EX-99.1 2 dex991.htm PRESS RELEASE Press release

 

Exhibit 99.1

 

LOGO

   

FORTRESS INVESTMENT GROUP LLC

 

   
Investor Contact:    Media Contact:
Lilly H. Donohue    Gordon E. Runté
212-798-6118    212-798-6082

Fortress Reports Third Quarter 2010 Financial Results

New York, NY. November 5, 2010 – Fortress Investment Group LLC (NYSE: FIG) today reported its third quarter 2010 results.

Summary Highlights

 

  •  

Assets under management of $44.0 billion as of September 30, 2010

 

  •  

Raised $1.2 billion of new third-party capital in the third quarter, of which $551 million was added to assets under management in the quarter

 

  •  

Fund management distributable earnings of $71 million

 

  •  

Pre-tax distributable earnings (DE) of $78 million, or $0.15 per dividend paying share

 

  •  

GAAP net loss, excluding principals agreement compensation, of $32 million. GAAP net loss of $272 million. GAAP net loss attributable to Class A Shareholders of $95 million

 

  •  

Announced Fortress Funds’ acquisition of American General Finance Inc., a leading provider of consumer credit in the U.S., Puerto Rico and the Virgin Islands

 

  •  

Fortress Funds completed the acquisition of a portfolio of performing and non-performing European residential assets from affiliates of Residential Capital, LLC

Subsequent Events in the Fourth Quarter

 

  •  

Fortress closed a new credit agreement including a $280 million term loan maturing in October 2015 and a $60 million revolving credit facility maturing in October 2013

 

  •  

Opened an office in Singapore where Adam Levinson, Co-CIO of Fortress macro funds, will lead Asian macro strategies

Third Quarter 2010 Results

For the quarter ended September 30, 2010, our GAAP net loss was $272 million compared to a loss of $190 million for third quarter 2009. Our GAAP net loss attributable to Class A Shareholders was $95 million, or $0.62 loss per diluted share, as compared to a loss of $59 million, or $0.43 loss per diluted share, for the third quarter 2009. Excluding principals agreement compensation, third quarter GAAP net loss was $32 million, as compared to net income of $50 million for third quarter 2009.

For the third quarter, fund management distributable earnings was $71 million compared to $51 million in the third quarter of 2009.

Pre-tax DE for the third quarter was $78 million, or $0.15 per dividend paying share, versus $57 million for the third quarter of 2009, or $0.11 per dividend paying share.

 

1

 

Our segment distributable earnings increased period-over-period while our GAAP results decreased. This is primarily a result of the way we record incentive income from PE style funds, as well as from hedge funds in interim periods. In determining distributable earnings, we generally recognize PE style incentive income when gains are realized and hedge fund incentive income based on current returns, and we recognize our employees’ share of this income as compensation expense at the same time. In contrast, GAAP requires that we recognize the compensation when incurred, but we must defer the recognition of the revenue until all contingencies, primarily minimum returns over the lives of the PE style funds and annual performance requirements of the hedge funds, are resolved – regardless of the probability of such returns being met. As a result, when we have significant PE style realizations or positive returns in our hedge funds, as we had in the first nine months of 2010 and which we regard as a positive event, the related incentive income impact improves our segment distributable earnings while reducing our GAAP results for the same period.

“This was a very solid quarter for Fortress, driven by strong investment performance,” stated Daniel Mudd, Chief Executive Officer. “Our hedge funds produced significant incentive income, our credit business remains in a sweet spot, attractive private equity opportunities are emerging, and assets under management continue to build. Fortress’s strengths—structuring expertise, operational depth, broad deal flow and experienced management—play to both the ‘Great Deleveraging’ and choppy markets. This combination can produce exceptional results for our investors.”

The table below details Fortress’s GAAP Net Income (Loss) and Distributable Earnings for the third quarter and nine months ended 2010 and 2009:

 

     Third Quarter     $
Change		     Nine Months
Ended		     $
Change		  
(in millions, except per share amount)    2010     2009       2010     2009    

Distributable Earnings

             

Fund management DE

    $ 71      $ 51      $ 20      $ 236      $ 148      $ 88   

Pre-tax DE

    $ 78      $ 57      $ 21      $ 247      $ 125      $ 122   

Per dividend paying share/unit

    $ 0.15      $ 0.11      $ 0.04      $ 0.48      $ 0.26      $ 0.22   

Weighted Average Dividend Paying Shares and Units Outstanding

      519        511          517        485     

GAAP

             

Net income (loss)

    $ (272 )    $ (190 )    $ (82 )    $ (784 )    $ (648 )    $ (136 ) 

Net income (loss) attributable to Class A Shareholders

    $ (95 )    $ (59 )    $ (36 )    $ (271 )    $ (170 )    $ (101 ) 

Per diluted share

    $ (0.62 )    $ (0.43 )    $ (0.19 )    $ (1.75 )    $ (1.53 )    $ (0.22 ) 

Net income (loss) excluding principals agreement compensation

    $ (32 )    $ 50      $ (82 )    $ (72 )    $ 64      $ (136 ) 

For reconciliations of non-GAAP measures, please see Exhibit 2, “Reconciliation of Fund Management DE to Pre-tax DE and GAAP Net Income (Loss) and Reconciliation of Segment Revenues to GAAP Revenues,” Exhibit 3, “Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement Compensation to GAAP Net Income (Loss)” and Exhibit 4, “Reconciliation of Weighted Average Class A Shares Outstanding (Used for Basic EPS) to Weighted Average Dividend Paying Shares and Units Outstanding (Used for DEPS)” at the end of this release. Distributable earnings is a supplemental measure of our operating performance that we believe provides a meaningful basis for comparison between present and future periods.

The Company’s quarterly segment revenues and distributable earnings will fluctuate materially depending upon the performance of our funds and the realization events within our private equity businesses, as well as other factors. Accordingly, the revenues and profits in any particular quarter should not be expected to be indicative of future results.

The following discussion of our results is based on segment reporting as presented in our Quarterly Report on Form 10-Q. Our GAAP statement of operations and balance sheet are presented following this discussion. The following table is a summary presentation of our segment performance with supplemental data provided for informational purposes.

 

2

 

Supplemental Data for Third Quarter 2010 and 2009:

 

     Three Months Ended September 30, 2010  
           Private Equity     Liquid Hedge
Funds		     Credit Funds     Principal
Investments 		 
(in millions)    Total     Funds     Castles       Hedge Funds     PE Funds    

Assets Under Management

               

AUM - July 1, 2010

    $ 41,660      $ 11,511      $ 2,871      $ 4,167      $ 8,744      $ 2,896      $ —     

Capital raised

      551        —          —          426        75        50        —     

Equity raised

      —          —          —          —          —          —          —     

Increase in invested capital

      1,297        43        —          2        —          1,252        —     

Capital acquisitions

      —          —          —          —          —          —          —     

Redemptions

      (173 )      —          —          (167 )      (6 )      —          —     

SPV distributions 1

      (240 )      —          —          (240 )      —          —          —     

RCA distributions 2

      (441 )      —          —          —          (441 )      —          —     

Return of capital distributions

      (132 )      (5 )      —          —          —          (127 )      —     

Crystallized Incentive Income

      —          —          —          —          —          —          —     

Equity buyback

      —          —          —          —          —          —          —     

Net Client Flows

      267        —          —          —          —          —          —     

Income (loss) and foreign exchange

      1,203        71        202        105        218        56        —     
                                                        

AUM - Ending Balance

    $ 43,992      $ 11,620      $ 3,073      $ 4,293      $ 8,590      $ 4,127      $ —     

Third-Party Capital Raised

    $ 1,229      $ —        $ —        $ 426      $ 75      $ 728      $ —     

Segment Revenues

               

Management fees

    $ 111      $ 37      $ 12      $ 19      $ 32      $ 11      $ —     

Incentive income

      75        5        —          20        41        9        —     

Unallocated Revenues

      5               
                                                        

Total

      191        42        12        39        73        20        —     

Segment Expenses

               

Operating expenses

      (78 )      (9 )      (8 )      (18 )      (35 )      (8 )      —     

Profit sharing compensation expenses

      (32 )      (2 )      —          (5 )      (20 )      (5 )      —     

Unallocated Expenses

      (10 )             
                                                        

Total

      (120 )      (11 )      (8 )      (23 )      (55 )      (13 )      —     
                                                        

Fund Management DE

      71        31        4        16        18        7        —     
                                                        

Investment Income

      10                  10   

Interest Expense

      (3 )                (3 ) 
                                                        

Pre-tax Distributable Earnings

    $ 78      $ 31      $ 4      $ 16      $ 18      $ 7      $ 7   
                                                        
     Three Months Ended September 30, 2009  
           Private Equity     Liquid Hedge
Funds		     Credit Funds     Principal
Investments 		 
(in millions)    Total     Funds     Castles       Hedge Funds     PE Funds    

Assets Under Management

               

AUM - July 1, 2009

    $ 30,796      $ 10,602      $ 3,193      $ 4,571      $ 9,673      $ 2,757      $ —     

Capital raised

      460        —          —          187        —          273        —     

Equity raised

      —          —          —          —          —          —          —     

Capital acquisitions 3

      170        —          —          —          170        —          —     

Increase in invested capital

      82        —          —          1        —          81        —     

Redemptions

      (384 )      —          —          (384 )      —          —          —     

SPV distributions

      (253 )      —          —          (253 )      —          —          —     

RCA distributions 2

      (129 )      —          —          —          (129 )      —          —     

Return of capital distributions

      (148 )      (24 )      —          —          (8 )      (116 )      —     

Crystallized Incentive Income

      —          —          —          —          —          —          —     

Equity buyback

      —          —          —          —          —          —          —     

Income (loss) and foreign exchange

      1,136        479        86        361        (146 )      356        —     
                                                        

AUM - Ending Balance

    $ 31,730      $ 11,057      $ 3,279      $ 4,483      $ 9,560      $ 3,351      $ —     

Third-Party Capital Raised

    $ 460      $ —        $ —        $ 187      $ —        $ 273      $ —     

Segment Revenues

               

Management fee

    $ 108      $ 32      $ 13      $ 18      $ 32      $ 13      $ —     

Incentive income

      10        —          —          9        —          1        —     
                                                        

Total

      118        32        13        27        32        14        —     

Segment Expenses

               

Operating expenses

      (58 )      (7 )      (8 )      (14 )      (24 )      (5 )      —     

Profit sharing compensation expenses

      (9 )      —          —          (7 )      (2 )      —          —     

Unallocated Expenses

      —                 
                                                        

Total

      (67 )      (7 )      (8 )      (21 )      (26 )      (5 )      —     
                                                        

Fund Management DE

      51        25        5        6        6        9        —     
                                                        

Investment Income

      10                  10   

Interest Expense

      (4 )                (4 ) 
                                                        

Pre-tax Distributable Earnings

    $ 57      $ 25      $ 5      $ 6      $ 6      $ 9      $ 6   
                                                        

 

1

Includes $142 million of SPV capital that ceased paying management fees in the third quarter.

2

Represents distributions from (i) assets held by redeeming capital accounts in our Drawbridge Special Opportunities Funds, and (ii) the Value Recovery Funds.

3

Represents $170 million of capital under management due to Fortress’s take over of management of the D.B. Zwirn funds and related investment vehicles.

 

3

 

Supplemental Data for the Nine Month Ended 2010 and 2009:

 

     Nine Months Ended September 30, 2010  
     Total     Private Equity     Liquid Hedge
Funds		     Credit Funds     Principal
Investments 		 
(in millions)      Funds     Castles       Hedge Funds     PE Funds    

Assets Under Management

               

AUM - January 1, 2010

    $ 31,476      $ 11,344      $ 3,232      $ 4,297      $ 9,256      $ 3,347      $ —     

Capital raised

      1,941        —          —          1,377        205        359        —     

Equity raised

      2        —          2        —          —          —          —     

Increase in invested capital

      1,990        48        —          5        3        1,934        —     

Capital acquisitions

      11,448        —          —          —          —          —          —     

Redemptions

      (779 )      —          —          (716 )      (63 )      —          —     

SPV distribution 4

      (814 )      —          —          (814 )      —          —          —     

RCA distributions 5

      (1,184 )      —          —          —          (1,184 )      —          —     

Return of capital distributions

      (1,769 )      (167 )      —          —          (3 )      (1,599 )      —     

Crystallized Incentive Income

      (8 )      —          —          (8 )      —          —          —     

Equity buyback

      (62 )      —          (62 )      —          —          —          —     

Net Client Flows

      117        —          —          —          —          —          —     

Income (loss) and foreign exchange

      1,634        395        (99 )      152        376        86        —     
                                                        

AUM - Ending Balance

    $ 43,992      $ 11,620      $ 3,073      $ 4,293      $ 8,590      $ 4,127      $ —     

Third-Party Capital Raised

    $ 3,650      $ —        $ —        $ 1,377      $ 205      $ 2,068      $ —     

Segment Revenues

               

Management fees

    $ 338      $ 103      $ 36      $ 58      $ 109      $ 32      $ —     

Incentive income

      224        5        —          24        54        141        —     

Unallocated Revenues

      9               
                                                        

Total

      571        108        36        82        163        173        —     

Segment Expenses

               

Operating expenses

      (203 )      (26 )      (23 )      (48 )      (87 )      (19 )      —     

Profit sharing compensation expenses

      (112 )      (2 )      —          (9 )      (29 )      (72 )      —     

Unallocated Expenses

      (20 )             
                                                        

Total

      (335 )      (28 )      (23 )      (57 )      (116 )      (91 )      —     
                                                        

Fund Management DE

      236        80        13        25        47        82        —     
                                                        

Investment Income

      22                  22   

Interest Expense

      (11 )                (11 ) 
                                                        

Pre-tax Distributable Earnings

    $ 247      $ 80      $ 13      $ 25      $ 47      $ 82      $ 11   
                                                        
     Nine Months Ended September 30, 2009  
     Total     Private Equity     Liquid Hedge
Funds		     Credit Funds     Principal
Investments 		 
(in millions)      Funds     Castles       Hedge Funds     PE Funds    

Assets Under Management

               

AUM - January 1, 2009

    $ 29,229      $ 10,307      $ 3,182      $ 7,169      $ 6,269      $ 2,302      $ —     

Capital raised

      702        —          —          295        —          407        —     

Equity raised

      —          —          —          —          —          —          —     

Capital acquisitions 6

      3,310        —          —          —          3,310        —          —     

Increase in invested capital

      845        70        —          1        2        772        —     

Redemptions

      (3,353 )      —          —          (3,353 )      —          —          —     

SPV distributions

      (363 )      —          —          (363 )      —          —          —     

RCA distributions 5

      (432 )      —          —          —          (432 )      —          —     

Return of capital distributions

      (893 )      (117 )      —          —          (16 )      (760 )      —     

Crystallized Incentive Income

      —          —          —          —          —          —          —     

Equity buyback

      —          —          —          —          —          —          —     

Income (loss) and foreign exchange

      2,685        797        97        734        427        630        —     
                                                        

AUM - Ending Balance

    $ 31,730      $ 11,057      $ 3,279      $ 4,483      $ 9,560      $ 3,351      $ —     

Third-Party Capital Raised

    $ 702      $ —        $ —        $ 295      $ —        $ 407      $ —     

Segment Revenues

               

Management fee

    $ 324      $ 109      $ 37      $ 61      $ 90      $ 27      $ —     

Incentive income

      18        —          —          9        1        8        —     
                                                        

Total

      342        109        37        70        91        35        —     

Segment Expenses

               

Operating expenses

      (173 )      (27 )      (21 )      (39 )      (70 )      (16 )      —     

Profit sharing compensation expenses

      (21 )      —          —          (12 )      (5 )      (4 )      —     

Unallocated Expenses

      —                 
                                                        

Total

      (194 )      (27 )      (21 )      (51 )      (75 )      (20 )      —     
                                                        

Fund Management DE

      148        82        16        19        16        15        —     
                                                        

Investment Income

      (3 )                (3 ) 

Interest Expense

      (20 )                (20 ) 
                                                        

Pre-tax Distributable Earnings

    $ 125      $ 82      $ 16      $ 19      $ 16      $ 15      $ (23 ) 
                                                        

 

4

Includes $142 million of SPV capital that ceased paying management fees in the third quarter.

5

Represents distributions from (i) assets held by redeeming capital accounts in our Drawbridge Special Opportunities Funds, and (ii) the Value Recovery Funds.

6

Represents $3.3 billion of capital under management due to Fortress’s take over of management of the D.B. Zwirn funds and related investment vehicles.

 

4

 

Overview

We managed $44.0 billion of assets in private equity funds, liquid hedge funds, credit funds and our traditional asset management business at September 30, 2010. We earn management fees based on the amount of capital we manage, incentive income based on the performance of our alternative investment funds, and investment income (loss) from our principal investments.

In the third quarter of 2010, we generated fund management distributable earnings of $71 million. Including principal investments, Fortress generated pre-tax DE of $78 million.

For the quarter ended September 30, 2010, the private equity segments accounted for approximately 28% of total segment revenues, the liquid hedge funds segment accounted for approximately 20% of total segment revenues, the credit funds segments accounted for approximately 49% of total segment revenues and the traditional asset management business accounted for approximately 3% of total segment revenues.

Private Equity – Funds

For the quarter ended September 30, 2010, the Company’s private equity funds had pre-tax DE of $31 million compared to pre-tax DE of $25 million for the quarter ended September 30, 2009.

Assets under management for private equity funds was $11.6 billion at September 30, 2010 compared to $11.1 billion at September 30, 2009.

Private Equity – Castles

For the quarter ended September 30, 2010, the Company’s Castles generated pre-tax DE of $4 million compared to $5 million for the quarter ended September 30, 2009.

Assets under management for the Castles was $3.1 billion at September 30, 2010 compared to $3.3 billion at September 30, 2009.

Liquid Hedge Funds

For the quarter ended September 30, 2010, the Company’s liquid hedge fund business generated pre-tax DE of $16 million compared to $6 million for the quarter ended September 30, 2009.

Assets under management for the liquid hedge funds was $4.3 billion at September 30, 2010 compared to $4.5 billion at September 30, 2009.

The following table shows our Assets Under Management by fund:

 

(dollars in billions)    September 30, 2010      December 31, 2009      September 30, 2009  

Macro Funds 7

    $ 3.2       $ 3.4       $ 3.6   

Fortress Commodities Funds 8

    $ 1.1       $ 0.9       $ 0.9   

 

7

Combined AUM for Fortress Macro Onshore Fund L.P., Fortress Macro Offshore Fund L.P., Fortress Macro Fund Ltd., Fortress Macro managed accounts, Drawbridge Global Macro Fund L.P., Drawbridge Global Macro Intermediate Fund L.P., Drawbridge Global Macro Alpha Intermediate Fund L.P., DBGM Offshore Ltd., DBGM Onshore L.P. and DBGM Alpha V Ltd.

8

Combined AUM for Fortress Commodities Fund L.P., Fortress Commodities MA1 L.P. and Fortress Commodities managed accounts.

 

5

 

The following table shows our gross and net returns by fund:9

 

      Three Months  Ended
September 30, 2010		     Nine Months  Ended
September 30, 2010		     Estimated
Ten Months  Ended
October 31, 2010		  

Gross Returns

       

Fortress Macro Offshore Fund L.P.

      4.7 %      8.8 %      11.4 % 

Drawbridge Global Macro Fund Ltd.

      4.1 %      7.4 %      9.7 % 

Fortress Commodities Fund L.P.

      -1.2 %      -1.6 %      1.9 % 

Net Returns

       

Fortress Macro Offshore Fund L.P.

      3.3 %      5.8 %      7.6 % 

Drawbridge Global Macro Fund Ltd.

      3.2 %      5.3 %      7.0 % 

Fortress Commodities Fund L.P.

      -1.7 %      -3.1 %      0.1 % 
      

Credit – Hedge Funds

For the quarter ended September 30, 2010, the Company’s credit hedge fund business generated pre-tax DE of $18 million compared to $6 million for the quarter ended September 30, 2009.

Assets under management for the credit hedge funds was $8.6 billion at September 30, 2010 compared to $9.6 billion at September 30, 2009.

The following table shows our Assets Under Management by fund:

 

(dollars in billions)    September 30, 2010      December 31, 2009      September 30, 2009  

Drawbridge Special Opportunities Funds 10

    $ 5.2       $ 5.2       $ 5.3   

Fortress Partners Funds 11

    $ 1.6       $ 1.6       $ 1.5   

Fortress Value Recovery Funds 12

    $ 1.8       $ 2.5       $ 2.8   

 

9

The performance data contained herein reflects returns for a “new issue eligible,” single investor class as of the close of business on the last day of the relevant period. Gross returns reflect performance data prior to management fees borne by the Fund and incentive allocations while net returns reflect performance data after taking into account management fees borne by the Fund and incentive allocations.

10

Combined AUM for Drawbridge Special Opportunities Fund Ltd., Drawbridge Special Opportunities Fund L.P., Drawbridge Special Opportunities Fund managed accounts, Worden Fund L.P. and Worden Fund II L.P.

11

Combined AUM for Fortress Partners Offshore Fund L.P. and Fortress Partners Fund L.P.

12

Fortress will receive management fees from these funds equal to 1% of cash receipts and up to 1% per annum on certain managed assets, subject to collectability, and may receive limited incentive income if aggregate realizations exceed an agreed threshold.

 

6

 

The following table shows our gross and net returns by fund:13

 

     Three Months Ended
September 30, 2010		     Nine Months Ended
September 30, 2010		  

Gross Returns

     

Drawbridge Special Opportunities L.P. 14

      8.5 %      22.0 % 

Drawbridge Special Opportunities Ltd. 14

      11.2 %      24.5 % 

Fortress Partners Fund L.P.

      3.6 %      6.9 % 

Fortress Partners Offshore Fund L.P.

      3.7 %      7.6 % 

Net Returns

     

Drawbridge Special Opportunities L.P. 14

      6.7 %      18.7 % 

Drawbridge Special Opportunities Ltd. 14

      8.4 %      20.0 % 

Fortress Partners Fund L.P.

      3.3 %      6.0 % 

Fortress Partners Offshore Fund L.P.

      3.5 %      6.7 % 

Credit – Private Equity Funds

For the quarter ended September 30, 2010, the Company’s credit private equity fund business generated pre-tax DE of $7 million as compared to $9 million for the quarter ended September 30, 2009.

Assets under management for the credit private equity funds was $4.1 billion at September 30, 2010 compared to $3.4 billion at September 30, 2009. As of September 30, 2010, the credit private equity funds have approximately $3.0 billion of uncalled or recallable committed capital that will become assets under management when invested.

Principal Investments

At September 30, 2010, we had $744 million of segment assets (excluding cash and cash equivalents) in our principal investments segment, compared to $805 million (excluding cash and cash equivalents) at September 30, 2009. Segment asset totals do not include net unrealized gains of $172 million, primarily on private equity type investments, which would be recognized as segment investment income when realized.

Our principal investments segment generated a net gain of $7 million for the three months ended September 30, 2010, due primarily to gains of $10 million from our balance sheet investments offset by $3 million of interest expense.

We had $113 million of unfunded commitments to our principal investments as of September 30, 2010, of which we estimate that approximately $29 million will never be funded based on the funds’ operating agreements.

Segment Expenses

Segment expenses were $120 million in the third quarter of 2010, up from $67 million for the third quarter of 2009. Segment expenses for the third quarter of 2010 included $32 million of profit sharing compensation, which is a function of revenues earned from our various funds and managed accounts.

 

 

13

The performance data contained herein reflects returns for a “new issue eligible,” single investor class as of the close of business on the last day of the relevant period. Gross returns reflect performance data prior to management fees borne by the Fund and incentive allocations while net returns reflect performance data after taking into account management fees borne by the Fund and incentive allocations. Specific performance may vary based on, among other things, whether fund investors are invested in one or more special investments.

14

The returns for the Drawbridge Special Opportunities Funds reflect the performance of each fund excluding the performance of the redeeming capital accounts which relate to December 31, 2008 and December 31, 2009 redemptions.

 

7

 

The Company had $296 million of share-based compensation expense (primarily relating to expense recorded in connection with the principals agreement, the issuance of restricted stock units to Fortress employees, and the issuance of restricted partnership units) for the quarter ended September 30, 2010, which contributed to our reporting a GAAP net loss. Share-based compensation expense is not included in segment expenses or in the calculation of distributable earnings.

Corporate Credit Agreement

In October 2010, we executed a new credit agreement and repaid the previous credit agreement in full. The new credit agreement includes a $280 million term loan and a $60 million revolving credit facility. The new term loan expires in October 2015, the new revolver expires in October 2013 and the credit agreement bears an interest rate of LIBOR plus 400 basis points (with a minimum LIBOR rate of 1.75%).

As of October 31, 2010, we have $280 million of debt outstanding and have capacity available of $50 million under our revolving credit facility.

Dividend Policy

Each quarter, we evaluate whether to pay quarterly dividends on our Class A shares. The amount of any dividends will be determined by our board of directors. However, no assurance can be given that any dividends, whether quarterly or otherwise, will or can be paid. In determining the amount of any dividends, our board will take into account various factors, including our financial performance, on both an actual and projected basis, earnings, liquidity and the operating performance of our segments as assessed by management.

Non-GAAP Information

Fortress discloses certain non-GAAP financial information, which management believes provides a meaningful basis for comparison among present and future periods. The following are non-GAAP measures used in the accompanying financial information:

 

  •  

Pre-tax DE and pre-tax DE per dividend paying share

 

  •  

Fund management distributable earnings

 

  •  

Segment revenues

 

  •  

GAAP net income excluding principals agreement compensation

 

  •  

Weighted Average Dividend Paying Shares and Units Outstanding (Used for DEPS)

We urge you to read the reconciliation of such data to the related GAAP measures appearing in the exhibits to this release.

Conference Call

Management will host a conference call today, Friday, November 5, 2010 at 8:30 a.m. (Eastern Time). A copy of the earnings release is posted to the Investor Relations section of Fortress’s website, www.fortress.com.

All interested parties are welcome to participate on the live call. The conference call may be accessed by dialing 1-877-252-8576 (from within the U.S.) or 1-706-679-1521 (from outside of the U.S.) ten minutes prior to the scheduled start of the call; please reference “Fortress Third Quarter Earnings Call.”

 

8

 

A simultaneous webcast of the conference call will be available to the public on a listen-only basis at www.fortress.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast.

A telephonic replay of the conference call will also be available until 11:59 P.M. Eastern Time on Friday, November 12, 2010 by dialing 1-800-642-1687 (from within the U.S.) or 1-706-645-9291 (from outside of the U.S.); please reference access code “18392742.”

About Fortress

Fortress is a leading global investment manager with approximately $44.0 billion in assets under management as of September 30, 2010. Fortress offers alternative and traditional investment products and was founded in 1998. For more information regarding Fortress Investment Group LLC or to be added to our e-mail distribution list, please visit www.fortress.com.

Cautionary Note Regarding Forward-Looking Statements — Certain statements in this press release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our sources of management fees, incentive income and investment income (loss), estimated fund performance, the amount and source of expected capital commitments and amount of redemptions. These statements are not historical facts, but instead represent only the Company’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the sources and amounts of management fees, incentive income and investment income, the amount and source of expected capital commitments for any new fund or redemption amounts may differ, possibly materially, from these forward-looking statements, and any such differences could cause our actual results to differ materially from the results expressed or implied by these forward-looking statements. For a discussion of some of the risks and important factors that could affect such forward-looking statements, see the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Quarterly Report on Form 10-Q, which is, or will be, available on the Company’s website (www.fortress.com). In addition, new risks and uncertainties emerge from time to time, and it is not possible for the Company to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements contained in this press release. The Company can give no assurance that the expectations of any forward-looking statement will be obtained. Such forward-looking statements speak only as of the date of this press release. The Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

9

 

Fortress Investment Group LLC

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except share data)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Revenues

         

Management fees: affiliates

    $ 107,752      $ 106,926      $ 327,182      $ 321,003   

Management fees: non-affiliates

      8,628        1,748        17,513        3,522   

Incentive income: affiliates

      7,487        7,638        53,892        14,596   

Incentive income: non-affiliates

      371        279        8,679        1,264   

Expense reimbursements from affiliates

      36,745        24,952        100,606        58,660   

Other revenues

      1,242        2,140        5,871        6,021   
                                
     162,225        143,683        513,743        405,066   
                                

Expenses

         

Interest expense

      3,549        4,451        11,043        20,242   

Compensation and benefits

      184,107        132,033        523,029        354,725   

Principals agreement compensation

      239,975        239,975        712,101        712,101   

General, administrative and other

      26,620        18,461        71,970        56,680   

Depreciation and amortization

      3,361        2,719        9,337        8,121   
                                
     457,612        397,639        1,327,480        1,151,869   
                                

Other Income (Loss)

         

Gains (losses)

      2,025        20,189        (10,360 )      37,157   

Tax receivable agreement liability adjustment

      —          —          1,317        (55 ) 

Earnings (losses) from equity method investees

      16,941        40,345        42,972        56,553   
                                
     18,966        60,534        33,929        93,655   
                                

Income (Loss) Before Income Taxes

      (276,421 )      (193,422 )      (779,808 )      (653,148 ) 

Income tax benefit (expense)

      4,545        3,116        (4,641 )      4,831   
                                

Net Income (Loss)

    $ (271,876 )    $ (190,306 )    $ (784,449 )    $ (648,317 ) 
                                

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

    $ (177,221 )    $ (131,704 )    $ (513,259 )    $ (477,964 ) 
                                

Net Income (Loss) Attributable to Class A Shareholders

    $ (94,655 )    $ (58,602 )    $ (271,190 )    $ (170,353 ) 
                                

Dividends declared per Class A share

    $ —        $ —        $ —        $ —     
                                

Earnings Per Class A share - Fortress Investment Group

                         

Net income (loss) per Class A share, basic

    $ (0.57 )    $ (0.41 )    $ (1.70 )    $ (1.50 ) 
                                

Net income (loss) per Class A share, diluted

    $ (0.62 )    $ (0.43 )    $ (1.75 )    $ (1.53 ) 
                                

Weighted average number of Class A shares outstanding, basic

      168,907,106        143,627,823        163,920,012        118,638,707   
                                

Weighted average number of Class A shares outstanding, diluted

      469,180,958        454,064,379        466,666,392        430,159,270   
                                

 

10

 

Fortress Investment Group LLC

Consolidated Balance Sheets

(dollars in thousands, except share data)

 

     September 30,
2010
(Unaudited)		     December 31,
2009		  

Assets

     

Cash and cash equivalents

    $ 233,724      $ 197,099   

Due from affiliates

      148,069        64,511   

Investments

      907,456        867,215   

Deferred tax asset

      459,015        440,639   

Other assets

      117,736        90,803   
                
   $ 1,866,000      $ 1,660,267   
                

Liabilities and Equity

     

Liabilities

     

Accrued compensation and benefits

    $ 184,898      $ 131,134   

Due to affiliates

      341,516        345,976   

Deferred incentive income

      252,885        160,097   

Debt obligations payable

      355,900        397,825   

Other liabilities

      76,729        25,921   
                
     1,211,928        1,060,953   
                

Commitments and Contingencies

     

Equity

     

Class A shares, no par value, 1,000,000,000 shares authorized, 168,916,882 and 145,701,622 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

      —          —     

Class B shares, no par value, 750,000,000 shares authorized, 300,273,852 and 307,773,852 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

      —          —     

Paid-in capital

      1,362,359        1,029,536   

Retained earnings (accumulated deficit)

      (1,039,184 )      (767,994 ) 

Accumulated other comprehensive income (loss)

      (2,015 )      (325 ) 
                

Total Fortress shareholders’ equity

      321,160        261,217   

Principals’ and others’ interests in equity of consolidated subsidiaries

      332,912        338,097   
                

Total equity

      654,072        599,314   
                
   $ 1,866,000      $ 1,660,267   
                

 

11

 

Fortress Investment Group LLC

Exhibit 1

Assets Under Management and Fund Management DE

(dollars in millions)

 

     Three Months Ended     Full Year
2009		     Three Months Ended     Nine Months
Ended
September 30,
2010		  
     March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		       March 31,
2010		     June 30,
2010		     September 30,
2010		    

Fortress

                   

Assets Under Management

                   

Private Equity & Castles

    $ 13,239      $ 13,795      $ 14,336      $ 14,576      $ 14,576      $ 14,610      $ 14,382      $ 14,693      $ 14,693   

Liquid Hedge Funds

      4,809        4,571        4,483        4,297        4,297        4,273        4,167        4,293        4,293   

Credit Hedge Funds

      6,215        9,673        9,560        9,256        9,256        9,117        8,744        8,590        8,590   

Credit Private Equity Funds

      2,039        2,757        3,351        3,347        3,347        2,197        2,896        4,127        4,127   

Traditional Asset Management

      —          —          —          —          —          —          11,471        12,289        12,289   
                                                                        

AUM - Ending Balance

    $ 26,302      $ 30,796      $ 31,730      $ 31,476      $ 31,476      $ 30,197      $ 41,660      $ 43,992      $ 43,992   

Third-Party Capital Raised

    $ 9      $ 233      $ 460      $ 677      $ 1,379      $ 890      $ 1,531      $ 1,229      $ 3,650   

Segment Revenues

                   

Management fees

    $ 106      $ 110      $ 108      $ 100      $ 424      $ 108      $ 119      $ 111      $ 338   

Incentive income

      1        7        10        57        75        99        50        75        224   

Unallocated revenues

      —          —          —          —          —          —          4        5        9   
                                                                        

Total

      107        117        118        157        499        207        173        191        571   

Segment Expenses

                   

Operating expenses

      (59 )      (56 )      (58 )      (70 )      (243 )      (64 )      (61 )      (78 )      (203 ) 

Profit sharing compensation expenses

      (4 )      (8 )      (9 )      (26 )      (47 )      (50 )      (30 )      (32 )      (112 ) 

Unallocated expenses

      —          —          —          (1 )      (1 )      (1 )      (9 )      (10 )      (20 ) 
                                                                        

Total

      (63 )      (64 )      (67 )      (97 )      (291 )      (115 )      (100 )      (120 )      (335 ) 
                                                                        

Fund Management DE

    $ 44      $ 53      $ 51      $ 60      $ 208      $ 92      $ 73      $ 71      $ 236   
                                                                        

 

12

 

Fortress Investment Group LLC

Exhibit 1

Assets Under Management and Fund Management DE

(dollars in millions)

 

     Three Months Ended           Three Months Ended     Nine Months
Ended
September 30,
2010		  
     March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		     Full Year
2009		     March 31,
2010		     June 30,
2010		     September 30,
2010		    

Private Equity Funds & Castles

                   

Assets Under Management

                   

Private Equity Funds

    $ 10,161      $ 10,602      $ 11,057      $ 11,344      $ 11,344      $ 11,555      $ 11,511      $ 11,620      $ 11,620   

Castles

      3,078        3,193        3,279        3,232        3,232        3,055        2,871        3,073        3,073   
                                                                        

AUM - Ending Balance

    $ 13,239      $ 13,795      $ 14,336      $ 14,576      $ 14,576      $ 14,610      $ 14,382      $ 14,693      $ 14,693   

Third-Party Capital Raised

    $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Segment Revenues

                   

Management fees

    $ 49      $ 52      $ 45      $ 35      $ 181      $ 45      $ 45      $ 49      $ 139   

Incentive income

      —          —          —          36        36        —          —          5        5   
                                                                        

Total

      49        52        45        71        217        45        45        54        144   

Segment Expenses

                   

Operating expenses

      (16 )      (17 )      (15 )      (19 )      (67 )      (17 )      (15 )    $ (17 )      (49 ) 

Profit sharing compensation expenses

      —          —          —          (13 )      (13 )      —          —          (2 )      (2 ) 
                                                                        

Total

      (16 )      (17 )      (15 )      (32 )      (80 )      (17 )      (15 )      (19 )      (51 ) 
                                                                        

Fund Management DE

    $ 33      $ 35      $ 30      $ 39      $ 137      $ 28      $ 30      $ 35      $ 93   
                                                                        

 

13

 

Fortress Investment Group LLC

Exhibit 1

Assets Under Management and Fund Management DE

(dollars in millions)

 

    Three Months Ended           Three Months Ended     Nine Months
Ended
September  30,
2010		  
    March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		     Full Year
2009		     March 31,
2010		     June 30,
2010		     September 30,
2010		    

Liquid Hedge Funds

                  

Assets Under Management

                  

Fortress Macro Funds 15

   $ —        $ 1,174      $ 1,544      $ 1,986      $ 1,986      $ 2,482      $ 2,427      $ 2,810      $ 2,810   

Drawbridge Global Macro Funds 16

     3,781        2,484        2,074        1,429        1,429        771        657        408        408   

Fortress Commodities Funds 17

     1,028        913        865        882        882        1,020        1,083        1,075        1,075   
                                                                       

AUM - Ending Balance

   $ 4,809      $ 4,571      $ 4,483      $ 4,297      $ 4,297      $ 4,273      $ 4,167      $ 4,293      $ 4,293   

Third-Party Capital Raised

   $ 9      $ 99      $ 187      $ 409      $ 704      $ 634      $ 317      $ 426      $ 1,377   

Segment Revenues

                  

Management fees

   $ 23      $ 20      $ 18      $ 19      $ 80      $ 19      $ 20      $ 19      $ 58   

Incentive income

     —          —          9        5        14        6        (2 )      20        24   
                                                                       

Total

     23        20        27        24        94        25        18        39        82   

Segment Expenses

                  

Operating expenses

     (14 )      (11 )      (14 )      (18 )      (57 )      (14 )      (16 )      (18 )      (48 ) 

Profit sharing compensation expenses

     (3 )      (2 )      (7 )      (4 )      (16 )      (3 )      (1 )      (5 )      (9 ) 
                                                                       

Total

     (17 )      (13 )      (21 )      (22 )      (73 )      (17 )      (17 )      (23 )      (57 ) 
                                                                       

Fund Management DE

   $ 6      $ 7      $ 6      $ 2      $ 21      $ 8      $ 1      $ 16      $ 25   
                                                                       

Returns

                  

Gross Returns 18

                  

Fortress Macro Offshore Fund L.P.

     N/A        4.3 %      4.9 %      3.9 %      13.7 %      4.3 %      -0.3 %      4.7 %      8.8 % 

Drawbridge Global Macro Fund Ltd.

     5.7 %      6.2 %      7.9 %      4.4 %      26.5 %      4.2 %      -1.0 %      4.1 %      7.4 % 

Fortress Commodities Fund L.P.

     0.0 %      2.3 %      5.2 %      3.2 %      11.0 %      -3.0 %      2.7 %      -1.2 %      -1.6 % 

Net Returns 18

                  

Fortress Macro Offshore Fund L.P.

     N/A        3.2 %      3.6 %      2.7 %      9.8 %      3.0 %      -0.7 %      3.3 %      5.8 % 

Drawbridge Global Macro Fund Ltd.

     5.2 %      5.8 %      7.4 %      3.9 %      24.2 %      3.7 %      -1.5 %      3.2 %      5.3 % 

Fortress Commodities Fund L.P.

     -0.5 %      1.8 %      3.9 %      2.0 %      7.3 %      -3.5 %      2.2 %      -1.7 %      -3.1 % 

 

15

Combined AUM for Fortress Macro Onshore Fund L.P., Fortress Macro Offshore Fund L.P., Fortress Macro Fund Ltd. and Fortress Macro managed accounts.

16

Combined AUM for Drawbridge Global Macro Fund L.P., Drawbridge Global Macro Intermediate Fund L.P., Drawbridge Global Macro Alpha Intermediate Fund L.P., DBGM Offshore Ltd., DBGM Onshore L.P., DBGM Alpha V Ltd. and Drawbridge Global Macro managed accounts.

17

Combined AUM for Fortress Commodities Fund L.P., Fortress Commodities MA1 L.P. and Fortress Commodities managed accounts.

18

The performance data contained herein reflects returns for a “new issue eligible,” single investor class as of the close of business on the last day of the relevant period. Gross returns reflect performance data prior to management fees borne by the Fund and incentive allocations while net returns reflect performance data after taking into account management fees borne by the Fund and incentive allocations.

 

14

 

Fortress Investment Group LLC

Exhibit 1

Assets Under Management and Fund Management DE

(dollars in millions)

 

    Three Months Ended           Three Months Ended     Nine Months
Ended
September  30,
2010		  
    March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		     Full Year
2009		     March 31,
2010		     June 30,
2010		     September 30,
2010		    

Credit Hedge Funds

                  

Assets Under Management

                  

Drawbridge Special Opportunities Funds 19

   $ 4,915      $ 5,097      $ 5,296      $ 5,209      $ 5,209      $ 5,227      $ 5,176      $ 5,200      $ 5,200   

Fortress Partners Funds 20

     1,300        1,436        1,513        1,584        1,584        1,564        1,539        1,604        1,604   

Value Recovery Funds 21

     —          3,140        2,751        2,463        2,463        2,326        2,029        1,786        1,786   
                                                                       

AUM - Ending Balance

   $ 6,215      $ 9,673      $ 9,560      $ 9,256      $ 9,256      $ 9,117      $ 8,744      $ 8,590      $ 8,590   

Third-Party Capital Raised

   $ —        $ —        $ —        $ —        $ —        $ 81      $ 49      $ 75      $ 205   

Segment Revenues

                  

Management fees

   $ 28      $ 30      $ 32      $ 33      $ 123      $ 34      $ 43      $ 32      $ 109   

Incentive income

     1        —          —          1        2        8        5        41        54   
                                                                       

Total

     29        30        32        34        125        42        48        73        163   

Segment Expenses

                  

Operating expenses

     (25 )      (21 )      (24 )      (27 )      (97 )      (27 )      (25 )      (35 )      (87 ) 

Profit sharing compensation expenses

     (1 )      (2 )      (2 )      (1 )      (6 )      (4 )      (5 )      (20 )      (29 ) 
                                                                       

Total

     (26 )      (23 )      (26 )      (28 )      (103 )      (31 )      (30 )      (55 )      (116 ) 
                                                                       

Fund Management DE

   $ 3      $ 7      $ 6      $ 6      $ 22      $ 11      $ 18      $ 18      $ 47   
                                                                       

Returns

                  

Gross Returns 22

                  

Drawbridge Special Opportunities L.P. 23

     3.6 %      7.8 %      7.4 %      6.3 %      27.5 %      7.5 %      4.6 %      8.5 %      22.0 % 

Drawbridge Special Opportunities Ltd. 23

     4.0 %      6.5 %      10.8 %      7.9 %      32.6 %      7.6 %      4.1 %      11.2 %      24.5 % 

Fortress Partners Funds L.P.

     -1.7 %      8.8 %      5.0 %      5.1 %      18.0 %      3.3 %      -0.1 %      3.6 %      6.9 % 

Fortress Partners Funds Ltd.

     -1.1 %      9.5 %      4.7 %      6.0 %      20.2 %      2.9 %      0.7 %      3.7 %      7.6 % 

Net Returns 22

                  

Drawbridge Special Opportunities L.P. 23

     3.1 %      7.3 %      6.8 %      5.8 %      25.0 %      6.9 %      4.0 %      6.7 %      18.7 % 

Drawbridge Special Opportunities Ltd. 23

     3.5 %      6.0 %      10.3 %      7.4 %      30.0 %      7.0 %      3.4 %      8.4 %      20.0 % 

Fortress Partners Funds L.P.

     -2.0 %      8.5 %      4.7 %      4.8 %      16.7 %      3.0 %      -0.3 %      3.3 %      6.0 % 

Fortress Partners Funds Ltd.

     -1.4 %      9.2 %      4.4 %      5.7 %      18.9 %      2.6 %      0.5 %      3.5 %      6.7 % 

 

19

Combined AUM for Drawbridge Special Opportunities Fund Ltd., Drawbridge Special Opportunities Fund L.P., Drawbridge Special Opportunities Fund managed accounts, Worden Fund L.P. and Worden Fund II L.P.

20

Combined AUM for Fortress Partners Offshore Fund L.P. and Fortress Partners Fund L.P.

21

Fortress will receive management fees from these funds equal to 1% of cash receipts and up to 1% per annum on certain managed assets, subject to collectability, and may receive limited incentive income if aggregate realizations exceed an agreed threshold.

22

The performance data contained herein reflects returns for a “new issue eligible,” single investor class as of the close of business on the last day of the relevant period. Gross returns reflect performance data prior to management fees borne by the Fund and incentive allocations while net returns reflect performance data after taking into account management fees borne by the Fund and incentive allocations. Specific performance may vary based on, among other things, whether fund investors are invested in one or more special investments.

23

The returns for the Drawbridge Special Opportunities Funds reflect the performance of each fund excluding the performance of the redeeming capital accounts which relate to December 31, 2008 and December 31, 2009 redemptions.

 

15

 

Fortress Investment Group LLC

Exhibit 1

Assets Under Management and Fund Management DE

(dollars in millions)

 

     Three Months Ended     Full  Year
2009		     Three Months Ended     Nine Months
Ended
September 30,
2010		  
     March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		       March 31,
2010		     June 30,
2010		     September 30,
2010		    

Credit Private Equity Funds

                   

Assets Under Management

                   

Long Dated Value Funds

    $ 537      $ 537      $ 569      $ 623      $ 623      $ 665      $ 660      $ 662      $ 662   

Real Assets Funds

      207        207        178        164        164        167        167        200        200   

Fortress Credit Opportunities Funds 24

      1,295        1,876        2,224        2,074        2,074        859        1,236        2,333        2,333   

Asia Funds (including FJOF) 25

      —          137        380        486        486        506        833        932        932   
                                                                        

AUM - Ending Balance

    $ 2,039      $ 2,757      $ 3,351      $ 3,347      $ 3,347      $ 2,197      $ 2,896      $ 4,127      $ 4,127   

Third-Party Capital Raised

    $ —        $ 134      $ 273      $ 268      $ 675      $ 175      $ 1,165      $ 728      $ 2,068   

Segment Revenues

                   

Management fees

    $ 6      $ 8      $ 13      $ 13      $ 40      $ 10      $ 11      $ 11      $ 32   

Incentive income

      —          7        1        15        23        85        47        9        141   
                                                                        

Total

      6        15        14        28        63        95        58        20        173   

Segment Expenses

                   

Operating expenses

      (4 )      (7 )      (5 )      (6 )      (22 )      (6 )      (5 )      (8 )      (19 ) 

Profit sharing compensation expenses

      —          (4 )      —          (8 )      (12 )      (43 )      (24 )      (5 )      (72 ) 
                                                                        

Total

      (4 )      (11 )      (5 )      (14 )      (34 )      (49 )      (29 )      (13 )      (91 ) 
                                                                        

Fund Management DE

    $ 2      $ 4      $ 9      $ 14      $ 29      $ 46      $ 29      $ 7      $ 82   
                                                                        

 

24

Combined AUM for Credit Opportunities Fund, Credit Opportunities Fund II, FTS SIP L.P., FCO MA LSS, FCO MA II and Net Lease Fund I.

25

Combined AUM for Japan Opportunities Fund and Global Opportunities Fund.

 

16

 

Fortress Investment Group LLC

Exhibit 2

Reconciliation of Fund Management DE to Pre-tax Distributable Earnings and GAAP Net Income (Loss) and

Reconciliation of Segment Revenues to GAAP Revenues

(dollars in millions)

 

     Three Months Ended           Three Months Ended     Nine Months
Ended
September 30,
2010		  
     March 31,
2009		     June 30,
2009		     September 30,
2009		     December 31,
2009		     Full Year
2009		     March 31,
2010		     June 30,
2010		     September 30,
2010		    

Fund Management DE

    $ 44      $ 53      $ 51      $ 60      $ 208      $ 92      $ 73      $ 71      $ 236   
                                                                        

Investment Income (Loss)

      (27 )      14        10        (55 )      (58 )      8        4        10        22   

Interest Expense

      (8 )      (8 )      (4 )      (4 )      (24 )      (4 )      (4 )      (3 )      (11 ) 
                                                                        

Pre-tax Distributable Earnings

    $ 9      $ 59      $ 57      $ 1      $ 126      $ 96      $ 73      $ 78      $ 247   
                                                                        

Private Equity incentive income

      —          —          —          3        3        (67 )      (18 )      (8 )      (93 ) 

Hedge Fund incentive income

      —          —          (2 )      2        —          (6 )      (4 )      (59 )      (69 ) 

Reserve for clawback

      —          —          —          (27 )      (27 )      —          —          —          —     

Distributions of earnings from equity method investees

      —          —          —          (1 )      (1 )      (6 )      (3 )      (2 )      (11 ) 

Earnings (losses) from equity method investees

      (39 )      37        29        (7 )      20        13        4        7        24   

Gains (losses) on options

      —          —          1        —          1        1        (1 )      —          —     

Gains (losses) on other Investments

      (2 )      20        19        (13 )      24        —          (12 )      2        (10 ) 

Incentive income guarantee recorded as a loss

      —          —          —          3        3        —          —          —          —     

Impairment of investments

      32        —          2        67        101        4        1        —          5   

Amortization of intangible assets and impairment of goodwill

      —          —          —          —          —          —          —          (1 )      (1 ) 

Employee equity-based compensation

      (53 )      (53 )      (61 )      (61 )      (228 )      (64 )      (49 )      (56 )      (169 ) 

Principal compensation

      (235 )      (237 )      (240 )      (240 )      (952 )      (235 )      (237 )      (240 )      (712 ) 

Employee portion of incentive income

      —          —          —          10        10        —          —          —          —     

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

      220        128        133        179        660        180        161        180        521   

Tax receivable agreement liability reduction

      —          —          —          —          —          1        —          —          1   

Taxes

      1        1        3        —          5        (1 )      (8 )      5        (4 ) 
                                                                        

GAAP Net Income (Loss) Attributable to Class A Shareholders

    $ (67 )    $ (45 )    $ (59 )    $ (84 )    $ (255 )    $ (84 )    $ (93 )    $ (94 )    $ (271 ) 
                                                                        

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

      (220 )      (126 )      (131 )      (177 )      (654 )      (177 )      (159 )      (177 )      (513 ) 
                                                                        

GAAP Net Income (Loss)

    $ (287 )    $ (171 )    $ (190 )    $ (261 )    $ (909 )    $ (261 )    $ (252 )    $ (271 )    $ (784 ) 
                                                                        

Segment Revenues

    $ 107      $ 117      $ 118      $ 157      $ 499      $ 207      $ 173      $ 191      $ 571   
                                                                        

Adjust management fees

      —          —          —          14        14        1        (3 )      —          (2 ) 

Adjust incentive income

      —          —          (2 )      (21 )      (23 )      (74 )      (21 )      (67 )      (162 ) 

Other revenues

      15        22        28        29        94        26        43        38        107   
                                                                        

GAAP Revenues

    $ 122      $ 139      $ 144      $ 179      $ 584      $ 160      $ 192      $ 162      $ 514   
                                                                        

“Distributable earnings” is our supplemental measure of operating performance. It reflects the value created which management considers available for distribution during any period. As compared to generally accepted accounting principles (“GAAP”) net income, distributable earnings excludes the effects of unrealized gains (or losses) on illiquid investments, reflects contingent revenue which has been received as income to the extent it is not expected to be reversed, and disregards expenses which do not require an outlay of assets, whether currently or on an accrued basis. Distributable earnings is reflected on an unconsolidated and pre-tax basis, and, therefore, the interests in consolidated subsidiaries related to Fortress Operating Group units (held by the principals) and income tax expense are added back in its calculation. Distributable earnings is not a measure of cash generated by operations which is available for distribution nor should it be considered in isolation

 

17

or as an alternative to cash flow or net income and it is not necessarily indicative of liquidity or cash available to fund our operations. For a complete discussion of distributable earnings and its reconciliation to GAAP, as well as an explanation of the calculation of distributable earnings impairment, see note 10 to our financial statements included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

Our management uses distributable earnings:

 

  •  

in its determination of periodic distributions to equity holders;

 

  •  

in making operating decisions and assessing the performance of each of our core businesses;

 

  •  

for planning purposes, including the preparation of our annual operating budgets; and

 

  •  

as a valuation measure in strategic analyses in connection with the performance of our funds and the performance of our employees.

Growing distributable earnings is a key component to our business strategy and distributable earnings is the supplemental measure used by our management to evaluate the economic profitability of each of our businesses and our total operations. Therefore, we believe that it provides useful information to our investors in evaluating our operating performance. Our definition of distributable earnings is not based on any definition contained in our amended and restated operating agreement.

 

18

 

Fortress Investment Group LLC

Exhibit 3

Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement

Compensation to GAAP Net Income (Loss)

(dollars in thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30 , 2010     September 30 , 2009     September 30 , 2010     September 30 , 2009  

GAAP net loss

    $ (271,876 )    $ (190,306 )    $ (784,449 )    $ (648,317 ) 

Principals agreement compensation

      239,975        239,975        712,101        712,101   
                                

GAAP net income (loss) excluding principals agreement compensation

    $ (31,901 )    $ 49,669      $ (72,348 )    $ 63,784   
                                

 

19

 

Fortress Investment Group LLC

Exhibit 4

Reconciliation of Weighted Average Class A Shares Outstanding (Used for Basic EPS) to Weighted Average Dividend Paying Shares and Units Outstanding (Used for DEPS)

 

     Three Months Ended September 30,  
     2010     2009  

Weighted Average Class A Shares Outstanding (Used for Basic EPS)

      168,907,106        143,627,823   
                

Weighted average fully vested restricted Class A share units with dividend equivalent rights

      (2,024,800 )      (1,158,673 ) 

Weighted average fully vested restricted Class A shares

      (224,744 )      (99,520 ) 
                

Weighted Average Class A Shares Outstanding

      166,657,562        142,369,630   
                

Weighted average restricted Class A shares 26

      426,669        183,173   

Weighted average fully vested restricted Class A share units which are entitled to dividend equivalent payments

      2,024,800        1,158,673   

Weighted average nonvested restricted Class A share units which are entitled to dividend equivalent payments

      18,992,319        25,480,488   

Weighted average Fortress Operating Group units

      300,273,852        310,436,556   

Weighted average Fortress Operating Group RPUs

      31,000,000        31,000,000   
                

Weighted Average Dividend Paying Shares and Units Outstanding (Used for DEPS)

      519,375,202        510,628,520   
                
     Nine Months Ended September 30,  
     2010     2009  

Weighted Average Class A Shares Outstanding (Used for Basic EPS)

      163,920,012        118,638,707   
                

Weighted average fully vested restricted Class A share units with dividend equivalent rights

      (5,632,820 )      (1,137,275 ) 

Weighted average fully vested restricted Class A shares

      (157,170 )      (92,890 ) 
                

Weighted Average Class A Shares Outstanding

      158,130,022        117,408,542   
                

Weighted average restricted Class A shares 26

      310,168        138,999   

Weighted average fully vested restricted Class A share units which are entitled to dividend equivalent payments

      5,632,820        1,137,275   

Weighted average nonvested restricted Class A share units which are entitled to dividend equivalent payments

      19,474,536        23,794,771   

Weighted average Fortress Operating Group units

      302,746,380        311,520,563   

Weighted average Fortress Operating Group RPUs

      31,000,000        31,000,000   
                

Weighted Average Dividend Paying Shares and Units Outstanding (Used for DEPS)

      517,293,926        485,000,150   
                

 

26

Includes both fully vested and nonvested weighted average restricted class A shares.

 

20