XNYS:APO Apollo Global Management LLC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 MARCH 31, 2012

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”, “accelerated 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 May 9, 2012 there were 126,460,740 Class A shares and 1 Class B share outstanding.

 

 

 


TABLE OF CONTENTS

 

          Page  

PART I

   FINANCIAL INFORMATION   

Item 1.

  

FINANCIAL STATEMENTS

  
  

Unaudited Condensed Consolidated Financial Statements

  
  

Condensed Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2012 and December 31, 2011

     5   
  

Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2012 and 2011

     6   
  

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2012 and 2011

     7   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2012 and 2011

     8   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2012 and 2011

     9   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     11   

ITEM 2.

  

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

     61   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     117   

ITEM 4.

  

CONTROLS AND PROCEDURES

     120   

PART II

   OTHER INFORMATION   

ITEM 1.

  

LEGAL PROCEEDINGS

     121   

ITEM 1A.

  

RISK FACTORS

     122   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     122   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     123   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     123   

ITEM 5.

  

OTHER INFORMATION

     123   

ITEM 6.

  

EXHIBITS

     124   

SIGNATURES

     128   

 

-2-


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 Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933 on March 9, 2012, 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.

Terms Used in This Report

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) or certain collateralized loan obligation and collateralized debt obligation credit funds that have a fee generating basis other than mark-to-market asset values, plus used or available leverage and/or capital commitments;

 

  (iii) the gross asset values or net 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;

 

-3-


  (iv) the incremental value associated with the reinsurance investments of the portfolio company assets that 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.

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. We consider multiple factors for determining what should be included in our definition of AUM. Such factors include but are not limited to (1) our ability to influence the investment decisions for existing and available assets; (2) our ability to generate income from the underlying assets in our funds; and (3) the AUM measures that we use internally or believe are used by other investment managers. Given the differences in the investment strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers.

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 par asset value,” “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.

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.

“Gross IRR” of a fund represents the cumulative investment-related cash flows for all of the investors in the fund on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on March 31, 2012 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, carried interest and certain other fund expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors;

“Net IRR” of a fund means the gross IRR applicable to all investors, including related parties which may not pay fees, net of management fees, organizational expenses, transaction costs, and certain other fund expenses (including interest incurred by the fund itself) and realized carried interest all offset to the extent of interest income, and measures returns based on amounts that, if distributed, would be paid to investors of the fund; to the extent that an Apollo private equity fund exceeds all requirements detailed within the applicable fund agreement, the estimated unrealized value is adjusted such that a percentage of up to 20.0% of the unrealized gain is allocated to the general partner, thereby reducing the balance attributable to fund investors;

“Net return” for Value Funds, SOMA and AAOF represents the calculated return that is based on month-to-month changes in net assets and is calculated using the returns that have been geometrically linked based on capital contributions, distributions and dividend reinvestments, as applicable.

 

-4-


APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF FINANCIAL CONDITION (UNAUDITED)

(dollars in thousands, except share data)

 

     March 31,
2012
    December 31,
2011
 

Assets:

    

Cash and cash equivalents

   $ 639,903      $ 738,679   

Cash and cash equivalents held at Consolidated Funds

     5,333        6,052   

Restricted cash

     7,374        8,289   

Investments

     2,007,008        1,857,465   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     273,448        173,542   

Investments, at fair value

     3,757,800        3,301,966   

Other assets

     60,311        57,855   

Carried interest receivable

     1,369,820        868,582   

Due from affiliates

     199,792        176,740   

Fixed assets, net

     50,811        52,683   

Deferred tax assets

     578,058        576,304   

Other assets

     26,332        26,976   

Goodwill

     48,894        48,894   

Intangible assets, net

     75,790        81,846   
  

 

 

   

 

 

 

Total Assets

   $ 9,100,674      $ 7,975,873   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 36,357      $ 33,545   

Accrued compensation and benefits

     48,411        45,933   

Deferred revenue

     270,059        232,747   

Due to affiliates

     519,559        578,764   

Profit sharing payable

     568,839        352,896   

Debt

     738,291        738,516   

Liabilities of consolidated variable interest entities:

    

Debt, at fair value

     3,700,536        3,189,837   

Other liabilities

     184,406        122,264   

Other liabilities

     49,142        33,050   
  

 

 

   

 

 

 

Total Liabilities

     6,115,600        5,327,552   
  

 

 

   

 

 

 

Commitments and Contingencies (see note 12)

    

Shareholders’ Equity:

    

Apollo Global Management, LLC shareholders’ equity:

    

Class A shares, no par value, unlimited shares authorized, 126,310,740 shares and 123,923,042 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     —          —     

Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Additional paid in capital

     2,941,818        2,939,492   

Accumulated deficit

     (2,348,454     (2,426,197

Appropriated partners’ capital

     183,300        213,594   

Accumulated other comprehensive loss

     (93     (488
  

 

 

   

 

 

 

Total Apollo Global Management, LLC shareholders’ equity

     776,571        726,401   

Non-Controlling Interests in consolidated entities

     1,550,815        1,444,767   

Non-Controlling Interests in Apollo Operating Group

     657,688        477,153   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     2,985,074        2,648,321   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 9,100,674      $ 7,975,873   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-5-


APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues:

    

Advisory and transaction fees from affiliates

   $ 27,236      $ 19,416   

Management fees from affiliates

     127,178        118,150   

Carried interest income from affiliates

     622,329        558,776   
  

 

 

   

 

 

 

Total Revenues

     776,743        696,342   
  

 

 

   

 

 

 

Expenses:

    

Compensation and benefits:

    

Equity-based compensation

     148,866        283,607   

Salary, bonus and benefits

     65,071        72,069   

Profit sharing expense

     249,024        217,085   

Incentive fee compensation

     35        10,159   
  

 

 

   

 

 

 

Total Compensation and Benefits

     462,996        582,920   

Interest expense

     11,380        10,882   

Professional fees

     11,527        17,361   

General, administrative and other

     19,207        16,607   

Placement fees

     921        539   

Occupancy

     8,726        7,226   

Depreciation and amortization

     8,473        6,046   
  

 

 

   

 

 

 

Total Expenses

     523,230        641,581   
  

 

 

   

 

 

 

Other Income:

    

Net gains from investment activities

     157,708        157,929   

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

     (16,201     17,088   

Income from equity method investments

     43,251        21,826   

Interest income

     1,614        258   

Other income, net

     5,816        8,063   
  

 

 

   

 

 

 

Total Other Income

     192,188        205,164   
  

 

 

   

 

 

 

Income before income tax provision

     445,701        259,925   

Income tax provision

     (14,560     (8,820
  

 

 

   

 

 

 

Net Income

     431,141        251,105   

Net income attributable to Non-Controlling Interests

     (333,098     (212,949
  

 

 

   

 

 

 

Net Income Attributable to Apollo Global Management, LLC

   $ 98,043      $ 38,156   
  

 

 

   

 

 

 

Distributions Declared per Class A Share

   $ 0.46      $ 0.17   
  

 

 

   

 

 

 

Net Income Per Class A Share:

    

Net Income Per Class A Share – Basic and Diluted

   $ 0.66      $ 0.33   
  

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Basic

     125,269,253        98,215,736   
  

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Diluted

     127,515,663        98,509,109   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-6-


APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2012     2011  

Net Income

   $ 431,141      $ 251,105   

Other Comprehensive Income, net of tax:

    

Net unrealized gain on interest rate swaps (net of taxes of $237 and $40 for Apollo Global Management, LLC for the three months ended March 31, 2012 and 2011, respectively) and $0 for Non-Controlling Interests in Apollo Operating Group for both the three months ended March 31, 2012 and 2011)

     1,602        1,727   

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

     2        (49
  

 

 

   

 

 

 

Total Other Comprehensive Income, net of tax

     1,604        1,678   
  

 

 

   

 

 

 

Comprehensive Income

     432,745        252,783   

Comprehensive Income attributable to Non-Controlling Interests

     (364,601     (211,410
  

 

 

   

 

 

 

Comprehensive Income Attributable to Apollo Global Management, LLC

   $ 68,144      $ 41,373   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-7-


APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(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’
Capital
    Accumu-
lated
Other
Compre-

hensive
(Loss)
Income
    Total
Apollo
Global
Manage-

ment,
LLC

Total
Share-

holders’
Equity

(Deficit)
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Apollo
Operating
Group
    Total
Shareho

lders’
Equity
 

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   

Capital increase related to equity-based compensation

    —          —          100,126        —          —          —          100,126        —          183,222        283,348   

Cash distributions

    —          —          —          —          —          —          —          (303,978     —          (303,978

Distributions

    —          —          (19,905     —          —          —          (19,905     —          (40,800     (60,705

Distributions related to deliveries of Class A shares for RSUs

    1,550,258        —          —          (9,045     —          —          (9,045     —          —          (9,045

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

    —          —          (6,515     —          —          —          (6,515     6,515        —          —     

Satisfaction of liability related to AAA RDUs

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

Net income

    —          —          —          38,156        2,792        —          40,948        154,159        55,998        251,105   

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

    —          —          —          —          —          (49     (49     —          —          (49

Net unrealized gain on interest rate swaps, net of taxes of $40 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively

    —          —          —          —          —          474        474        —          1,253        1,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

    99,471,490        1      $ 2,156,441      $ (1,908,707   $ 14,151      $ (1,104   $ 260,781      $ 1,744,920      $ 1,241,966      $ 3,247,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

    123,923,042        1      $ 2,939,492      $ (2,426,197   $ 213,594      $ (488   $ 726,401      $ 1,444,767      $ 477,153      $ 2,648,321   

Capital increase related to equity-based compensation

    —          —          72,003        —          —          —          72,003          76,330        148,333   

Capital contributions

    —          —          —          —          —          —          —          7,351        —          7,351   

Cash distributions

    —          —          —          —          —          —          —          (2,030     —          (2,030

Distributions

    —          —          (68,386     —          —          —          (68,386     —          (110,400     (178,786

Distributions related to deliveries of Class A shares for RSUs

    2,387,698        —          13        (19,478     —          —          (19,465     —          —          (19,465

Purchase of AAA shares

    —          —          —          —          —          —          —          (50,321     —          (50,321

Non-cash distributions

    —          —          —          (822     —          —          (822     (1,249     —          (2,071

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

    —          —          (2,301     —          —          —          (2,301     2,301        —          —     

Satisfaction of liability related to AAA RDUs

    —          —          997        —          —          —          997        —          —          997   

Net income (loss)

    —          —          —          98,043        (30,294     —          67,749        149,996        213,396        431,141   

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

    —          —          —          —          —          2        2        —          —          2   

Net unrealized gain on interest rate swaps (net of taxes of $237 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively)

    —          —          —          —          —          393        393        —          1,209        1,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    126,310,740        1      $ 2,941,818      $ (2,348,454   $ 183,300      $ (93   $ 776,571      $ 1,550,815      $ 657,688      $ 2,985,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-8-


APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 and 2011

(dollars in thousands, except share data)

 

     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 431,141      $ 251,105   

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

    

Equity-based compensation

     148,866        283,607   

Depreciation and amortization

     2,417        2,793   

Amortization of intangible assets

     6,055        3,253   

Amortization of debt issuance costs

     128        43   

Gains from investment in HFA and other investments

     (3,664     (17,829

Non-cash interest income

     (893     —     

Income from equity awards received for directors’ fees

     (373     —     

Income from equity method investment

     (43,251     (21,826

Waived management fees

     (6,791     (7,739

Non-cash compensation expense related to waived management fees

     6,791        7,739   

Deferred taxes, net

     11,424        10,926   

Loss on assets held for sale

     —          571   

Changes in assets and liabilities:

    

Carried interest receivable

     (501,238     (366,587

Due from affiliates

     (22,579     17,342   

Other assets

     517        (458

Accounts payable and accrued expenses

     3,097        1,380   

Accrued compensation and benefits

     2,942        15,437   

Deferred revenue

     37,312        16,373   

Due to affiliates

     (68,875     (14,296

Profit sharing payable

     215,943        167,694   

Other liabilities

     4,555        1,062   

Apollo Funds related:

    

Net realized (gains) losses from investment activities

     (2,376     15,044   

Net unrealized gains from investment activities

     (224,217     (172,247

Net realized gains on debt

     —          (41,819

Net unrealized losses on debt

     88,578        49,944   

Distributions from investment activities

     50,000        —     

Change in cash held at consolidated variable interest entities

     (99,906     23,183   

Purchases of investments

     (884,940     (342,097

Proceeds from sale of investments and liquidating distributions

     499,512        985,107   

Change in other assets

     (2,456     22,643   

Change in other liabilities

     62,097        16,035   
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Operating Activities

     (290,184     906,383   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of fixed assets

     (831     (2,821

Proceeds from disposals of fixed assets

     —          250   

Purchase of investments in HFA (see note 3)

     —          (52,069

Cash contributions to equity method investments

     (12,017     (12,366

Cash distributions from equity method investments

     13,593        21,855   

Change in restricted cash

     915        (78
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

   $ 1,660      $ (45,229
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-9-


APOLLO GLOBAL MANAGEMENT, LLC

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

THREE MONTHS ENDED MARCH 31, 2012 and 2011

(dollars in thousands, except share data)

 

     2012     2011  

Cash Flows from Financing Activities:

    

Principal repayments on debt and repurchase of debt

   $ (225   $ (345

Distributions related to deliveries of Class A shares for RSUs

     (17,020     (9,045

Distributions to Non-Controlling Interests in consolidated entities

     (2,030     (3,055

Contributions from Non-Controlling Interests in consolidated entities

     2,458        —     

Distributions paid

     (61,219     (17,354

Distributions paid to Non-Controlling Interests in Apollo Operating Group

     (110,400     (40,800

Apollo Funds related:

    

Issuance of debt

     425,684        —     

Principal repayment on term loans and senior secured notes

     (2,791     (412,057

Purchase of AAA shares

     (50,321     —     

Distributions paid to Non-Controlling Interests in consolidated entities

     —          (300,923

Contributions from Non-Controlling Interest in consolidated entities

     4,893        —     
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     189,029        (783,579
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (99,495     77,575   

Cash and Cash Equivalents, Beginning of Period

     744,731        382,269   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 645,236      $ 459,844   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Interest paid

   $ 13,859      $ 11,128   

Interest paid by consolidated variable interest entities

     14,176        5,446   

Income taxes paid

     158        1,903   

Supplemental Disclosure of Non-Cash Investing Activities:

    

Non-cash contributions on equity method investments

     86        2,901   

Non-cash distributions from equity method investments

     (468     (225

Non-cash distributions from investing activities

     2,071        —     

Change in accrual for purchase of fixed assets

     286        1,337   

Supplemental Disclosure of Non-Cash Financing Activities:

    

Non-cash dividends

   $ (7,167   $ (2,551

Non-cash distributions

     (822     —     

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

     (1,249     —     

Non-cash contributions to Non-Controlling Interests related to equity-based compensation

     76,330        183,222   

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

     1,209        1,253   

Satisfaction of liability related to AAA RDUs

     997        (3,845

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

     2,301        6,515   

Net transfers of AAA ownership interest from AGM

     (2,301     (6,515

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

     2        (49

Unrealized gain on interest rate swaps

     630        514   

Deferred tax liability related to interest rate swaps

     (237     (40

Capital increases related to equity-based compensation

     72,003        100,126   

Tax benefits related to deliveries of Class A shares for RSUs

     (13     —     

Non-cash additional accrued compensation related to RDUs

     137        259   

See accompanying notes to condensed consolidated financial statements.

 

-10-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(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 managed, 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 non-performing loans; and

 

   

Real estate—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, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC.

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 “2007 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 March 31, 2012, 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”), 34.5% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group through its wholly-owned general partners.

 

-11-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(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 (the “Contributing Partners”) indirectly own (through Holdings) Apollo Operating Group units (“AOG Units”) that represent 65.5% of the economic interests in the Apollo Operating Group as of March 31, 2012. 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, through AAA Investments L.P., its investment partnership, 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”) and Apollo Credit Senior Loan Fund, L.P. (“Apollo Senior Loan Fund”). 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.

 

-12-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Under both the previous and amended consolidation rules, 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 the previous and amended consolidation rules, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes 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 statements of financial condition as of March 31, 2012 and December 31, 2011.

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. 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, primarily 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 Interests relating to Apollo primarily includes the 65.5% 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 March 31, 2012. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s condensed consolidated statements of financial condition; net income (loss) includes the net

 

-13-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

income (loss) attributed to the Non-Controlling Interest holders on the Company’s condensed consolidated statements of operations; 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 profits and losses are allocated to Non-Controlling Interests in proportion to their ownership interests regardless of their basis.

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”). These costs (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) are determined to be broken upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is broken, all of the costs are reimbursed by the funds and then included in the calculation of the Management Fee Offset described below. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company of all costs incurred.

As a result of providing advisory services to certain private equity and capital markets portfolio companies, Apollo is generally 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 may be 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, and are based upon (1) a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments, or (2) 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 carried interest income from affiliates 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.

 

-14-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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 the fair value option was elected. 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.

 

-15-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(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, 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.

On a quarterly basis, Apollo utilizes a valuation committee consisting of members from senior management to review and approve the valuation results related to our private equity investments. Management also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. Management performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis.

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.

 

-16-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

On a quarterly basis, Apollo utilizes a sub-valuation committee consisting of members from senior management to review and approve the valuation results related to our capital markets investments. Management performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis.

Real Estate Investments—For the CMBS portfolio of Apollo’s funds, 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. 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 the 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.

On a quarterly basis, Apollo utilizes a sub-valuation committee consisting of members from senior management to review and approve the valuation results related to our real estate investments. Management performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis.

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 $784.6 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 statements of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy.

Fair Value Option—Apollo has elected the fair value option for the convertible notes issued by HFA and 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 elected to separately present interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible notes issued by HFA. 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.

 

-17-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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.

Compensation and Benefits

Equity-Based Compensation—Equity-based compensation is 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 three months ended March 31, 2012 and 2011, 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 the Contributing Partners.

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

 

-18-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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 an accrual basis as the related carried interest income is earned. Incentive fee compensation expense may be subject to reversal until 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. The condensed consolidated financial statements include the net realized and unrealized gains (losses) of AAA, Apollo Senior Loan Fund and the investment in HFA discussed in note 3.

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.

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 distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions 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.

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 did not have a material impact on the Company’s condensed consolidated financial statements.

 

-19-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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. The guidance also requires enhanced disclosures about fair value measurements, including, among other things, (a) for fair value measurements categorized within Level III of the fair value hierarchy, (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) the valuation process used by the reporting entity, and (3) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any, and (b) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed (for example, a financial instrument that is measured at amortized cost in the statement of financial position but for which fair value is disclosed). The guidance also amends disclosure requirements for significant transfers between Level I and Level II and now requires disclosure of all transfers between Levels I and II in the fair value hierarchy. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements, as the impact of the guidance is primarily limited to enhanced disclosures.

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. In December 2011, the FASB issued an amendment to this update deferring changes related to the presentation of reclassification adjustments out of accumulated other comprehensive income. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements as the Company presents separate condensed consolidated statements 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 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 when the Company performs its annual goodwill impairment test in June, 2012.

In December 2011, the FASB issued amended guidance which will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is in the process of evaluating the impact that this guidance will have on its condensed consolidated financial statements.

 

-20-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

3. INVESTMENTS

The following table represents Apollo’s investments:

 

     March 31,
2012
     December 31,
2011
 

Investments, at fair value

   $ 1,660,281       $ 1,552,122   

Other investments

     346,727         305,343   
  

 

 

    

 

 

 

Total Investments

   $ 2,007,008       $ 1,857,465   
  

 

 

    

 

 

 

Investments at Fair Value

Investments at fair value consist of financial instruments held by AAA, investments held by the Senior Loan Fund, the Company’s investment in HFA, other investments held by the Company at fair value. As of March 31, 2012 and December 31, 2011, the net assets of the consolidated funds (excluding VIEs) were $1,607.0 million and $1,505.5 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

  March 31, 2012     December 31, 2011  
  Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
    Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
 
  Private
Equity
    Capital
Markets
    Total         Private
Equity
    Capital
Markets
    Total      

Investments held by:

                   

AAA

  $ 1,581,773      $ —        $ 1,581,773      $ 1,610,928        98.4   $ 1,480,152      $ —        $ 1,480,152      $ 1,662,999        98.4

Investments held by Senior Loan Fund

    —          25,937        25,937        25,877        1.6        —          24,213        24,213        24,569        1.6   

HFA

    —          50,873        50,873        55,405        N/A        —          46,678        46,678        54,628        N/A   

Other

    1,698        —          1,698        3,254        N/A        1,079        —          1,079        2,881        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,583,471      $ 76,810      $ 1,660,281      $ 1,695,464        100.0   $ 1,481,231      $ 70,891      $ 1,552,122      $ 1,745,077        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

At March 31, 2012 and December 31, 2011, the sole investment held by AAA was its investment in AAA Investments, L.P. (“AAA Investments”), which is measured based on AAA’s share of net asset value of AAA Investments. The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the funds that the Company consolidates (excluding VIEs) as of the aforementioned dates:

 

     March 31, 2012  
     Instrument Type    Cost      Fair Value      % of Net
Assets of
Consolidated
Funds
 

Apollo Life Re Ltd.

   Equity    $ 358,241       $ 431,600         26.9

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      105,889         176,768         11.0   

Rexnord Corporation

   Equity      37,461         164,986         10.3   

LeverageSource, L.P.

   Equity      139,913         127,691         7.9   

NCL Corporation

   Equity      98,906         85,800         5.3   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      84,811         84,196         5.2   

 

-21-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

     December 31, 2011  
     Instrument Type    Cost      Fair Value      % of Net
Assets of
Consolidated
Funds
 

Apollo Life Re Ltd.

   Equity    $ 358,241       $ 430,800         28.6

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      105,889         164,811         10.9   

Rexnord Corporation

   Equity      37,461         139,100         9.2   

LeverageSource, L.P.

   Equity      139,913         102,834         6.8   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      88,166         86,329         5.7   

Momentive Performance Materials Holdings, Inc.

   Equity      80,657         85,300         5.7   

AAA Investments owns equity, as a private equity co-investment and converted from debt positions, 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 valued at $122.2 million and $75.2 million as of March 31, 2012 and December 31, 2011, respectively. At March 31, 2012, AAA Investments’ combined share of these debt and equity investments was greater than 5% of the net assets of the consolidated funds. Apollo Strategic Value Offshore Fund, Ltd. (the “Apollo Strategic Value Fund”) has an ownership interest in a special purpose vehicle, Apollo VIF/SVF Bradco LLC, which owns interests in Bradco Supply Corporation. AAA Investments’ share of this investment is valued at $94.4 million and $80.9 million at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 and December 31, 2011, AAA Investments’ combined share of these debt and equity investments was greater than 5% of the net assets of the consolidated funds. In addition to the 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 the consolidated funds and is valued at $85.9 million at December 31, 2011.

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’ investment in the Apollo Strategic Value Fund was converted into liquidating shares issued by the Apollo Strategic Value Fund. The liquidating shares were initially allocated a pro rata portion of each of the 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 current expenses incurred by the Apollo Strategic Value Fund.

During the first quarter of 2012, the general partner of the Apollo Asia Opportunity Offshore Fund, Ltd. (the “Apollo Asia Opportunity Fund”) determined that it was in the best interests of the investors in the Apollo Asia Opportunity Fund to wind down the fund and begin making distributions to investors shortly after March 31, 2012. The General Partner of the Apollo Asia Opportunity Fund expects that a substantial amount of the investment in the Apollo Asia Opportunity Fund will be returned shortly after March 31, 2012. The remainder of the investment in the Apollo Asia Opportunity Fund is currently expected to be distributed as the less liquid investments are realized, with the final liquidation expected to occur in 2013, although the actual timing of the realizations may differ substantially from this estimate.

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, Athene Annuity & Life Assurance Company (formerly 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 backed note and funding agreement markets.

 

-22-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Senior Loan Fund

On December 31, 2011, the Company invested $26.0 million in the Apollo Credit Senior Loan Fund, L.P. (“Senior Loan Fund”). As a result, the Company became the sole investor in the fund and therefore consolidated the assets and liabilities of the fund. The fund invests in U.S. denominated senior secured loans, senior secured bonds and other income generating fixed-income investments. At least 90% of the Senior Loan Fund’s portfolio of investments must consist of senior secured, floating rate loans or cash or cash equivalents. Up to 10% of the Senior Loan Fund’s portfolio may consist of non-first lien fixed income investments and other income generating fixed income investments, including but not limited to senior secured bonds. The Senior Loan Fund may not purchase assets rated (tranche rating) at B3 or lower by Moody’s, or equivalent rating by another nationally recognized rating agency.

The Company has classified the instruments associated with the Senior Loan Fund investment as Level II and Level III investments. All Level II and Level III investments of the Senior Loan Fund were valued using broker quotes.

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.

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 on March 11, 2019. 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 “if-converted basis”, which is based on a hypothetical exit through conversion to common equity (for which quoted price exists) as of the valuation date. The Company separately presents interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible note. For the three months ended March 31, 2012, the Company recorded $0.8 million in PIK interest income included in interest income in the condensed consolidated statements of operations. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $1.03 as of March 31, 2012) 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 months ended March 31, 2012 and 2011, the Company recorded an unrealized gain of approximately $3.4 million and $17.8 million, related to the convertible note and stock options within net 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.

 

-23-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Net Gains from Investment Activities

Net 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 gains resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized gains. Additionally net 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 gains from investment activities for the three months ended March 31, 2012 and 2011:

 

     For the Three Months Ended
March 31, 2012
 
     Private Equity      Capital Markets      Total  

Realized gains on sales of investments

   $ —         $ 91       $ 91   

Change in net unrealized gains due to changes in fair values

     153,692         3,925         157,617   
  

 

 

    

 

 

    

 

 

 

Net Gains from Investment Activities

   $ 153,692       $ 4,016       $ 157,708   
  

 

 

    

 

 

    

 

 

 

 

     For the Three Months Ended
March 31, 2011
 
     Private Equity      Capital Markets      Total  

Change in net unrealized gains due to changes in fair value

   $ 140,100       $ 17,829       $ 157,929   
  

 

 

    

 

 

    

 

 

 

Net Gains from Investment Activities

   $ 140,100       $ 17,829       $ 157,929   
  

 

 

    

 

 

    

 

 

 

 

-24-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(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 from equity method investments in the condensed consolidated statements of operations.

The following table presents income from equity method investments for the three months ended March 31, 2012 and 2011:

 

     For the Three Months Ended
March 31,
 
     2012     2011  

Investments:

    

Private Equity Funds:

    

AAA Investments

   $ 84      $ 80   

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

     —          10   

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

     5        5   

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

     2,612        2,674   

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

     24,081        10,370   

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

     37        —     

Capital Markets Funds:

    

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

     696        294   

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

     19        15   

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

     15        9   

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

     1,888        693   

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

     395        466   

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

     9,019        4,185   

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

     2,433        615   

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

     644        1,347   

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

     903        1,175   

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

     511        348   

Apollo Senior Floating Rate Fund (“AFT”)

     10        —     

Apollo Residential Mortgage, Inc. (“AMTG”)

     152 (1)      —     

Apollo European Credit, L.P. (“AEC”)

     35        —     

Apollo European Strategic Investment L.P. (“AESI”)

     193        —     

Real Estate:

    

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

     248 (1)      137 (2) 

AGRE US Real Estate Fund, L.P.

     (53     —     

CPI Capital Partners NA Fund

     (21     —     

CPI Capital Partners Asia Pacific Fund

     5        —     

Other Equity Method Investments:

    

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

     (305     (623

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

     (150     46   

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

     242        (20

Other

     (447     —     
  

 

 

   

 

 

 

Total Income from Equity Method Investments

   $ 43,251      $ 21,826   
  

 

 

   

 

 

 

 

(1) Amounts are as of December 31, 2011.
(2) Amounts are as of December 31, 2010.

 

-25-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Other investments as of March 31, 2012 and December 31, 2011 consisted of the following:

 

     Equity Held as of  
     March 31,
2012
    % of
Ownership
    December 31,
2011
    % of
Ownership
 

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 916        0.057   $ 859        0.057

Fund IV

     15        0.010        15        0.010   

Fund V

     207        0.014        202        0.014   

Fund VI

     10,324        0.092        7,752        0.082   

Fund VII

     164,096        1.321        139,765        1.318   

Apollo Natural Resources Partners, L.P.

     1,604        1.955        1,982        2.544   

Capital Markets Funds:

        

Apollo Special Opportunities Managed Account, L.P.

     5,746        0.529        5,051        0.525   

Apollo Value Investment Fund, L.P.

     142        0.083        122        0.081   

Apollo Strategic Value Fund, L.P.

     138        0.059        123        0.059   

Apollo Credit Liquidity Fund, L.P.

     14,894        2.467        14,449        2.465   

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

     6,157        6.156        6,009        6.156   

Apollo Credit Opportunity Fund I, L.P.

     46,827        1.945        37,806        1.977   

Apollo Credit Opportunity Fund II, L.P

     25,412        1.450        22,979        1.472   

Apollo European Principal Finance Fund, L.P.

     14,276        1.363        14,423        1.363   

Apollo Investment Europe II, L.P.

     8,748        2.131        7,845        2.076   

Apollo Palmetto Strategic Partnership, L.P.

     11,101        1.186        10,739        1.186   

Apollo Senior Floating Rate Fund

     94        0.034        84        0.034   

Apollo/JH Loan Portfolio, L.P.

     —          —          100        0.189   

Apollo Residential Mortgage, Inc.(3)

     3,999 (1)      1.865 (1)      4,000 (2)      1.850 (2) 

Apollo European Credit, L.P.

     679        0.778        542        1.053   

Apollo European Strategic Investments L.P.

     2,011        0.997        1,704        1.035   

Apollo Centre Street Partnership

     2,000        2.439        —          —     

Real Estate:

        

Apollo Commercial Real Estate Finance, Inc.(3)

     11,420 (1)      2.730 (1)      11,288 (2)      2.730 (2) 

AGRE U.S. Real Estate Fund

     5,831        2.065        5,884        2.065   

CPI Capital Partners NA Fund

     450        0.324        564        0.344   

CPI Capital Partners Europe Fund

     5        0.001        5        0.001   

CPI Capital Partners Asia Pacific Fund

     247        0.039        256        0.039   

Other Equity Method Investments:

        

Vantium A/B /B

     54        6.500        359        6.450   

Vantium C

     6,047        2.100        6,944        2.300   

Vantium D

     1,587        6.300        1,345        6.300   

Portfolio Company Holdings

     1,700        N/A (4)      2,147        N/A (4) 
  

 

 

     

 

 

   

Total Other Investments

   $ 346,727        $ 305,343     
  

 

 

     

 

 

   

 

(1) Amounts are as of December 31, 2011.
(2) Amounts are as of September 30, 2011.
(3) 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.
(4) Ownership percentages are not presented for these equity method investments in our portfolio companies as we only present for the funds in which we are the general partner.

As of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011, no single equity method investee held by Apollo exceeded 20% of its total consolidated assets or income. As such, Apollo is not required to present summarized income statement information for any of its equity method investees.

 

-26-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(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 March 31, 2012 and December 31, 2011:

 

     Level I      Level II      Level III      Totals  
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Assets, at fair value:

                       

Investment in AAA Investments, L.P.

   $ —         $ —         $ —         $ —         $ 1,581,773       $ 1,480,152       $ 1,581,773       $ 1,480,152   

Investments held by Senior Loan Fund

     —           —           25,453         23,757         484         456         25,937         24,213   

Investments in HFA and Other

     —           —           —           —           52,571         47,757         52,571         47,757   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 25,453       $ 23,757       $ 1,634,828       $ 1,528,365       $ 1,660,281       $ 1,552,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Level I      Level II      Level III      Totals  
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Liabilities, at fair value:

                       

Interest rate swap agreements

   $ —         $ —         $ 2,027       $ 3,843       $ —         $ —         $ 2,027       $ 3,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 2,027         3,843       $ —         $ —         $ 2,027         3,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was a transfer of investments from Level II into Level III relating to investments held by the Senior Loan Fund during the three months ended March 31, 2012, 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. There were no transfers between Level I, II or III during the three months ended March 31, 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
March 31,
 
     2012     2011  

Balance, Beginning of Period

   $ 1,480,152      $ 1,637,091   

Purchases

     —          —     

Distributions

     (52,071     —     

Change in unrealized gains, net

     153,692        140,100   
  

 

 

   

 

 

 

Balance, End of Period

   $ 1,581,773      $ 1,777,191   
  

 

 

   

 

 

 

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
March 31,
 
     2012      2011  

Balance, Beginning of Period

   $ 47,757       $ —     

Purchases

     1,150         52,069   

Change in unrealized gains, net

     3,664         17,829   
  

 

 

    

 

 

 

Balance, End of Period

   $ 52,571       $ 69,898   
  

 

 

    

 

 

 

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

 

-27-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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

 

     For the Three Months Ended
March 31,
 
     2012  

Balance, Beginning of Period

   $ 456   

Sale of investments

     (460

Realized gains

     9   

Change in unrealized losses

     (5

Transfers into Level III

     484   
  

 

 

 

Balance, End of Period

   $ 484   
  

 

 

 

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

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  
     March 31, 2012     December 31, 2011  
           % 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

   $ 605,166        33.7   $ 749,374        44.6

Discounted cash flow models

     601,072        33.5        643,031        38.4   

Listed quotes

     369,879        20.6        139,833        8.3   

Broker quotes

     192,274        10.7        179,621        10.7   

Other net assets (liabilities)(1)

     27,072        1.5        (33,330     (2.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

     1,795,463        100.0     1,678,529        100.0
    

 

 

     

 

 

 

Other net liabilities(2)

     (213,690       (198,377  
  

 

 

     

 

 

   

Total Net Assets

   $ 1,581,773        $ 1,480,152     
  

 

 

     

 

 

   

 

(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 $402.5 million in long-term debt offset by cash and cash equivalents at the March 31, 2012 and December 31, 2011 balance sheet dates. Carrying values approximate fair value for other assets and liabilities and, accordingly, extended valuation procedures are not required.

The significant unobservable inputs used in the fair value measurement of the Level 3 investments are the comparable multiples and weighed average cost of capital rates applied in the valuation models for each investment. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, the comparable multiples are generally multiplied by the underlying companies EBITDA to establish the Total Enterprise Value of our portfolio company investments. The comparable multiple is determined based on the implied trading multiple of public industry peers. Similarly, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the fair value of an investment; conversely a decrease in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the weighted average cost of capital calculation that weights the cost of equity and the cost of debt based on comparable debt to equity ratios.

 

-28-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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. There is no recourse to the Company for the consolidated VIEs’ liabilities.

The assets and liabilities of the consolidated VIEs are comprised primarily of investments and debt, at fair value, and are included within assets and liabilities of consolidated variable interest entities, respectively, in the condensed consolidated statements of financial condition.

Consolidated Variable Interest Entities

In accordance with the methodology described in note 2, Apollo consolidated four VIEs under the amended consolidation guidance during 2010, an additional VIE during the second quarter of 2011, and six additional VIEs during the fourth quarter of 2011 in connection with its acquisition of Gulf Stream Asset Management, LLC (“Gulf Stream”). During the first quarter of 2012, Apollo consolidated two newly formed VIEs.

Certain of the consolidated VIEs were formed for the sole purpose of issuing collateralized notes to investors. 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.

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.

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 against 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.

 

-29-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Fair Value Measurements

The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of March 31, 2012 and December 31, 2011:

 

     Level I      Level II      Level III      Totals  
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Investments, at fair value

   $ —         $ —         $ 3,542,554       $ 3,055,357       $ 215,246       $ 246,609       $ 3,757,800       $ 3,301,966   
     Level I      Level II      Level III      Totals  
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Liabilities, at fair value

   $ —         $ —         $ —         $ —         $ 3,700,536       $ 3,189,837       $ 3,700,536       $ 3,189,837   

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 accounted for as of the end of the reporting period in which the transfer occurred. For the three months ended March 31, 2012 and 2011, there were no transfers between Level I and Level II investments.

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
March 31,
 
     2012     2011  

Balance, Beginning of Period

   $ 246,609      $ 170,369   

Purchases of investments

     226,945        284,625   

Sale of investments

     (39,274     (50,459

Net realized (losses) gains

     (4,658     1,288   

Changes in net unrealized gains

     11,592        2,422   

Transfers out of Level III

     (290,517     (296,382

Transfers into Level III

     64,549        23,564   
  

 

 

   

 

 

 

Balance, End of Period

   $ 215,246      $ 135,427   
  

 

 

   

 

 

 

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

   $ 6,236      $ 760   
  

 

 

   

 

 

 

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.

 

-30-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

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
March 31,
 
     2012     2011  

Balance, Beginning of Period

   $ 3,189,837      $ 1,127,180   

Borrowings

     425,684        —     

Repayments

     (2,791     (412,057

Net realized gains on debt

     —          (41,819

Changes in net unrealized losses from debt

     88,578        49,944   

Elimination of debt attributable to consolidated VIEs

     (772     (16
  

 

 

   

 

 

 

Balance, End of Period

   $ 3,700,536      $ 723,232   
  

 

 

   

 

 

 

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

   $ 88,699      $ 4,717   
  

 

 

   

 

 

 

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 months ended March 31, 2012 and 2011, respectively:

 

     For the Three Months Ended
March 31,
 
     2012     2011  

Net unrealized gains from investment activities

   $ 70,019      $ 32,147   

Net realized gains (losses) from investment activities

     2,285        (15,044
  

 

 

   

 

 

 

Net gains from investment activities

     72,304        17,103   
  

 

 

   

 

 

 

Net unrealized losses from debt

     (88,578     (49,944

Net realized gains from debt

     —          41,819   
  

 

 

   

 

 

 

Net losses from debt

     (88,578     (8,125
  

 

 

   

 

 

 

Interest and other income

     45,631        14,761   

Other expenses

     (45,558     (6,651
  

 

 

   

 

 

 

Net (Losses) Gains from Investment Activities of Consolidated VIEs

   $ (16,201   $ 17,088   
  

 

 

   

 

 

 

Senior Secured Notes and Subordinated Notes—Included within liabilities of consolidated VIEs debt, at fair value 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 March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Principal
Outstanding
     Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years
     Principal
Outstanding
     Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years
 

Senior Secured Notes(2)(3)

   $ 3,506,834         1.44     8.9       $ 3,121,126         1.35     8.9   

Subordinated Notes(2)(3)

     463,688         N/A (1)      8.8         416,275         N/A (1)      8.8   
  

 

 

         

 

 

      
   $ 3,970,522            $ 3,537,401        
  

 

 

         

 

 

      

 

(1) The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs.
(2) The fair value of Senior Secured and Subordinated Notes as of March 31, 2012 and December 31, 2011 was $3,701 million and $3,190 million, respectively.
(3) The debt at fair value of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another. As of March 31, 2012 and December 31, 2011, the fair value of the consolidated VIE assets was $4,092 million and $3,533 million, respectively. This collateral consisted of cash and cash equivalents, investments as fair value and other assets.

 

-31-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

As of March 31, 2012, the fair value of $3,560 million of senior secured notes and subordinated notes were valued using broker quotes. The remaining fair value of $141 million of subordinated notes was valued using a discounted cash flow model. The significant unobservable inputs used in the fair value measurement of the subordinated notes include the discount rate applied in the valuation models, default and recovery rates. These inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of an investment; conversely decrease in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks.

The following table provides quantitative measures used to determine the fair values of the Level III debt of the consolidated VIEs valued using discounted cash flow as of March 31, 2012:

 

     As of
March 31, 2012
     Fair Value      Valuation
Technique
   Unobservable Input    Range

Subordinated Notes

   $ 141,408       Discounted Cash
Flow
   Discount Rate    17.0%–17.0%
         Default Rate    1.5%–1.5%
         Recovery Rate    80.0%–80.0%

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 March 31, 2012, 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.

 

     March 31, 2012  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 14,293,325      $ (31,022   $ 7,689   

Capital Markets

     3,155,272        (515,428     14,872   

Real Estate

     2,122,756        (1,635,416     5,831   
  

 

 

   

 

 

   

 

 

 

Total

   $ 19,571,353 (1)    $ (2,181,866 )(2)    $ 28,392 (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $827,987 in cash, $18,222,185 in investments and $521,181 in receivables.
(2) Represents $2,167,487 in debt and other payables, $9,607 in securities sold, not purchased, and $4,772 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.

 

-32-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

     December 31, 2011  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 11,879,948      $ (146,374   $ 8,753   

Capital Markets

     3,274,288        (1,095,266     11,305   

Real Estate

     2,216,870        (1,751,280     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 17,371,106 (1)    $ (2,992,920 )(2)    $ 20,058 (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $383,017 in cash, $16,507,142 in investments and $480,947 in receivables.
(2) Represents $2,874,394 in debt and other payables, $86,102 in securities sold, not purchased, and $32,424 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 March 31, 2012, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P. and AutumnLeaf, L.P. At March 31, 2012, the aggregate amount of such investments was $169.2 million. The Company’s ownership interest in AAA was 2.38% at March 31, 2012.

At December 31, 2011, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P. and AutumnLeaf, L.P. At December 31, 2011, the aggregate amount of such investments was $131.8 million. The Company’s ownership interest in AAA was 2.45% at December 31, 2011.

5. CARRIED INTEREST RECEIVABLE

Carried interest receivable from private equity and capital markets funds consists of the following:

 

     March 31,
2012
     December 31,
2011
 

Private equity

   $ 1,039,650       $ 672,952   

Capital markets

     330,170         195,630   
  

 

 

    

 

 

 

Total Carried Interest Receivable

   $ 1,369,820       $ 868,582   
  

 

 

    

 

 

 

The table below provides a roll-forward of the carried interest receivable balance for the three months ended March 31, 2012:

 

     Private Equity     Capital Markets     Real Estate     Total  

Carried interest receivable, January 1, 2012

   $ 672,952      $ 195,630      $ —        $ 868,582   

Change in fair value of funds(1)

     413,928        154,514        1,677        570,119   

Foreign exchange gain

     —          1,604        —          1,604   

Fund cash distributions to the Company

     (47,230     (21,578     (1,677     (70,485
  

 

 

   

 

 

   

 

 

   

 

 

 

Carried Interest Receivable, March 31, 2012(2)

   $ 1,039,650      $ 330,170      $ —        $ 1,369,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During the three months ended March 31, 2012, the Company recorded a reversal of $34.1 million and $18.1 million of a general partner obligation to return previously distributed carried interest income or fees relating to Fund VI and SOMA, respectively.
(2) As of March 31, 2012, the Company had a general partner obligation of $41.2 million relating to Fund VI. The general partner obligation is recognized based upon a hypothetical liquidation of the fund as of March 31, 2012. The actual determination and any required payment of a general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund.

The timing of the payment of carried interest due to the general partner or investment manager varies depending on the terms of the applicable fund agreements. Generally, carried interest with respect to the private equity funds is payable and is distributed to the fund’s general partner upon realization of an investment if the fund’s cumulative returns are in excess of the preferred return. For most capital markets funds, carried interest is payable based on realizations after the end of the relevant fund’s fiscal year or fiscal quarter, subject to high watermark provisions. There is currently no carried interest receivable associated with the Company’s real estate segment.

 

-33-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

6. OTHER LIABILITIES

Other liabilities consist of the following:

 

     March 31,
2012
     December 31,
2011
 

Deferred taxes

   $ 16,176       $ 2,774   

Deferred rent

     15,675         14,798   

Deferred payment related to acquisition

     3,858         3,858   

Unsettled trades and redemption payable

     7,137         2,902   

Interest rate swap agreements

     2,027         3,843   

Other

     4,269         4,875   
  

 

 

    

 

 

 

Total Other Liabilities

   $ 49,142       $ 33,050   
  

 

 

    

 

 

 

Interest Rate Swap Agreements—The principal financial instruments used for cash flow hedging purposes are interest rate swaps. Apollo enters into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively converted a portion of the Company’s variable rate debt under the AMH Credit Agreement (discussed in note 8) to a fixed rate, without exchanging the notional principal amounts. Apollo entered into an interest rate swap agreement whereby Apollo receives floating rate payments in exchange for fixed rate payments based on 5.175%, on the notional amount of $167.0 million, effectively converting a portion of its floating rate borrowings to a fixed rate. The interest rate swap expires in May 2012. Apollo has hedged only the risk related to changes in the benchmark interest rate (three month LIBOR). As of March 31, 2012 and December 31, 2011, the Company has recorded a liability of $2.0 million and $3.8 million, respectively, to recognize the fair value of this derivative.

The Company has determined that the valuation of the interest rate swaps fall within Level II of the fair value hierarchy. The Company estimates the fair value of its interest rate swaps using discounted cash flow models, which project future cash flows based on the instruments’ contractual terms using market-based expectations for interest rates. The Company also includes a credit risk adjustment to the cash flow discount rate to incorporate the impact of non-performance risk in the recognized measure of the fair value of the swaps. This adjustment is based on the counterparty’s credit risk when the swaps are in a net asset position and on the Company’s own credit risk when the swaps are in a net liability position.

7. INCOME TAXES

The Company is treated as a partnership for tax purposes and is therefore not subject to U.S. Federal and state income taxes; however, APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal corporate income taxes. In addition, certain subsidiaries of the Company are subject to New York City Unincorporated Business Tax (“NYC UBT”) attributable to the Company’s operations apportioned to New York City and certain non-U.S. subsidiaries of the Company are subject to income taxes in their local jurisdictions. APO Corp. is required to file a standalone Federal corporate tax return, as well as filing standalone corporate state and local tax returns in California, New York and New York City. The Company’s provision for income taxes is accounted in accordance with U.S. GAAP.

The Company’s provision for income taxes totaled $14.6 million and $8.8 million for the three months ended March 31, 2012 and 2011, respectively. The Company’s effective tax rate was approximately 3.27% and 3.39% for the three months ended March 31, 2012 and 2011, respectively.

Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company determined no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.

 

-34-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax authorities. With a few exceptions, as of March 31, 2012, Apollo and its predecessor entities’ U.S. federal, state, local and foreign income tax returns for the years 2008 through 2011 are open under the normal statute of limitations and therefore subject to examination.

8. DEBT

Debt consists of the following:

 

     March 31, 2012     December 31, 2011  
     Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
    Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
 

AMH Credit Agreement

   $ 728,273         6.06 %(1)    $ 728,273         5.39 %(1) 

CIT secured loan agreement

     10,018         3.61     10,243         3.39
  

 

 

      

 

 

    

Total Debt

   $ 738,291         6.02   $ 738,516         5.35
  

 

 

      

 

 

    

 

(1) Includes the effect of interest rate swaps.

AMH Credit Agreement—On April 20, 2007, Apollo Management Holdings, L.P. (“AMH”), a subsidiary of the Company which is a Delaware limited partnership owned by APO Corp. and Holdings, entered into a $1.0 billion seven year credit agreement (the “AMH Credit Agreement”). Interest payable under the AMH Credit Agreement may from time to time be based on Eurodollar (“LIBOR”) or Alternate Base Rate (“ABR”) as determined by the borrower. Through the use of interest rate swaps, AMH has irrevocably elected three-month LIBOR for $167 million of the debt for five years from the closing date of the AMH Credit Agreement, which expires in May 2012. The remaining amount of the debt is computed currently based on three-month LIBOR. The interest rate of the Eurodollar loan, which was amended as discussed below, is the daily Eurodollar rate plus the applicable margin rate (4.25% for loans with extended maturity, as discussed below, and 1.50% for loans without the extended maturity as of March 31, 2012 and 3.75% for loans with extended maturity and 1.00% for loans without the extended maturity as of December 31, 2011). The interest rate on the ABR term loan, which was amended as discussed below, for any day, will be the greatest of (a) the prime rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.5% and (c) the one-month Eurodollar Rate plus 1.00%, in each case plus the applicable margin. The AMH Credit Agreement originally had a maturity date of April 2014.

On December 20, 2010, Apollo amended the AMH Credit Agreement to extend the maturity date of $995.0 million (including the $90.9 million of fair value debt repurchased by the Company) of the term loans from April 20, 2014 to January 3, 2017 and modified certain other terms of the credit facility. Pursuant to this amendment, AMH or an affiliate was required to purchase from each lender that elected to extend the maturity date of its term loan a portion of such extended term loan equal to 20% thereof. In addition, AMH or an affiliate is required to repurchase at least $50.0 million aggregate principal amount of term loans by December 31, 2014 and at least $100.0 million aggregate principal amount of term loans (inclusive of the previously purchased $50.0 million) by December 31, 2015 at a price equal to par plus accrued interest. The sweep leverage ratio was also extended to end at the new loan term maturity date. The interest rate for the highest applicable margin for the loan portion extended changed to LIBOR plus 4.25% and ABR plus 3.25%. On December 20, 2010, an affiliate of AMH that is a guarantor under the AMH Credit Agreement repurchased approximately $180.8 million of term loans in connection with the extension of the maturity date of such loans and thus the AMH Credit Agreement (excluding the portions held by AMH affiliates) had a remaining balance of $728.3 million. The Company determined that the amendments to the AMH Credit Agreement resulted in a debt extinguishment which did not result in any gain or loss.

The interest rate on the $723.3 million, net ($995.0 million portion less amount repurchased by the Company) of the loan at March 31, 2012 was 4.75% and the interest rate on the remaining $5.0 million

 

-35-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

portion of the loan at March 31, 2012 was 2.00%. The estimated fair value of the Company’s long-term debt obligation related to the AMH Credit Agreement is believed to be approximately $784.6 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. The $728.3 million carrying value of debt that is recorded on the condensed consolidated statements of financial condition at March 31, 2012 is the amount for which the Company expects to settle the AMH Credit Agreement.

As of March 31, 2012 and December 31, 2011, the AMH Credit Agreement was guaranteed by, and collateralized by, substantially all of the assets of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH, as well as cash proceeds from the sale of assets or similar recovery events and any cash deposited pursuant to the excess cash flow covenant, which will be deposited as cash collateral to the extent necessary as set forth in the AMH Credit Agreement. As of March 31, 2012, the consolidated net assets (deficit) of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and their respective subsidiaries were $103.8 million, $65.8 million, $53.4 million, $172.4 million and $(987.4) million, respectively. As of December 31, 2011, the consolidated net assets (deficit) of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and their respective subsidiaries were $56.6 million, $46.2 million, $50.1 million, $131.9 million and $(1,014.3) million, respectively.

In accordance with the AMH Credit Agreement as of March 31, 2012, Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and their respective subsidiaries were subject to certain negative and affirmative covenants. Among other things, the AMH Credit Agreement includes an excess cash flow covenant and an asset sales covenant. The AMH Credit Agreement does not contain any financial maintenance covenants.

If AMH’s debt to EBITDA ratio (the “Leverage Ratio”) as of the end of any fiscal year exceeds the level set forth in the next sentence (the “Excess Sweep Leverage Ratio”), AMH must deposit in the cash collateral account the lesser of (a) 100% of its Excess Cash Flow (as defined in the AMH Credit Agreement) and (b) the amount necessary to reduce the Leverage Ratio on a pro forma basis as of the end of such fiscal year to 0.25 to 1.00 below the Excess Sweep Leverage Ratio. The Excess Sweep Leverage Ratio is: for 2012, 4.00 to 1.00; for 2013, 4.00 to 1.00; for 2014, 3.75 to 1.00; for 2015, 3.50 to 1.00; and thereafter, 3.50 to 1.00.

In addition, AMH must deposit the lesser of (a) 50% of any remaining Excess Cash Flow and (b) the amount required to reduce the Leverage Ratio on a pro forma basis at the end of each fiscal year to a level 0.25 to 1.00 below the Sweep Leverage Ratio (as defined in the next paragraph) for such fiscal year.

If AMH receives net cash proceeds from certain non-ordinary course asset sales, then such net cash proceeds shall be deposited in the cash collateral account as necessary to reduce its Leverage Ratio on a pro forma basis as of the last day of the most recently completed fiscal quarter (after giving effect to such non-ordinary course asset sale and such deposit) to (the following specified levels for the specified years, the “Sweep Leverage Ratio”) (i) for 2012 and 2013, a Leverage Ratio of 3.50 to 1.00, (ii) for 2014, a Leverage Ratio of 3.25 to 1.00, (iii) for all other years, a Leverage Ratio of 3.00 to 1.00.

The AMH Credit Agreement contains customary events of default, including events of default arising from non-payment, material misrepresentations, breaches of covenants, cross default to material indebtedness, bankruptcy and changes in control of AMH. As of March 31, 2012, the Company was not aware of any instances of non-compliance with the AMH Credit Agreement.

CIT Secured Loan Agreement—During the second quarter of 2008, the Company entered into four secured loan agreements totaling $26.9 million with CIT Group/Equipment Financing Inc. (“CIT”) to finance the purchase of certain fixed assets. The loans bear interest at LIBOR plus 318 basis points per annum with interest and principal to be repaid monthly and a balloon payment of the remaining principal

 

-36-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

totaling $9.4 million due at the end of the terms in April 2013. At March 31, 2012, the interest rate was 3.42%. On April 28, 2011, the Company sold its ownership interest in certain assets which served as collateral to the CIT secured loan agreement for $11.3 million with $11.1 million of the proceeds going to CIT directly. As a result of the sale and an additional payment made by the Company of $1.1 million, the Company satisfied the loan associated with the related asset of $12.2 million on April 28, 2011. As of March 31, 2012, the carrying value of the remaining CIT secured loan is $10.0 million.

Apollo has determined that the carrying value of this debt approximates fair value as the loans are primarily variable rate in nature and would be categorized as a Level III liability in the fair value hierarchy.

9. NET INCOME 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 distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions 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.

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 the assumed conversion of these potential common shares.

The table below presents basic and diluted net income per Class A share using the two-class method for the three months ended March 31, 2012 and 2011:

 

     Basic and Diluted  
   For the Three Months Ended
March 31,
 
   2012     2011  

Numerator:

    

Net income attributable to Apollo Global Management, LLC

   $ 98,043      $ 38,156   

Distributions declared on Class A shares

     (58,080 )(1)      (16,647 )(2) 

Distributions on participating securities

     (10,306     (3,258

Earnings allocable to participating securities

     (4,749     (3,007
  

 

 

   

 

 

 

Undistributed Income Attributable to Class A Shareholders

   $ 24,908      $ 15,244   
  

 

 

   

 

 

 

Denominator:

    

Weighted average number of Class A shares outstanding

     125,269,253        98,215,736   
  

 

 

   

 

 

 

Net income per Class A share: Basic and Diluted(3)

    

Distributable Earnings

   $ 0.46      $ 0.17   

Undistributed income

     0.20        0.16   
  

 

 

   

 

 

 

Net Income per Class A Share

   $ 0.66      $ 0.33   
  

 

 

   

 

 

 

 

(1) The Company declared a $0.46 distribution on Class A shares on February 12, 2012.
(2) The Company declared a $0.17 distribution on Class A shares on January 4, 2011.
(3)

For the three months ended March 31, 2012, share options and unvested RSUs were determined to be dilutive, and were accordingly included in the diluted earnings per share calculation. The resulting diluted earnings per share amount was not significantly different from basic earnings per share and therefore, was presented as the same amount. The AOG Units were determined to be anti-dilutive for the three months ended March 31, 2012. For the three months ended March 31, 2011, unvested RSUs were determined to be dilutive, and were accordingly included in the diluted earnings per share calculation. The

 

-37-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

  resulting diluted earnings per share amount was not significantly different from basic earnings per share and therefore, was presented as the same amount. The AOG Units and share options were determined to be anti-dilutive for the three months ended March 31, 2011.

On October 24, 2007, the Company commenced the granting of restricted share units (“RSUs”) that provide the right to receive, upon vesting, Class A shares of Apollo Global Management, LLC, pursuant to the Company’s 2007 Omnibus Equity Incentive Plan. Certain RSU grants to employees during 2010 and 2011 provide the right to receive distribution equivalents on vested RSUs on an equal basis any time a distribution is declared. The Company refers to these RSU grants as “Plan Grants.” For certain Plan Grants made before 2010, distribution equivalents are paid in January of the calendar year next following the calendar year in which a distribution on Class A shares was declared. In addition, certain RSU grants to employees in 2010 and 2011 (the Company refers to these as “Bonus Grants”) provide that both vested and unvested RSUs participate in distribution equivalents on an equal basis with the Class A shareholders any time a distribution is declared. As of March 31, 2012, approximately 18.7 million vested RSUs and 5.3 million unvested RSUs were eligible for participation in distribution equivalents.

Any distribution equivalent paid to an employee will not be returned to the Company upon forfeiture of the award by the employee. Vested and unvested RSUs that are entitled to non-forfeitable distribution equivalents qualify as participating securities and are included in the Company’s basic and diluted earnings per share computations using the two-class method. The holder of an RSU participating security would have a contractual obligation to share in the losses of the entity if the holder is obligated to fund the losses of the issuing entity or if the contractual principal or mandatory redemption amount of the participating security is reduced as a result of losses incurred by the issuing entity. Because the RSU participating securities do not have a mandatory redemption amount and the holders of the participating securities are not obligated to fund losses, neither the vested RSUs nor the unvested RSUs are subject to any contractual obligation to share in losses of the Company.

Holders of AOG Units are subject to the vesting requirements and transfer restrictions set forth in the agreements with the respective holders, and may up to four times each year (subject to the terms of the exchange agreement) exchange their AOG Units for Class A shares on a one-for-one basis. A limited partner must exchange one partnership unit in each of the eight Apollo Operating Group partnerships to effect an exchange for one Class A share. If fully converted, the result would be an additional 240,000,000 Class A shares added to the diluted earnings per share calculation.

Apollo has one Class B share outstanding, which is held by Holdings. The voting power of the Class B share is reduced on a one vote per one AOG Unit basis in the event of an exchange of AOG Units for Class A shares, as discussed above. The Class B share has no net income (loss) per share as it does not participate in Apollo’s earnings (losses) or distributions. The Class B share has no distribution or liquidation rights. The Class B share has voting rights on a pari passu basis with the Class A shares. The Class B share currently has a super voting power of 240,000,000 votes.

 

-38-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

The table below presents transactions in Class A shares during the three months ended March 31, 2012 and the year ended December 31, 2011, and the resulting impact on the Company’s and Holdings’ ownership interests in the Apollo Operating Group:

 

Date

  

Type of AGM
Class A Shares
Transaction

   Number of Shares Issued
(Repurchased/Cancelled)
in AGM Class A Shares
Transaction

(in thousands)
    AGM ownership%
in AOG before
AGM Class A
Shares Transaction
    AGM ownership%
in AOG after
AGM Class A
Shares
Transaction
    Holdings
ownership% in
AOG before
AGM Class A
Shares
Transaction
    Holdings
ownership% in
AOG after AGM
Class A Shares
Transaction
 

January 8, 2011

   Issuance      2        N/A (1)      N/A (1)      N/A (1)      N/A (1) 

March 15, 2011

   Issuance      1,548        29.0     29.3     71.0     70.7

April 4, 2011

   Issuance      21,500        29.3     33.5     70.7     66.5

April 7, 2011

   Issuance      750        33.5     33.7     66.5     66.3

July 11, 2011

   Issuance      77        N/A (1)      N/A (1)      N/A (1)      N/A (1) 

August 15, 2011

   Issuance      1,191        33.7     33.9     66.3     66.1

October 10, 2011

   Issuance      52        N/A (1)      N/A (1)      N/A (1)      N/A (1) 

November 10, 2011

   Issuance      1,011        33.9     34.1     66.1     65.9

November 22, 2011

   Net Settlement      (130     N/A (1)      N/A (1)      N/A (1)      N/A (1) 

January 18, 2012

   Issuance      394        34.1     34.1     65.9     65.9

February 13, 2012

   Issuance      1,994        34.1     34.5     65.9     65.5

March 5, 2012

   Issuance      50        N/A (1)      N/A (1)      N/A (1)      N/A (1) 

 

(1) Transaction did not have a material impact on ownership.

10. EQUITY-BASED COMPENSATION

AOG Units

The fair value of the AOG Units of approximately $5.6 billion is charged to compensation expense on a straight-line basis over the five or six year service period, as applicable. For the three months ended March 31, 2012 and 2011, $116.2 million and $258.2 million of compensation expense was recognized, respectively. The estimated forfeiture rate was 3% for Contributing Partners and 0% for Managing Partners based on actual forfeitures as well as the Company’s future forfeiture expectations. As of March 31, 2012, there was $391.8 million of total unrecognized compensation cost related to unvested AOG Units that are expected to vest over the next 15 months.

The following table summarizes the activity of the AOG Units for the three months ended March 31, 2012:

 

     Apollo Operating
Group Units
    Weighted Average
Grant Date

Fair Value
 

Balance at January 1, 2012

     22,593,210      $ 22.64   

Granted

     —          —     

Forfeited

     —          —     

Vested at March 31, 2012

     (5,063,556     22.94   
  

 

 

   

Balance at March 31, 2012

     17,529,654      $ 22.55   
  

 

 

   

Units Expected to Vest—As of March 31, 2012, approximately 17,400,000 AOG Units are expected to vest.

RSUs

On October 24, 2007, the Company commenced the granting of RSUs under the Company’s 2007 Omnibus Equity Incentive Plan. These grants are accounted for as a grant of equity awards in accordance with U.S. GAAP. All grants after March 29, 2011 consider the public share price of the Company. For Plan Grants the fair value is based on grant date fair value, and are discounted for transfer restrictions and lack of distributions until vested. For Bonus Grants, the valuation methods consider transfer restrictions and timing of distributions. The total fair value is charged to compensation expense on a straight-line basis over the vesting period, which is generally up to 24 quarters (for Plan Grants) or annual vesting over three years (for Bonus Grants). There were no RSUs granted during the quarter ended March 31, 2012. The actual

 

-39-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

forfeiture rate was 1.3% and 0.6% for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, $31.0 million and $23.8 million of compensation expense were recognized, respectively.

Delivery of Class A Shares

During the first quarter of 2012 and 2011, the Company delivered Class A Shares for vested RSUs. The Company allows RSU participants to settle their tax liabilities with a reduction of their Class A share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a tax liability and a corresponding accumulated deficit adjustment. The adjustment was $17.0 million and $9.0 million in the first quarter in 2012 and 2011, respectively, and is disclosed in the condensed consolidated statements of changes in shareholders’ equity.

The delivery of RSUs does not cause a transfer of amounts in the condensed consolidated statements of changes in shareholders’ equity to the Class A Shareholders. The delivery of Class A Shares for vested RSUs causes the income allocated to the Non-Controlling Interests to shift to the Class A shareholders from the date of delivery forward. During the three months ended March 31, 2012, the Company delivered 2,337,853 million Class A Shares in settlement of vested RSUs, which caused the Company’s ownership interest in the Apollo Operating Group to increase to 34.5% from 34.1%.

The following table summarizes RSU activity for the three months ended March 31, 2012:

 

     Unvested     Weighted Average
Grant Date Fair
Value
     Vested     Total Number of
RSUs
Outstanding
 

Balance at January 1, 2012

     20,480,773      $ 11.38         20,240,008        40,720,781   

Granted

     —          —           —          —     

Forfeited

     (263,907     11.55         —          (263,907

Delivered

     —          11.17         (3,466,843     (3,466,843

Vested

     (1,961,145     11.67         1,961,145        —     
  

 

 

      

 

 

   

 

 

 

Balance at March 31, 2012

     18,255,721      $ 11.35         18,734,310        36,990,031 (1) 
  

 

 

      

 

 

   

 

 

 

 

(1) Amount excludes RSUs which have vested and have been issued in the form of Class A shares.

Units Expected to Vest—As of March 31, 2012, approximately 17,200,000 RSUs are expected to vest.

Share Options

Under the Company’s 2007 Omnibus Equity Incentive Plan, 5,000,000 options were granted on December 2, 2010. These options vested and became exercisable with respect to 4/24 of the option shares on December 31, 2011 and the remainder vest in equal installments over each of the remaining 20 quarters with full vesting on December 31, 2016. In addition, 555,556 options were granted on January 22, 2011 and 25,000 options were granted on April 9, 2011. Of the options granted on January 22, 2011, half of such options that vested and became exercisable on December 31, 2011 were exercised on March 5, 2012 and the other half that were due to vest and become exercisable on December 31, 2012 were forfeited during the quarter ended March 31, 2012. The options granted on April 9, 2011 vested and became exercisable with respect to half of the options shares on December 31, 2011 and the other half vests in four equal quarterly installments starting on March 31, 2012 and ending on December 31, 2012. For the three months ended March 31, 2012 and 2011, $1.2 million and $1.3 million of compensation expense were recognized as a result of option grants, respectively.

 

-40-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

Apollo measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options awarded during 2011:

 

Assumptions:

   2011(2)  

Risk-free interest rate

     2.79

Weighted average expected dividend yield

     2.25

Expected volatility factor(1)

     40.22

Expected life in years

     5.72   

Fair value of options per share

   $ 8.44   

 

(1) The Company determined its expected volatility based on comparable companies using daily stock prices.
(2) Represents weighted average of 2011 grants.

The following table summarizes the share option activity for the three months ended March 31, 2012:

 

     Options
Outstanding
    Weighted
Average
Exercise
Price
     Aggregate
Fair
Value
    Weighted
Average
Remaining
Contractual
Term
 

Balance at January 1, 2012

     5,580,556      $ 8.14       $ 32,996      $ 8.93   

Granted

     —          —           —          —     

Exercised

     (277,778     9.00         (2,364     —     

Forfeited

     (277,778     9.00         (2,364     —     
  

 

 

      

 

 

   

Balance at March 31, 2012

     5,025,000        8.05       $ 28,268        8.67   
  

 

 

      

 

 

   

Exercisable at March 31, 2012

     1,057,291      $ 8.15       $ 5,959      $ 8.67   
  

 

 

      

 

 

   

Units Expected to VestAs of March 31, 2012, approximately 3,700,000 options are expected to vest.

The expected life of the options granted represents the period of time that options are expected to be outstanding and is based on the contractual term of the option. Unamortized compensation cost related to unvested share options at March 31, 2012 was $21.0 million and is expected to be recognized over a weighted average period of 4.7 years.

AAA RDUs

Incentive units that provide the right to receive AAA restricted depositary units (“RDUs”) following vesting are granted periodically to employees of Apollo. These grants are accounted for as equity awards in accordance with U.S. GAAP. The incentive units granted to employees generally vest over three years. In contrast, the Company’s Managing Partners and Contributing Partners have received distributions of fully-vested AAA RDUs. The fair value at the date of the grants is recognized on a straight-line basis over the vesting period (or upon grant in the case of fully vested AAA RDUs). The grant date fair value considers the public share price of AAA. Vested AAA RDUs can be converted into ordinary common units of AAA subject to applicable securities law restrictions. During the three months ended March 31, 2012 and 2011, the actual forfeiture rate was 0%. For the three months ended March 31, 2012 and 2011, $0.1 million and $0.1 million of compensation expense was recognized, respectively.

 

-41-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

During the three months ended March 31, 2012 and 2011, the Company delivered 60,702 and 389,785 RDUs, respectively, to individuals who had vested in these units. The deliveries in 2012 and 2011 resulted in a reduction of the accrued compensation liability of $0.5 million and $3.8 million, respectively, and the recognition of a net decrease of additional paid in capital in 2012 of $1.3 million and a net decrease in 2011 of $2.7 million, respectively. These amounts are presented in the condensed consolidated statements of changes in shareholders’ equity. There was $0.1 million and $0.5 million of liability for undelivered RDUs included in accrued compensation and benefits in the condensed consolidated statements of financial condition as of March 31, 2012 and December 31, 2011, respectively. The following table summarizes RDU activity for the three months ended March 31, 2012:

 

     Unvested      Weighted
Average
Grant Date
Fair Value
     Vested     Total Number
of RDUs
Outstanding
 

Balance at January 1, 2012

     196,653       $ 8.17         60,702        257,355   

Granted

     256,673         9.45         —          256,673   

Forfeited

     —           —           —          —     

Delivered

     —           8.69         (60,702     (60,702

Vested

     —           —           —          —     
  

 

 

       

 

 

   

 

 

 

Balance at March 31, 2012

     453,326       $ 8.89         —          453,326   
  

 

 

       

 

 

   

 

 

 

Units Expected to Vest—As of March 31, 2012, approximately 426,000 RDUs are expected to vest.

The following table summarizes the activity of RDUs available for future grants:

 

     RDUs Available
For Future
Grants
 

Balance at January 1, 2012

     1,947,837   

Purchases

     16,335   

Granted

     (387,617 )(1) 

Forfeited

     —     
  

 

 

 

Balance at March 31, 2012

     1,576,555   
  

 

 

 

 

(1) On March 7, 2012, the Company issued and delivered 130,944 RDUs to certain employees as part of AAA’s carry reinvestment program. This resulted in a decrease in profit sharing payable of $0.6 million in the condensed consolidated statements of financial condition. No additional compensation expense was recognized.

Restricted Stock and Restricted Stock Unit Awards—ARI

On September 29, 2009, 97,500 and 145,000 shares of ARI restricted stock were granted to the Company and certain of the Company’s employees, respectively. Additionally, on December 31, 2009, 5,000 shares of ARI restricted stock were granted to an employee of the Company. The fair value of the Company and employee awards granted was $1.8 million and $2.7 million, respectively. These awards generally vest over three years or twelve quarters, with the first quarter vesting on January 1, 2010. On March 23, 2010, July 1, 2010 and July 21, 2010, 102,084, 5,000 and 16,875 shares of ARI restricted stock units (“ARI RSUs”), respectively, were granted to certain of the Company’s employees. Pursuant to the March 23, 2010 and July 21, 2010 issuances, 102,084 and 16,875 shares of ARI restricted stock, respectively, were forfeited by the Company’s employees. As the fair value of ARI RSUs was not greater than the forfeiture of the restricted stock, no additional value will be amortized. On April 1, 2011 and August 4, 2011, 5,000 and 152,750 ARI RSUs, respectively, were granted to certain of the Company’s employees. On August 4, 2011, 156,000 ARI RSUs were granted to the Company. On December 28, 2011, the Company issued 45,587 ARI RSUs to certain of the Company’s employees. On March 15, 2012, 20,000 ARI RSUs were granted to an employee of the Company. The awards granted to the Company are accounted for as investments and deferred revenue in the condensed consolidated statements of financial condition. As these awards vest, the deferred revenue is recognized as management fees. The investment is accounted for using the equity method of accounting for awards granted to the Company and as a deferred compensation asset for the awards granted to employees. Compensation expense will be recognized on a straight line-basis over the vesting period for the awards granted to the employees. The Company recorded an asset and a liability upon receiving the awards on behalf of the Company’s employees. The fair value of the awards to employees is based on the grant date fair value, which utilizes the public share price of ARI, less discounts for certain restrictions. The awards granted to the Company’s employees are remeasured each period to reflect the fair value of the asset and liability and any changes in these values are recorded in

 

-42-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

the condensed consolidated statements of operations. For the three months ended March 31, 2012 and 2011, $0.5 million and $0.3 million of management fees and $0.4 million and $0.2 million of compensation expense were recognized in the condensed consolidated statements of operations, respectively. The actual forfeiture rate for unvested ARI restricted stock awards and ARI RSUs was 1% and 0% for the three months ended March 31, 2012 and 2011, respectively.

The following table summarizes activity for the ARI restricted stock awards and ARI RSUs that were granted to both the Company and certain of its employees for the three months ended March 31, 2012:

 

     ARI
Restricted
Stock
Unvested
    ARI RSUs
Unvested
    Weighted
Average
Grant Date
Fair Value
     ARI RSUs
Vested
     Total
Number of
RSUs
Outstanding
 

Balance at January 1, 2012

     32,502        374,754      $ 15.12         73,542         448,296   

Granted to employees of the Company

     —          20,000        15.17         —           20,000   

Granted to the Company

     —          —          —           —           —     

Forfeited by employees of the Company

     —          (5,522     14.09         —           (5,522

Vested awards of the employees of the Company

     —          (52,585     15.31         52,585         —     

Vested awards of the Company

     (8,125     (52,000     15.34         52,000         —     
  

 

 

   

 

 

      

 

 

    

 

 

 

Balance at March 31, 2012

     24,377        284,647      $ 15.07         178,127         462,774   
  

 

 

   

 

 

      

 

 

    

 

 

 

Units Expected to Vest—As of March 31, 2012, approximately 274,000 and 24,377 shares of ARI RSUs and ARI restricted stock, respectively, are expected to vest.

Restricted Stock Unit Awards—Apollo Residential Mortgage, Inc. (“AMTG”)

On July 27, 2011, 18,750 and 11,250 AMTG restricted stock units (“AMTG RSUs”) were granted to the Company and certain of the Company’s employees, respectively. On September 26, 2011, 875 AMTG RSUs were granted to certain employees of the Company. The fair value of the Company and employee awards granted was $0.3 million and $0.2 million, respectively. These awards generally vest over three years or twelve calendar quarters, with the first quarter vesting on October 1, 2011. The awards granted to the Company are accounted for as investments and deferred revenue in the condensed consolidated statements of financial condition. As these awards vest, the deferred revenue is recognized as management fees. The investment is accounted for using the equity method of accounting for awards granted to the Company and as a deferred compensation asset for the awards granted to employees. Compensation expense will be recognized on a straight line-basis over the vesting period for the awards granted to the employees. The Company recorded an asset and a liability upon receiving the awards on behalf of the Company’s employees. The awards granted to the Company’s employees are remeasured each period to reflect the fair value of the asset and liability and any changes in these values are recorded in the condensed consolidated statements of operations.

The fair value of the awards to employees is based on the grant date fair value, which utilizes the public share price of AMTG less discounts for certain restrictions. For the three months ended March 31, 2012, $0.0 million of management fees and $0.0 million of compensation expense were recognized in the condensed consolidated statements of operations, respectively. The actual forfeiture rate for AMTG RSUs was 0% for the three months ended March 31, 2012.

 

-43-


APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands, except share data)

 

The following table summarizes activity for the AMTG RSUs that were granted to both the Company and certain of its employees for the three months ended March 31, 2012:

 

     AMTG RSUs
Unvested
    Weighted
Average
Grant Date
Fair Value
     Vested      Total
Number of
RSUs
Outstanding
 

Balance at January 1, 2012

     28,305      $ 17.56         2,570         30,875   

Vested awards of the employees of the Company

     (1,011     16.57         1,011         —     

Vested awards of the Company

     (1,563     18.20         1,563         —     
  

 

 

      

 

 

    

 

 

 

Balance at March 31, 2012

     25,731      $ 17.56         5,144         30,875   
  

 

 

      

 

 

    

 

 

 

Units Expected to Vest—As of March 31, 2012, approximately 25,000 AMTG RSUs are expected to vest.

Equity-Based Compensation Allocation

Equity-based compensation is allocated based on ownership interests. Therefore, the amortization of the AOG Units is allocated to Shareholders’ Equity attributable to Apollo Global Management, LLC and the Non-Controlling Interests, which results in a difference in the amounts charged to equity-based compensation expense and the amounts credited to shareholders’ equity attributable to Apollo Global Management, LLC in the Company’s condensed consolidated financial statements.

Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC for the three months ended March 31, 2012:

 

     Total
Amount
     Non-Controlling
Interest % in
Apollo
Operating
Group
    Allocated to
Non-
Controlling
Interest in
Apollo
Operating
Group(1)
    Allocated to
Apollo
Global
Management,
LLC
 

AOG Units