EX-99.1 2 dex991.htm PRESS RELEASE Press release

Exhibit 99.1

LOGO

 

Contact:    FOR IMMEDIATE RELEASE
Lilly H. Donohue   
212-798-6118   

Fortress Reports Second Quarter 2008 Financial Results

Second Quarter Highlights

 

 

•

  

Assets under management1 of $35.1 billion, up 23% from 2Q2007

 

  •  

Segment management fee revenues of $150 million, up 27% from 2Q2007

 

  •  

Raised $2.8 billion of total third-party capital, or $2.5 billion net third-party capital raised

 

  •  

Pre-tax distributable earnings of $58 million, versus $143 million from 2Q2007. Fund management DE of $75 million

 

  •  

GAAP net loss, excluding principals agreement compensation, of $345,000. GAAP net loss of $55 million

Subsequent Events in the Third Quarter

 

  •  

Since quarter-end, raised an additional $1.9 billion of total third-party capital, bringing our year to date total third-party capital raised to $7.5 billion, or $6.4 billion net third-party capital raised

New York, NY. August 7, 2008 – Fortress Investment Group LLC (NYSE: FIG) today reported its results for the second quarter ended June 30, 2008.

Second Quarter 2008

For the quarter ended June 30, 2008, our GAAP net loss was $55 million, or $0.67 per diluted share. Excluding principals agreement compensation, second quarter GAAP net loss was $345,000.

Pre-tax distributable earnings for the quarter were $58 million, or $0.13 per dividend paying share, versus $143 million for the second quarter 2007.

For reconciliations from pre-tax distributable earnings and fund management DE to GAAP net income (loss), and from GAAP net income (loss) excluding principals agreement compensation to GAAP net income (loss) see “Reconciliation of Fund Management DE to Pre-tax Distributable Earnings and GAAP Net Income (Loss)” and “Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement Compensation to GAAP Net Income (Loss)” in this release. Distributable earnings and distributable earnings per dividend paying share are supplemental measures of our operating performance that we believe provide a meaningful basis for comparison between present and future periods2.

 

 

1

Assets under management in this press release refers to management fee paying assets under management.

2

Comparisons of after tax or per share amounts to periods prior to our reorganization, including the first quarter of 2007 (prior to January 17), may not be meaningful because of the impact of the reorganization transactions on our financial statements.

 

1

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 business, as well as other factors. Accordingly, the revenues and profits in any particular quarter should not be expected to be indicative of future results. Quarterly dividends are not necessarily representative of the Company’s earnings in the current quarter.

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. For a reconciliation of our segment results to the corresponding GAAP data, see the reconciliation information included later in this release.

 

2

Supplemental Data for Three Months:

 

Three Months Ended June 30, 2008          Private Equity     Hedge Funds     Principal
Investments		  
(in millions)    Total     Funds     Castles     Liquid     Hybrid    
AUM             

AUM - April 1, 2008

    $ 34,187     $ 12,993     $ 3,503     $ 9,254     $ 8,437     $ —    

New capital raised, increase in invested capital

      2,195       1,165       —         925       105       —    

Return of Capital (PE) / Redemptions (Hedge Funds)

      (546 )     (54 )     —         (311 )     (181 )     —    

Reset Date

      —         —         —         —         —         —    

Crystallized Incentive Income

      —         —         —         —         —         —    

+/- Net Asset Value & Foreign Exchange rate change

      (747 )     (608 )     (5 )     (163 )     29       —    
                                                

AUM - Ending Balance

    $ 35,089     $ 13,496     $ 3,498     $ 9,705     $ 8,390     $ —    

Segment Revenues

             

Management fee

    $ 150     $ 42     $ 15     $ 57     $ 36     $ —    

Incentive income

      15       —         —         14       1       —    
                                                

Total

      165       42       15       71       37       —    

Segment Expenses

             

Profit sharing compensation expenses

      (20 )     (1 )     (1 )     (16 )     (2 )     —    

Operating expenses

      (70 )     (9 )     (10 )     (25 )     (26 )     —    

Unallocated Expenses

      —              
                                                

Total

      (90 )     (10 )     (11 )     (41 )     (28 )     —    
                                                

Fund Management DE

      75       32       4       30       9       —    
                                                

Investment Income

      (7 )             (7 )

Interest Expense

      (10 )             (10 )
                                                

Pre-tax Distributable Earnings

    $ 58     $ 32     $ 4     $ 30     $ 9     $ (17 )
                                                

Weighted Average Dividend Paying Shares and Units Outstanding

      456            
                  
Three Months Ended June 30, 2007          Private Equity     Hedge Funds     Principal
Investments		  
(in millions)    Total     Funds     Castles     Liquid     Hybrid    

AUM

             

AUM - April 1, 2007

    $ 23,426     $ 8,398     $ 2,967     $ 5,915     $ 6,146     $ —    

New capital raised, increase in invested capital

      5,862       4,048       206       1,024       584       —    

Return of Capital (PE) / Redemptions (Hedge Funds)

      (51 )     —         —         (42 )     (9 )     —    

Reset Date

      (1,367 )     (1,367 )     —         —         —         —    

+/- Net Asset Value & Foreign Exchange rate change

      699       (86 )     —         519       266       —    
                                                

AUM - Ending Balance

    $ 28,569     $ 10,993     $ 3,173     $ 7,416     $ 6,987     $ —    

Segment Revenues

             

Management fee

    $ 118     $ 36     $ 12     $ 38     $ 32     $ —    

Incentive income

      165       —         14       113       38       —    
                                                

Total

      283       36       26       151       70       —    

Segment Expenses

             

Profit sharing compensation expenses

      (82 )     (1 )     (5 )     (58 )     (18 )     —    

Operating expenses

      (67 )     (7 )     (8 )     (18 )     (34 )     —    

Unallocated Expenses

      (4 )          
                                                

Total

      (153 )     (8 )     (13 )     (76 )     (52 )     —    
                                                

Fund Management DE

      130       28       13       75       18       —    
                                                

Investment Income

      20               20  

Interest Expense

      (7 )             (7 )
                                                

Pre-tax Distributable Earnings

    $ 143     $ 28     $ 13     $ 75     $ 18     $ 13  
                                                

Weighted Average Dividend Paying Shares and Units Outstanding

      431            
                  

 

3

Supplemental Data for Six Months:

 

Six Months Ended June 30, 2008          Private Equity     Hedge Funds     Principal
Investments		  
(in millions)    Total     Funds     Castles     Liquid     Hybrid    

AUM

             

AUM - January 1, 2008

    $ 33,234     $ 13,278     $ 3,328     $ 8,128     $ 8,500     $ —    

New capital raised, increase in invested capital

      4,867       1,793       —         2,211       863       —    

Return of Capital (PE) / Redemptions (Hedge Funds)

      (1,294 )     (194 )     —         (421 )     (679 )     —    

Reset Date

      —         —         —         —         —         —    

Crystallized Incentive Income

      (95 )     —         —         —         (95 )  

+/- Net Asset Value & Foreign Exchange rate change

      (1,623 )     (1,381 )     170       (213 )     (199 )     —    
                                                

AUM - Ending Balance

    $ 35,089     $ 13,496     $ 3,498     $ 9,705     $ 8,390     $ —    

Segment Revenues

             

Management fee

    $ 295     $ 84     $ 28     $ 110     $ 73     $ —    

Incentive income

      47       29       —         17       1       —    
                                                

Total

      342       113       28       127       74       —    

Segment Expenses

             

Profit sharing compensation expenses

      (52 )     (13 )     (2 )     (33 )     (4 )     —    

Operating expenses

      (144 )     (18 )     (18 )     (49 )     (59 )     —    

Unallocated Expenses

      —              
                                                

Total

      (196 )     (31 )     (20 )     (82 )     (63 )     —    
                                                

Fund Management DE

      146       82       8       45       11       —    
                                                

Investment Income

      (10 )             (10 )

Interest Expense

      (20 )             (20 )
                                                

Pre-tax Distributable Earnings

    $ 116     $ 82     $ 8     $ 45     $ 11     $ (30 )
                                                

Weighted Average Dividend Paying Shares and Units Outstanding

      443            
                  
Six Months Ended June 30, 2007          Private Equity     Hedge Funds     Principal
Investments		  
(in millions)    Total     Funds     Castles     Liquid     Hybrid    

AUM

             

AUM - January 1, 2007

    $ 20,853     $ 7,539     $ 2,842     $ 5,022     $ 5,450     $ —    

New capital raised, increase in invested capital

      8,829       5,618       331       1,776       1,104       —    

Return of Capital (PE) / Redemptions (Hedge Funds)

      (822 )     (691 )     —         (78 )     (53 )     —    

Reset Date

      (1,367 )     (1,367 )     —         —         —         —    

+/- Net Asset Value & Foreign Exchange rate change

      1,076       (106 )     —         696       486       —    
                                                

AUM - Ending Balance

    $ 28,569     $ 10,993     $ 3,173     $ 7,416     $ 6,987     $ —    

Segment Revenues

             

Management fee

    $ 216     $ 63     $ 23     $ 69     $ 61     $ —    

Incentive income

      450       190       18       158       84       —    
                                                

Total

      666       253       41       227       145       —    

Segment Expenses

             

Profit sharing compensation expenses

      (205 )     (73 )     (7 )     (87 )     (38 )     —    

Operating expenses

      (121 )     (13 )     (15 )     (35 )     (58 )     —    

Unallocated Expenses

      (7 )          
                                                

Total

      (333 )     (86 )     (22 )     (122 )     (96 )     —    
                                                

Fund Management DE

      333       167       19       105       49       —    
                                                

Investment Income

      49               49  

Interest Expense

      (19 )             (19 )
                                                

Pre-tax Distributable Earnings

    $ 363     $ 167     $ 19     $ 105     $ 49     $ 30  
                                                

Weighted Average Dividend Paying Shares and Units Outstanding

      417            
                  

 

4

Overview

We manage $35.1 billion of assets in private equity funds and hedge funds as of June 30, 2008. Fortress’s revenues consist of (i) management fees, which are based on the size of our funds, (ii) incentive income, which is based on the performance of our funds, and (iii) investment income, which is based on our principal investments.

In the second quarter of 2008, we generated fund management revenues of $165 million, which included management fees of $150 million and incentive income of $15 million. After segment expenses and principal investments, Fortress generated pre-tax distributable earnings of $58 million for the quarter ended June 30, 2008.

For the quarter ended June 30, 2008, the private equity segments accounted for approximately 35% of total segment revenues and the hedge fund segments accounted for approximately 65% of total segment revenues.

For the quarter ended June 30, 2008, the private equity and hedge fund businesses accounted for approximately 48% and 52%, respectively, of total fund management DE.

Private Equity - Funds

For the quarter ended June 30, 2008, the Company’s private equity funds generated $32 million of pre-tax distributable earnings as compared to $28 million for the quarter ended June 30, 2007.

Assets under management as of June 30, 2008 increased 23% to $13.5 billion from $11.0 billion as of June 30, 2007.

As of June 30, 2008, our funds’ private equity capital invested in non-public transactions totaled approximately $10.8 billion, and our private equity funds’ unfunded commitments were approximately $1.5 billion.

Private Equity - Castles

For the quarter ended June 30, 2008, the Company’s Castles generated $4 million of pre-tax distributable earnings as compared to $13 million for the quarter ended June 30, 2007.

Assets under management increased 10% to $3.5 billion as of June 30, 2008 from $3.2 billion as of June 30, 2007.

Liquid Hedge Funds

For the quarter ended June 30, 2008, the Company’s liquid hedge fund business generated $30 million of pre-tax distributable earnings as compared to $75 million for the quarter ended June 30, 2007.

Assets under management increased 31% to $9.7 billion as of June 30, 2008 from $7.4 billion as of June 30, 2007.

 

5

The following table shows our Assets Under Management by fund:

 

(dollars in billions)    June 30, 2008    December 31, 2007    June 30, 2007

Drawbridge Global Macro Funds 3

    $ 8.8    $ 8.1    $ 7.4

Fortress Commodities Fund 4

    $ 0.9      N/A      N/A

The following table shows our Gross and Net Returns by fund:

 

     Three months ended
June 30, 2008		     Six months ended
June 30, 2008		  

Gross Returns5

     

Drawbridge Global Macro Fund Ltd

    -2.07 %   -1.82 %

Fortress Commodities Fund LP

    10.63 %   12.33 %

Net Returns6

     

Drawbridge Global Macro Fund Ltd

    -2.55 %   -2.76 %

Fortress Commodities Fund LP

    8.11 %   9.01 %

Hybrid Hedge Funds

For the quarter ended June 30, 2008, the Company’s hybrid hedge fund business generated $9 million of pre-tax distributable earnings as compared to $18 million for the quarter ended June 30, 2007.

Assets under management increased 20% to $8.4 billion as of June 30, 2008 from $7.0 billion as of June 30, 2007.

The following table shows our Assets Under Management by fund:

 

(dollars in billions)    June 30, 2008    December 31, 2007    June 30, 2007

Drawbridge Special Opportunities Funds 7

   $ 6.6    $ 6.8    $ 6.1

Fortress Partners Funds 8

    $ 1.8    $ 1.7    $ 0.9

 

3

Consolidated AUM for Drawbridge Global Macro Fund Ltd, Drawbridge Global Macro Fund LP and Drawbridge Global Macro Managed Accounts.

4

Fund commenced operations in January 2008.

5

The performance data contained herein reflects returns for a “new issue eligible,” single investor class, net of expenses borne by the Fund (prior to any fees), as of the close of business on the last day of the relevant period. Specific performance may vary based on, among other things, whether fund investors are invested in one or more Special Investments.

6

The performance data contained herein reflects returns for a “new issue eligible,” single investor class, net of all fees and expenses borne by the Fund, as of the close of business on the last day of the relevant period. Specific performance may vary based on, among other things, whether fund investors are invested in one or more Special Investments.

7

Consolidated AUM for Drawbridge Special Opportunities Fund Ltd, Drawbridge Special Opportunities Fund LP and Drawbridge Special Opportunities Managed Accounts.

8

Consolidated AUM for Fortress Partners Fund Ltd and Fortress Partners Fund LP.

 

6

The following table shows our Gross and Net Returns by fund:

 

      Three months ended
June 30, 2008		     Six months ended
June 30, 2008		  

Gross Returns5

     

Drawbridge Special Opportunities LP

    1.44 %   0.35 %

Drawbridge Special Opportunities Ltd

    0.18 %   -0.96 %

Fortress Partners Fund LP

    0.85 %   -3.50 %

Fortress Partners Fund Ltd

    1.92 %   -1.82 %

Net Returns6

     

Drawbridge Special Opportunities LP

    0.94 %   -0.65 %

Drawbridge Special Opportunities Ltd

    -0.32 %   -2.18 %

Fortress Partners Fund LP

    0.50 %   -4.15 %

Fortress Partners Fund Ltd

    1.58 %   -2.52 %

Principal Investments

At June 30, 2008, we had $1.1 billion of assets (excluding $0.3 billion of cash and cash equivalents) in our principal investments segment, up from $0.7 billion (excluding $0.3 billion of cash and cash equivalents) at June 30, 2007. During the three months ended June 30, 2008, we increased our commitments to our principal investments by $17 million and funded $11 million of our commitments. We had $183 million of unfunded commitments to our principal investments as of June 30, 2008.

Our principal investments segment generated a loss of $17 million for the three months ended June 30, 2008 primarily due to an impairment of $10 million on our investment in Newcastle Investment Corp. and $8 million of net interest expense.

Segment Expenses

Segment expenses were $90 million in the second quarter of 2008, down from $153 million from the second quarter of 2007. Segment expenses for the second quarters of 2008 and 2007 included $20 million and $82 million of profit sharing compensation, respectively, which is a function of the performance of various funds.

Fortress’s headcount increased by approximately 24% since the second quarter of 2007. As of June 30, 2008, the firm and its affiliates employed 880 people around the world.

The Company had $291 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 in the IPO, and the issuance of restricted partnership units during this quarter) for the quarter ended June 30, 2008, which contributed to our reporting a GAAP net loss per share. Share-based compensation expense is not included in segment expenses or in the calculation of distributable earnings.

 

 

5

The performance data contained herein reflects returns for a “new issue eligible,” single investor class, net of expenses borne by the Fund (prior to any fees), as of the close of business on the last day of the relevant period. Specific performance may vary based on, among other things, whether fund investors are invested in one or more Special Investments.

6

The performance data contained herein reflects returns for a “new issue eligible,” single investor class, net of all fees and expenses borne by the Fund, as of the close of business on the last day of the relevant period. Specific performance may vary based on, among other things, whether fund investors are invested in one or more Special Investments.

 

7

Dividend

The Company paid a second quarter cash dividend of $0.225 per share on its common stock, for the quarter ending June 30, 2008, on July 11, 2008 to stockholders of record on June 30, 2008.

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 distributable earnings (DE)

 

  •  

Fund management DE

 

  •  

Segment revenues

 

  •  

GAAP net income excluding principals agreement compensation

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

Conference Call

Management will host a conference call today, Thursday, August 7, 2008 at 10:00 AM eastern time. A copy of the earnings release will be 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 1-877-717-3044 (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 Second Quarter Earnings Call.” 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, August 15, 2008 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 “57630061.”

Fortress is a leading global alternative asset manager with approximately $35.1 billion in assets under management as of June 30, 2008. Fortress manages private equity funds and hedge funds. Fortress 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 public company surplus, dividends sources of management fees, incentive income and investment income, estimated fund performance, the amount and source of expected capital commitments for the new fund and our effective tax rate. 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

 

8

control. It is possible that the actual amounts of future dividends, our public company surplus, sources of management fees, incentive income and investment income, the amount and source of expected capital commitments for any new fund or our effective tax rate 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 Annual Report on Form 10-K and Quarterly Report on Form 10-Q, each of 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

(Prior to January 17, 2007, Fortress Operating Group)

Consolidated and Combined Statements of Operations

(dollars in thousands, except share data)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2008     2007     2008     2007  

Revenues

         

Management fees from affiliates

    $ 149,605     $ 118,678     $ 293,662     $ 161,965  

Incentive income from affiliates

      18,300       132,961       55,444       177,189  

Other revenues

      20,191       16,480       39,870       36,265  

Interest and dividend income - investment company holdings

         

Interest income

      —         —         —         243,713  

Interest income from controlled affiliate investments

      —         —         —         4,707  

Dividend income

      —         —         —         7,436  

Dividend income from controlled affiliate investments

      —         —         —         53,174  
                                
     188,096       268,119       388,976       684,449  
                                

Expenses

         

Interest expense

         

Investment company holdings

      —         —         —         132,620  

Other

      9,888       6,711       20,224       18,731  

Compensation and benefits

      137,460       187,783       264,479       405,300  

Principals agreement compensation

      237,367       242,659       474,734       380,933  

General, administrative and other

      19,746       23,603       36,316       62,908  

Depreciation and amortization

      2,436       2,184       4,872       4,193  
                                
     406,897       462,940       800,625       1,004,685  
                                

Other Income (Loss)

         

Gains (losses) from investments

         

Investment company holdings

         

Net realized gains (losses)

      —         —         —         86,264  

Net realized gains (losses) from controlled affiliate investments

      —         —         —         715,024  

Net unrealized gains (losses)

      —         —         —         (19,928 )

Net unrealized gains (losses) from controlled affiliate investments

      —         —         —         (1,428,837 )

Other investments

         

Net realized gains (losses)

      61       (1,735 )     1,674       54  

Net realized gains (losses) from affiliate investments

      (92 )     9,452       155       145,493  

Net unrealized gains (losses)

      —         (396 )     —         (677 )

Net unrealized gains (losses) from affiliate investments

      (6,584 )     (36,338 )     (36,401 )     (167,166 )

Earnings (losses) from equity method investees

      (26,500 )     7,231       (75,629 )     7,427  
                                
     (33,115 )     (21,786 )     (110,201 )     (662,346 )
                                

Income (Loss) Before Deferred Incentive Income, Principals’ and Others’ Interests in Income of Consolidated Subsidiaries and Income Taxes

      (251,916 )     (216,607 )     (521,850 )     (982,582 )

Deferred incentive income

      —         —         —         307,034  

Principals’ and others’ interests in (income) loss of consolidated subsidiaries

      194,411       166,485       402,680       702,016  
                                

Income (Loss) Before Income Taxes

      (57,505 )     (50,122 )     (119,170 )     26,468  

Income tax benefit (expense)

      1,949       (5,009 )     (5,303 )     (19,456 )
                                

Net Income (Loss)

    $ (55,556 )   $ (55,131 )   $ (124,473 )   $ 7,012  
                                

Dividends declared per Class A share

    $ 0.2250     $ 0.2250     $ 0.4500     $ 0.3924  
                                

Earnings Per Unit - Fortress Operating Group

                      January 1 through
January 16		  

Net income per Fortress Operating Group unit

          $ 0.36  
              

Weighted average number of Fortress Operating Group units outstanding

            367,143,000  
              

Earnings Per Class A share - Fortress Investment Group

                      January 17 through
June 30		  

Net income (loss) per Class A share, basic

    $ (0.62 )   $ (0.59 )   $ (1.36 )   $ (1.43 )
                                

Net income (loss) per Class A share, diluted

    $ (0.67 )   $ (0.66 )   $ (1.37 )   $ (1.43 )
                                

Weighted average number of Class A shares outstanding, basic

      94,913,677       94,894,636       94,904,157       89,226,434  
                                

Weighted average number of Class A shares outstanding, diluted

      406,985,227       406,966,186       406,975,707       89,226,434  
                                

 

10

Fortress Investment Group LLC

(Prior to January 17, 2007, Fortress Operating Group)

Consolidated Balance Sheets

(dollars in thousands, except share data)

 

     June 30,
2008		     December 31,
2007		  
     (Unaudited)        

Assets

     

Cash and cash equivalents

    $ 255,155     $ 100,409  

Due from affiliates

      141,765       198,669  

Investments

     

Equity method investees

      961,123       1,091,918  

Options in affiliates

      871       16,001  

Deferred tax asset

      512,237       511,204  

Other assets

      72,684       71,580  
                
   $ 1,943,835     $ 1,989,781  
                

Liabilities and Shareholders’ Equity

     

Liabilities

     

Accrued compensation and benefits

    $ 126,040     $ 269,324  

Due to affiliates

      464,709       455,734  

Dividends payable

      21,286       21,285  

Deferred incentive income

      164,144       173,561  

Debt obligations payable

      800,000       535,000  

Other liabilities

      40,239       36,729  
                
     1,616,418       1,491,633  
                

Commitments and Contingencies

     

Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries

      173,104       308,023  

Shareholders’ Equity

     

Class A shares, no par value, 1,000,000,000 shares authorized, 94,604,806 and 94,597,646 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively.

      —         —    

Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding

      —         —    

Paid-in capital

      469,319       384,700  

Retained earnings (accumulated deficit)

      (315,564 )     (193,200 )

Accumulated other comprehensive income (loss)

      558       (1,375 )
                
     154,313       190,125  
                
   $ 1,943,835     $ 1,989,781  
                

 

11

Fortress Investment Group LLC

(Prior to January 17, 2007, Fortress Operating Group)

Reconciliation of Fund Management DE to Pre-tax Distributable

Earnings and GAAP Net Income (Loss)

(dollars in millions)

 

     Three Months Ended  
     June 30, 2008     June 30, 2007  

Fund Management DE

    $ 75     $ 130  
                

Investment Income (Loss)

      (7 )     20  

Interest Expense

      (10 )     (7 )
                

Pre-tax Distributable Earnings

      58       143  
                

Private equity incentive income

      3       6  

Hybrid hedge fund incentive income

      —         (37 )

Castle options incentive income

      —         —    

Castle options management fee

      —         1  

Distributions of earnings from equity method investees

      —         (2 )

Earnings from equity method investees

      (27 )     (8 )

Gains/losses on options

      (2 )     (30 )

Gains/losses on other investments

      (3 )     —    

Impairment of investments

      10       —    

Employee equity-based compensation

      (53 )     (29 )

Principal compensation

      (238 )     (243 )

Employee portion of incentive income

      —         (20 )

Principals’ interest in income of consolidated subsidiaries

      195       169  

Taxes

      2       (5 )
                

GAAP Net Income (Loss)9

    $ (55 )   $ (55 )
                
     Six Months Ended  
     June 30, 2008     June 30, 2007  

Fund Management DE

    $ 146     $ 333  
                

Investment Income (Loss)

      (10 )     49  

Interest Expense

      (20 )     (19 )
                

Pre-tax Distributable Earnings

      116       363  
                

Private equity incentive income

      9       21  

Hybrid hedge fund incentive income

      —         (83 )

Castle options incentive income

      —         —    

Castle options management fee

      —         2  

Distributions of earnings from equity method investees

      —         (12 )

Earnings from equity method investees

      (68 )     (19 )

Gains/losses on options

      (15 )     (25 )

Gains/losses on other investments

      (21 )     —    

Impairment of investments

      10       —    

Employee equity-based compensation

      (89 )     (67 )

Principal compensation

      (475 )     (381 )

Employee portion of incentive income

      10       (20 )

Principals’ interest in income of consolidated subsidiaries

      404       247  

Taxes

      (5 )     (19 )
                

GAAP Net Income (Loss)9

    $ (124 )   $ 7  
                

 

9

We had GAAP net income of $133.4 million for the period from January 1, 2007 through January 16, 2007 and a GAAP net loss of $126.4 million for the period from January 17, 2007 through June 30, 2007.

 

12

Fortress Investment Group LLC

(Prior to January 17, 2007, Fortress Operating Group)

Reconciliation of Segment Revenues to GAAP Revenues

(dollars in millions)

 

     Three Months Ended  
     June 30, 2008    June 30, 2007  

Segment Revenues

    $ 165    $ 283  

Adjust incentive income

      3      (33 )

Adjust income from the receipt of options

      —        1  

Other revenues

      20      16  

Consolidation and elimination

      —        1  
               

GAAP Revenues

    $ 188    $ 268  
               
     Six Months Ended  
     June 30, 2008    June 30, 2007  

Segment Revenues

    $ 342    $ 666  

Adjust incentive income

      9      (62 )

Adjust income from the receipt of options

      —        2  

Other revenues

      38      30  

Consolidation and elimination

      —        48  
               

GAAP Revenues

    $ 389    $ 684  
               

“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 Company 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 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, see note 10 to our financial statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

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.

 

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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.

Fortress Investment Group LLC

(Prior to January 17, 2007, Fortress Operating Group)

Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement

Compensation to GAAP Net Income (Loss)

(dollars in thousands)

 

     Three months ended
June 30, 2008		     Six months ended
June 30, 2008		  

GAAP net loss

    $ (55,556 )   $ (124,473 )

Principals agreement compensation

      237,367       474,734  

Portion not allocable to public shareholders

      (182,156 )     (364,311 )
                

GAAP net loss excluding principals agreement compensation

    $ (345 )   $ (14,050 )
                

 

14