may occur, also might make it more difficult for us to sell equity securities in the
future at a time and price that we deem appropriate. As of March 31, 2009, we had 406,571,901
outstanding Class A shares on a fully diluted basis, 48,563,539 restricted Class A share units
granted to employees and affiliates (net of forfeitures), 138,064 restricted Class A shares granted
to directors pursuant to our equity incentive plan, and 66,298,397 Class A shares and Fortress
Operating Group units that remain available for future grant under our equity incentive plan.
Beginning in 2008, the Class A shares reserved under our equity incentive plan will be increased on
the first day of each fiscal year during the plans term by the lesser of (x) the excess of (i) 15%
of the number of outstanding Class A and Class B shares of the company on the last day of the
immediately preceding fiscal year over (ii) the number of shares reserved and available for
issuance under our equity incentive plan as of such date or (y) 60,000,000 shares. In 2008 and
2009, this computation did not result in an increase. We may issue and sell in the future
additional Class A shares or any securities issuable upon conversion of, or exchange or exercise
for, Class A shares (including Fortress Operating Group units) at any time.
Our principals own an aggregate of 312,071,550 Fortress Operating Group units. Each principal has
the right to exchange each of his Fortress Operating Group units for one of our Class A shares at
any time, subject to the Principals Agreement. These Class A shares and Fortress Operating Group
units are eligible for resale from time to time, subject to certain contractual restrictions and
Securities Act limitations.
In addition, in April 2008, Fortress granted 31,000,000 Fortress Operating Group restricted
partnership units (RPUs) to a senior employee. The RPUs will vest into full capital interests in
Fortress Operating Group units in three equal portions on the first business day of 2011, 2012 and
2013, respectively, subject to continued employment with Fortress. If and when vested, these
31,000,000 Fortress Operating Group units will be exchangeable into Class A shares on a one-for-one
basis. In addition, such units will have the same resale terms and restrictions as those
applicable to the principals Fortress Operating Group units.
Our principals and Nomura are parties to shareholders agreements with us. The principals have the
ability to cause us to register the Class A shares they acquire upon exchange for their Fortress
Operating Group units. Nomura has the ability to cause us to register any of its 55,071,450 Class A
shares.
Our principals beneficial ownership of Class B shares and anti-takeover provisions in our charter
documents and Delaware law could delay or prevent a change in control.
Our principals beneficially own all of our Class B shares. The principals Class B shares will
represent a majority of the total combined voting power of our outstanding Class A and Class B
shares. As a result, if they vote all of their shares in the same manner, they will be able to
exercise control over all matters requiring the approval of shareholders and will be able to
prevent a change in control of our company. In addition, provisions in our operating agreement may
make it more difficult and expensive for a third party to acquire control of us even if a change of
control would be beneficial to the interests of our shareholders. For example, our operating
agreement provides for a staggered board, requires advance notice for proposals by shareholders and
nominations, places limitations on convening shareholder meetings, and authorizes the issuance of
preferred shares that could be issued by our board of directors to thwart a takeover attempt. In
addition, certain provisions of Delaware law may delay or prevent a transaction that could cause a
change in our control. The market price of our Class A shares could be adversely affected to the
extent that our principals control over us, as well as provisions of our operating agreement,
discourage potential takeover attempts that our shareholders may favor.
There are certain provisions in our operating agreement regarding exculpation and indemnification
of our officers and directors that differ from the Delaware General Corporation Law (DGCL) in a
manner that may be less protective of the interests of our Class A shareholders.
Our operating agreement provides that to the fullest extent permitted by applicable law our
directors or officers will not be liable to us. However, under the DGCL, a director or officer
would be liable to us for (i) breach of duty of loyalty to us or our shareholders, (ii) intentional
misconduct or knowing violations of the law that are not done in good faith, (iii) improper
redemption of shares or declaration of dividend, or (iv) a transaction from which the director or
officer derived an improper personal benefit. In addition, our operating agreement provides that we
indemnify our directors and officers for acts or omissions to the fullest extent provided by law.
However, under the DGCL, a corporation can only indemnify directors and
officers for acts or omissions if the director or officer acted in good faith, in a manner he
reasonably believed to be in the best interests of the corporation, and, in a criminal action, if
the officer or director had no reasonable cause to believe his conduct was unlawful. Accordingly,
our operating agreement may be less protective of the interests of our Class A shareholders, when
compared to the DGCL, insofar as it relates to the exculpation and indemnification of our officers
and directors.
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We have elected to become a controlled company within the meaning of the New York Stock Exchange
rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate
governance requirements.
A company of which more than 50% of the voting power is held by an individual, a group or another
company is a controlled company within the meaning of the New York Stock Exchange rules and may
elect not to comply with certain corporate governance requirements of the New York Stock Exchange,
including:
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the requirement that a majority of our board of directors consist of independent
directors; |
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the requirement that we have a nominating/corporate governance committee that is
composed entirely of independent directors; and |
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the requirement that we have a compensation committee that is composed entirely of
independent directors. |
We have elected to become a controlled company within the meaning of the New York Stock Exchange
rules, and we intend to rely on one or more of the exemptions listed above. For example, our board
is not currently, and likely in the future will not be, comprised of a majority of independent
directors. Accordingly, you will not have the same protections afforded to stockholders of
companies that are subject to all of the corporate governance requirements of the New York Stock
Exchange.
Risks Related to Taxation
Class A shareholders may be subject to U.S. federal income tax on their share of our taxable
income, regardless of whether they receive any cash dividends from us.
So long as we are not required to register as an investment company under the Investment Company
Act of 1940 and 90% of our gross income for each taxable year constitutes qualifying income
within the meaning of the Internal Revenue Code of 1986, as amended (the Code), on a continuing
basis, we will be treated, for U.S. federal income tax purposes, as a partnership and not as an
association or a publicly traded partnership taxable as a corporation. Class A shareholders may be
subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their
allocable share of our items of income, gain, loss, deduction and credit (including our allocable
share of those items of any entity in which we invest that is treated as a partnership or is
otherwise subject to tax on a flow through basis) for each of our taxable years ending with or
within their taxable year, regardless of whether or not they receive cash dividends from us. They
may not receive cash dividends equal to their allocable share of our net taxable income or even the
tax liability that results from that income. In addition, certain of our holdings, including
holdings, if any, in a Controlled Foreign Corporation (CFC) and a Passive Foreign Investment
Company (PFIC), may produce taxable income prior to the receipt of cash relating to such income,
and holders of our Class A shares will be required to take such income into account in determining
their taxable income. Under our operating agreement, in the event of an inadvertent partnership
termination in which the Internal Revenue Service (IRS) has granted us limited relief, each
holder of our Class A shares also is obligated to make such adjustments as are required by the IRS
to maintain our status as a partnership. Such adjustments may require persons who hold our Class A
shares to recognize additional amounts in income during the years in which they hold such shares.
We may also be required to make payments to the IRS.
Our intermediate holding company, FIG Corp., is subject to corporate income taxation in the United
States, and we may be subject to additional taxation in the future.
A significant portion of our investments and activities may be made or conducted through FIG Corp.
Dividends paid by FIG Corp. from time to time will, as is usual in the case of a U.S. corporation,
then be included in our income. Income received as a result of investments made or activities
conducted through FIG Asset Co. LLC (but excluding through its taxable corporate affiliates) is not
subject to corporate income taxation in our structure, but we cannot provide any assurance that it
will not become subject to additional taxation in the future, which would negatively impact our
results of operations.
There can be no assurance that amounts paid as dividends on Class A shares will be sufficient to
cover the tax liability arising from ownership of Class A shares.
Any dividends paid on Class A shares will not take into account a shareholders particular tax
situation (including the possible application of the alternative minimum tax) and, therefore,
because of the foregoing as well as other possible reasons, may not be sufficient to pay their full
amount of tax based upon their share of our net taxable income. In addition, the actual amount and
timing of dividends will always be subject to the discretion of our board of directors. In
particular, the amount and timing of dividends will depend upon a number of factors, including,
among others:
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our actual results of operations and financial condition; |
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restrictions imposed by our operating agreement or applicable law; |
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restrictions imposed by our credit agreements; |
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reinvestment of our capital; |
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the timing of the investment of our capital; |
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the amount of cash that is generated by our investments or to fund liquidity needs; |
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levels of operating and other expenses; |
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contingent liabilities; or |
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factors that our board of directors deems relevant. |
Even if we do not distribute cash in an amount that is sufficient to fund a shareholders tax
liabilities, they will still be required to pay income taxes on their share of our taxable income.
Tax gain or loss on disposition of our common units could be more or less than expected.
If a Class A shareholder sells common units, such shareholder will recognize a gain or loss equal
to the difference between the amount realized and the adjusted tax basis in those common units.
Prior distributions to such common shareholder in excess of the total net taxable income allocated
to such shareholder, which decreased the tax basis in its common units, will increase the gain
recognized upon a sale when the common units are sold at a price greater than such shareholders
tax basis in those common units, even if the price is less than the original cost. A portion of the
amount realized, whether or not representing gain, may be ordinary income to such shareholder.
We currently do not intend to make an election under Section 754 of the Internal Revenue Code to
adjust our asset basis, so a holder of common units could be allocated more taxable income in
respect of those common units prior to disposition than if such an election were made.
We currently do not intend to make an election under Section 754 of the Internal Revenue Code to
adjust our asset basis. If no Section 754 election is made, there will generally be no adjustment
to the basis of our assets in connection with our initial public offering, or upon a subsequent
transferees acquisition of common units from a prior holder of such common units, even if the
purchase price for those interests or units, as applicable, is greater than the share of the
aggregate tax basis of our assets attributable to those interests or units immediately prior to the
acquisition. Consequently, upon our sale of an asset, gain allocable to a holder of common units
could include built-in gain in the asset existing at the time such holder acquired such units,
which built-in gain would otherwise generally be eliminated if a Section 754 election had been
made.
If we are treated as a corporation for U.S. federal income tax purposes, the value of the Class A
shares would be adversely affected.
We have not requested, and do not plan to request, a ruling from the IRS on our treatment as a
partnership for U.S. federal income tax purposes, or on any other matter affecting us. As of the
date of the consummation of our initial public offering, under then current law and assuming full
compliance with the terms of our operating agreement (and other relevant documents) and based upon
factual statements and representations made by us, our outside counsel opined, as of that date,
that we would be treated as a partnership, and not as an association or a publicly traded
partnership taxable as a corporation for U.S. federal income tax purposes. However, opinions of
counsel are not binding upon the IRS or any court, and the IRS may challenge this conclusion and a
court may sustain such a challenge. The factual representations made by us upon which our outside
counsel relied related to our organization, operation, assets, activities, income, and present and
future conduct of our operations. In general, if an entity that would otherwise be classified as a
partnership for U.S. federal income tax purposes is a publicly traded partnership (as defined in
the Code) it will be nonetheless treated as a corporation for U.S. federal income tax purposes,
unless the exception described below, and upon which we intend to rely, applies. A publicly traded
partnership will, however, be treated as a partnership, and not as a corporation for U.S. federal
income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes
qualifying income within the meaning of the Code and it is not required to register as an
investment company under the Investment Company Act of 1940. We refer to this exception as the
qualifying income exception.
Qualifying income generally includes dividends, interest, capital gains from the sale or other
disposition of stocks and securities and certain other forms of investment income. We expect that
our income generally will consist of interest, dividends, capital gains and other types of
qualifying income, including dividends from FIG Corp. and interest on indebtedness from FIG Corp.
No assurance can be given as to the types of income that will be earned in any given year. If we
fail to satisfy the qualifying income exception described above, items of income and deduction
would not pass through to holders of the Class A shares and holders of the Class A shares would be
treated for U.S. federal (and certain state and local) income tax
purposes as shareholders in a corporation. In such a case, we would be required to pay income tax
at regular corporate rates on all of our income. In addition, we would likely be liable for state
and local income and/or franchise taxes on all of such income. Dividends to holders of the Class A
shares would constitute ordinary dividend income taxable to such holders to the extent of our
earnings and profits, and the payment of these dividends would not be deductible by us. Taxation of
us as a publicly traded partnership taxable as a corporation could result in a material adverse
effect on our cash flow and the after-tax returns for holders of Class A shares and thus could
result in a substantial reduction in the value of the Class A shares.
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Our structure involves complex provisions of U.S. federal income tax law for which no clear
precedent or authority may be available. Our structure also is subject to potential legislative,
judicial or administrative change and differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of holders of the Class A shares depends in some instances on
determinations of fact and interpretations of complex provisions of U.S. federal income tax law for
which no clear precedent or authority may be available. Readers should be aware that the U.S.
federal income tax rules are constantly under review by persons involved in the legislative
process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations
of established concepts, statutory changes, revisions to regulations and other modifications and
interpretations. The IRS pays close attention to the proper application of tax laws to
partnerships. The present U.S. federal income tax treatment of an investment in the Class A shares
may be modified by administrative, legislative or judicial interpretation at any time, possibly on
a retroactive basis, and any such action may affect investments and commitments previously made.
For example, changes to the U.S. federal tax laws and interpretations thereof could make it more
difficult or impossible to meet the qualifying income exception for us to be treated as a
partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or
cause us to change our investments and commitments, change the character or treatment of portions
of our income (including, for instance, treating carried interest as ordinary fee income rather
than capital gain) affect the tax considerations of an investment in us and adversely affect an
investment in our Class A shares.
Our organizational documents and agreements permit the board of directors to modify our operating
agreement from time to time, without the consent of the holders of Class A shares, in order to
address certain changes in U.S. federal income tax regulations, legislation or interpretation. In
some circumstances, such revisions could have a material adverse impact on some or all of the
holders of our Class A shares. Moreover, we will apply certain assumptions and conventions in an
attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to
holders in a manner that reflects such holders beneficial ownership of partnership items, taking
into account variation in ownership interests during each taxable year because of trading activity.
However, these assumptions and conventions may not be in compliance with all aspects of applicable
tax requirements. It is possible that the IRS will assert successfully that the conventions and
assumptions used by us do not satisfy the technical requirements of the Code and/or Treasury
regulations and could require that items of income, gain, deductions, loss or credit, including
interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects
holders of the Class A shares.
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We cannot match transferors and transferees of common units, and we have therefore adopted certain
income tax accounting positions that may not conform with all aspects of applicable tax
requirements. The IRS may challenge this treatment, which could adversely affect the value of our
common units.
Because we cannot match transferors and transferees of common units, we have adopted depreciation,
amortization and other tax accounting positions that may not conform with all aspects of existing
Treasury regulations. A successful IRS challenge to those positions could adversely affect the
amount of tax benefits available to our common unitholders. It also could affect the timing of
these tax benefits or the amount of gain on the sale of common units and could have a negative
impact on the value of our common units or result in audits of and adjustments to our common
unitholders tax returns.
The sale or exchange of 50% or more of our capital and profit interests will result in the
termination of our partnership for U.S. federal income tax purposes. We will be considered to have
been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more
of the total interests in our capital and profits within a 12-month period. Our termination would,
among other things, result in the closing of our taxable year for all common unitholders and could
result in a deferral of depreciation deductions allowable in computing our taxable income.
FIG Asset Co. LLC may not be able to invest in certain assets, other than through a taxable
corporation.
In certain circumstances, FIG Asset Co. LLC or one of its subsidiaries may have an opportunity to
invest in certain assets through an entity that is characterized as a partnership for U.S. federal
income tax purposes, where the income of such entity may not be qualifying income for purposes of
the publicly traded partnership rules. In order to manage our affairs so that we will meet the
qualifying income exception, we may either refrain from investing in such entities or,
alternatively, we may structure our investment through an entity classified as a corporation for
U.S. federal income tax purposes. If the entity were a U.S. corporation, it would be subject to
U.S. federal income tax on its operating income, including any gain recognized on its disposal of
its interest in the entity in which the opportunistic investment has been made, as the case may be,
and such income taxes would reduce the return on that investment.
Complying with certain tax-related requirements may cause us to forego otherwise attractive
business or investment opportunities or enter into acquisitions, borrowings, financings or
arrangements we may not have otherwise entered into.
In order for us to be treated as a partnership for U.S. federal income tax purposes, and not as an
association or publicly traded partnership taxable as a corporation, we must meet the qualifying
income exception discussed above on a continuing basis and we must not be required to register as
an investment company under the Investment Company Act of 1940. In order to effect such treatment
we (or our subsidiaries) may be required to invest through foreign or domestic corporations, forego
attractive business or investment opportunities or enter into borrowings or financings we may not
have otherwise entered into. This may adversely affect our ability to operate solely to maximize
our cash flow. Our structure also may impede our ability to engage in certain corporate acquisitive
transactions because we generally intend to hold all of our assets through the Fortress Operating
Group. In addition, we may be unable to participate in certain corporate reorganization
transactions that would be tax free to our holders if we were a corporation. To the extent we hold
assets other than through the Fortress Operating Group, we will make appropriate adjustments to the
Fortress Operating Group agreements so that distributions to principals and us would be the same as
if such assets were held at that level.
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The IRS could assert that we are engaged in a U.S. trade or business, with the result that some
portion of our income is properly treated as effectively connected income with respect to non-U.S.
holders. Moreover, certain REIT dividends and other stock gains may be treated as effectively
connected income with respect to non-U.S. holders.
While we expect that our method of operation will not result in a determination that we are engaged
in a U.S. trade or business, there can be no assurance that the IRS will not assert successfully
that we are engaged in a U.S. trade or business, with the result that some portion of our income is
properly treated as effectively connected income with respect to non-U.S. holders.
Moreover, dividends paid by an investment that we make in a REIT that is attributable to gains from
the sale of U.S. real property interests will, and sales of certain investments in the stock of
U.S. corporations owning significant U.S. real property may, be treated as effectively connected
income with respect to non-U.S. holders. To the extent our income is treated as
effectively connected income, non-U.S. holders generally would be subject to withholding tax on
their allocable shares of such income, would be required to file a U.S. federal income tax return
for such year reporting their allocable shares of income effectively connected with such trade or
business, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such
income. Non-U.S. holders may also be subject to a 30% branch profits tax on such income in the
hands of non-U.S. holders that are corporations.
An investment in Class A shares will give rise to UBTI to certain tax-exempt holders.
We will not make investments through taxable U.S. corporations solely for the purpose of limiting
unrelated business taxable income, or UBTI, from debt-financed property and, thus, an investment
in Class A shares will give rise to UBTI to certain tax-exempt holders. For example, FIG Asset Co.
LLC will invest in or hold interests in entities that are treated as partnerships, or are otherwise
subject to tax on a flow-through basis, that will incur indebtedness. FIG Asset Co. LLC may borrow
funds from FIG Corp. or third parties from time to time to make investments. These investments will
give rise to UBTI from debt-financed property. However, we expect to manage our activities to
avoid a determination that we are engaged in a trade or business, thereby limiting the amount of
UBTI that is realized by tax-exempt holders of our Class A shares.
We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S.
federal income tax purposes.
Certain of our investments may be in foreign corporations or may be acquired through a foreign
subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an
entity may be a PFIC or a CFC for U.S. federal income tax purposes. U.S. holders of Class A shares
indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences.
Several
items of tax legislation have recently been introduced, which, if
enacted, could materially adversely affect us, including by
preventing us from continuing to qualify as a partnership for
U.S. federal income tax purposes.
Our structure also is subject to potential judicial or administrative change and differing
interpretations, possibly on a retroactive basis.
On June 14, 2007, legislation was introduced in the Senate that would tax as corporations publicly
traded partnerships that directly or indirectly derive income from investment adviser or asset
management services. In addition, the Chairman and the Ranking Republican Member of the Senate
Committee on Finance concurrently issued a press release stating that they do not believe that
proposed public offerings of private equity and hedge fund management firms are consistent with the
intent of the existing rules regarding publicly traded partnerships because the majority of their
income is from the active provision of services to investment funds and limited partner investors
in such funds. As explained in the technical explanation accompanying the proposed legislation:
Under the bill, the exception from corporate treatment for a publicly traded partnership does not
apply to any partnership that, directly or indirectly, has any item of income or gain (including
capital gains or dividends), the rights to which are derived from services provided by any person
as an investment adviser, as defined in the Investment Advisers Act of 1940, or as a person
associated with an investment adviser, as defined in that Act. Further, the exception from
corporate treatment does not apply to a partnership that, directly or indirectly, has any item of
income or gain (including capital gains or dividends), the rights to which are derived from asset
management services provided by an investment adviser, a person associated with an investment
adviser, or any person related to either, in connection with the management of assets with respect
to which investment adviser services were provided. If enacted in its proposed form, the
transition rules of the proposed legislation would delay the application of these rules for five
years.
In addition, on June 25, 2008, legislation was passed in the House, but not the Senate, that would
have the effect of treating income recognized from carried interests as ordinary fee income,
thereby effectively causing such income to be treated as nonqualifying income under the publicly
traded partnership rules, which would have precluded us from qualifying for treatment as a
partnership for U.S. federal income tax purposes. President Obama has indicated during the recent
presidential campaign that he would support changing the tax treatment of carried interests, and
on February 26, 2009, President Obamas staff released an outline of his fiscal year 2010 budget
proposal which includes a proposal to tax carried interests as ordinary income.
On April 2, 2009, Congressman Sander Levin introduced new legislation in the House that would have
the effect of treating income recognized from carried interests as ordinary fee income. While
the legislation, if enacted in its current form, would explicitly treat such income as
nonqualifying income under the publicly traded partnership rules, thereby precluding us from
qualifying for treatment as a partnership for U.S. federal income tax purposes, the proposed
legislation provides for a 10 year transition period before these rules are applicable.
On March 2, 2009, Senator Carl Levin introduced the Stop Tax Haven Abuse Act in the United States
Senate, similar to a prior legislative proposal from 2007. Among other effects, this proposal
would, if enacted in its current form, subject our offshore funds to significant U.S. federal
income taxes and potentially state and local taxes, which would adversely affect our ability to
raise capital from foreign investors and certain tax-exempt investors.
As a result of widespread budget deficits, several states are evaluating proposals to subject
partnerships to U.S. federal or state entity level taxation through the imposition of state income, franchise or other
forms of taxation. If any version of any of these legislative proposals were to be enacted into law in the
form in which it was introduced, or if other similar legislation were enacted or any other change
in the tax laws, rules, regulations or interpretations were to preclude us from qualifying for
treatment as a partnership for U.S. federal income tax purposes under the publicly-traded
partnership rules or otherwise impose additional taxes, Class A shareholders would be negatively
impacted because we would incur a material increase in our tax liability as a public company from
the date any such changes became applicable to us, which could result in a reduction in the value
of our Class A Shares.
88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
89
Item 6. Exhibits
|
(a) |
|
and (c) Financial statements and schedules: |
See Part I, Item 1, Financial Statements
|
(b) |
|
Exhibits filed with this Quarterly Report on Form 10-Q: |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Formation of the Registrant (incorporated by reference to
the Registrants Registration Statement on Form S-1 (File No. 333-138514), Exhibit
3.1). |
|
|
|
|
|
|
3.2 |
|
|
Certificate of Amendment to Certificate of Formation of the Registrant
(incorporated by reference to the Registrants Registration Statement on Form S-1
(File No. 333-138514), Exhibit 3.2). |
|
|
|
|
|
|
3.3 |
|
|
Third Amended and Restated Limited Liability Company Agreement of the
Registrant (incorporated by reference to the Registrants Annual Report on Form 10-K
filed with the SEC on March 28, 2008 (File No. 001-33294), Exhibit 3.3). |
|
|
|
|
|
|
10.1 |
|
|
Second Amendment to the Third Amended and Restated Credit Agreement,
dated March 12, 2009, among FIG LLC, as Borrower, certain subsidiaries and
affiliates of the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer
(incorporated by reference to the Registrants Annual Report on Form 10-K filed with
the SEC on March 16, 2009 (File No. 001-33294), Exhibit 10.31). |
|
|
|
|
|
|
10.2 |
|
|
Third Amendment to the Third Amended and Restated Credit Agreement, dated
March 13, 2009, among FIG LLC, as Borrower, certain subsidiaries and affiliates of
the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer (incorporated
by reference to the Registrants Annual Report on Form 10-K filed with the SEC on
March 16, 2009 (File No. 001-33294), Exhibit 10.32). |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
90
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized:
|
|
|
|
|
|
FORTRESS INVESTMENT GROUP LLC
May 11, 2009
|
|
|
By: |
/s/ Wesley R. Edens
|
|
|
|
Wesley R. Edens |
|
|
|
Chairman of the Board |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
By:
|
|
/s/ Wesley R. Edens |
|
|
|
|
Wesley R. Edens
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
May 11, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Daniel N. Bass |
|
|
|
|
Daniel N. Bass
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
May 11, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Jonathan R. Brown |
|
|
|
|
Jonathan R. Brown
|
|
|
|
|
Chief Accounting Officer |
|
|
May 11, 2009
91
EXHIBIT INDEX
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
3.1 |
|
|
Certificate of Formation of the Registrant (incorporated by reference to
the Registrants Registration Statement on Form S-1 (File No. 333-138514), Exhibit
3.1). |
|
|
|
|
|
|
3.2 |
|
|
Certificate of Amendment to Certificate of Formation of the Registrant
(incorporated by reference to the Registrants Registration Statement on Form S-1
(File No. 333-138514), Exhibit 3.2). |
|
|
|
|
|
|
3.3 |
|
|
Third Amended and Restated Limited Liability Company Agreement of the
Registrant (incorporated by reference to the Registrants Annual Report on Form 10-K
filed with the SEC on March 28, 2008 (File No. 001-33294), Exhibit 3.3). |
|
|
|
|
|
|
10.1 |
|
|
Second Amendment to the Third Amended and Restated Credit Agreement,
dated March 12, 2009, among FIG LLC, as Borrower, certain subsidiaries and
affiliates of the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer
(incorporated by reference to the Registrants Annual Report on Form 10-K filed with
the SEC on March 16, 2009 (File No. 001-33294), Exhibit 10.31). |
|
|
|
|
|
|
10.2 |
|
|
Third Amendment to the Third Amended and Restated Credit Agreement, dated
March 13, 2009, among FIG LLC, as Borrower, certain subsidiaries and affiliates of
the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer (incorporated
by reference to the Registrants Annual Report on Form 10-K filed with the SEC on
March 16, 2009 (File No. 001-33294), Exhibit 10.32). |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |