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Section 1: 10-Q (FORM 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-33294

Fortress Investment Group LLC

(Exact name of registrant as specified in its charter)

 

Delaware   20-5837959

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer

Identification No.)

1345 Avenue of the Americas, New York, NY   10105
(Address of principal executive offices)   (Zip Code)

(212) 798-6100

(Registrant’s telephone number, including area code)

  

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  x   

Non-accelerated filer  ¨

(Do not check if a smaller reporting company)

   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Class A Shares: 158,836,075 outstanding as of May 4, 2010.

Class B Shares: 300,273,852 outstanding as of May 4, 2010.

 

 

 


Table of Contents

FORTRESS INVESTMENT GROUP LLC

FORM 10-Q

INDEX

 

          PAGE
   PART I. FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009

   1
  

Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2010 and 2009

   2
  

Consolidated Statement of Equity (unaudited) for the three months ended March 31, 2010

   3
  

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009

   4
  

Notes to Consolidated Financial Statements (unaudited)

   5

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   33

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   59

Item 4.

  

Controls and Procedures

   62
   PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

   62

Item 1A.

  

Risk Factors

   63

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   92

Item 3.

  

Defaults upon Senior Securities

   92

Item 4.

  

Reserved

   92

Item 5.

  

Other Information

   92

Item 6.

  

Exhibits

   93

SIGNATURES

   94


Table of Contents

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:

 

  (i) the capital commitments or invested capital (or NAV, if lower) of our private equity funds and credit PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with private equity funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,

 

  (ii) the contributed capital of our publicly traded alternative investment vehicles, which we refer to as our “Castles,”

 

  (iii) the net asset value, or “NAV,” of our hedge funds, including the Value Recovery Funds which pay fees based on realizations (and on certain managed assets); and

 

  (iv) 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.


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 

   

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 

   

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

 

   

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

 

   

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

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

 

     March 31,
2010
(Unaudited)
    December 31,
2009
 

Assets

    

Cash and cash equivalents

   $ 223,421      $ 197,099   

Due from affiliates

     101,130        64,511   

Investments

     878,467        867,215   

Deferred tax asset

     443,359        440,639   

Other assets

     89,150        90,803   
                
   $ 1,735,527      $ 1,660,267   
                

Liabilities and Equity

    

Liabilities

    

Accrued compensation and benefits

   $ 64,828      $ 131,134   

Due to affiliates

     362,568        345,976   

Deferred incentive income

     227,303        160,097   

Debt obligations payable

     369,876        397,825   

Other liabilities

     58,054        25,921   
                
     1,082,629        1,060,953   
                

Commitments and Contingencies

    

Equity

    

Class A shares, no par value, 1,000,000,000 shares authorized, 151,070,002 and 145,701,622 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively

     —          —     

Class B shares, no par value, 750,000,000 shares authorized, 307,773,852 shares issued and outstanding at March 31, 2010

     —          —     

Paid-in capital

     1,130,850        1,029,536   

Retained earnings (accumulated deficit)

     (852,145     (767,994

Accumulated other comprehensive income (loss)

     (635     (325
                

Total Fortress shareholders’ equity

     278,070        261,217   

Principals’ and others’ interests in equity of consolidated subsidiaries

     374,828        338,097   
                

Total equity

     652,898        599,314   
                
   $ 1,735,527      $ 1,660,267   
                

See notes to consolidated financial statements

 

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FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)

 

     Three Months Ended March 31,  
     2010     2009  

Revenues

    

Management fees from affiliates

   $ 106,536      $ 105,652   

Incentive income from affiliates

     17,556        —     

Expense reimbursements from affiliates

     23,067        13,047   

Other revenues (affiliate portion disclosed in Note 6)

     13,029        3,597   
                
     160,188        122,296   
                

Expenses

    

Interest expense

     3,796        8,186   

Compensation and benefits

     179,393        109,236   

Principals agreement compensation

     234,759        234,759   

General, administrative and other

     21,108        17,185   

Depreciation and amortization

     2,682        2,641   
                
     441,738        372,007   
                

Other Income (Loss)

    

Gains (losses) from investments

     572        (2,473

Tax receivable agreement liability adjustment

     1,317        (55

Earnings (losses) from equity method investees

     19,881        (34,849
                
     21,770        (37,377
                

Income (Loss) Before Income Taxes

     (259,780     (287,088

Income tax benefit (expense)

     (1,552     407   
                

Net Income (Loss)

   $ (261,332   $ (286,681
                

Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries

   $ (177,181   $ (219,522
                

Net Income (Loss) Attributable to Class A Shareholders

   $ (84,151   $ (67,159
                

Dividends declared per Class A share

   $ —        $ —     
                

Earnings Per Class A share - Fortress Investment Group

    

Net income (loss) per Class A share, basic

   $ (0.56   $ (0.71
                

Net income (loss) per Class A share, diluted

   $ (0.58   $ (0.71
                

Weighted average number of Class A shares outstanding, basic

     157,821,895        95,202,243   
                

Weighted average number of Class A shares outstanding, diluted

     465,595,747        95,202,243   
                

 

See notes to consolidated financial statements

 

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FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(dollars in thousands)

 

     Class A Shares    Class B Shares    Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Fortress
Shareholders’
Equity
    Principals’ and
Others’ Interests in
Equity of
Consolidated
Subsidiaries
    Total
Equity
 

Equity - December 31, 2009

   145,701,622    307,773,852    $ 1,029,536      $ (767,994   $ (325   $ 261,217      $ 338,097      $ 599,314   

Contributions from principals’ and others’ interests in equity

   —      —        —          —          —          —          44,880        44,880   

Distributions to principals’ and others’ interests in equity

   —      —        (572     —          —          (572     (28,998     (29,570

Net deferred tax effects resulting from acquisition of Fortress Operating Group units

   —      —        2,261        —          —          2,261        —          2,261   

Director restricted share grant

   15,991    —        57        —          —          57        119        176   

Capital increase related to equity-based compensation, net

   5,352,389    —        96,135        —          —          96,135        202,423        298,558   

Dilution impact of Class A share issuance

   —      —        3,433        —          —          3,433        (3,433     —     

Comprehensive income (loss) (net of tax)

                  

Net income (loss)

   —      —        —          (84,151     —          (84,151     (177,181     (261,332

Foreign currency translation

   —      —        —          —          (144     (144     (534     (678

Comprehensive income (loss) from equity method investees

   —      —        —          —          (166     (166     (545     (711
                        

Total comprehensive income (loss)

                     (262,721
                                                          

Equity - March 31, 2010

   151,070,002    307,773,852    $ 1,130,850      $ (852,145   $ (635   $ 278,070      $ 374,828      $ 652,898   
                                                          

 

 

 

See notes to consolidated financial statements

 

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FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

 

     Three Months Ended March 31,  
     2010     2009  

Cash Flows From Operating Activities

    

Net income (loss)

   $ (261,332   $ (286,681

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

    

Depreciation and amortization

     2,682        2,641   

Other amortization and accretion

     877        3,414   

(Earnings) losses from equity method investees

     (19,881     34,849   

Distributions of earnings from equity method investees

     2,707        11   

(Gains) losses from investments

     (572     2,473   

Deferred incentive income

     (17,944     —     

Deferred tax (benefit) expense

     (726     (3,759

Tax receivable agreement liability adjustment

     (1,317     55   

Equity-based compensation

     298,566        287,803   

Allowance for doubtful accounts

     1,122        —     

Cash flows due to changes in

    

Due from affiliates

     (45,653     (25,932

Other assets

     (1,292     (1,257

Accrued compensation and benefits

     (21,211     (108,216

Due to affiliates

     3,128        (1,367

Deferred incentive income

     85,150        —     

Other liabilities

     32,302        32,657   
                

Net cash provided by (used in) operating activities

     56,606        (63,309
                

Cash Flows From Investing Activities

    

Contributions to equity method investees

     (28,485     (31,792

Distributions of capital from equity method investees

     41,616        10,538   

Purchase of fixed assets

     (388     (1,110

Proceeds from disposal of fixed assets

     —          6   
                

Net cash provided by (used in) investing activities

     12,743        (22,358
                

Cash Flows From Financing Activities

    

Repayments of debt obligations

     (27,950     (125,000

Payment of deferred financing costs

     —          (4,162

Principals’ and others’ interests in equity of consolidated subsidiaries - contributions

     37        25   

Principals’ and others’ interests in equity of consolidated subsidiaries - distributions

     (15,114     (5,225
                

Net cash provided by (used in) financing activities

     (43,027     (134,362
                

Net Increase (Decrease) in Cash and Cash Equivalents

     26,322        (220,029

Cash and Cash Equivalents, Beginning of Period

     197,099        263,337   
                

Cash and Cash Equivalents, End of Period

   $ 223,421      $ 43,308   
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for interest

   $ 3,384      $ 3,730   
                

Cash paid during the period for income taxes

   $ 2,464      $ 3,008   
                

Supplemental Schedule of Non-cash Investing and Financing Activities

    

Employee compensation invested directly in subsidiaries

   $ 45,095      $ 1,701   
                

Investments of receivable amounts into Fortress Funds

   $ 7,652      $ —     
                

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

   $ 31,335      $ —     
                

See notes to consolidated financial statements

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(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:

 

  1) Private equity:

 

  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) Credit funds:

 

  a) Credit 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 which include non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and

 

  b) Credit private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of ‘‘long dated value’’ funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), and an Asian fund.

 

  4) Principal investments in the above described funds.

Financial Statement Guide

 

Selected Financial Statement Captions

   Note
Reference
  

Explanation

Balance Sheet

     

Due from Affiliates

   6    Generally, management fees, expense reimbursements and incentive income due from Fortress Funds.

Investments

   3    Primarily the carrying value of Fortress’s principal investments in the Fortress Funds.

Deferred Tax Asset

   5    Relates to potential future tax benefits.

Due to Affiliates

   6    Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement.

Deferred Incentive Income

   2    Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance.

Debt Obligations Payable

   4    The balance outstanding on the credit agreement.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Selected Financial Statement Captions

   Note
Reference
  

Explanation

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.

Statement of Operations

     

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 Investments

   N/A    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 Adjustment

   5    Represents a change in the amount due to the Principals under the tax receivable agreement.

Earnings (Losses) from Equity Method Investees

   3    Fortress’s share of the net earnings (losses) of the Fortress Funds resulting from its principal investments.

Income Tax Benefit (Expense)

   5    The net tax result related to the current period. Certain of Fortress’s revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings.

Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries

   6    Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group.

Earnings Per Share

   8    GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

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 Fortress’s management committee.

The accompanying consolidated financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortress’s consolidated and combined financial statements for the year ended December 31, 2009 and notes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2009.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

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 Fortress’s 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 Fortress’s agreements with each are detailed below.

Management Fees, Incentive Income and Related Profit Sharing Expense

Fortress recognized management fees and incentive income as follows:

 

     Three Months Ended
March 31,
     2010     2009

Private Equity

    

Private Equity Funds

    

Management fees - affil.

   $ 33,465      $ 37,669

Incentive income - affil.

     —          —  

Castles

    

Management fees - affil.

     11,780        11,390

Incentive income - affil.

     —          —  

Management fees - non-affil. (A)

     884        646

Liquid Hedge Funds

    

Management fees - affil.

     17,466        22,604

Incentive income - affil.

     (259     —  

Management fees - non-affil. (A)

     1,336        25

Incentive income - non-affil. (A)

     —          —  

Credit Funds

    

Credit Hedge Funds

    

Management fees - affil.

     33,668        27,908

Incentive income - affil.

     (129     —  

Management fees - non-affil. (A)

     381        215

Incentive income - non-affil. (A)

     7,928        822

Credit PE Funds

    

Management fees - affil.

     10,157        6,081

Incentive income - affil.

     17,944        —  

Management fees - non-affil. (A)

     —          —  

Total

    

Management fees - affil.

   $ 106,536      $ 105,652

Incentive income - affil. (B)

   $ 17,556      $ —  

Management fees - non-affil. (A)

   $ 2,601      $ 886

Incentive income - non-affil. (A)

   $ 7,928      $ 822

 

(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 credit 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.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the three months ended March 31, 2010 and 2009. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $6.2 million and $0.0 million of additional incentive income from affiliates would have been recognized during the three months ended March 31, 2010 and 2009, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

During the three months ended March 31, 2010 and 2009, Fortress recognized $17.9 million and $0 million, respectively, of incentive income distributions from its credit PE funds which represented “tax distributions.” These tax distributions are not subject to clawback and reflect a cash amount equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.

Deferred incentive income from the Fortress Funds, subject to contingent repayment, was comprised of the following, on an inception to date basis:

 

     Distributed-
Gross
   Distributed-
Recognized (A)
    Distributed-
Unrecognized (B)
    Undistributed net of
intrinsic clawback
(C) (D)
 

Deferred incentive income as of December 31, 2009

   $ 480,211    $ (320,114   $ 160,097      $ 168,686   

Share of income (loss) of Fortress Funds

     —        —          —          82,732   

Distribution of incentive income

     85,150      —          85,150        (85,150

Recognition of previously deferred incentive income

     —        (17,944     (17,944     —     
                               

Deferred incentive income as of March 31, 2010

   $ 565,361    $ (338,058   $ 227,303      $ 166,268   
                               

 

(A) All related contingencies have been resolved.

 

(B) Reflected on the balance sheet.

 

(C) At March 31, 2010, the net undistributed incentive income is comprised of $249.6 million of gross undistributed incentive income, net of $83.3 million of intrinsic clawback (see next page). The net undistributed incentive income amount represents the amount that would be received by Fortress from the related funds if such funds were liquidated on March 31, 2010 at their net asset values.

 

(D) From inception to March 31, 2010, Fortress has paid $172.4 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $27.9 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related employees. If the $249.6 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $128.6 million of compensation expense.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

The following tables summarize information with respect to the Fortress Funds, other than the Castles, and their related incentive income thresholds as of March 31, 2010:

 

Fund
(Vintage)
(A)

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

Private Equity Funds

                                 

NIH (1998)

   Indefinite    $ 415,574    $ (782,065   $ 34,957      N/A      $ —        N/A    $ —      $ 94,513    $ —      $ —      $ —  

Fund I (1999) (J )

   Apr-10      1,062,177      (2,711,651     181,010    $ 1,830,484        —        N/A      32,054      292,099      1,664      —        —  

Fund II (2002)

   Feb-13      1,974,296      (2,915,346     496,763      1,437,813        —        N/A      32,105      250,811      75,083      —        —  

Fund III (2004)

   Jan-15      2,762,993      (1,307,362     1,525,504      69,873        803,470    $ 733,597      —        66,903      66,903      66,903    $ 45,108

Fund III Coinvestment (2004)

   Jan-15      273,648      (90,925     186,979      4,256        107,874      103,618      —        —        —        —        —  

Fund IV (2006)

   Jan-17      3,639,561      (119,772     2,619,639      (900,150     907,683      1,807,833      —        —        —        —        —  

Fund IV Coinvestment (2006)

   Jan-17      762,696      (12,661     522,522      (227,513     196,897      424,410      —        —        —        —        —  

GAGACQ Fund (2004)

   Nov-09      545,663      (595,401     N/A      N/A        N/A      N/A      N/A      51,476      N/A      N/A      N/A

FRID (2005)

   Apr-15      1,220,228      (480,604     452,808      (286,816     384,577      671,393      —        16,447      16,447      16,447      10,041

FRIC (2006)

   May-16      328,754      (17,460     187,925      (123,369     106,010      229,379      —        —        —        —        —  

FICO (2006)

   Jan-17      724,525      —          7,189      (717,336     214,820      932,156      —        —        —        —        —  

FHIF (2006)

   Jan-17      1,436,386      (63,154     1,078,430      (294,802     380,258      675,060      —        —        —        —        —  

Mortgage Opportunities Fund III (2008)

   Jun-13      193,861      (29,718     111,277      (52,866     N/A      52,866      —        —        —        —        —  
                                                     
                      $ 64,159    $ 772,249    $ 160,097    $ 83,350    $ 55,149
                                                     

PE Funds in Investment Period

                                 

Fund V (2007)

   Feb-18    $ 3,613,881    $ (2,521   $ 1,904,616    $ (1,706,744   $ 541,910    $ 2,248,654    $ —      $ —      $ —      $ —      $ —  

Fund V Coinvestment (2007)

   Feb-18      936,145      (113     453,003      (483,029     160,114      643,143      —        —        —        —        —  

FECI (2007)

   Feb-18      982,779      (139     729,291      (253,349     220,516      473,865      —        —        —        —        —  
                                                     
                      $ —      $ —      $ —      $ —      $ —  
                                                     

Credit PE Funds

                                 

Long Dated Value Fund I (2005)

   Apr-30    $ 267,325    $ (45,627   $ 255,683    $ 33,985      $ 60,228    $ 26,243    $ —      $ —      $ —      $ —      $ —  

Long Dated Value Fund II (2005)

   Nov-30      263,823      (39,575     244,698      20,450        46,320      25,870      —        412      —        —        —  

Long Dated Value Fund III (2007)

   Feb-32      334,532      (73,453     309,087      48,008        —        N/A      8,140      1,219      —        —        —  

LDVF Patent Fund (2007)

   Nov-27      38,934      (9,543     51,679      22,288        —        N/A      1,567      484      —        —        —  
                                                     
                      $ 9,707    $ 2,115    $ —      $ —      $ —  
                                                     

Credit PE Funds in Investment Period

                                 

Real Assets Fund (2007)

   Jun-17    $ 270,349    $ (89,988   $ 213,524    $ 33,163      $ —        N/A    $ 3,880    $ 1,316    $ —      $ —      $ —  

Assets Overflow Fund (2008)

   May-18      90,500      (56,498     50,299      16,297        —        N/A      1,536      90      —        —        —  

Credit Opportunities Fund (2008)

   Oct-20      3,218,487      (3,076,564     1,264,338      1,122,415        —        N/A      143,628      78,916      45,871      —        —  

FTS SIP L.P. (2008)

   Oct-18      610,505      (646,208     224,599      260,302        —        N/A      26,013      25,940      21,335      —        —  

Credit Opportunities Fund II (2009)

   Jul-22      101,736      (3,223     104,553      6,040        —        N/A      1,421      —        —        —        —  

Japan Opportunity Fund (2009)

   Jun-19      299,799      (62,169     275,156      37,526        —        N/A      7,303      —        —        —        —  
                                                     
                      $ 183,781    $ 106,262    $ 67,206    $ —      $ —  
                                                     

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

     Incentive Income
Eligible NAV (K)
   Gain to Cross
Incentive Income
Threshold (L)
   Percentage of
Incentive Income
Eligible NAV Above

Incentive Income
Threshold (M)
    Undistributed
Incentive Income (N)
   Year to date
Incentive Income
Crystallized (O)

Liquid Hedge Funds

             

Macro Funds (P)

             

Main fund investments

   $ 2,126,601    $ 7,969    66.5   $ 4,689    $ 407

Sidepocket investments (Q)

     81,602      48,910    7.4     295      —  

Sidepocket investments - redeemers (R)

     233,299      135,436    7.7     796      —  

Fortress Commodities Funds (S)

             

Main fund investments

     911,701      35,064    0.0     —        —  

Credit Hedge Funds

             

Special Opportunities Funds (S)

             

Main fund investments (T)

   $ 2,457,868    $ 34,863    4.8   $ 92    $ —  

Sidepocket investments (Q)

     194,642      68,997    0.1     —        —  

Sidepocket investments - redeemers (R)

     223,371      62,561    8.4     580      —  

Main fund investments (liquidating) (U)

     2,152,801      322,847    0.0     —        —  

Fortress Partners Funds (S)

             

Main fund investments

     291,229      73,668    26.4     357      —  

Sidepocket investments (Q)

     100,630      24,649    8.0     43      —  

Worden Fund

             

Main fund investments

     76,938      —      100.0     74      —  

 

(A) Vintage represents the year in which the fund was formed.

 

(B) Represents the contractual maturity date including the assumed exercise of all extension options, which in some cases may require the approval of the applicable fund advisory board. Private equity funds that have reached their maturity date are included in the table to the extent they have generated incentive income.

 

(C) Represents the gain needed to cross the incentive income threshold (as described in (E) below), excluding the impact of any relevant performance (i.e. preferred return) thresholds (as described in (D) below).

 

(D) Represents the gain needed to achieve the current relevant performance thresholds, assuming the gain described in (C) above is already achieved.

 

(E) Represents the immediate increase in NAV needed for Fortress to begin earning incentive income, including the achievement of any relevant performance thresholds. It does not include the amount needed to earn back intrinsic clawback (see (I) below), if any. Incentive income is not recorded as revenue until it is received and any related contingencies are resolved (see (H) below).

 

(F) Represents the amount of additional incentive income Fortress would receive if the fund were liquidated at the end of the period at its NAV.

 

(G) Represents the amount of incentive income previously received from the fund since inception.

 

(H) Represents the amount of incentive income previously received from the fund which is still subject to contingencies and is therefore recorded on the consolidated balance sheet as Deferred Incentive Income. This amount will either be recorded as revenue when all related contingencies are resolved, or, if the fund does not meet certain performance thresholds, will be returned by Fortress to the fund (i.e., “clawed back”).

 

(I) Represents the amount of incentive income previously received from the fund that would be clawed back (i.e., returned by Fortress to the fund) if the fund were liquidated at the end of the period at its NAV, excluding the effect of any tax adjustments. Employees, former employees and affiliates of Fortress would be required to return a portion of this incentive income that was paid to them under profit sharing arrangements. “Gross” and “Net” refer to amounts that are gross and net, respectively, of this employee/affiliate portion of the intrinsic clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees/affiliates. Fortress withheld a portion of the amounts due to employees under these profit sharing arrangements as a reserve against future clawback; as of March 31, 2010, Fortress held $37.9 million of such amounts on behalf of employees related to all of the private equity funds.

 

(J) Fund I undistributed and distributed incentive income amounts are presented for the total fund, of which Fortress is entitled to approximately 50%. Distributed incentive income subject to clawback for Fund I is presented with respect to Fortress’s portion only.

 

(K) Represents the portion of a fund’s NAV that is eligible to earn incentive income.

 

(L) Represents, for those fund investors whose NAV is below the performance threshold Fortress needs to obtain before it can earn incentive income from such investors (their “incentive income threshold” or “high water mark”), the amount by which their aggregate incentive income thresholds exceed their aggregate NAVs. The amount by which the NAV of each investor within this category is below their respective incentive income threshold varies and, therefore, Fortress may begin earning incentive income from certain investors before this entire amount is earned back. Fortress earns incentive income whenever the assets of new investors, as well as of investors whose NAV exceeds their incentive income threshold, increase in value.

 

(M) Represents the percentage which is computed by dividing (i) the aggregate NAV of all investors who are at or above their respective incentive income thresholds, by (ii) the total incentive income eligible NAV of the fund. The amount by which the NAV of each fund investor who is not in this category is below their respective incentive income threshold varies, and may vary significantly.

 

(N) Represents the amount of additional incentive income Fortress would earn from the fund if it were liquidated at the end of the period at its NAV. This amount is currently subject to performance contingencies generally until the end of the year or, in the case of sidepocket investments, until such investments are realized. Main Fund Investments (Liquidating) pay incentive income only after all capital is returned.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

(O) Represents the amount of incentive income Fortress has earned in the current period from the fund which is no longer subject to contingencies.

 

(P) Represents the Drawbridge Global Macro Funds and Fortress Macro Funds. The Drawbridge Global Macro SPV (the “SPV”), which was established in February 2009 to liquidate illiquid investments and distribute the proceeds to then existing investors, is not subject to incentive income and is therefore not presented in the table. However, realized gains or losses within the SPV can decrease or increase, respectively, the gain needed to cross the incentive income threshold for investors with a corresponding investment in the main fund. The impact of the unrealized gains and losses within the SPV at March 31, 2010, as if they became realized, was immaterial to the amounts presented in the table for the Macro main fund.

 

(Q) Represents investments held in sidepockets (also known as special investment accounts), which generally have investment profiles similar to private equity funds. The performance of these investments may impact Fortress’s ability to earn incentive income from main fund investments. For the credit hedge funds, realized and unrealized losses from individual sidepockets reduce the incentive income earned from main fund investments. For the Macro Funds, only realized losses from individual sidepockets reduce the incentive income earned from main fund investments. Base on current unrealized losses in Macro Fund sidepockets, if all of the Macro Fund sidepockets were liquidated at their NAV at March 31, 2010, the undistributed incentive income from the Macro main fund would be reduced by $0.9 million.

 

(R) Represents investments held in sidepockets for investors with no corresponding investment in the related main fund investments (other than the SPV, see (P) above).

 

(S) Includes onshore and offshore funds.

 

(T) Subsequent to March 31, 2010, these funds recorded earnings which resulted in 100% of the offshore main fund investors exceeding their incentive income thresholds or high water marks and 100% of the onshore main fund investors being approximately 1% from exceeding their incentive income thresholds or high water marks.

 

(U) Relates to accounts where investors have provided withdrawal notices and are subject to payout as underlying fund investments are realized.

Private Equity Funds and Credit PE Funds

During the three months ended March 31, 2010, Fortress formed new private equity funds or credit PE funds which had capital commitments as follows as of March 31, 2010:

 

Fortress’s commitments

   $ 510

Fortress’s affiliates’ commitments

     19,700

Third party investors’ commitments

     102,255
      

Total capital commitments

   $ 122,465
      

Liquid Hedge Funds and Credit Hedge Funds

During the three months ended March 31, 2010, Fortress formed, or became the manager of, hedge funds with net asset values as follows as of March 31, 2010:

 

     Liquid    Credit

Fortress

   $ —      $ 102

Fortress’s affiliates

     —        —  

Third party investors

     —        76,937
             

Total NAV (A)

   $ —      $ 77,039
             

 

(A) Or other fee paying basis, as applicable.

Redemption notices received, and redemption payments which are made in periods after notices are received, including affiliates, have been as follows:

 

     Liquid Hedge Funds    Credit Hedge Funds

Three Months Ended March 31,

   Redemption Notices
Received
   Redemptions Paid
During the Period
   Redemption Notices
Received
   Redemptions Paid
During the Period

2010

   $ 263,180    $ 715,385    $ 16,995    $ 450,847

2009

   $ 582,785    $ 2,801,035    $ —      $ 141,092

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.

 

12


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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

3. INVESTMENTS

Investments consist primarily of investments in equity method investees and options in these investees. The investees are primarily Fortress Funds.

Investments can be summarized as follows:

 

     March 31,
2010
    December 31,
2009
 

Equity method investees

   $ 820,512      $ 809,757   

Equity method investees, held at fair value

     56,652        56,710   
                

Total equity method investments

     877,164        866,467   

Options in equity method investees

     1,303        748   
                

Total investments

   $ 878,467      $ 867,215   
                

Gains (losses) from investments can be summarized as follows:

    
     Three Months Ended
March 31,
 
     2010     2009  

Net realized gains (losses)

   $ 400      $ (396

Net realized gains (losses) from affiliate investments

     (329     (248

Net unrealized gains (losses)

     —          —     

Net unrealized gains (losses) from affiliate investments

     501        (1,829
                

Total gains (losses) from investments

   $ 572      $ (2,473
                

Investments in Equity Method Investees

Fortress holds investments in certain Fortress Funds which are recorded based on the equity method of accounting. Fortress’s 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:

 

      Fortress’s Investment    Fortress’s Equity in Net Income (Loss)  
     March 31,    December 31,    Three Months Ended
March 31,
 
     2010    2009    2010     2009  

Private equity funds, excluding NIH (A)

   $ 533,985    $ 506,383    $ 9,242      $ (32,308

NIH

     2,332      2,486      (149     (279

Newcastle (B)

     3,313      2,144      N/A        N/A   

Eurocastle (B)

     2,256      2,616      N/A        N/A   
                              

Total private equity

     541,886      513,629      9,093        (32,587

Liquid hedge funds

     9,902      12,296      266        1,012   

Credit hedge funds

     212,549      220,511      9,334        (2,149

Credit PE funds

     107,938      115,896      (48     (1,528

Other

     4,889      4,135      1,236        403   
                              
     $877,164    $ 866,467    $ 19,881      $ (34,849
                              

 

(A) Includes Fortress’s 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 the fair value option for financial instruments.

 

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Table of Contents

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

A summary of the changes in Fortress’s investments in equity method investees is as follows:

 

     Three Months Ended March 31, 2010  
     Private Equity     Liquid
Hedge Funds
    Credit     Other     Total  
     NIH     Other Funds (A)     Castles (B)       Hedge Funds     PE Funds      

Investment, beginning

   $ 2,486      $ 506,383      $ 4,760      $ 12,296      $ 220,511      $ 115,896      $ 4,135      $ 866,467   

Earnings from equity method investees

     (149     9,242        N/A        266        9,334        (48     1,236        19,881   

Other comprehensive income from equity method investees

     (5     —          N/A        —          —          (865     —          (870

Contributions to equity method investees

     —          19,422        —          6,820        932        12,517        21        39,712   

Distributions of earnings from equity method investees

     —          —          N/A        (91     (5     (2,608     (3     (2,707

Distributions of capital from equity method investees

     —          (194     N/A        (9,389     (18,223     (16,954     (500     (45,260
                                                                

Total distributions from equity method investees

     —          (194     N/A        (9,480     (18,228     (19,562     (503     (47,967
                                                                

Mark to fair value - during period (C)

     N/A        2,128        958        N/A        N/A        N/A        N/A        3,086   

Translation adjustment

     —          (2,996     (149     —          —          —          —          (3,145
                                                                

Investment, ending

   $ 2,332      $ 533,985      $ 5,569      $ 9,902      $ 212,549      $ 107,938      $ 4,889      $ 877,164   
                                                                

Ending balance of undistributed earnings

   $ —        $ 274        N/A      $ 9      $ 2,987        2,240      $ 1,523      $ 7,033   
                                                                

 

(A) Includes Fortress’s 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 the fair value option for financial instruments.

 

(C) Recorded to Other Investments – Net Unrealized Gains (Losses) from Affiliate Investments.

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. NIH, the Castles, GAGFAH and Other are not presented as they are insignificant to Fortress’s investments.

 

     Private Equity Funds excluding NIH  
     March 31,
2010
    December 31,
2009
 

Assets

   $ 11,399,417      $ 10,993,214   

Debt

     (273,874     (705,432

Other liabilities

     (254,790     (275,702
                

Equity

   $ 10,870,753      $ 10,012,080   
                

Fortress’s Investment (A)

   $ 533,985      $ 506,383   
                

Ownership (B)

     4.9     5.1
                
     Three Months Ended March 31,  
     2010     2009  

Revenues and gains (losses) on investments

   $ 301,821      $ (767,348

Expenses

     (56,796     (121,035
                

Net Income (Loss)

   $ 245,025      $ (888,383
                

Fortress’s equity in net income (loss)

   $ 9,242      $ (32,308
                

 

(A) Includes Fortress’s direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). GAGFAH’s summary financial information is not included in this table.

 

(B) Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

     Liquid Hedge Funds     Credit Hedge Funds     Credit PE Funds (B)  
     March 31,
2010
    December 31,
2009
    March 31,
2010
    December 31,
2009
    March 31,
2010
    December 31,
2009
 

Assets

   $ 11,702,099      $ 9,641,111      $ 10,889,781      $ 11,048,076      $ 3,978,684      $ 6,243,776   

Debt

     —          —          (2,732,070     (2,938,213     (530,053     (1,767,331

Other liabilities

     (7,761,818     (6,187,965     (643,828     (667,604     (125,558     (95,807

Non-controlling interest

     —          —          (4,003     (16,600     (2,828     (153,016
                                                

Equity

   $ 3,940,281      $ 3,453,146      $ 7,509,880      $ 7,425,659      $ 3,320,245      $ 4,227,622   
                                                

Fortress’s Investment

   $ 9,902      $ 12,296      $ 212,549      $ 220,511      $ 107,938      $ 115,896   
                                                

Ownership (A)

     0.3     0.4     2.8     3.0     3.3     2.7
                                                
     Three Months Ended March 31,     Three Months Ended March 31,     Three Months Ended March 31,  
     2010     2009     2010     2009     2010     2009  

Revenues and gains (losses) on investments

   $ 128,834      $ 158,965      $ 425,999      $ 172,679      $ 436,771      $ (18,429

Expenses

     (46,982     (48,119     (66,014     (77,849     (78,305     (31,590
                                                

Net Income (Loss)

   $ 81,852      $ 110,846      $ 359,985      $ 94,830      $ 358,466      $ (50,019
                                                

Fortress’s equity in net income (loss)

   $ 266      $ 1,012      $ 9,334      $ (2,149   $ (48   $ (1,528
                                                

 

(A) Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates.

 

(B) Includes one entity which is recorded on a one quarter lag (i.e., the balances reflected for this entity are for the periods ended December 31, 2009 and 2008, respectively) and two entities which are recorded on a one month lag. They are recorded on a lag because they are foreign entities and do 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, 2010 which caused a change in Fortress’s accounting, except as described below.

The following table sets forth certain information as of March 31, 2010 regarding entities formed during the three months ended March 31, 2010 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.

 

     Fortress is not Primary Beneficiary     

Business Segment

   Gross Assets    Financial Obligations (A)    Fortress Investment (B)    Notes

Credit Hedge Funds

   $ 88,597    $ 2,619    $ 126    (C) (D)

 

(A) Represents financial obligations at the fund level, which are not recourse to Fortress. Financial obligations include financial borrowings, derivative liabilities and short securities. In many cases, these funds have additional debt within unconsolidated subsidiaries.

 

(B) Represents Fortress’s maximum exposure to loss with respect to these entities, which includes direct and indirect investments in the funds. In addition to the table above, Fortress is exposed to potential changes in cash flow and revenues attributable to the management fees and/or incentive income Fortress earns from these entities.

 

(C) Fortress is not the primary beneficiary of this entity, which represents a master fund, because the feeder fund (which is not consolidated) is more closely associated with this fund than Fortress based on both a quantitative and qualitative analysis. The master fund was formed for the sole purpose of acting as an investment vehicle for the related feeder fund.

 

(D) Fortress’s investment includes $24,000 of other receivables from the credit hedge funds.

In June 2009, the FASB issued new guidance on consolidation which became effective for Fortress on January 1, 2010. This guidance changes the definition of a variable interest entity (“VIE”) and changes the methodology to determine who is the primary beneficiary of, or in other words who consolidates, a VIE. Generally, the changes are expected to cause more entities to be defined as VIE’s and to shift consolidation to those entities that exercise day-to-day control over the VIE’s, such as investment managers. In February 2010, the FASB updated this guidance to defer its application to certain managed entities, particularly investment companies and similar entities. As a result, this guidance had no material impact on Fortress’s financial position, results of operations or liquidity.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

The following table sets forth certain information regarding VIEs in which Fortress held a variable interest. The March 31, 2010 amounts presented below include VIEs formed during the period (as shown in the immediately preceding table) 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.

 

     Fortress is not Primary Beneficiary     
     March 31, 2010    December 31, 2009     

Business Segment

   Gross Assets    Financial Obligations (A)    Fortress Investment (B)    Gross Assets    Financial Obligations (A)    Fortress Investment (B)    Notes

Private Equity Funds

   $ 346,506    $ 195,699    $ 2,518    $ 352,787    $ 197,791    $ 2,740    (C) (D)

Castles

     10,392,052      10,824,385      17,993      11,150,750      12,066,365      13,335    (C) (D)

Liquid Hedge Funds

     10,249,585      7,254,359      4,659      7,773,895      5,090,344      7,170    (C) (D)

Credit Hedge Funds

     2,386,481      452,022      2,368      2,153,220      598,216      3,132    (C) (D)

Credit PE Funds

     349,024      —        3,294      268,919      5,300      3,710    (C) (D)

 

(A) Represents financial obligations at the fund level, which are not recourse to Fortress. Financial obligations include financial borrowings, derivative liabilities and short securities. In many cases, these funds have additional debt within unconsolidated subsidiaries. Of the financial obligations represented herein as of March 31, 2010, $195.7 million, $10,218.9 million, and $420.3 million represent financial borrowings which have weighted average maturities of 1.1, 4.2, and 3.0 years for the private equity funds, Castles and credit hedge funds, respectively. Of the financial obligations represented herein as of December 31, 2009, $197.8 million, $11,438.7 million, $551.4 million, and $5.3 million represent financial borrowings which have weighted average maturities of 1.4, 4.5, 3.2, and 0.5 years for the private equity funds, Castles, credit hedge funds, and credit PE funds, respectively.

 

(B) Represents Fortress’s maximum exposure to loss with respect to these entities, which includes direct and indirect investments in these funds. In addition to the table above, Fortress is exposed to potential changes in cash flow and revenues attributable to the management fee and/or incentive income Fortress earns from those entities.

 

(C) Fortress is not the primary beneficiary of the Castles and NIH because it does not absorb a majority of their expected income or loss based on a quantitative analysis. Of the remaining entities represented herein, which represent investing vehicles, intermediate entities and master funds, Fortress is not the primary beneficiary because the related funds, intermediate entities and feeder funds (which are not consolidated) are more closely associated with these funds than Fortress based on both a quantitative and qualitative analysis. The investing vehicles, intermediate entities and master funds were formed for the sole purpose of acting as investment vehicles for the related funds.

 

(D) As of March 31, 2010, Fortress’s investment includes $7.7 million, $0.1 million, $0.5 million, and $0.2 million of management fees receivable from the Castles, liquid hedge funds, credit hedge funds, and credit PE funds, respectively, as well as $0.4 million in incentive income receivable from the liquid hedge funds. As of March 31, 2010, Fortress’s investment also includes $0.2 million, $3.4 million, $2.2 million, $0.6 million and $0.4 million of expense reimbursements and other receivables from the private equity funds, Castles, liquid hedge funds, credit hedge funds and credit PE funds, respectively. As of December 31, 2009, Fortress’s investment includes $4.1 million, $0.5 million, and $1.0 million of management fees receivable from the Castles, credit hedge funds, and credit PE funds, respectively, as well as $3.7 million and $0.9 million in incentive income receivable from the liquid hedge funds and credit hedge funds, respectively. As of December 31, 2009, Fortress’s investment also includes $0.2 million, $3.7 million, $1.5 million, $0.6 million and $0.7 million of expense reimbursements and other receivables from the private equity funds, Castles, liquid hedge funds, credit hedge funds and credit PE funds, respectively. In addition, Fortress has remaining capital commitments to certain credit PE funds which are VIEs which aggregated $2.7 million at March 31, 2010.

In March 2010, Fortress determined that a reconsideration event had occurred with respect to an operating subsidiary (“FCF”) of one of its private equity funds. FCF provides operating services to all of Fortress’s private equity funds and is reimbursed for related costs by the private equity funds based on a contractual formula. Therefore, FCF by design does not produce net income or have equity. Historically, Fortress has provided temporary advances to FCF as a result of certain funds having insufficient current liquidity to make their required reimbursements on a timely basis; these advances were deemed fully collectable. In March 2010, Fortress determined it would make advances to FCF related to a fund from which reimbursement was subject to significant uncertainty. Management determined that these advances would represent the provision of financial support to FCF. As a result of this reconsideration event, FCF was deemed to be a VIE and Fortress, as a result of directing the operations of FCF through its management contracts with the private equity funds, and providing financial support to FCF beginning in March 2010, was deemed to be its primary beneficiary. Therefore, Fortress consolidated FCF beginning in March 2010, which resulted in a gross up of reimbursement revenues, compensation and miscellaneous expenses, receivables, and payables, but had no impact on Fortress’s net income or equity. As of March 31, 2010, FCF’s gross assets were approximately $9.6 million, primarily comprised of affiliate receivables. Fortress’s exposure to loss from FCF is limited to its outstanding advances, which were approximately $1.0 million at March 31, 2010, plus any future advances. Subsequent to Fortress’s consolidation of FCF, these advances are eliminated in consolidation. FCF’s creditors do not have recourse to Fortress’s other assets.

 

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Table of Contents

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Fair Value of Financial Instruments

The following table presents information regarding Fortress’s financial instruments that are recorded at fair value. Investments denominated in foreign currencies have been translated at the period end exchange rate. Changes in fair value are recorded in Net Unrealized Gains (Losses) from Affiliate Investments.

 

     Fair Value   

Valuation Method

     March 31, 2010    December 31, 2009     

Assets - Carried at Fair Value

        

Newcastle and Eurocastle common shares

   $ 3,761    $ 2,662    Level 1 - Quoted prices in active markets for identical assets

GAGFAH common shares

   $ 51,082    $ 51,950    Level 1 - Quoted prices in active markets for identical assets

Eurocastle convertible debt (A)

   $ 1,808    $ 2,098    Level 3 - Internal model using significant unobservable inputs

Newcastle and Eurocastle options

   $ 1,303    $ 748    Level 2 - Lattice-based option valuation models using significant observable inputs

 

(A) The debt bears interest at 20% per annum and is perpetual, but ECT may redeem the securities after June 2011 at a premium of 20%. As of March 31, 2010, it had a face amount of €1.2 million ($1.6 million) and was convertible into ECT common shares at €0.30 per share. The fair value was determined using the market approach.

Fortress’s investments in instruments measured at fair value using Level 3 inputs changed during the three months ended March 31, 2010 as follows:

 

Balance at December 31, 2009

   $ 2,098   

Total gains (losses) included in net income (including foreign currency translation)

     (290
        

Balance at March 31, 2010

   $ 1,808   
        

4. DEBT OBLIGATIONS

The following table presents summarized information regarding Fortress’s debt obligations:

 

                         March 31, 2010
     Face Amount and
Carrying Value
   Contractual
Interest Rate
   Final
Stated
Maturity
   Weighted
Average

Funding
Cost (A)
    Weighted
Average

Maturity
(Years)
Debt Obligation    March 31,
2010
   December 31,
2009
          

Credit agreement (B)

                

Revolving debt (C)

   $ —      $ —      LIBOR + 2.50% (D)    May 2012    —        —  

Term loan

     350,000      350,000    LIBOR + 2.50%    May 2012    3.55   1.92

Delayed term loan (C)

     19,876      47,825    LIBOR + 2.50%    May 2012    3.18   0.37
                              

Total

   $ 369,876    $ 397,825          3.53   1.84
                              

 

(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 0.23%.

 

(B) Collateralized by substantially all of Fortress Operating Group’s assets as well as Fortress Operating Group’s rights to fees from the Fortress Funds and its equity interests therein.

 

(C) Approximately $66.5 million was undrawn on the revolving debt facility as of March 31, 2010. The revolving debt facility includes a $25 million letter of credit subfacility of which $8.5 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2 million (including $0.8 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, $60.1 million of the undrawn amount was available.

 

(D) Subject to unused commitment fees of 0.50% per annum.

To management’s knowledge, there have not been any market transactions in Fortress’s debt obligations. However, management believes the fair value of this debt was between 95% and 100% of face value at March 31, 2010.

 

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Table of Contents

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Fortress was in compliance with all of its debt covenants as of March 31, 2010. The following table sets forth the financial covenant requirements as of March 31, 2010 (dollars in millions).

 

     March 31, 2010
(dollars in millions)
   Notes
     Requirement    Actual   

AUM

   >$ 20,000    $ 30,237    (A)

Consolidated Leverage Ratio

   < 3.50      1.29    (B)

Required Investment Assets

   >$ 381    $ 894    (C)

Fortress Fund Investments

   >$ 153    $ 566    (C)

Total Investments

   >$ 229    $ 723    (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 changes in clawback reserves or gains and losses, including impairment, on investments.

 

(C) Impacted by capital investments in funds and the valuation of such funds’ investments.

5. INCOME TAXES AND TAX RELATED PAYMENTS

For the three months ended March 31, 2010, an estimated annual effective tax rate of (1.88)% 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 Fortress’s income is not subject to U.S. federal income tax, but is allocated directly to Fortress’s shareholders.

The provision for income taxes consists of the following:

 

     Three Months Ended March 31,  
     2010     2009  
Current     

Federal income tax expense (benefit)

   $ 81      $ 814   

Foreign income tax expense (benefit)

     587        411   

State and local income tax expense (benefit)

     1,610        2,127   
                
     2,278        3,352   
                
Deferred     

Federal income tax expense (benefit)

     (1,069     (1,518

Foreign income tax expense (benefit)

     3        (96

State and local income tax expense (benefit)

     340        (2,145
                
     (726     (3,759
                

Total expense (benefit)

   $ 1,552      $ (407
                

The tax effects of temporary differences have resulted in deferred income tax assets and liabilities as follows:

 

     March 31, 2010     December 31, 2009  

Total deferred tax assets

   $ 550,192      $ 545,253   

Valuation allowance

     (106,833     (104,614
                

Net deferred tax assets

   $ 443,359      $ 440,639   
                

Total deferred tax liabilities (A)

   $ 470      $ 456   
                

 

(A) Included in Other Liabilities

For the three months ended March 31, 2010, a deferred income tax benefit of $0.2 million was credited to other comprehensive income, primarily related to the equity method investees. A current income tax benefit of $0.3 million was credited to additional paid in capital, related to (i) dividend equivalent payments on RSUs (Note 8), and (ii) distributions to Fortress Operating Group restricted partnership unit holders (Note 7), which are currently deductible for income tax purposes.

 

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Table of Contents

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Tax Receivable Agreement

Although the tax receivable agreement payments are calculated based on annual tax savings, for the three months ended March 31, 2010, the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were estimated to be $3.6 million.

6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES

Affiliate Receivables and Payables

Due from affiliates was comprised of the following:

 

     Private Equity    Liquid Hedge
Funds
   Credit    Other    Total
     Funds    Castles       Hedge Funds    PE Funds      
March 31, 2010                     

Management fees and incentive income (A)

   $ 42,799    $ 7,740    $ 770    $ 4,647    $ 9,870    $ —      $ 65,826

Expense reimbursements

     8,648      3,408      3,162      4,753      4,311      —        24,282

Expense reimbursements - FCF (B)

     7,457      —        —        —        —        —        7,457

Dividends and distributions

     1,539      —        —        —        —        —        1,539

Other

     20      249      —        —        30      1,727      2,026
                                                

Total

   $ 60,463    $ 11,397    $ 3,932    $ 9,400    $ 14,211    $ 1,727    $ 101,130
                                                
     Private Equity    Liquid Hedge
Funds
   Credit    Other    Total
     Funds    Castles       Hedge Funds    PE Funds      
December 31, 2009                     

Management fees and incentive income (C)

   $ 17,116    $ 4,087    $ 7,557    $ 4,038    $ 11,200    $ —      $ 43,998

Expense reimbursements (C)

     5,471      3,750      1,802      4,752      3,010      —        18,785

Dividends and distributions

     —        —        —        —        —        —        —  

Other

     88      179      —        —        1      1,460      1,728
                                                

Total

   $ 22,675    $ 8,016    $ 9,359    $ 8,790    $ 14,211    $ 1,460    $ 64,511
                                                

 

(A) Net of allowances for uncollectable management fees of $14.9 million.

 

(B) Represents expense reimbursements due to FCF, a consolidated VIE (Note 3).

 

(C) Net of allowances for uncollectable management fees and expense reimbursements of $13.8 million and $0.8 million, respectively.

Due to affiliates was comprised of the following:

 

     March 31, 2010    December 31, 2009

Principals

     

- Tax receivable agreement - Note 5

   $ 325,193    $ 326,467

- Distributions payable on Fortress Operating Group units

     31,335      16,552

Other

     6,040      2,957
             
   $ 362,568    $ 345,976
             

As of March 31, 2010, amounts due from Fortress Funds recorded in Due from Affiliates included $42.5 million of past due management fees, excluding $11.3 million which has been subordinated to other liabilities of the related fund and has been fully reserved by Fortress, and $8.6 million of private equity general and administrative expenses advanced on behalf of certain Fortress Funds. Although such funds are currently experiencing liquidity issues, Fortress believes the unreserved fees will ultimately be collectable as the NAV’s of the respective funds exceed the amounts owed.

 

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Table of Contents

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Other Related Party Transactions

For the three months ended March 31, 2010 and 2009, Other Revenues included approximately $2.1 million and $1.7 million, respectively, of revenues from affiliates, primarily dividends.

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, 2010 and 2009, these expenses, mainly related to subscriptions to market data services, approximated $3.6 million and $2.9 million, respectively.

In February 2010, two employees terminated their employment at Fortress in order to form their own management company. Effective April 1, 2010, a subsidiary of Fortress entered into a sub-advisory agreement with them and their management company for the purpose of continuing to have them advise on an existing portfolio of illiquid investments in emerging markets on which they previously worked while they were employees. Pursuant to the terms of the agreement, the subsidiary will pay their management company an annual advisory fee and pay them a percentage of realized net proceeds from certain of such investments. As part of the agreement, the former employees have agreed to notify Fortress about certain investment opportunities in which they are involved.

In April 2010, Fortress entered into a software sublicensing agreement on an “as is” basis with a subsidiary of several Fortress Funds. The software is designed to facilitate cash management, legal entity management and data reconciliation. Fortress paid a one-time licensing fee of $150,000. The license is perpetual and irrevocable and for the non-exclusive use of Fortress’s affiliates.

Principals’ and Others’ Interests in Consolidated Subsidiaries

These amounts relate to equity interests in Fortress’s 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, 2010    December 31, 2009

Principals’ Fortress Operating Group units

   $ 295,100    $ 301,469

Employee interests in majority owned and controlled fund advisor and general partner entities

     78,463      35,789

Other

     1,265      839
             

Total

   $ 374,828    $ 338,097
             

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,  
     2010     2009  

Principals’ Fortress Operating Group units

   $ (180,123   $ (219,623

Employee interests in majority owned and controlled fund advisor and general partner entities

     2,654        28   

Other

     288        73   
                

Total

   $ (177,181   $ (219,522
                

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

The purpose of this schedule is to disclose the effects of changes in Fortress’s ownership interest in Fortress Operating Group on Fortress’s equity:

 

     Three Months Ended March 31,  
     2010     2009  

Net income (loss) attributable to Fortress

   $ (84,151   $ (67,159

Transfers (to) from the Principals’ and Others’ Interests:

    

Increase in Fortress’s paid-in capital for delivery of 5,251,558 and 28,890 restricted Class A shares during the three months ended March 31, 2010 and 2009, respectively

     3,433        3   
                

Change from net income (loss) attributable to Fortress and transfers (to) from Principals’ and Others’ Interests

   $ (80,718   $ (67,156
                

7. EQUITY-BASED AND OTHER COMPENSATION

Fortress’s total compensation and benefits expense, excluding Principals Agreement compensation, is comprised of the following:

 

     Three Months Ended March 31,
     2010    2009

Equity-based compensation, per below

   $ 63,806    $ 53,045

Profit-sharing expense, per below

     50,414      3,605

Discretionary bonuses

     34,359      22,859

Other payroll, taxes and benefits

     30,814      29,727
             
   $ 179,393    $ 109,236
             

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, 2009

   44,941,811      $ 14.59    6,689,054      $ 13.42    216,367    $ 9.58    31,000,000    $ 13.75

Issued

   7,233,070        4.70    1,004,551        4.70    15,991      5.35    —        —  

Converted to Class A shares

   (4,412,525     17.02    (782,226     14.47    —        —      —        —  

Transfers (C)

   5,374,289        12.51    (5,374,289     12.51    —        —      —        —  

Forfeited

   (103,544     14.54    (212,555     8.42    —        —      —        —  
                                                 

Outstanding as of March 31, 2010 (B)

   53,033,101      $ 12.83    1,324,535      $ 10.67    232,358    $ 9.29    31,000,000    $ 13.75
                                                 

 

     Three Months Ended March 31,
     2010    2009

Expense incurred (B)

     

Employee RSUs

   $ 38,453    $ 24,423

Non-Employee RSUs

     1,250      4,461

Restricted Shares

     90      148

LTIP

     1,696      1,696

RPUs

     22,317      22,317
             

Total equity-based compensation expense

   $ 63,806    $ 53,045
             

 

(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, 2010 for awards granted to non-employees was $3.99, which is equal to the closing trading price per share of Fortress’s Class A shares on such date.

 

(B) In future periods, Fortress will recognize compensation expense on its non-vested equity based awards of $603.9 million, with a weighted average recognition period of 2.9 years. This does not include amounts related to the Principals Agreement.

 

(C) Relates to FCF employees who became employees of Fortress (see Note 3).

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

When Fortress records equity-based compensation expense, including that related to the Principals Agreement, it records a corresponding increase in capital. When Fortress delivers Class A shares as a result of the vesting of equity-based compensation, to the extent that it pays withholding taxes in cash (rather than through the sale of employee shares upon delivery) it will record a decrease in capital related to these payments.

Profit Sharing Expense

Recognized profit sharing compensation expense is summarized as follows:

 

     Three Months Ended March 31,  
     2010    2009  

Private equity funds (A)

   $ —      $ (15

Castles (A)

     —        (137

Liquid hedge funds

     3,026      2,564   

Credit hedge funds

     4,145      1,193   

Credit private equity funds

     43,243      —     

Other

     —        —     
               

Total

   $ 50,414    $ 3,605   
               

 

(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,  
     2010     2009  
     Basic     Diluted     Basic     Diluted  

Weighted average shares outstanding

        

Class A shares outstanding

     146,073,810        146,073,810        94,500,351        94,500,351   

Fully vested restricted Class A share units with dividend equivalent rights

     11,606,613        11,606,613        631,260        631,260   

Fully vested restricted Class A shares

     141,472        141,472        70,632        70,632   

Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1)

     —          307,773,852        —          —     

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

     157,821,895        465,595,747        95,202,243        95,202,243   
                                

Basic and diluted net income (loss) per Class A share

        

Net income (loss) attributable to Class A shareholders

   $ (84,151   $ (84,151   $ (67,159   $ (67,159

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)

     (4,934     (4,934     (359     (359

Dividend equivalents declared on non-vested restricted Class A shares and restricted Class A share units

     —          —          —          —     

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)

     —          (180,051     —          —     
                                

Net income (loss) available to Class A shareholders

   $ (89,085   $ (269,136   $ (67,518   $ (67,518
                                

Weighted average shares outstanding

     157,821,895        465,595,747        95,202,243        95,202,243   
                                

Basic and diluted net income (loss) per Class A share

   $ (0.56   $ (0.58   $ (0.71   $ (0.71
                                

 

(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.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

(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 Fortress’s Class A shares and therefore participate fully in the results of Fortress’s 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.

 

(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:

 

     Three Months Ended March 31,
     2010    2009

Share Units

   27,632,927    25,347,250

 

(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 Fortress’s earnings (losses) or distributions. The Class B shares have no dividend or liquidation rights. Each Class B share, along with one Fortress Operating Group (“FOG”) 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.

Fortress’s dividend paying shares and units were as follows:

 

     Weighted Average
     Three Months Ended March 31,
     2010    2009

Class A shares (public shareholders)

   146,073,810    94,500,351

Restricted Class A shares (directors)

   231,292    135,496

Restricted Class A share units (employees) (A)

   11,606,613    631,260

Restricted Class A share units (employees) (B)

   19,651,275    22,955,132

Fortress Operating Group units (Principals)

   307,773,852    312,071,550

Fortress Operating Group RPUs (senior employee)

   31,000,000    31,000,000
         

Total

   516,336,842    461,293,789
         

 

     As of March 31, 2010    As of December 31, 2009

Class A shares (public shareholders)

   150,837,644    145,485,255

Restricted Class A shares (directors)

   232,358    216,367

Restricted Class A share units (employees) (A)

   6,905,998    1,174,117

Restricted Class A share units (employees) (B)

   19,651,275    25,218,073

Fortress Operating Group units (Principals)

   307,773,852    307,773,852

Fortress Operating Group RPUs (senior employee)

   31,000,000    31,000,000
         

Total

   516,401,127    510,867,664
         

 

(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.

In January 2010, 11.4 million existing RSUs vested and the related Class A shares will be delivered within six months of vesting pursuant to the plan documents. A portion of these shares was delivered in March 2010.

Dividends and distributions during the three months ended March 31, 2010 are summarized as follows:

 

          Current Year
     Declared in Prior Year,
Paid Current Year
   Declared and
Paid
   Declared but not
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)

     9,442      —        28,468      28,468

Distributions to Fortress Operating Group RPU holders (Note 7) (B)

     951      —        2,867      2,867
                           

Total distributions

   $ 10,393    $ —      $ 31,335    $ 31,335
                           

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

(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 tax-related distributions to the Principals and RPU holders. In the fourth quarter of 2009, Fortress declared $16.6 million of such distributions of which $10.4 million were paid, as reflected in the table, and $6.2 million were not paid as a result of a change in tax estimates.

The following table summarizes our comprehensive income (loss) (net of taxes) for the three months ended March 31, 2009:

 

     Impact to Total
Fortress
Shareholders’
Equity
    Impact to Principals’
and Others’ Interests
in Equity of
Consolidated
Subsidiaries
    Impact to
Total Equity
 

Net income (loss)

   $ (67,159   $ (219,522   $ (286,681

Foreign currency translation

     (2     (244     (246

Comprehensive income (loss) from equity method investees

     (71     (355     (426
                        

Total comprehensive income (loss)

   $ (67,232   $ (220,121   $ (287,353
                        

9. COMMITMENTS AND CONTINGENCIES

Other than as described below, Fortress’s commitments and contingencies remain materially unchanged from December 31, 2009.

Private Equity Fund and Credit PE Fund Capital Commitments – Fortress has remaining capital commitments to certain of the Fortress Funds which aggregated $114.8 million as of March 31, 2010. 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 are as follows:

 

April 1 to December 31, 2010

   $ 13,640

2011

     12,239

2012

     11,726

2013

     11,532

2014

     10,923

2015

     10,458

Thereafter

     11,613
      

Total

   $ 82,131
      

Rent expense recognized on a straight-line basis during the three months ended March 31, 2010 and 2009 was $5.0 million and $4.9 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, 2010, if any, will not materially affect Fortress’s results of operations, liquidity or financial position.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(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) credit hedge funds, (v) credit private equity (“PE”) funds, and (vi) principal investments in these funds as well as cash that is available to be invested.

“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 Fortress’s Class A shareholders adjusted as follows:

Incentive Income

 

  (i)     a. for Fortress Funds which are private equity funds and credit 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 Fortress’s 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 credit 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) 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,

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 or subtracting, as necessary, any changes in the fair value of contingent consideration payable with respect to the acquisition of a business, to the extent management intends to pay it in equity and it is recorded on the statement of operations under GAAP,

 

  (vii) adding back the amortization of intangible assets and any impairment of goodwill recorded under GAAP,

 

  (viii) adding back compensation expense recorded in connection with the forfeiture arrangements entered into among the principals,

 

  (ix) adding the income (or subtracting the loss) allocable to the interests in consolidated subsidiaries attributable to Fortress Operating Group units, and

 

  (x) adding back income tax benefit or expense and any income or expense recorded in connection with the tax receivable agreement (Note 5).

Fund management DE is equal to distributable earnings excluding investment-related results (specifically, investment income (loss) and interest expense) and is used by management to measure performance of the operating (management) business on a stand-alone basis. Fortress defines its segment operating margin to be equal to fund management DE divided by segment revenues.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

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,

 

  (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, and

 

  (iv) the difference, if any, between the GAAP carrying amount of intangible assets and goodwill and their carrying amount for segment reporting purposes resulting from the distributable earnings adjustments listed above.

Distributable Earnings Impairment

Investment Impairment for DE purposes

During the three months ended March 31, 2010, Fortress recorded $4.3 million of impairment on its direct and indirect investments in private equity funds and credit PE funds for segment reporting purposes. This impairment primarily related to declines in the value of investments that were previously impaired. As of March 31, 2010, Fortress had $0.3 million of unrealized losses on certain indirect investments in hedge fund special investment accounts that have not been recorded as impairment. As of March 31, 2010, Fortress’s share of the net asset value of its direct and indirect investments in private equity funds and credit PE funds exceeded its segment cost basis by $165.7 million, representing unrealized gains.

Clawback Reserve on Incentive Income for DE Purposes

Fortress had recognized incentive income for DE purposes from the following private equity funds, which are subject to contingent clawback, as of March 31, 2010:

 

Fund

   Net
Intrinsic
Clawback
(A)
   Periods
in Intrinsic
Clawback
   Prior Year-End
Inception-to-Date
Net DE

Reserve
   Current
Year-to-Date
Gross DE

Reserve
   Current
Year-to-Date
Net DE

Reserve
   Inception-to-Date
Net DE
Reserve
   Notes  

Fund I

     N/A    N/A    $ —      $ —      $ —      $ —      (B

Fund II - A

     N/A    N/A      —        —        —        —      (B

Fund II - B

   $ 6,029    6 Quarters      8,520      —        —        8,520    (C

Fund III

     45,108    9 Quarters      45,108      —        —        45,108    (D

FRID

     10,041    11 Quarters      10,041      —        —        10,041    (D

Credit Opportunities Fund

     N/A    N/A      —        —        —        —      (B

FTS SIP L.P.

     N/A    N/A      —        —        —        —      (B
                                        

Total

   $ 61,178       $ 63,669    $ —      $ —      $ 63,669   
                                        

 

(A) See Note 2.

 

(B) This fund had significant unrealized gains at March 31, 2010. As a result, the CODM determined that no reserve for clawback was required.

 

(C) The net intrinsic clawback in this fund, after the employee portion, is less than previously recorded reserves. As a result, no further reserve was deemed necessary.

 

(D) The potential clawback on these funds has been fully reserved in prior periods.

Impairment Determination

Fortress has recorded a total of approximately $4.3 million of impairment and net reserves for DE purposes on certain private equity funds and credit PE funds as described above during the three months ended March 31, 2010. Fortress expects aggregate returns on its other private equity funds and credit 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, 2010 NAV (although Fortress has no current intention of doing so), the result would be additional impairment losses and reserves for DE purposes of approximately $0.3 million.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Summary financial data on Fortress’s segments is presented on the following pages, together with a reconciliation to revenues, assets and net income (loss) for Fortress as a whole. Fortress’s investments in, and earnings (losses) from, its equity method investees by segment are presented in Note 3.

March 31, 2010 and the Three Months Then Ended

 

               Liquid    Credit                 
     Private Equity    Hedge    Hedge    PE    Principal           Fortress
     Funds    Castles    Funds    Funds    Funds    Investments     Unallocated     Subtotal

Segment revenues

                     

Management fees

   $ 33,252    $ 12,539    $ 18,802    $ 33,102    $ 10,157    $ —        $ —        $ 107,852

Incentive income

     —        —        5,502      8,321      85,150      —          —          98,973
                                                         

Segment revenues - total

   $ 33,252    $ 12,539    $ 24,304    $ 41,423    $ 95,307    $ —        $ —        $ 206,825
                                                         

Fund management distributable earnings

   $ 24,562    $ 4,437    $ 7,812    $ 10,762    $ 45,801    $ —        $ (1,230   $ 92,144
                                                         

Pre-tax distributable earnings

   $ 24,562    $ 4,437    $ 7,812    $ 10,762    $ 45,801    $ 4,249      $ (1,230   $ 96,393
                                                         

Total segment assets

   $ 58,906    $ 13,599    $ 5,104    $ 9,428    $ 12,006    $ 947,202      $ 526,300      $ 1,572,545
                                                         
                      (A  

(A)   Unallocated assets include deferred tax assets of $443.4 million.

 

March 31, 2009 and the Three Months Then Ended

               Liquid    Credit                 
     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
                                                         

Fund management distributable earnings

   $ 29,289    $ 3,989    $ 5,975    $ 2,904    $ 2,233    $ —        $ (151   $ 44,239
                                                         

Pre-tax distributable earnings

   $ 29,289    $ 3,989    $ 5,975    $ 2,904    $ 2,233    $ (35,034   $ (151   $ 9,205
                                                         

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

     March 31, 2010 and
the Three Months Then
Ended
    Three Months Ended
March 31, 2009
 

Fund management distributable earnings

   $ 92,144      $ 44,239   

Investment income (loss)

     8,001        (26,909

Interest expense

     (3,752     (8,125
                

Pre-tax distributable earnings

     96,393        9,205   

Adjust incentive income

    

Incentive income received from private equity funds and credit PE funds, subject to contingent repayment

   $ (85,150   $ —     

Incentive income accrued from private equity funds and credit PE funds, not subject to contingent repayment

     —          —     

Incentive income received from private equity funds and credit PE funds, not subject to contingent repayment

     17,944        —     

Incentive income from hedge funds, subject to annual performance achievement

     (6,283     —     

Incentive income received from the sale of shares related to options

     —       

Reserve for clawback, gross (see discussion above)

     —          —     
                
     (73,489     —     

Adjust other income

    

Distributions of earnings from equity method investees**

     (5,776     —     

Earnings (losses) from equity method investees**

     12,599        (38,921

Gains (losses) on options in equity method investees

     556        24   

Gains (losses) on other investments

     (58     (1,853

Incentive income guarantee

     —          —     

Impairment of investments (see discussion above)

     4,344        32,274   

Adjust income from the receipt of options

     —          —     
                
     11,665        (8,476

Adjust employee compensation

    

Adjust employee equity-based compensation expense (including Castle options assigned)

     (63,806     (53,044

Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income

     —          —     

Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment

     —          —     
                
     (63,806     (53,044

Adjust Principals’ equity-based compensation expense

     (234,759     (234,759

Adjust non-controlling interests related to Fortress Operating Group units

     180,123        219,623   

Adjust tax receivable agreement liability

     1,317        (55

Adjust income taxes

     (1,595     347   
                

Total adjustments

     (180,544     (76,364

Net Income (Loss) Attributable to Class A Shareholders

     (84,151     (67,159

Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries

     (177,181     (219,522
                

Net Income (Loss)

   $ (261,332   $ (286,681
                

Total segment assets

   $ 1,572,545     

Adjust equity investments from cost

     115,719     

Adjust investments gross of employee portion

     45,959     

Adjust option investments to intrinsic value

     1,304     
          

Total assets (GAAP)

   $ 1,735,527     
          

 

** This adjustment relates to all of the Castles, private equity and credit PE Fortress Funds and hedge fund special investment accounts in which Fortress has an investment.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(dollars in tables in thousands, except share data)

 

Reconciling items between segment measures and GAAP measures:

 

     Three Months Ended March 31,  
     2010     2009  

Segment revenues

   $ 206,825      $ 107,197   

Adjust management fees*

     1,285        163   

Adjust incentive income

     (73,489     —     

Adjust income from the receipt of options

     —          —     

Other revenues*

    

Adjust management fees from non-affiliates

     (2,601     (886

Adjust incentive income from non-affiliates

     (7,928     (822

Adjust other revenues (including expense reimbursements)

     36,096        16,644   
                
     25,567        14,936   
                

Total revenues (GAAP)

   $ 160,188      $ 122,296   
                

 

* 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.

Fortress’s depreciation expense by segment was as follows:

 

     Private Equity    Liquid
Hedge
Funds
   Credit          
     Funds    Castles       Hedge
Funds
   PE Funds    Unallocated    Total

Three Months Ended March 31,

                    

2010

   $ 278    $ 115    $ 385    $ 834    $ 210    $ 860    $ 2,682

2009

   $ 284    $ 169    $ 611    $ 696    $ 107    $ 774    $ 2,641

11. SUBSEQUENT EVENTS

These financial statements include a discussion of material events which have occurred subsequent to March 31, 2010 (referred to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have not been considered in these financial statements.

On February 16, 2010, Fortress announced that certain of its consolidated affiliates had agreed to acquire 100% of the equity of Logan Circle Partners, L.P. (“Logan Circle”) and its general partner, Logan Circle Partners GP, LLC, for approximately $22 million (subject to certain adjustments), with the potential for an additional payment at the end of 2011, contingent on the growth and performance of Logan Circle’s business. The closing of the transaction occurred on April 16, 2010. The contingent consideration is payable in cash or Class A shares, at Fortress’s option, and has an estimated current fair value of approximately $4 million (maximum payment of $28 million) and, therefore, the total purchase price was approximately $26 million which is expected to be allocated approximately as follows: $8 million to goodwill, $8 million to amortizable intangible assets, $7 million to net deferred tax assets, and $3 million to miscellaneous net assets. In addition, Fortress incurred approximately $1 million of acquisition-related costs which were expensed as incurred to General, Administrative and Other Expense.

Logan Circle is a fixed income asset manager with approximately $11.4 billion in assets under management as of April 16, 2010. With this acquisition, Fortress will expand its investment management business to offer fixed income products to investors worldwide. Logan Circle will initially be reported in the “unallocated” section of Fortress’s segments until such time as it becomes material to Fortress’s operations.

In connection with the acquisition of Logan Circle, Fortress established an equity compensation plan for Fortress employees who were formerly employed by Logan Circle. No awards had been granted under this plan through March 31, 2010.

In April 2010, certain Principals exchanged an aggregate of 7,500,000 FOG units and Class B shares for an equal number of Class A shares and simultaneously contributed these shares to a charitable organization.

 

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FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2010

(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 Group’s consolidated financial statements as of, and for the three months ended, March 31, 2010.

Fortress Operating Group includes all of Fortress’s operating and investing entities. The upper tier Fortress Operating Group entities are the obligors on Fortress’s credit agreement (Note 4). Segregating the financial results of this group of entities provides a more transparent view of the capital deployed in Fortress’s businesses and the relevant ratios for borrowing entities.

The consolidating balance sheet information is as follows:

 

     As of March 31, 2010  
     Fortress
Operating
Group
Combined
    Fortress
Investment
Group LLC
Consolidated (A)
    Intercompany
Eliminations
    Fortress
Investment
Group LLC
Consolidated
 

Assets

        

Cash and cash equivalents

   $ 220,500      $ 2,921      $ —        $ 223,421   

Due from affiliates

     102,439        17,004        (18,313     101,130   

Investments

     878,467        145,834        (145,834     878,467   

Deferred tax asset

     13,332        430,027        —          443,359   

Other assets

     80,365        9,161        (376     89,150   
                                
   $ 1,295,103      $ 604,947      $ (164,523   $ 1,735,527   
                                

Liabilities and Equity

        

Liabilities

        

Accrued compensation and benefits

   $ 64,828      $ —        $ —        $ 64,828   

Due to affiliates

     54,380