10-Q 1 d237794d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-35107

 

 

APOLLO GLOBAL MANAGEMENT, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8880053

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9 West 57th Street, 43rd Floor

New York, New York 10019

(Address of principal executive offices) (Zip Code)

(212) 515-3200

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of November 8, 2011 there were 123,041,890 Class A shares and 1 Class B share outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I   

FINANCIAL INFORMATION

  
Item 1.   

FINANCIAL STATEMENTS

     6   
  

Unaudited Condensed Consolidated Financial Statements

  
  

Condensed Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2011 and December 31, 2010

     6   
  

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010

     7   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010

     8   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2011 and 2010

     9   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010

     10   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     12   
ITEM 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     67   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     135   
ITEM 4.   

CONTROLS AND PROCEDURES

     137   
PART II   

OTHER INFORMATION

  
ITEM 1.   

LEGAL PROCEEDINGS

     138   
ITEM 1A.   

RISK FACTORS

     138   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     138   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     138   
ITEM 4.   

(REMOVED AND RESERVED)

     138   
ITEM 5.   

OTHER INFORMATION

     138   
ITEM 6.   

EXHIBITS

     139   
SIGNATURES      143   

 

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Forward-Looking Statements

This quarterly report may contain forward looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, its liquidity and capital resources and the other non-historical statements in the discussion and analysis. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this quarterly report, the words “believe,” “anticipate,” “estimate,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions, including risks relating to our dependence on certain key personnel, our ability to raise new private equity, capital markets or real estate funds, market conditions, generally; our ability to manage our growth, fund performance, changes in our regulatory environment and tax status, the variability of our revenues, net income and cash flow, our use of leverage to finance our businesses and investments by our funds and litigation risks, among others. We believe these factors include but are not limited to those described under the section entitled “Risk Factors.” In the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933 on March 30, 2011, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in other filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.

 

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In this quarterly report, references to “Apollo,” “we,” “us,” “our” and the “Company” refer collectively to Apollo Global Management, LLC and its subsidiaries, including the Apollo Operating Group and all of its subsidiaries.

“Apollo funds” and “our funds” refer to the funds, alternative asset companies and other entities that are managed by the Apollo Operating Group. “Apollo Operating Group” refers to:

 

  (i) the limited partnerships through which our Managing Partners currently operate our businesses and;

 

  (ii) one or more limited partnerships formed for the purpose of, among other activities, holding certain of our gains or losses on our principal investments in the funds, which we refer to as our “principal investments”

“Assets Under Management,” or “AUM,” refers to the investments we manage or with respect to which we have control, including capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:

 

  (i) the fair value of our private equity investments plus the capital that we are entitled to call from our investors pursuant to the terms of their capital commitments plus non-recallable capital to the extent a fund is within the commitment period in which management fees are calculated based on total commitments to the fund;

 

  (ii) the net asset value, or “NAV,” of our capital markets funds, other than certain senior credit funds, which are structured as collateralized loan obligations (such as Artus, which we measure by using the mark-to-market value of the aggregate principal amount of the underlying collateralized loan obligations), plus used or available leverage and/or capital commitments;

 

  (iii) the gross asset values of our real estate entities and the structured portfolio vehicle investments included within the funds we manage, which includes the leverage used by such structured portfolio vehicles;

 

  (iv) the incremental value associated with the reinsurance investments of the funds we manage; and

 

  (v) the fair value of any other investments that we manage plus unused credit facilities, including capital commitments for investments that may require pre-qualification before investment plus any other capital commitments available for investment that are not otherwise included in the clauses above.

Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds. Management fees are normally based on “net asset value,” “gross assets,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees for AUM purposes are based on the total value of certain structured portfolio vehicle investments, which normally include leverage, less any portion of such total value that is already considered in fee-generating AUM.

 

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Non-fee generating AUM consists of assets that do not produce management fees or monitoring fees. These assets generally consist of the following: (a) fair value above invested capital for those funds that earn management fees based on invested capital, (b) net asset values related to general partner and co-investment ownership, (c) unused credit facilities, (d) available commitments on those funds that generate management fees on invested capital, (e) structured portfolio vehicle investments that do not generate monitoring fees and (f) the difference between gross assets and net asset value for those funds that earn management fees based on net asset value. We use non-fee generating AUM combined with fee generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income.

Our AUM measure includes Assets Under Management for which we charge either no or nominal fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our operating agreement or in any of our Apollo fund management agreements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(dollars in thousands, except share data)

 

     September 30,
2011
    December 31,
2010
 

Assets:

    

Cash and cash equivalents

   $ 808,259      $ 382,269   

Cash and cash equivalents held at Consolidated Funds

     46        —     

Restricted cash

     8,305        6,563   

Investments

     1,764,034        1,920,553   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     32,344        87,556   

Investments, at fair value

     1,114,602        1,342,611   

Other assets

     15,710        36,754   

Carried interest receivable

     634,700        1,867,073   

Due from affiliates

     174,111        144,363   

Fixed assets, net

     54,343        44,696   

Deferred tax assets

     592,366        571,325   

Other assets

     29,738        35,141   

Goodwill

     48,894        48,894   

Intangible assets, net

     53,319        64,574   
  

 

 

   

 

 

 

Total Assets

   $ 5,330,771      $ 6,552,372   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 24,524      $ 31,706   

Accrued compensation and benefits

     96,481        54,057   

Deferred revenue

     257,665        251,475   

Due to affiliates

     594,491        517,645   

Profit sharing payable

     284,527        678,125   

Debt

     738,623        751,525   

Liabilities of consolidated variable interest entities:

    

Debt, at fair value

     1,136,926        1,127,180   

Other liabilities

     20,860        33,545   

Other liabilities

     23,051        25,695   
  

 

 

   

 

 

 

Total Liabilities

     3,177,148        3,470,953   
  

 

 

   

 

 

 

Commitments and Contingencies (see note 12)

    

Shareholders’ Equity:

    

Apollo Global Management, LLC shareholders’ equity:

    

Class A shares, no par value, unlimited shares authorized, 122,990,227 shares and 97,921,232 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

     —          —     

Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at September 30, 2011 and December 31, 2010

     —          —     

Additional paid-in-capital

     2,847,054        2,078,890   

Accumulated deficit

     (2,434,557     (1,937,818

Appropriated partners’ capital

     (2,838     11,359   

Accumulated other comprehensive loss

     (832     (1,529
  

 

 

   

 

 

 

Total Apollo Global Management, LLC shareholders’ equity

     408,827        150,902   

Non-Controlling Interests in consolidated entities

     1,443,782        1,888,224   

Non-Controlling Interests in Apollo Operating Group

     301,014        1,042,293   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     2,153,623        3,081,419   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 5,330,771      $ 6,552,372   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenues:

        

Advisory and transaction fees from affiliates

   $ 16,837      $ 19,505      $ 59,809      $ 57,418   

Management fees from affiliates

     122,666        106,720        362,003        316,636   

Carried interest (loss) income from affiliates

     (1,619,083     332,426        (896,174     387,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     (1,479,580     458,651        (474,362     761,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Compensation and benefits:

        

Equity-based compensation

     288,208        281,914        859,173        835,520   

Salary, bonus and benefits

     68,433        60,446        204,788        180,505   

Profit sharing expense

     (563,255     119,357        (275,437     125,307   

Incentive fee compensation

     (3,876     2,136        2,689        11,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

     (210,490     463,853        791,213        1,152,727   

Interest expense

     9,790        7,340        30,999        27,664   

Professional fees

     6,965        9,661        37,318        32,065   

General, administrative and other

     16,566        14,186        55,675        45,689   

Placement fees

     1,991        (793     3,105        3,748   

Occupancy

     10,391        5,882        25,542        16,690   

Depreciation and amortization

     6,687        5,874        19,635        18,020   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

     (158,100     506,003        963,487        1,296,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (Loss) Income:

        

Net (losses) gains from investment activities

     (371,647     101,210        (150,407     201,926   

Net (losses) gains from investment activities of consolidated variable interest entities

     (4,760     32,910        (41     32,645   

(Loss) income from equity method investments

     (56,438     27,480        (29,242     33,648   

Interest income

     670        359        1,540        1,021   

Other (loss) income, net

     (10,135     48,581        11,039        70,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other (Loss) Income

     (442,310     210,540        (167,111     339,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax benefit (provision)

     (1,763,790     163,188        (1,604,960     (195,351

Income tax benefit (provision)

     19,847        (30,856     7,477        (47,638
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income

     (1,743,943     132,332        (1,597,483     (242,989

Net loss (income) attributable to Non-Controlling Interests

     1,277,017        (108,192     1,117,724        131,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income Attributable to Apollo Global Management, LLC

   $ (466,926   $ 24,140      $ (479,759   $ (111,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared per Class A Share

   $ 0.24      $ 0.07      $ 0.63      $ 0.14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income Per Class A Share:

        

Net (Loss) Income Per Class A Share – Basic and Diluted

   $ (3.86   $ 0.23      $ (4.33   $ (1.18
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Basic and Diluted

     122,381,069        97,757,567        113,941,869        96,637,785   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Net (Loss) Income

   $ (1,743,943   $ 132,332      $ (1,597,483   $ (242,989

Other Comprehensive Income, net of tax:

        

Net unrealized gain on interest rate swaps (net of taxes of $260 and $183 for Apollo Global Management, LLC for the three months ended September 30, 2011 and 2010, respectively, and $605 and $1,204 for Apollo Global Management, LLC for the nine months ended September 30, 2011 and 2010, respectively, and $0 for Non-Controlling Interests in Apollo Operating Group for both the three months and nine months ended September 30, 2011 and 2010)

     1,894        1,373        5,040        9,105   

Net (loss) income on available-for-sale securities (from equity method investment)

     (52     107        (161     230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income, net of tax

     1,842        1,480        4,879        9,335   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (Loss) Income

     (1,742,101     133,812        (1,592,604     (233,654

Comprehensive Loss (Income) attributable to Non-Controlling Interests

     1,271,024        (106,114     1,099,701        123,567   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (Loss) Income Attributable to Apollo Global Management, LLC

   $ (471,077   $ 27,698      $ (492,903   $ (110,087
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(dollars in thousands, except share data)

 

    Apollo Global Management, LLC Shareholders                          
    Class A
Shares
    Class B
Shares
    Additional
Paid-In

Capital
    Accumu-
lated
Deficit
    Appro-
priated
Partners
(Deficit)

Capital
    Accumu-
lated
Other
Compre-

hensive
Loss
    Apollo
Global
Manage-

ment,
LLC
Total
Share-
holders’
(Deficit)

Equity
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Apollo
Operating
Group
    Total
Share-

holders’
Equity
 

Balance at January 1, 2010

    95,624,541        1      $ 1,729,593      $ (2,029,541   $ —        $ (4,088   $ (304,036   $ 1,283,262      $ 319,884      $ 1,299,110   

Transition adjustment relating to consolidation of variable interest entity

    —          —          —          —          —          —          —          411,885        —          411,885   

Capital increase related to equity-based compensation

    —          —          279,255        —          —          —          279,255        —          552,322        831,577   

Reclassification of equity-based compensation

    —          —          (3,497     —          —          —          (3,497     —          —          (3,497

Repurchase of Class A shares

    (7,135     —          (43     —          —          —          (43     —          —          (43

Purchase of AAA shares

    —          —          —          —          —          —          —          (48,768     —          (48,768

Capital contributions

    —          —          —          —          —          —          —          15        —          15   

Cash distributions

    —          —          —          —          —          —          —          (40,461     —          (40,461

Dividends

    —          —          (15,997     —          —          —          (15,997     (6,602     (33,600     (56,199

Distributions related to deliveries of Class A shares for RSUs

    2,303,826        —          —          (2,851     —          —          (2,851     —          —          (2,851

Non-cash contributions

    —          —          —          —          —          —          —          114        —          114   

Non-cash distributions

    —          —          —          (18     —          —          (18     (575     —          (593

Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities

    —          —          (4,605     —          —          —          (4,605     4,605        —          —     

Satisfaction of liability related to AAA RDUs

    —          —          6,099        —          —          —          6,099        —          —          6,099   

Net (loss) income

    —          —          —          (111,666     (401     —          (112,067     240,865        (371,787     (242,989

Net income on available-for-sale securities (from equity method investment)

    —          —          —          —          —          230        230        —          —          230   

Net unrealized gain on interest rate swaps (net of taxes of $1,204 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively)

    —          —          —          —          —          1,750        1,750        —          7,355        9,105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

    97,921,232        1      $ 1,990,805      $ (2,144,076   $ (401   $ (2,108   $ (155,780   $ 1,844,340      $ 474,174      $ 2,162,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2011

    97,921,232        1      $ 2,078,890      $ (1,937,818   $ 11,359      $ (1,529   $ 150,902      $ 1,888,224      $ 1,042,293      $ 3,081,419   

Issuance of Class A shares

    21,500,000        —          382,488        —          —          —          382,488        —          —          382,488   

Dilution impact of issuance of Class A shares

    —          —          134,720        —          —          (356     134,364        —          (127,096     7,268   

Capital increase related to equity-based compensation

    —          —          332,038        —          —          —          332,038        —          525,910        857,948   

Cash distributions

    —          —          —          —          —          —          —          (311,352     —          (311,352

Dividends

    —          —          (85,991     —          —          —          (85,991     (27,284     (151,200     (264,475

Distributions related to deliveries of Class A shares for RSUs

    3,568,995        —          7,588        (16,980     —          —          (9,392     —          —          (9,392

Non-cash distributions

    —          —          —          —          —          —          —          (1,522     —          (1,522

Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities

    —          —          (6,524     —          —          —          (6,524     6,524        —          —     

Satisfaction of liability related to AAA RDUs

    —          —          3,845        —          —          —          3,845        —          —          3,845   

Net loss

    —          —          —          (479,759     (14,197     —          (493,956     (110,808     (992,719     (1,597,483

Net loss on available-for-sale securities (from equity method investment)

    —          —          —          —          —          (161     (161     —          —          (161

Net unrealized gain on interest rate swaps (net of taxes of $605 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively)

    —          —          —          —          —          1,214        1,214        —          3,826        5,040   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    122,990,227        1      $ 2,847,054      $ (2,434,557   $ (2,838   $ (832   $ 408,827      $ 1,443,782      $ 301,014      $ 2,153,623   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands, except share data)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net loss

   $ (1,597,483   $ (242,989

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Equity-based compensation

     859,173        835,520   

Depreciation

     8,380        8,660   

Amortization of intangible assets

     11,255        9,360   

Amortization of debt issuance costs

     383        28   

Losses from investment in HFA and Other Investments

     14,535        —     

Income from equity awards received for directors’ fees

     (2,808     —     

Loss (income) from equity method investments

     29,242        (33,648

Waived management fees

     (19,490     (19,728

Non-cash compensation related to waived management fees

     19,490        19,728   

Deferred taxes, net

     (6,945     38,321   

Loss on sale of assets

     570        —     

Changes in assets and liabilities:

    

Carried interest receivable

     1,232,373        (245,727

Due from affiliates

     (29,332     16,699   

Other assets

     (7,603     (2,930

Accounts payable and accrued expenses

     (5,933     (7,058

Accrued compensation and benefits

     45,034        69,794   

Deferred revenue

     3,532        (29,836

Due to affiliates

     67,404        17,937   

Profit sharing payable

     (393,598     85,290   

Other liabilities

     3,171        (6,137

Apollo Funds related:

    

Net realized losses (gains) from investment activities

     12,581        (2,118

Net unrealized losses (gains) from investment activities

     156,128        (220,035

Net realized gains on debt

     (41,819     (5,483

Net unrealized losses on debt

     9,261        16,927   

Dividends from investment activities

     28,000        55,470   

Cash transferred in from Metals Trading Fund

     —          38,033   

Change in cash held at consolidated variable interest entities

     55,212        (9,780

Purchases of investments

     (991,189     (393,237

Sales of investments

     1,185,930        344,385   

Change in other assets

     21,049        (117,956

Change in other liabilities

     (12,685     (1,841
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     653,818        217,649   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of fixed assets

     (19,931     (3,227

Business acquisition

     —          (1,354

Proceeds from disposals of fixed assets

     367        —     

Purchase of investments in HFA (see note 3)

     (52,069     —     

Cash contributions to equity method investments

     (40,868     (52,059

Cash distributions from equity method investments

     46,872        26,249   

Change in restricted cash

     (1,742     241   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

   $ (67,371   $ (30,150
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS (UNAUDITED) (CONT’D)

(dollars in thousands, except share data)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash Flows from Financing Activities:

    

Issuance of Class A shares

   $ 383,990      $ —     

Repurchase of Class A shares

     —          (43

Issuance costs

     (1,502     —     

Principal repayments on debt

     (1,832     (1,148

Distributions related to deliveries of Class A shares for RSUs

     (16,980     (2,851

Distributions to Non-Controlling Interests in consolidated entities

     (10,431     (40,461

Contributions from Non-Controlling Interests in consolidated entities

     —          15   

Dividends paid

     (76,550     (14,140

Dividends paid to Non-Controlling Interests in Apollo Operating Group

     (151,200     (33,600

Apollo Funds related:

    

Issuance of debt

     454,356        320,154   

Principal repayment of term loans

     (412,057     (136,110

Purchase of AAA shares

     —          (48,768

Dividends paid to Non-Controlling Interests in consolidated entities

     (27,284     (6,602

Distributions paid to Non-Controlling Interests in consolidated variable interest entities

     (300,921     —     
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Financing Activities

     (160,411     36,446   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     426,036        223,945   

Cash and Cash Equivalents, Beginning of Period

     382,269        366,226   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 808,305      $ 590,171   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Interest paid

   $ 36,974      $ 30,338   

Interest paid by consolidated variable interest entities

     13,852        6,045   

Income taxes paid

     8,821        6,614   

Supplemental Disclosure of Non-Cash Investing Activities:

    

Change in accrual for purchase of fixed assets

     967        120   

Non-cash contributions on equity method investments

     6,296        —     

Non-cash distributions on equity method investments

     (703     —     

Non-cash sale of assets held-for-sale for repayment of CIT loan

     (11,069     —     

Non-cash purchases of other investments, at fair value

     2,808        —     

Non-cash dividends from investing activities

     1,522        —     

Supplemental Disclosure of Non-Cash Financing Activities:

    

Non-cash distributions

     —          (18

Non-cash dividends

     (9,441     (1,857

Non-cash distributions to Non-Controlling Interests in consolidated entities

     (1,522     (575

Non-cash contributions from Non-Controlling Interests in Apollo Operating Group related to equity-based compensation

     525,910        552,322   

Non-cash contributions from Non-Controlling Interests in consolidated entities

     —          114   

Unrealized gain on interest rate swaps attributable to Non-Controlling Interests in Apollo Operating Group, net of taxes

     3,826        7,355   

Satisfaction of liability related to AAA RDUs

     3,845        6,099   

Dilution impact of issuance of Class A shares

     134,364        —     

Dilution impact of issuance of Class A shares on Non-Controlling Interests in Apollo Operating Group

     (127,096     —     

Net transfers of AAA ownership interest to Non-Controlling Interests in consolidated entities

     6,524        4,605   

Net transfers of AAA ownership interest from AGM

     (6,524     (4,605

Unrealized gain on interest rate swaps

     1,819        2,954   

Unrealized (loss) gain on available-for-sale securities (from equity method investment)

     (161     230   

Capital increases related to equity-based compensation

     332,038        279,255   

Deferred tax asset related to interest rate swaps

     (605     (1,204

Tax benefits related to deliveries of Class A shares for RSUs

     (7,588     —     

Non-cash accrued compensation related to ARI RSUs and AMTG RSUs

     848        600   

Non-cash accrued compensation related to AAA RDUs

     377        3,342   

Reclassification of equity-based compensation

     —          (3,497

Satisfaction of liability related to repayment on CIT loan

     11,069        —     

Net Assets Transferred from Metals Trading Fund:

    

Cash

     —          38,033   

Other assets

     —          443   

Net Assets Transferred from Consolidated Variable Interest Entity:

    

Investments

     —          1,102,114   

Other assets

     —          28,789   

Debt

     —          (706,027

Other liabilities

     —          (12,991

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

Apollo Global Management, LLC and its consolidated subsidiaries (the “Company” or “Apollo”), is a global alternative investment manager whose predecessor was founded in 1990. Its primary business is to raise and invest private equity, capital markets and real estate funds as well as managed accounts, on behalf of pension and endowment funds, as well as other institutional and high net worth individual investors. For these investment management services, Apollo receives management fees generally related to the amount of Assets Under Management, transaction and advisory fees for the investments made and carried interest income related to the performance of the respective funds that it manages. Apollo has three primary business segments:

 

   

Private equity—primarily invests in control equity and related debt instruments, convertible securities and distressed debt investments;

 

   

Capital markets—primarily invests in non-control debt and non-control equity investments, including distressed debt securities; and

 

   

Real estate—primarily invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, the Company sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and instructions to Form 10-Q. The condensed consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Company is considered the primary beneficiary, and certain entities which are not considered variable interest entities but in which the Company has a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 included in the Company’s prospectus dated March 29, 2011 filed with the Securities and Exchange Commission on March 30, 2011.

Reorganization of the Company

The Company was formed as a Delaware limited liability company on July 3, 2007 and completed a reorganization of its predecessor businesses on July 13, 2007 (the “Reorganization”). The Company is managed and operated by its manager, AGM Management, LLC, which in turn is wholly owned and controlled by Leon Black, Joshua Harris and Marc Rowan (the “Managing Partners”).

As of September 30, 2011, the Company owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC (“APO Asset”), a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC (“APO (FC)”), an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the “Intermediate Holding Companies”), 33.9% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group as general partners.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership (“Holdings”), is the entity through which the Managing Partners and the Company’s other partners (and their related parties) who indirectly own (through Holdings) Apollo Operating Group units (the “Contributing Partners”) hold Apollo Operating Group units (“AOG Units”) that represent 66.1% of the economic interests in the Apollo Operating Group as of September 30, 2011. The Company consolidates the financial results of the Apollo Operating Group and its consolidated subsidiaries. Holdings’ ownership interest in the Apollo Operating Group is reflected as a Non-Controlling Interest in the accompanying condensed consolidated financial statements.

Apollo also entered into an exchange agreement with Holdings that allows the partners in Holdings, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Apollo Operating Group, to exchange their AOG Units for the Company’s Class A shares on a one-for-one basis up to four times each year, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. A limited partner must exchange one partnership unit in each of the ten Apollo Operating Group partnerships to effect an exchange for one Class A share.

Initial Public Offering—On April 4, 2011, the Company completed the initial public offering (“IPO”) of its Class A shares, representing limited liability company interests of the Company. AGM received net proceeds from the initial public offering of approximately $382.5 million, which was used to acquire additional AOG Units. As a result, Holdings ownership interest in the Apollo Operating Group decreased from 70.7% to 66.5% and the Company’s ownership interest increased from 29.3% to 33.5%. As such, the difference between the fair value of the consideration paid for the Apollo Operating Group level ownership interest and the book value on the date of the IPO is reflected in Additional Paid in Capital.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—Apollo consolidates those entities it controls through a majority voting interest or through other means, including those funds in which the general partner is presumed to have control (e.g., AP Alternative Assets, L.P., a Guernsey limited partnership that generally invests alongside certain of the Company’s private equity funds and directly in certain of its capital markets funds and in other transactions that the Company sponsors and manages (“AAA”)). Apollo also consolidates entities that are VIEs for which Apollo is the primary beneficiary. Under the amended consolidation rules, an enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.

Certain of the Company’s subsidiaries hold equity interests in and/or receive fees qualifying as variable interests from the funds that the Company manages. The amended consolidation rules require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would give it a controlling financial interest. When the VIE has qualified for the deferral of the amended consolidation rules in accordance with U.S. GAAP, the analysis is based on previous consolidation rules, which require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would be expected to absorb a majority of the variability of the entity.

Under both guidelines, the determination of whether an entity in which Apollo holds a variable interest is a VIE requires judgments which include determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, determining whether two or more parties’ equity interests should be aggregated, and determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. Under both guidelines, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

involved with a VIE and reconsiders that conclusion continuously. The consolidation analysis can generally be performed qualitatively. However, if it is not readily apparent whether Apollo is the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Apollo, affiliates of Apollo or third parties) or amendments to the governing documents of the respective Apollo fund may affect an entity’s status as a VIE or the determination of the primary beneficiary.

Apollo assesses whether it is the primary beneficiary and will consolidate or deconsolidate the entity accordingly. Performance of that assessment requires the exercise of judgment. Where the variable interests have qualified for the deferral, judgments are made in estimating cash flows in evaluating which member within the equity group absorbs a majority of the expected profits or losses of the VIE. Where the variable interests have not qualified for the deferral, judgments are made in determining whether a member in the equity group has a controlling financial interest including power to direct activities that most significantly impact the VIE’s economic performance and rights to receive benefits or obligations to absorb losses that are potentially significant to the VIE. Under both guidelines, judgment is made in evaluating the nature of the relationships and activities of the parties involved in determining which party within a related-party group is most closely associated with a VIE. The use of these judgments has a material impact to certain components of Apollo’s condensed consolidated financial statements.

Assets and liability amounts of the consolidated VIEs are shown in separate sections within the condensed consolidated statement of financial condition.

Refer to additional disclosures regarding VIEs in note 4. Intercompany transactions and balances, if any, have been eliminated in the consolidation.

Equity Method Investments—For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of such entities. Income (loss) from equity method investments is recognized as part of other income (loss) in the condensed consolidated statements of operations and income (loss) on available-for-sale securities (from equity method investments) is recognized as part of other comprehensive income (loss), net of tax in the condensed consolidated statements of comprehensive income (loss). The carrying amounts of equity method investments are reflected in investments in the condensed consolidated statements of financial condition. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities are at fair value.

Non-Controlling Interest—For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in Non-Controlling Interest in the condensed consolidated financial statements. The Non-Controlling Interest relating to Apollo Global Management, LLC primarily includes the 66.1% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings and other ownership interests in consolidated entities, which primarily consist of the approximate 98% ownership interest held by limited partners in AAA as of September 30, 2011. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

The authoritative guidance for Non-Controlling Interests in the condensed consolidated financial statements requires reporting entities to present Non-Controlling Interest as equity and provides guidance on the accounting for transactions between an entity and Non-Controlling Interests. According to the guidance, (1) Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s condensed consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributed to the Non-Controlling Interest holders on the Company’s condensed consolidated statements of operations, (3) the primary components of Non-Controlling Interest are separately presented in the Company’s condensed consolidated statements of changes in shareholders’ equity to clearly distinguish the interests in the Apollo Operating Group and other ownership interests in the consolidated entities and (4) profits and losses are allocated to Non-Controlling Interests in proportion to their ownership interests regardless of their basis.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Revenues—Revenues are reported in three separate categories that include (i) advisory and transaction fees from affiliates, which relate to the investments of the funds and may include individual monitoring agreements with the portfolio companies and debt investment vehicles of the private equity funds and capital markets funds; (ii) management fees from affiliates, which are based on committed capital, invested capital, net asset value, gross assets or as otherwise defined in the respective agreements; and (iii) carried interest income (loss) from affiliates, which is normally based on the performance of the funds subject to preferred return.

Advisory and Transaction Fees from Affiliates—Advisory and transaction fees, including directors’ fees, are recognized when the underlying services rendered are substantially completed in accordance with the terms of their transaction and advisory agreements. Additionally, during the normal course of business, the Company incurs certain costs related to private equity fund transactions that are not consummated (“Broken Deal Costs”).

As a result of providing advisory services to certain private equity and capital markets portfolio companies, Apollo is entitled to receive fees for transactions related to the acquisition and disposition of portfolio companies as well as ongoing monitoring of portfolio company operations. The amounts due from portfolio companies are included in “Due from Affiliates,” which is discussed further in note 11. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds is subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to Advisory and Transaction Fees from Affiliates in the condensed consolidated statements of operations.

Management Fees from Affiliates—Management fees for private equity funds, real estate funds and certain capital markets funds are recognized in the period during which the related services are performed in accordance with the contractual terms of the related agreement. Management fees for private equity funds and certain capital markets and real estate funds are based upon a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments. For most capital markets and real estate funds, management fees are recognized in the period during which the related services are performed and are based upon net asset value, gross assets or as otherwise defined in the respective agreements.

Carried Interest Income from Affiliates—Apollo is entitled to an incentive return that can normally amount to as much as 20% of the total returns on funds’ capital, depending upon performance. Performance-based fees are assessed as a percentage of the investment performance of the funds. The carried interest income from affiliates for any period is based upon an assumed liquidation of the fund’s net assets on the reporting date, and distribution of the net proceeds in accordance with the fund’s income allocation provisions. Carried interest receivable is presented separately in the condensed consolidated statements of financial condition. The net carried interest income may be subject to reversal to the extent that the carried interest income recorded exceeds the amount due to the general partner based on a fund’s cumulative investment returns. When applicable, the accrual for potential repayment of previously received carried interest income, which is a component of due to affiliates, represents all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund’s life.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Compensation and Benefits

The components of compensation and benefits have been expanded for the three and nine month periods ended September 30, 2010 to conform with the 2011 presentation.

Equity-Based Compensation—Equity-based compensation is accounted for in accordance with U.S. GAAP, which requires that the cost of employee services received in exchange for an award of equity instruments generally be measured based on the grant date fair value of the award. Equity-based awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are expensed over the relevant service period. The Company estimates forfeitures for equity-based awards that are not expected to vest. Equity based awards granted to non-employees for services provided to the affiliates are remeasured to fair value at the end of each reporting period and expensed over the relevant service period.

Salaries, Bonus and Benefits—Salaries, bonus and benefits includes base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are accrued over the service period.

From time to time, the Company may assign profits interests received in lieu of management fees to certain investment professionals. Such assignments of profits interests are treated as compensation and benefits when assigned.

The Company sponsors a 401(k) Savings Plan whereby U.S.-based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the nine months ended September 30, 2011 and 2010, respectively.

Profit Sharing Expense—Profit sharing expense consists of a portion of carried interest earned in one or more funds allocated to employees and former employees. Profit sharing expense is recognized as the related carried interest income is recognized. Profit sharing expense can be reversed during periods when there is a decline in carried interest income that was previously recognized. Additionally, profit sharing expenses paid may be subject to clawback from employees, former employees and Contributing Partners.

In June 2011, the Company adopted a performance based bonus arrangement for certain Apollo partners and employees designed to more closely align compensation on an annual basis with the overall performance of the Company. This arrangement enables certain partners and employees to earn discretionary bonuses based on carried interest realizations earned by the Company in a given year which amounts are reflected as profit sharing expense in the accompanying condensed consolidated financial statements.

Incentive Fee Compensation—Certain employees are entitled to receive a discretionary portion of incentive fee income from certain of our capital markets funds, based on performance for the year. Incentive fee compensation expense is recognized on accrual basis as the related carried interest income is earned. Incentive fee compensation expense may be subject to reversal during the interim period where there is a decline in the related carried interest income, however it is not subject to reversal once the carried interest income crystallizes.

Other Income (Loss)

Net Gains (Losses) from Investment Activities—Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in the Company’s investment portfolio between the opening balance sheet date and the closing balance sheet date. Net unrealized gains (losses) are a result of changes in the fair value of investments that have not been realized as of the balance sheet date. The condensed consolidated financial statements include the net realized and unrealized gains (losses) of AAA and the investment in HFA Holdings Limited (“HFA”) (see note 3).

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Net Gains from Investment Activities of Consolidated Variable Interest Entities—Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to Non-Controlling Interests in the condensed consolidated statements of operations.

Investments, at Fair Value—The Company follows U.S. GAAP attributable to fair value measurements, which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. Investments, at fair value, represent investments of the consolidated funds, investments of the consolidated VIEs and certain financial instruments for which fair value option was elected and the unrealized gains and losses resulting from changes in the fair value are reflected as net gains (losses) from investment activities and net gains (losses) from investment activities of the consolidated variable interest entities, respectively, in the condensed consolidated statements of operations. In accordance with U.S. GAAP, investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level I—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and the sale of such position would likely deviate from the quoted price.

Level II—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives where the fair value is based on observable inputs. These investments exhibit higher levels of liquid market observability as compared to Level III investments. The Company subjects broker quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II investment. These criteria include, but are not limited to, the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services.

Level III—Pricing inputs are unobservable for the investment and includes situations where there is little observable market activity for the investment. The inputs into the determination of fair value may require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, mezzanine funds, funds of hedge funds, distressed debt and non-investment grade residual interests in securitizations and collateralized debt obligations where the fair value is based on observable inputs as well as unobservable inputs. When a security is valued based on broker quotes, the Company subjects those quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II or Level III investment. Some of the factors we consider include the number of broker quotes we obtain, the quality of the broker quotes, the standard deviations of the observed broker quotes and the corroboration of the broker quotes to independent pricing services.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment when the fair value is based on unobservable inputs.

In cases where an investment or financial instrument that is measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, the Company accounts for the transfer as of the end of the reporting period.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Private Equity Investments—The value of liquid investments, where the primary market is an exchange (whether foreign or domestic) is determined using period end market prices. Such prices are generally based on the last sales price on the date of determination.

Valuation approaches used to estimate the fair value of investments that are less liquid include the income approach and the market approach. The income approach provides an indication of fair value based on the present value of cash flows that a business or security is expected to generate in the future. The most widely used methodology used in the income approach is a discounted cash flow method. Inherent in the discounted cash flow method are assumptions of expected results and a calculated discount rate. The market approach provides an indication of fair value based on a comparison of the subject company to comparable publicly traded companies and transactions in the industry. The market approach is driven more by current market conditions of actual trading levels of similar companies and actual transaction data of similar companies. Consideration may also be given to such factors as the Company’s historical and projected financial data, valuations given to comparable companies, the size and scope of the Company’s operations, the Company’s strengths, weaknesses, expectations relating to the market’s receptivity to an offering of the Company’s securities, applicable restrictions on transfer, industry information and assumptions, general economic and market conditions and other factors deemed relevant. As part of management’s process, the Company utilizes a valuation committee to review and approve the valuations. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

Capital Markets Investments—The majority of the investments in Apollo’s capital markets funds are valued using quoted market prices. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing recognized pricing services, market participants or other sources. The capital markets funds also enter into foreign currency exchange contracts, credit default swap contracts, and other derivative contracts, which may include options, caps, collars and floors. Foreign currency exchange contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. If securities are held at the end of this period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Credit default swap contracts are recorded at fair value as an asset or liability with changes in fair value recorded as unrealized appreciation or depreciation. Realized gains or losses are recognized at the termination of the contract based on the difference between the close-out price of the credit default contract and the original contract price.

Forward contracts are valued based on market rates obtained from counterparties or prices obtained from recognized financial data service providers. When determining fair value pricing when no market value exists, the value attributed to an investment is based on the enterprise value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation approaches used to estimate the fair value of illiquid investments included in Apollo’s capital markets funds also may use the income approach or market approach. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks.

Real Estate Investments—For Apollo’s CMBS portfolio, the estimated fair value is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the funds would receive in an actual trade for the applicable instrument. Additionally, the loans held-for-investment are stated at the principal amount outstanding, net of deferred loan fees and costs in accordance with U.S. GAAP. Loans that the funds plan to sell or liquidate in the near term will be treated as loans held-for-sale and will be held at the lower of cost or fair value. For Apollo’s illiquid investments, valuations of non-marketable underlying investments are determined using methods that include, but are not limited to (i) discounted cash flow estimates or comparable analysis prepared internally, (ii) third party appraisals or valuations by qualified real estate appraisers, and (iii) contractual sales value of investments/properties subject to bona fide purchase contracts. Methods (i) and (ii) also incorporate consideration of the use of the income, cost, or sales comparison approaches of estimating property values. For portfolio or operating company investments, valuations may also incorporate the use of sales comparisons, valuing statistically meaningful samples, and the use of other techniques such as earnings multiples of similar companies due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the value of investments by certain of our real estate funds may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Fair Value of Financial Instruments—U.S. GAAP guidance requires the disclosure of the estimated fair value of financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Except for the Company’s debt obligation related to the AMH Credit Agreement (as defined in note 8), Apollo’s financial instruments are recorded at fair value or at amounts whose carrying value approximates fair value. See “Investments, at Fair Value” above. While Apollo’s valuations of portfolio investments are based on assumptions that Apollo believes are reasonable under the circumstances, the actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may ultimately differ significantly from the assumptions on which the valuations were based. Other financial instruments carrying values generally approximate fair value because of the short-term nature of those instruments or variable interest rates related to the borrowings. As disclosed in note 8, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $745.9 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. However, the carrying value that is recorded on the condensed consolidated statement of financial condition is the amount for which we expect to settle the long term debt obligation.

Financial Instruments held by Consolidated VIEs—The consolidated VIEs hold investments that are traded over-the-counter. Investments in securities that are traded on a securities exchange or comparable over-the-counter quotation systems are valued based on the last reported sale price at that date. If no sales of such investments are reported on such date, and in the case of over-the-counter securities or other investments for which the last sale date is not available, valuations are based on independent market quotations obtained from market participants, recognized pricing services or other sources deemed relevant, and the prices are based on the average of the “bid” and “ask” prices, or at ascertainable prices at the close of business on such day. Market quotations are generally based on valuation pricing models or market transactions of similar securities adjusted for security-specific factors such as relative capital structure priority and interest and yield risks, among other factors.

The consolidated VIEs also have debt obligations that are recorded at fair value. The valuation approach used to estimate the fair values of debt obligations is the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. Debt obligations are discounted based on the appropriate yield curve given the loan’s respective maturity and credit rating. Management uses its discretion and judgment in considering and appraising relevant factors for determining the valuations of its debt obligations.

Fair Value Option—Apollo has elected the fair value option for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. Apollo has applied the fair value option for certain corporate loans, other investments and debt obligations held by these entities that otherwise would not have been carried at fair value. Refer to note 4 for further disclosure on financial instruments of the consolidated VIEs for which the fair value option has been elected.

Net Income (Loss) Per Class A Share—U.S. GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The remaining earnings are allocated to common Class A Shares and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from a hypothetical conversion of these potential common shares.

Use of Estimates—The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Apollo’s most significant estimates include goodwill, intangible assets, income taxes, carried interest income from affiliates, non-cash compensation and fair value of investments and debt in the consolidated and unconsolidated funds and VIEs. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

In April 2011, the FASB amended existing guidance for agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments remove from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and the collateral maintenance implementation guidance related to that criterion. The guidance is effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In May 2011, the FASB issued an update which includes amendments that result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Certain of the amendments could change how the fair value measurement guidance is applied including provisions related to highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement, fair value of an instrument classified in a reporting entity’s shareholders’ equity, and additional disclosure requirements about fair value measurements. The update is effective for interim and annual periods beginning after December 15, 2011 for public entities to be applied prospectively. The Company is currently evaluating the impact that this guidance will have on its condensed consolidated financial statements.

In June 2011, the FASB issued an update which includes amendments that eliminate the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity and requires entities to report components of other comprehensive income in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements. In a single continuous statement, entities must include the components of net income, a total for net income, the components of OCI, a total for OCI, and a total for comprehensive income. Under the two separate but continuous statements approach, the first statement would include components of net income, consistent with the income statement format used today, and the second statement would include components of OCI. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For all entities, the amendments must be applied retrospectively for all periods presented and do not require any transition disclosures. The adoption of this guidance will not have an impact on the Company’s condensed consolidated financial statements as the Company presents a separate statement of comprehensive income.

In September 2011, the FASB issued an update which amends the guidance related to testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option to perform a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not to be less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The update does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant. The amendments are effective for all entities for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact on the Company’s condensed consolidated financial statements.

3. INVESTMENTS

The following table represents Apollo’s investments:

 

     September 30,
2011
     December 31,
2010
 

Investments, at fair value

   $ 1,510,401       $ 1,637,091   

Other investments

     253,633         283,462   
  

 

 

    

 

 

 

Total Investments

   $ 1,764,034       $ 1,920,553   
  

 

 

    

 

 

 

Investments at Fair Value

Investments at fair value consist of financial instruments held by AAA, the investment in HFA, other investments held at fair value and investments of consolidated VIEs as discussed further in note 4. As of September 30, 2011 and December 31, 2010, the net assets of the consolidated funds and VIEs were $1,474.6 million and $1,951.6 million, respectively. The following investments, except the investment in HFA and other investments, are presented as a percentage of net assets of the consolidated funds and VIEs:

 

Investments, at Fair Value – Affiliates

  September 30, 2011     December 31, 2010  
 

 

Fair Value

    Cost     % of  Net
Assets of
Consolidated
Funds  and
VIEs
    Fair Value     Cost     % of  Net
Assets of
Consolidated
Funds and
VIEs
 
  Private
Equity
    Capital
Markets
    Total         Private
Equity
    Capital
Markets
    Total      

Investments, at fair value:

                   

AAA

  $ 1,472,129      $ —        $ 1,472,129      $ 1,666,902        99.8   $ 1,637,091      $ —        $ 1,637,091      $ 1,695,992        83.9

HFA

    —          36,691        36,691        52,069        (1)      —          —          —          —          —     

Other

    1,581        —          1,581        2,807        (1)      —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,473,710      $ 36,691      $ 1,510,401      $ 1,721,778        99.8   $ 1,637,091      $ —        $ 1,637,091      $ 1,695,992        83.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Investments were not held by a consolidated fund or consolidated VIEs.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Securities

At September 30, 2011 and December 31, 2010, the sole investment of AAA was its investment in AAA Investments, L.P. (“AAA Investments”). The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the consolidated funds and VIEs as of the aforementioned dates:

 

     September 30, 2011  
     Instrument Type    Cost      Fair Value      % of Net
Assets  of
Consolidated
Funds  and
VIEs
 

Apollo Life Re Ltd.

   Equity    $ 301,098       $ 372,900         25.3

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      113,772         159,517         10.8   

Momentive Performance Materials Holdings Inc.

   Equity      76,007         151,232         10.3   

Charter Communications, Inc.

   Equity      44,602         107,319         7.3   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      96,357         98,209         6.7   

Rexnord Corporation

   Equity      37,461         93,300         6.3   

LeverageSource, L.P.

   Equity      139,913         80,608         5.5   
     December 31, 2010  
     Instrument Type    Cost      Fair Value      % of Net
Assets  of
Consolidated
Funds  and
VIEs
 

Apollo Life Re Ltd.

   Equity    $ 201,098       $ 249,900         12.8

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      113,772         160,262         8.2   

Momentive Performance Materials Holdings Inc.

   Equity      76,007         137,992         7.1   

Rexnord Corporation

   Equity      37,461         133,700         6.9   

LeverageSource, L.P.

   Equity      140,743         115,677         5.9   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      102,530         110,029         5.6   

Caesars Entertainment Corporation

   Equity      176,729         99,000         5.1   

AAA Investments owns equity as a private equity co-investment in Caesars Entertainment Corporation (formerly known as Harrah’s Entertainment, Inc.) and AAA Investments has an ownership interest in LeverageSource, L.P., which owns debt of Caesars Entertainment Corporation. At December 31, 2010, AAA Investments’ combined share of these debt and equity investments was greater than 5% of the net assets of the consolidated funds and VIEs and was valued at $102.8 million. In addition to AAA Investments’ private equity co-investment in Momentive Performance Materials Holdings Inc. (“Momentive”) noted above, AAA Investments has an ownership interest in the debt of Momentive. AAA Investments’ combined share of these debt and equity investments is greater than 5% of the net assets of consolidated funds and VIEs and is valued at $151.9 million and $138.8 million at September 30, 2011 and December 31, 2010, respectively. Furthermore, AAA Investments owns equity, as a private equity co-investment, and debt, through its investment in Autumnleaf, L.P. and Apollo Fund VI BC, L.P., in CEVA Logistics. AAA Investments’ combined share of these debt and equity investments was greater than 5% of the net assets of consolidated funds and VIEs and was valued at $90.8 million and $124.6 million as of September 30, 2011 and December 31, 2010, respectively.

Apollo Strategic Value Offshore Fund, Ltd. (the “Apollo Strategic Value Fund”) primarily invests in the securities of leveraged companies in North America and Europe through three core strategies: distressed investments, value-driven investments and special opportunities. In connection with the redemptions requested by AAA Investments of its investment in the Apollo Strategic Value Fund, the remainder of AAA Investments’

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

investment in the Apollo Strategic Value Fund, was converted into liquidating shares issued by the Apollo Strategic Value Fund. The liquidating shares are generally allocated a pro rata portion of each of Apollo Strategic Value Fund’s existing investments and liabilities, and as those investments are sold, AAA Investments is allocated the proceeds from such disposition less its proportionate share of any expenses incurred by the Apollo Strategic Value Fund.

Apollo Asia Opportunity Offshore Fund, Ltd. (“Asia Opportunity Fund”) is an investment vehicle that seeks to generate attractive risk-adjusted returns across market cycles by capitalizing on investment opportunities created by the increasing demand for capital in the rapidly expanding Asian markets. In connection with a redemption requested by AAA Investments of its investment in Asia Opportunity Fund, a portion of AAA Investments’ investment was converted into liquidating shares issued by the Asia Opportunity Fund. The liquidating shares are generally allocated a pro rata portion of each of Asia Opportunity Fund’s existing investments and liabilities, and as those investments are sold, AAA Investments is allocated the proceeds from such disposition less its proportionate share of any expenses incurred or reserves set by Asia Opportunity Fund. At September 30, 2011 and December 31, 2010, the liquidating shares of Asia Opportunity Fund had a fair value of $37.1 million and $45.0 million, respectively.

Apollo Life Re Ltd. is an Apollo-sponsored vehicle that owns the majority of the equity of Athene Holding Ltd., (“Athene”), the parent of Athene Life Re Ltd., a Bermuda-based reinsurance company focused on the life reinsurance sector, Liberty Life Insurance Company, a recently acquired Delaware-domiciled (formerly South Carolina domiciled) stock life insurance company focused on retail sales and reinsurance in the retirement services market, Investors Insurance Corporation, a recently acquired Delaware-domiciled stock life insurance company focused on the retirement services market and Athene Life Insurance Company, a recently organized Indiana-domiciled stock life insurance company focused on the institutional guaranteed investment contract (“GIC”) backed note and funding agreement markets.

HFA

On March 7, 2011, the Company invested $52.1 million (including expenses related to the purchase) in a convertible note with an aggregate principal amount of $50.0 million and received 20,833,333 stock options issued by HFA, an Australian based specialist global funds management company providing absolute return fund products to investors.

The terms of the convertible note allow the Company to convert the note, in whole or in part, into common shares of HFA at an exchange rate equal to the principal plus accrued payment-in-kind interest (or “PIK” interest) divided by US$0.98 at any time, and convey participation rights, on an as-converted basis, in any dividends declared in excess of $6.0 million per annum, as well as seniority rights over HFA common equity holders. Unless previously converted, repurchased or cancelled, the note will be converted on the eighth anniversary of its issuance. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion. The PIK interest provides for the Company to receive additional common shares of HFA if the note is converted. The Company has elected the fair value option for the convertible note. The convertible note is valued using an as “if-converted basis”. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $0.97 as of September 30, 2011) per stock option. The stock options became exercisable upon issuance and expire on the eighth anniversary of the issuance date. The stock options are accounted for as a derivative and are valued at their fair value under U.S. GAAP at each balance sheet date. As a result, for the three and nine months ended September 30, 2011, the Company recorded an unrealized loss of approximately $33.4 million and $13.3 million, respectively, related to the convertible note and stock options within net (losses) gains from investment activities in the condensed consolidated statements of operations.

The Company has classified the instruments associated with the HFA investment as Level III investments.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Net (Losses) Gains from Investment Activities

Net (losses) gains from investment activities in the condensed consolidated statements of operations include net realized gains from sales of investments, and the change in net unrealized (losses) gains resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized (losses) gains. Additionally net (losses) gains from investment activities include changes in the fair value of the investment in HFA and other investments held at fair value. The following tables present Apollo’s net (losses) gains from investment activities for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months  Ended
September 30, 2011
 
     Private Equity     Capital Markets     Total  

Net unrealized losses due to changes in fair value

   $ (338,277   $ (33,370   $ (371,647
  

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities

   $ (338,277   $ (33,370   $ (371,647
  

 

 

   

 

 

   

 

 

 

 

     Three Months  Ended
September 30, 2010
 
     Private Equity      Capital Markets      Total  

Net unrealized gains due to changes in fair value

   $ 101,210       $ —         $ 101,210   
  

 

 

    

 

 

    

 

 

 

Net Gains from Investment Activities

   $ 101,210       $ —         $ 101,210   
  

 

 

    

 

 

    

 

 

 

 

     Nine Months  Ended
September 30, 2011
 
     Private Equity     Capital Markets     Total  

Net unrealized losses due to changes in fair value

   $ (137,098   $ (13,309   $ (150,407
  

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities

   $ (137,098   $ (13,309   $ (150,407
  

 

 

   

 

 

   

 

 

 

 

     Nine Months  Ended
September 30, 2010
 
     Private Equity      Capital Markets     Total  

Net unrealized gains (losses) due to changes in fair value

   $ 204,200       $ (2,274   $ 201,926   
  

 

 

    

 

 

   

 

 

 

Net Gains (Losses) from Investment Activities

   $ 204,200       $ (2,274   $ 201,926   
  

 

 

    

 

 

   

 

 

 

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Other Investments

Other Investments primarily consist of equity method investments. Apollo’s share of operating income (loss) generated by these investments is recorded within income (loss) from equity method investments in the condensed consolidated statements of operations.

Income (loss) from equity method investments for the three and nine months ended September 30, 2011 and 2010 consisted of the following:

 

     For the Three Months
Ended September 30
    For the Nine Months
Ended September 30,
 
     2011     2010     2011     2010  

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ (185   $ 58      $ (66   $ 122   

Apollo Investment Fund IV, L.P. (“Fund IV”)

     (1     3        11        19   

Apollo Investment Fund V, L.P. (“Fund V”)

     (16     4        1        29   

Apollo Investment Fund VI, L.P. (“Fund VI”)

     (996     334        1,900        93   

Apollo Investment Fund VII, L.P. (“Fund VII”)

     (28,646     15,577        (14,981     18,280   

Apollo Natural Resources Partners, L.P. (“ANRP”)

     (101     —          (101     —     

Capital Markets Funds:

        

Apollo Special Opportunities Managed Account, L.P. (“SOMA”)

     (1,024     100        (882     421   

Apollo Value Investment Fund, L.P. (“VIF”)

     (28     2        (24     15   

Apollo Strategic Value Fund, L.P. (“SVF”)

     (21     2        (18     10   

Apollo Credit Liquidity Fund, L.P. (“ACLF”)

     (3,360     2,467        (2,864     1,379   

Apollo/Artus Investors 2007-I, L.P. (“Artus”)

     (535     1,254        (166     2,445   

Apollo Credit Opportunity Fund I, L.P. (“COF I”)

     (13,851     7,506        (9,491     5,376   

Apollo Credit Opportunity Fund II, L.P. (“COF II”)

     (3,574     1,835        (2,636     2,007   

Apollo European Principal Finance Fund, L.P. (“EPF”)

     (1,461     (1,091     1,402        869   

Apollo Investment Europe II, L.P. (“AIE II”)

     (1,558     1,251        (148     1,140   

Apollo Palmetto Strategic Partnership, L.P. (“Palmetto”)

     (962     268        (441     401   

Real Estate:

        

Apollo Commercial Real Estate Finance, Inc. (“ARI”)

     212        164        524        284   

CPI Capital Partners NA Fund

     4        —          85        —     

CPI Capital Partners Asia Pacific Fund

     18        —          32        —     

Other Equity Method Investments:

        

VC Holdings, L.P. Series A (“Vantium A”)

     (554     (336     (1,860     (862

VC Holdings, L.P. Series C (“Vantium C”)

     244        (1,910     464        1,604   

VC Holdings, L.P. Series D (“Vantium D”)

     (43     (8     17        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (Loss) Income from Equity Method Investments

   $ (56,438   $ 27,480      $ (29,242   $ 33,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Other investments as of September 30, 2011 and December 31, 2010 consisted of the following:

 

     Equity Held as of  
     September 30,
2011
    % of
Ownership
    December 31,
2010
    % of
Ownership
 

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 849        0.057   $ 929        0.056

Fund IV

     27        0.006        48        0.005   

Fund V

     212        0.014        231        0.013   

Fund VI

     7,587        0.082        5,860        0.051   

Fund VII

     107,384        1.315        122,384        1.345   

Apollo Natural Resources Partners, L.P

     740        2.575        —          —     

Capital Markets Funds:

        

Apollo Special Opportunities Managed Account, L.P.

     4,964        0.523        5,863        0.537   

Apollo Value Investment Fund, L.P.

     129        0.081        152        0.085   

Apollo Strategic Value Fund, L.P.

     126        0.059        144        0.055   

Apollo Credit Liquidity Fund, L.P.

     12,319        2.467        18,736        2.450   

Apollo/Artus Investors 2007-I, L.P.

     5,721        6.156        7,143        6.156   

Apollo Credit Opportunity Fund I, L.P.

     29,551        2.039        41,793        1.949   

Apollo Credit Opportunity Fund II, L.P

     21,707        1.524        27,415        1.441   

Apollo European Principal Finance Fund, L.P.

     16,316        1.363        15,352        1.363   

Apollo Investment Europe II, L.P.

     8,005        2.072        8,154        2.045   

Apollo Palmetto Strategic Partnership, L.P.

     6,770        1.186        6,403        1.186   

Apollo Senior Floating Rate Fund (“AFT”)

     100        0.034        —          —     

Apollo/JH Loan Portfolio, L.P.

     100        0.196        —          —     

Apollo Residential Mortgage, Inc. (“AMTG”)(4)

     4,142 (1)      1.850 (1)      —          —     

Real Estate:

        

Apollo Commercial Real Estate Finance, Inc.(4)

     11,384 (2)      3.197 (2)      9,440 (3)      3.198 (3) 

AGRE U.S. Real Estate Fund

     5,963        5.892        —          —     

CPI Capital Partners NA Fund

     550        0.358        —          —     

CPI Capital Partners Europe Fund

     5        0.001        —          —     

CPI Capital Partners Asia Pacific Fund

     224        0.032        —          —     

Other Equity Method Investments:

        

Vantium A

     359        42.989        2,219        12.240   

Vantium C

     7,321        2.077        10,135        2.166   

Vantium D

     1,078        6.345        1,061        6.345   
  

 

 

     

 

 

   

Total Other Investments

   $ 253,633        $ 283,462     
  

 

 

     

 

 

   

 

(1) Amounts are as of July 22, 2011, the date of AMTG’s initial public offering.
(2) Amounts are as of June 30, 2011.
(3) Amounts are as of September 30, 2010.
(4) Investment value includes the fair value of RSUs granted to the Company as of the grant date. These amounts are not considered in the percentage of ownership until the RSUs are vested, at which point the RSUs are converted to common stock and delivered to the Company.

As of September 30, 2011 and December 31, 2010 and for the nine months ended September 30, 2011 and September 30, 2010, no single equity method investee held by Apollo exceeded 20% of its total consolidated assets or income, respectively. As such, Apollo is not required to present summarized income statement information for any of its equity method investee.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Fair Value Measurements

The following table summarizes the valuation of Apollo’s investments in fair value hierarchy levels as of September 30, 2011 and December 31, 2010:

 

     Level I      Level II      Level III      Totals  
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
 

Assets, at fair value:

                       

Investment in AAA Investments, L.P.

   $ —         $ —         $ —         $ —         $ 1,472,129       $ 1,637,091       $ 1,472,129       $ 1,637,091   

Investments in HFA and Other

     —           —           —           —           38,272         —           38,272         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —         $ 1,510,401       $ 1,637,091       $ 1,510,401       $ 1,637,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Level I      Level II      Level III      Totals  
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
 

Liabilities, at fair value:

                       

Interest rate swap agreements

   $ —         $ —         $ 4,893       $ 11,531       $ —         $ —         $ 4,893       $ 11,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           4,893       $ 11,531       $ —         $ —           4,893       $ 11,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level I, II or III during the three and nine months ended September 30, 2011 relating to assets and liabilities, at fair value, noted in the tables above.

The following table summarizes the changes in AAA Investments, which is measured at fair value and characterized as a Level III investment:

 

     For the Three Months
Ended September 30
    For the Nine Months
Ended September 30
 
     2011     2010     2011     2010  

Balance, Beginning of Period

   $ 1,810,577      $ 1,411,281      $ 1,637,091      $ 1,324,939   

Purchases

     125        32        432        375   

Distributions

     (1,522     (38,479     (29,522     (55,470

Change in unrealized (losses) gains, net

     (337,051     101,210        (135,872     204,200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,472,129      $ 1,474,044      $ 1,472,129      $ 1,474,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the changes in the investment in HFA and Other Investments, which are measured at fair value and characterized as Level III investments:

 

     For the
Three Months
Ended
September 30,
    For the
Nine Months
Ended
September 30,
 
     2011     2011  

Balance, Beginning of Period

   $ 72,498      $ —     

Purchases

     370        54,876   

Change in unrealized losses, net

     (34,596     (14,535

Expenses incurred

     —          (2,069
  

 

 

   

 

 

 

Balance, End of Period

   $ 38,272      $ 38,272   
  

 

 

   

 

 

 

The change in unrealized losses, net has been recorded within the caption “Net (losses) gains from investment activities” in the condensed consolidated statements of operations.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The following table summarizes a look-through of the Company’s Level III investments by valuation methodology of the underlying securities held by AAA Investments:

 

     Private Equity  
     September 30, 2011     December 31, 2010  
           % of
Investment
of AAA
          % of
Investment
of AAA
 

Approximate values based on net asset value of the underlying funds, which are based on the funds underlying investments that are valued using the following:

        

Comparable company and industry multiples

   $ 744,400        42.5   $ 782,775        42.6

Discounted cash flow models

     594,099        34.0        490,024        26.6   

Listed quotes

     213,343        12.2        24,232        1.3   

Broker quotes

     159,640        9.1        504,917        27.5   

Other net assets(1)

     38,643        2.2        37,351        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

     1,750,125        100.0     1,839,299        100.0
    

 

 

     

 

 

 

Other net liabilities(2)

     (277,996       (202,208  
  

 

 

     

 

 

   

Total Net Assets

   $ 1,472,129        $ 1,637,091     
  

 

 

     

 

 

   

 

(1) Balances include other assets and liabilities of certain funds in which AAA Investments has invested. Other assets and liabilities at the fund level primarily include cash and cash equivalents, broker receivables and payables and amounts due to and from affiliates. Carrying values approximate fair value for other assets and liabilities, and accordingly, extended valuation procedures are not required.
(2) Balances include other assets, liabilities and general partner interests of AAA Investments and are primarily comprised of $400.5 million and $537.5 million in long-term debt offset by cash and cash equivalents at the September 30, 2011 and December 31, 2010 balance sheet dates, respectively. Carrying values approximate fair value for other assets and liabilities (except for debt), and, accordingly, extended valuation procedures are not required.

4. VARIABLE INTEREST ENTITIES

The Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. The purpose of such VIEs is to provide strategy-specific investment opportunities for investors in exchange for management and performance based fees. The investment strategies of the entities that the Company manages may vary by entity, however, the fundamental risks of such entities have similar characteristics, including loss of invested capital and the return of carried interest income previously distributed to the Company by certain private equity and capital markets entities. The nature of the Company’s involvement with VIEs includes direct and indirect investments and fee arrangements. The Company does not provide performance guarantees and has no other financial obligations to provide funding to VIEs other than its own capital commitments.

Consolidated Variable Interest Entities

In accordance with the methodology described in note 2, Apollo consolidated four VIEs under the amended consolidation guidance during 2010 and consolidated an additional VIE during the second quarter of 2011.

One of the consolidated VIEs was formed to purchase loans and bonds in a leveraged structure for the benefit of its limited partners, which included certain Apollo funds that contributed equity to the consolidated VIE. Through its role as general partner of this VIE, it was determined that Apollo had the characteristics of the power to direct the activities that most significantly impact the VIE’s economic performance. Additionally, the Apollo funds have involvement with the VIE that have the characteristics of the right to receive benefits from the VIE that could potentially be significant to the VIE. As a group, the Company and its related parties have the characteristics of a controlling financial interest. Apollo determined that it is the party within the related party group that is most closely associated with the VIE and therefore should consolidate it.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Three of the consolidated VIEs including the VIE formed during the second quarter 2011 were formed for the sole purpose of issuing collateralized notes to investors, which include one Apollo fund. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt. Through its role as collateral manager of these VIEs, it was determined that Apollo had the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that the potential fees that it could receive directly and indirectly from these VIEs represent rights to returns that could potentially be significant to such VIEs. As a result, Apollo determined that it is the primary beneficiary and therefore should consolidate the VIEs.

Additionally, one of the consolidated VIEs, which qualified as an asset-backed financing entity, was formed during the fourth quarter of 2010 and the Company determined that it was the primary beneficiary of such VIE. Based on a restructuring of this VIE which occurred later in the fourth quarter of 2010, the Company no longer possessed the power to direct the activities of such VIE resulting in deconsolidation of such VIE in the fourth quarter of 2010.

Apollo holds no equity interest in any of the consolidated VIEs described above. The assets of these consolidated VIEs are not available to creditors of the Company. In addition, the investors in these consolidated VIEs have no recourse to the assets of the Company. The Company has elected the fair value option for financial instruments held by its consolidated VIEs, which includes investments in loans and corporate bonds, as well as debt obligations held by such consolidated VIEs. Other assets include amounts due from brokers and interest receivables. Other liabilities include payables for securities purchased, which represent open trades within the consolidated VIEs and primarily relate to corporate loans that are expected to settle within the next sixty days.

Fair Value Measurements

The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of September 30, 2011 and December 31, 2010:

 

     Level I      Level II      Level III      Totals  
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
 

Investments, at fair
value
(1)(2)

   $ —         $ —         $ 1,040,440       $ 1,172,242       $ 74,162       $ 170,369       $ 1,114,602       $ 1,342,611   
     Level I      Level II      Level III      Totals  
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
     September 30,
2011
     December 31,
2010
 

Liabilities, at fair value(3)

   $ —         $ —         $ —         $ —         $ 1,136,926       $ 1,127,180       $ 1,136,926       $ 1,127,180   

 

(1) During the first quarter of 2011, one of the consolidated VIEs sold all of its investments. At December 31, 2010, the cost and fair value of the investments of this VIE were $719.5 million and $684.1 million, respectively. The consolidated VIE had a net investment gain of $16.0 million relating to the sale for the nine months ended September 30, 2011, which is reflected in the net (losses) gains from investment activities of consolidated variable interest entities on the condensed consolidated statement of operations.
(2) During the second quarter of 2011, the Company consolidated an additional VIE which included investments and notes.
(3) At December 31, 2010, the cost and fair value of the term loans were $453.9 million and $408.7 million, respectively. The term loans were paid down in the first quarter of 2011, with payments totaling $412.1 million, resulting in a realized gain of $41.8 million. Combined with net unrealized depreciation on the term loans of $45.2 million, as such, the consolidated VIE had a net loss on term loans of $3.4 million for the nine months ended September 30, 2011, which is reflected in the net (losses) gains from investment activities of consolidated variable interest entities on the condensed consolidated statement of operations.

Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs, while the Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2. All Level II and III investments were valued using broker quotes. Transfers of investments out of Level III and into Level II or Level I, if any, are recorded as of the quarterly period in which the transfer occurred.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following table summarizes the changes in investments of consolidated VIEs, which are measured at fair value and characterized as Level III investments:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Balance, Beginning of Period

   $ 272,991      $ 1,374,367      $ 170,369      $ —     

Transition adjustment relating to consolidation of VIE on January 1, 2010

     —          —          —          1,102,114   

Purchases

     85,764        21,622        571,279        392,862   

Sale of investments

     (18,135     (261,413     (98,724     (344,385

Net realized gains

     111        1,932        1,945        2,118   

Net unrealized (losses) gains

     (9,443     33,256        (6,753     18,109   

Elimination of equity investment attributable to consolidated VIEs

     —          19        —          (1,035

Transfers out of Level III

     (274,795     —          (673,776     —     

Transfers into Level III

     17,669        —          109,822        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 74,162      $ 1,169,783      $ 74,162      $ 1,169,783   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in net unrealized (losses) gains included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to investments still held at reporting date

   $ (2,337   $ 25,042      $ (1,886   $ 12,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investments were transferred out of Level III into Level II and into Level III out of Level II, respectively, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services.

The following table summarizes the changes in liabilities of consolidated VIEs, which are measured at fair value and characterized as Level III liabilities:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Balance, Beginning of Period

   $ 1,174,568      $ 1,006,548      $ 1,127,180      $ —     

Transition adjustment relating to consolidation of VIE on January 1, 2010

     —          —          —          706,027   

Elimination of equity investments attributable to consolidated VIEs

     1        19        5        (1,035

Additions

     —          —          454,356        320,154   

Repayments

     —          (118,871     (412,057     (136,110

Net realized gains on debt

     —          (3,804     (41,819     (5,483

Net unrealized (gains) losses on debt

     (37,643     16,588        9,261        16,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,136,926      $ 900,480      $ 1,136,926      $ 900,480   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in net unrealized (gains) losses included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to liabilities still held at reporting date

   $ (37,643   $ 4,399      $ (35,966   $ 436   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

-30-


Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Net (Losses) Gains from Investment Activities of Consolidated Variable Interest Entities

The following table presents net (losses) gains from investment activities of the consolidated VIEs for the three and nine months ended September 30, 2011 and 2010, respectively:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Net unrealized (losses) gains from investment activities

   $ (45,446   $ 33,256      $ (20,256   $ 18,109   

Net realized gains (losses) from investment activities

     38        1,932        (12,581     2,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (losses) gains from investment activities

     (45,408     35,188        (32,837     20,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) from debt

     37,643        (16,588     (9,261     (16,927

Net realized gains from debt

     —          3,804        41,819        5,483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) from debt

     37,643        (12,784     32,558        (11,444
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other income

     14,831        15,435        39,779        38,864   

Other expenses

     (11,826     (4,929     (39,541     (15,002
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Losses) Gains from Investment Activities of Consolidated VIEs

   $ (4,760   $ 32,910      $ (41   $ 32,645   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Investments of Consolidated VIEs

The following table presents a condensed summary of investments of the consolidated VIEs that are included in the condensed consolidated statements of financial condition as of September 30, 2011 and December 31, 2010:

 

     Fair Value
as of
September 30,
2011
    % of Net
Assets
of
Consolidated
Funds and
VIEs
    Fair Value
as of
December 31,
2010
    % of Net
Assets
of
Consolidated
Funds and
VIEs
 

Corporate Loans:

        

North America

        

Chemicals

   $ 24,218        1.6   $ 13,950        0.7

Communications

        

Intelsat Jackson term loan due February 1, 2014

     —          —          105,659        5.4   

Other

     88,052        6.0        221,383        11.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Communications

     88,052        6.0        327,042        16.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consumer & Retail

     151,729        10.3        114,931        5.9   

Distribution & Transportation

     8,393        0.6        7,794        0.4   

Energy

     35,240        2.4        25,026        1.3   

Financial and Business Services

     147,999        10.0        85,713        4.4   

Healthcare

     145,492        9.9        144,343        7.4   

Manufacturing & Industrial

     145,598        9.9        200,290        10.3   

Media, Cable & Leisure

     153,898        10.3        93,798        4.8   

Metals & Mining

     12,353        0.8        14,025        0.7   

Packaging & Materials

     30,231        2.1        21,066        1.1   

Technology

     99,660        6.8        34,862        1.8   

Other

     5,384        0.4        9,539        0.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Loans – North America (amortized cost $1,082,073 and $1,075,287)

     1,048,247        71.1        1,092,379        56.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Europe

        

Chemicals

     18,256        1.2        9,909        0.5   

Consumer & Retail

     —          —          75,007        3.8   

Healthcare

        

Alliance Boots seniors facility B1 due July 5, 2015

     —          —          143,105        7.3   

Other

     14,853        1.0        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Healthcare

     14,853        1.0        143,105        7.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Manufacturing & Industrial

     16,319        1.1        7,696        0.4   

Media, Cable & Leisure

     —          —          10,787        0.6   

Technology

     5,939        0.4        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Loans – Europe (amortized cost $58,258 and $284,760)

     55,367        3.7        246,504        12.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Loans (amortized cost $1,140,331 and $1,360,047)

     1,103,614        74.8        1,338,883        68.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Bonds:

        

North America

        

Communications

     —          —          1,564        0.1   

Distribution & Transportation

     4,721        0.3        4,160        0.2   

Energy

     —          —          3,640        0.2   

Manufacturing & Industrial

     770        0.1        —          —     

Media, Cable & Leisure

     6,242        0.4        3,550        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Bonds – North America (amortized cost $12,472 and $12,406)

     11,733        0.8        12,914        0.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Europe

        

Media, Cable & Leisure

     1,370        0.1        1,599        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Bonds – Europe (amortized cost $1,400 and $1,519)

     1,370        0.1        1,599        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Corporate Bonds (amortized cost $13,872 and $13,925)

     13,103        0.9        14,513        0.8   

Elimination of equity investments attributable to consolidated VIEs

     (2,115     (0.1     (10,785     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments, at fair value, of Consolidated VIEs (amortized cost $1,154,203 and $1,373,972)

   $ 1,114,602        75.6   $ 1,342,611        68.8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Senior Secured Notes, Subordinated Note, Term Loans—Included within debt are amounts due to third-party institutions of the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of September 30, 2011 and December 31, 2010:

 

     As of
September 30, 2011
    As of
December 31, 2010
          

Description

   Outstanding
Principal
Balance
    Fair
Value
    Weighted
Average
Interest
Rate
    Outstanding
Principal
Balance
     Fair
Value
     Weighted
Average
Interest
Rate
   

Maturity Date

  

Interest Rate

Loans:

                   

Term A Loan

   $ —        $ —          —     $ 146,502       $ 142,601         0.91   October 29, 2012    BBA 3 mo. LIBOR (USD) plus 0.5%

Term B Loan

     —          —          —          145,390         111,655         0.91   June 13, 2013    BBA 3 mo. LIBOR (GBP) plus 0.5%

Term C Loan

     —          —          —          161,984         154,394         0.91   October 29, 2013    BBA 3 mo. LIBOR (USD) plus 0.5%
  

 

 

   

 

 

     

 

 

    

 

 

         
     —    (1)      —    (1)      —          453,876         408,650           
  

 

 

   

 

 

     

 

 

    

 

 

         

Notes(1)(2)(3)

                   

Senior secured notes – A1

     215,400        215,400        2.14     215,400         215,400         2.02   May 20, 2020    BBA 3 mo LIBOR (USD) plus 1.7%

Senior secured notes – A2

     11,100        10,434        2.72     11,100         10,767         2.48   May 20, 2020    BBA 3 mo LIBOR (USD) plus 2.25%

Senior secured notes – B

     24,700        22,118        2.78     24,700         22,971         2.52   May 20, 2020    BBA 3 mo LIBOR (USD) plus 2.30%

Subordinated note

     70,946        69,134          70,946         70,376         N/A      May 20, 2020    N/A (7)
  

 

 

   

 

 

     

 

 

    

 

 

         
     322,146        317,086          322,146         319,514           
  

 

 

   

 

 

     

 

 

    

 

 

         

Notes(1)(2)(4)

                   

Senior secured notes – A1

     262,000        256,760        2.05     262,000         261,371         2.22   November 20, 2020    BBA 3 mo LIBOR (USD) plus 1.7%

Senior secured notes – A1

     20,500        19,475        2.85     20,500         19,959         3.05   November 20, 2020    BBA 3 mo LIBOR (USD) plus 2.5%

Senior secured notes – B

     25,750        22,660        3.35     25,750         24,426         3.58   November 20, 2020    BBA 3 mo LIBOR (USD) plus 3.0%

Senior secured notes – C

     14,000        11,238        4.35     14,000         12,604         4.62   November 20, 2020    BBA 3 mo LIBOR (USD) plus 4.0%

Senior secured notes – D

     10,000        7,586        6.35     10,000         9,398         6.71   November 20, 2020    BBA 3 mo LIBOR (USD) plus 6.0%

Subordinated note(5)

     71,258        71,348          71,258         71,258         N/A      November 20, 2020    N/A (7)
  

 

 

   

 

 

     

 

 

    

 

 

         
     403,508        389,067          403,508         399,016           
  

 

 

   

 

 

     

 

 

    

 

 

         

Notes(1)(2)(6)

                   

Senior secured notes – A

     274,500        269,696        1.67     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 1.24%

Senior secured notes – B

     58,500        54,698        2.33     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 1.90%

Senior secured notes – C

     29,812        25,936        3.18     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 2.75%

Senior secured notes – D

     20,250        16,301        3.63     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 3.20%

Senior secured notes – E

     23,625        17,719        4.63     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 4.20%

Senior secured notes – F

     11,270        8,058        5.93     —           —           —        July 18, 2022    BBA 3 mo LIBOR (USD) plus 5.50%

Subordinated note

     43,350        38,365          —           —           —        July 18, 2022    N/A (7)
  

 

 

   

 

 

     

 

 

    

 

 

         
     461,307        430,773          —           —             
  

 

 

   

 

 

     

 

 

    

 

 

         

Total notes and loans

   $ 1,186,961      $ 1,136,926        $ 1,179,530       $ 1,127,180           
  

 

 

   

 

 

     

 

 

    

 

 

         

 

(1) At December 31, 2010, the cost and fair value of the term loans were $453.9 million and $408.7 million, respectively. The term loans were paid down in the first quarter of 2011, with payments totaling $412.1 million, resulting in a gain of $41.8 million. Combined with net unrealized depreciation on the term loans of $45.2 million, the consolidated VIE had a net loss on term loans of $3.4 million for the nine months ended September 30, 2011, which is reflected in the net (losses) gains from investment activities of consolidated variable interest entities on the condensed consolidated statements of operations.
(2) Each class of notes will mature at par on the stated maturity, unless previously redeemed or repaid. Principal will not be payable on the notes except in certain limited circumstances. Interest on the notes is payable quarterly in arrears on the outstanding amount of the notes on scheduled payment dates. The subordinated note will be fully redeemed on the stated maturity unless previously redeemed. The subordinated note may be redeemed, in whole but not in part, on or after the redemption or repayment in full of principal and interest on the secured notes. No interest accrues or is payable on the subordinated note.
(3) The notes are subject to two coverage tests. These tests are primarily used to determine whether principal and interest may be paid on the secured notes and distributions may be made on the subordinated notes. The “Coverage Tests” consist of the Overcollateralization Ratio Test and the Interest Coverage Test; each test applies to each note. The Overcollateralization Ratio Test and Interest Coverage Test applicable to the indicated classes of secured notes will be satisfied as of any date on which such Coverage Test is applicable, if (1) the applicable Overcollateralization Ratio or Interest Coverage Ratio is at least equal to the applicable ratio or (2) the class or classes of secured notes is no longer outstanding. The applicable Interest Coverage Ratio for Class A Notes and B Notes is 110.0% and 105.0%, respectively. The applicable Overcollateralization Ratio for Class A Notes and B Notes is 137.5% and 126.4%, respectively.
(4) The notes are subject to two coverage tests. These tests are primarily used to determine whether principal and interest may be paid on the secured notes and distributions may be made on the subordinated notes. The “Coverage Tests” consist of the Overcollateralization Ratio Test and the Interest Coverage Test; each test applies to each note. The Overcollateralization Ratio Test and Interest Coverage Test applicable to the indicated classes of secured notes will be satisfied as of any date on which such Coverage Test is applicable, if (1) the applicable Overcollateralization Ratio or Interest Coverage Ratio is at least equal to the applicable ratio or (2) the class or classes of secured notes is no longer outstanding. The applicable Interest Coverage Ratio for Class A Notes, Class B Notes, Class C Notes and Class D Notes is 110.0%, 105.0%, 102.0% and 101.0%, respectively. The applicable Overcollateralization Ratio for Class A Notes, Class B Notes, Class C Notes and Class D Notes is 135.59%, 124.76%, 120.13% and 117.39%, respectively.

 

-33-


Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

(5) The subordinated notes were issued to an affiliate of the Company. Amount is reduced by approximately $2.1 million due to elimination of equity investment attributable to consolidated VIEs as of September 30, 2011 and December 31, 2010, respectively.
(6) The notes are subject to two coverage tests. These tests are primarily used to determine whether principal and interest may be paid on the secured notes and distributions may be made on the subordinated notes or whether funds which would otherwise be used to pay interest on the Secured Notes other than the Class A Notes and the Class B Notes and to make distributions on the Subordinated Notes must instead be used to pay principal on one or more Classes of Secured Notes according to the priorities defined. The “Coverage Tests” consist of the Overcollateralization Ratio Test and the Interest Coverage Test; each test applies to each specified Class or Classes of Secured Notes. The Overcollateralization Ratio Test and Interest Coverage Test applicable to the indicated classes of secured notes will be satisfied as of any date of determination on which such Coverage Test is applicable, if (1) the applicable Overcollateralization Ratio or Interest Coverage Ratio is at least equal to the applicable ratio or (2) the class or classes of secured notes is no longer outstanding. The applicable Interest Coverage Ratio for Class A and B Notes, Class C Notes and Class D Notes is 100.0% in respect of the first determination date and 120% thereafter, 110.0%, and 105.0%, respectively. The applicable Overcollateralization Ratio for Class A and B Notes, Class C Notes, Class D Notes and Class E Notes is 125.1%, 118.0%, 113.5% and 107.7%, respectively.
(7) The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs.

The consolidated VIEs have elected the fair value option to value the term loans and notes payable. The general partner uses its discretion and judgment in considering and appraising relevant factors in determining valuation of these loans. As of September 30, 2011, the notes payable are classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the term loans and notes payable, which are not publicly traded, estimated values may differ significantly from the values that would have been reported had a ready market for such investments existed.

The consolidated VIEs debt obligations contain various customary loan covenants as described above. As of the balance sheet date, the Company was not aware of any instances of noncompliance with any of these covenants.

Variable Interest Entities Which are Not Consolidated

The Company holds variable interests in certain VIEs which are not consolidated, as it has been determined that Apollo is not the primary beneficiary.

The following tables present the carrying amounts of the assets and liabilities of the VIEs for which Apollo has concluded that it holds a significant variable interest, but that it is not the primary beneficiary. In addition, the tables present the maximum exposure to loss relating to those VIEs.

 

     September 30, 2011  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 9,814,244      $ (61,659   $ 8,758   

Capital Markets

     2,728,999        (557,064     10,940   

Real Estate

     2,252,563        (1,795,256     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 14,795,806 (1)    $ (2,413,979 )(2)    $ 19,698 (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $296,728 in cash, $14,046,259 in investments and $452,819 in receivables.
(2) Represents $2,343,762 in debt and other payables, $68,336 in securities sold, not purchased, and $1,881 in capital withdrawals payable.
(3) Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest.

 

-34-


Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

     December 31, 2010  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 11,593,805      $ (39,625   $ 13,415   

Capital Markets

     3,117,013        (824,957     13,302   

Real Estate

     1,569,147        (1,263,354     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 16,279,965 (1)    $ (2,127,936 )(2)    $ 26,717 (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $207,168 in cash, $15,672,604 in investments and $400,193 in receivables.
(2) Represents $2,011,194 in debt and other payables, $21,369 in securities sold, not purchased, and $95,373 in capital withdrawals payable.
(3) Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest.

At September 30, 2011, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P., AutumnLeaf, L.P., and Apollo ALS Holdings, L.P. At September 30, 2011, the aggregate amount of such investments was $110.7 million. The Company’s ownership interest in AAA was 2.45% at September 30, 2011.

At December 31, 2010, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P., AutumnLeaf, L.P., Apollo ALS Holdings, L.P., and A.P. Charter Holdings, L.P. At December 31, 2010, the aggregate amount of such investments was $251.5 million. The Company’s ownership interest in AAA was 2.81% at December 31, 2010.

5. CARRIED INTEREST RECEIVABLE

The table below provides a roll-forward of the carried interest receivable balance for the nine months ended September 30, 2011:

 

     Private Equity     Capital Markets     Total  

Carried interest receivable at January 1, 2011

   $ 1,578,135      $ 288,938      $ 1,867,073