Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-35107

 

 

APOLLO GLOBAL MANAGEMENT, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8880053

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9 West 57th Street, 43rd Floor

New York, New York 10019

(Address of principal executive offices) (Zip Code)

(212) 515-3200

(Registrant’s telephone number, including area code)

 

 

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

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  ¨    No  ¨

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

 

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

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

As of May 12, 2011 there were 121,721,490 Class A shares and 1 Class B shares outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

  FINANCIAL INFORMATION   

Item 1.

  FINANCIAL STATEMENTS      6   
 

Unaudited Condensed Consolidated Financial Statements – March 31, 2011 and 2010

  
 

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

     6   
 

Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2011 and 2010

     7   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2011 and 2010

     8   
 

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2011 and 2010

     9   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010

     10   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     12   

ITEM 2.

 

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

     56   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      109   

ITEM 4.

  CONTROLS AND PROCEDURES      111   

PART II

  OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      112   

ITEM 1A.

  RISK FACTORS      112   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      112   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      112   

ITEM 4.

  (REMOVED AND RESERVED)      112   

ITEM 5.

  OTHER INFORMATION      112   

ITEM 6.

  EXHIBITS      113   

SIGNATURES

     117   

 

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Forward-Looking Statements

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

 

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

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

 

  (i) the limited partnerships through which our managing partners currently operate our businesses and ;

 

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

“AMH” refers to Apollo Management Holdings, L.P., a Delaware limited partnership owned by APO Corp. and Holdings. “APO Corp.” refers to APO Corp., a Delaware corporation and a wholly-owned subsidiary of Apollo Global Management, LLC. “Holdings” means AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our managing partners and our contributing partners hold their Apollo Operating Group units; “managing partners” refers to Messrs. Leon Black, Joshua Harris and Marc Rowan collectively and, when used in reference to holdings of interests in Apollo or Holdings, includes certain related parties of such individuals; “our manager” means AGM Management, LLC, a Delaware limited liability company that is controlled by our managing partners.

“AAA” refers to AP Alternative Assets, L.P., a Guernsey limited partnership that generally invests alongside certain of our private equity funds and directly in certain of our capital markets funds and in other transactions that we sponsor and manage; the common units of AAA are listed on NYSE Euronext in Amsterdam, which we refer to as “Euronext Amsterdam”; “AAA Investments” refers to AAA Investments, L.P., a Guernsey limited partnership through which AAA’s investments are made.

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

 

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

 

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

 

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

 

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

 

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

Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds.

 

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Management fees are normally based on “net asset value,” “gross assets,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees for AUM purposes are based on the total value of certain structured portfolio vehicle investments, which normally include leverage, less any portion of such total value that is already considered in fee-generating AUM.

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 and (e) structured portfolio vehicle investments that do not generate monitoring fees. We use non-fee generating AUM combined with fee generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income.

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(dollars in thousands, except share data)

 

     March 31,
2011
    December 31,
2010
 

Assets:

    

Cash and cash equivalents

   $ 459,844      $ 382,269   

Restricted cash

     6,641        6,563   

Investments

     2,145,515        1,920,553   

Assets of consolidated variable interest entities

    

Cash and cash equivalents

     64,373        87,556   

Investments, at fair value

     716,705        1,342,611   

Other assets

     14,095        36,754   

Carried interest receivable

     2,233,660        1,867,073   

Due from affiliates

     127,246        144,363   

Fixed assets, net

     42,566        44,696   

Deferred tax assets

     561,525        571,325   

Other assets

     32,654        35,141   

Goodwill

     48,894        48,894   

Intangible assets, net

     61,321        64,574   
                

Total Assets

   $ 6,515,039      $ 6,552,372   
                

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 31,747      $ 31,706   

Accrued compensation and benefits

     65,908        54,057   

Deferred revenue

     267,848        251,475   

Due to affiliates

     505,901        517,645   

Profit sharing payable

     845,819        678,125   

Debt

     751,180        751,525   

Liabilities of consolidated variable interest entities

    

Debt, at fair value

     723,232        1,127,180   

Other liabilities

     49,580        33,545   

Other liabilities

     26,157        25,695   
                

Total Liabilities

     3,267,372        3,470,953   
                

Commitments and Contingencies (see note 12)

    

Shareholders’ Equity:

    

Apollo Global Management, LLC shareholders’ equity:

    

Class A shares, no par value, unlimited shares authorized, 99,471,490 shares and 97,921,232 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

     —          —     

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

     —          —     

Additional paid in capital

     2,156,441        2,078,890   

Accumulated deficit

     (1,908,707     (1,937,818

Appropriated partners’ capital

     14,151        11,359   

Accumulated other comprehensive income (loss)

     (1,104     (1,529
                

Total Apollo Global Management, LLC shareholders’ equity

     260,781        150,902   

Non-Controlling Interests in consolidated entities

     1,744,920        1,888,224   

Non-Controlling Interests in Apollo Operating Group

     1,241,966        1,042,293   
                

Total Shareholders’ Equity

     3,247,667        3,081,419   
                

Total Liabilities and Shareholders’ Equity

   $ 6,515,039      $ 6,552,372   
                

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Revenues:

    

Advisory and transaction fees from affiliates

   $ 19,416      $ 11,069   

Management fees from affiliates

     118,150        103,804   

Carried interest income from affiliates

     558,776        108,721   
                

Total Revenues

     696,342        223,594   
                

Expenses:

    

Compensation and benefits:

    

Equity-based compensation

     283,607        273,646   

Salary, bonus and benefits

     72,069        59,770   

Profit sharing expense

     217,085        38,516   

Incentive fee compensation

     10,159        2,945   
                

Total Compensation and Benefits

     582,920        374,877   

Interest expense

     10,882        10,822   

Professional fees

     17,361        12,865   

General, administrative and other

     16,607        14,513   

Placement fees

     539        3,861   

Occupancy

     7,226        5,447   

Depreciation and amortization

     6,046        6,105   
                

Total Expenses

     641,581        428,490   
                

Other Income:

    

Net gains from investment activities

     157,929        111,721   

Net gains from investment activities of consolidated variable interest entities

     17,088        19,167   

Income from equity method investments

     21,826        7,880   

Interest income

     258        362   

Other income (loss), net

     8,063        (3,358
                

Total Other Income

     205,164        135,772   
                

Income (loss) before income tax provision

     259,925        (69,124

Income tax provision

     (8,820     (4,055
                

Net Income (Loss)

     251,105        (73,179

Net (income) loss attributable to Non-Controlling Interests

     (212,949     12,497   
                

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

   $ 38,156      $ (60,682
                

Dividends Declared per Class A Share

   $ 0.17      $ —     
                

Net Income (Loss) Per Class A Share:

    

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

   $ 0.33      $ (0.63
                

Weighted Average Number of Class A Shares – Basic and Diluted

     98,215,736        95,784,872   
                

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Net Income (Loss)

   $ 251,105      $ (73,179

Other Comprehensive Income, net of tax:

    

Net unrealized gain on interest rate swaps (net of taxes of $40 and $2,193 for Apollo Global Management, LCC and $0 for Non-Controlling Interests in Apollo Operating Group for both the three months ended March 31, 2011 and 2010, respectively)

     1,727        4,271   

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

     (49     —     
                

Total Other Comprehensive Income, net of tax

     1,678        4,271   
                

Comprehensive Income (Loss)

     252,783        (68,908

Comprehensive (Income) Loss attributable to Non-Controlling Interests

     (211,410     9,041   
                

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

   $ 41,373      $ (59,867
                

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands, except share data)

 

    Apollo Global Management, LLC Shareholders                          
    Class A
Shares
    Class B
Shares
    Additional
Paid-In
Capital
    Accumu-
lated
Deficit
    Appro-
priated
Partners
Capital
     Accumu-
lated
Other
Compre-
hensive
(Loss)
Income
    Apollo
Global
Manage-
ment,
LLC
Total

Share-
holders’
Deficit
    Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Apollo
Operating

Group
    Total
Share-
holders’
Equity
 

Balance at January 1, 2010

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

Transition adjustment relating to consolidation of variable interest entity

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

Capital increase related to equity-based compensation

    —          —          88,176        —          —           —          88,176        —          184,630        272,806   

Cash distributions

    —          —          —          —          —           —          —          (3,186     —          (3,186

Distributions related to deliveries of Class A shares for RSUs

    721,491        —          —          (773     —           —          (773     —          —          (773

Non-cash distributions

    —          —          —          —          —           —          —          (382     —          (382

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

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

Satisfaction of liability related to AAA RDUs

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

Net (loss) income

    —          —          —          (60,682     —           —          (60,682     131,142        (143,639     (73,179

Net unrealized gain on interest rate swaps, net of taxes of $2,193 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively

    —          —          —          —          —           815        815        —          3,456        4,271   
                                                                                

Balance at March 31, 2010

    96,346,032        1      $ 1,819,263      $ (2,090,996   $ —         $ (3,273   $ (275,006   $ 1,827,326      $ 364,331      $ 1,916,651   
                                                                                

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

Dividends

    —          —          (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 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   

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

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

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   
                                                                                

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ 251,105      $ (73,179

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

    

Equity-based compensation

     283,607        273,646   

Depreciation

     2,793        2,929   

Amortization of intangible assets

     3,253        3,176   

Amortization of debt issuance costs

     43        28   

Gain from investment in HFA

     (17,829     —     

Income from equity method investments

     (21,826     (7,880

Waived management fees

     (7,739     (7,315

Non-cash compensation related to waived management fees

     7,739        7,315   

Deferred taxes, net

     10,926        2,692   

Loss on assets held for sale

     571        —     

Changes in assets and liabilities:

    

Carried interest receivable

     (366,587     (23,371

Due from affiliates

     17,342        9,166   

Other assets

     (458     140   

Accounts payable and accrued expenses

     1,380        1,361   

Accrued compensation and benefits

     15,437        15,099   

Deferred revenue

     16,373        (14,259

Due to affiliates

     (14,296     (71

Profit sharing payable

     167,694        22,627   

Other liabilities

     1,062        524   

Apollo Funds related:

    

Net realized losses from investment activities

     15,044        633   

Net unrealized gains from investment activities

     (172,247     (133,053

Net realized gains on debt

     (41,819     (998

Net unrealized losses on debt

     49,944        10,714   

Change in cash held at consolidated variable interest entities

     23,183        —     

Purchases of investments

     (342,097     (57,812

Sales of investments

     985,107        58,844   

Change in other assets

     22,643        7,953   

Change in other liabilities

     16,035        (3,781
                

Net Cash Provided by Operating Activities

     906,383        95,128   
                

Cash Flows from Investment Activities:

    

Purchases of fixed assets

     (2,821     (929

Proceeds from disposals of fixed assets

     250        —     

Purchase of investments in HFA (see note 3)

     (52,069     —     

Cash paid for business acquisition

     —          (1,350

Cash contributions to equity method investments

     (12,366     (2,492

Cash distributions from equity method investments

     21,855        5,869   

Change in restricted cash

     (78     214   
                

Net Cash (Used in) Provided by Investing Activities

   $ (45,229   $ 1,312   
                

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED

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

(dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash Flows from Financing Activities:

    

Principal repayments on debt

   $ (345   $ (459

Distributions related to deliveries of Class A shares for RSUs

     (9,045     (773

Distributions to Non-Controlling Interests in consolidated entities

     (3,055     (3,186

Dividends paid to Non-Controlling Interests in Apollo Operating Group

     (40,800     —     

Dividends paid

     (17,354     —     

Apollo Funds related:

    

Principal repayment of term loans

     (412,057     (13,445

Distributions to Non-Controlling Interests in consolidated entities

     (300,923     —     
                

Net Cash Used in Financing Activities

     (783,579     (17,863
                

Net Increase in Cash and Cash Equivalents

     77,575        78,577   

Cash and Cash Equivalents, Beginning of Period

     382,269        366,226   
                

Cash and Cash Equivalents, End of Period

   $ 459,844      $ 444,803   
                

Supplemental Disclosure of Cash Flow Information:

    

Interest paid

   $ 11,128      $ 11,426   

Interest paid by consolidated variable interest entities

     5,446        2,774   

Income taxes paid

     1,903        1,113   

Supplemental Disclosure of Non-Cash Investment Activities:

    

Change in accrual for purchase of fixed assets

     1,337        876   

Non-cash contributions on equity method investments

     2,901        —     

Non-cash distributions on equity method investments

     (225     —     

Supplemental Disclosure of Non-Cash Financing Activities:

    

Non-cash dividends

     (2,551     —     

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

     —          (382

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

     183,222        184,630   

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

     1,253        3,456   

Satisfaction of liability related to AAA RDUs

     (3,845     (6,099

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

     6,515        4,605   

Net transfers of AAA ownership interest from AGM

     (6,515     (4,605

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

     (49     —     

Unrealized gain on interest rate swaps

     514        1,382   

Deferred tax liability related to interest rate swaps

     (40     (567

Capital increases related to equity-based compensation

     100,126        88,176   

Non-cash accrued compensation related to RDUs

     259        674   

Net Assets Transferred from Consolidated Variable Interest Entity:

    

Investments

     —          1,102,114   

Other assets

     —          28,789   

Debt

     —          (706,027

Other liabilities

     —          (12,991

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

Apollo Global Management, LLC and its consolidated subsidiaries (the “Company” or “Apollo”), is a global alternative asset manager whose predecessor was founded in 1990. Its primary business is to raise, invest and manage private equity, capital markets and real estate funds on behalf of pension and endowment funds, as well as other institutional and high net worth individual investors. For these investment and 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

 

   

Real estate—primarily invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. The Company may seek to sponsor additional 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 statements of the Company for the year ended December 31, 2010 included in the Company’s prospectus dated March 29, 2011 filed with the Securities and Exchange Commission on March 30, 2011.

Reorganization of the Company

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

As of March 31, 2011, the Company owned, through three intermediate holding companies that include APO Corp. (“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”), 29.3% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group as general partners.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership (“Holdings”), is the entity through which the Managing Partners and the contributing partners (the “Contributing Partners”) hold Apollo Operating Group Units (“AOG Units”) that represent 70.7% of the economic interests in the Apollo Operating Group as of March 31, 2011. The Company consolidates the financial results of the Apollo Operating Group and its consolidated subsidiaries. Holdings’ ownership interest in the Apollo Operating Group is reflected as a Non-Controlling Interest in the accompanying condensed consolidated financial statements.

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

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 over them (e.g. AP Alternative Assets, L.P. (“AAA”)). Apollo also consolidates entities that are VIEs for which Apollo is the primary beneficiary. Under the amended consolidation rules, an enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.

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

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

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

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

Equity Method Investments—For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of these 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, 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 Global Management, LLC primarily includes the 70.7% 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, 2011. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

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

Revenues—Revenues are reported in three separate categories that include (i) 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; (ii) 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; and (iii) carried interest income (loss) from affiliates, which is normally based on the performance of the funds subject to preferred return.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

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

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

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

Compensation and Benefits

The components of compensation and benefits have been expanded for the three month period ended March 31, 2010 to conform with the 2011 presentation.

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

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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, 2011 and 2010, respectively.

Profit Sharing Expense—Profit sharing expense consists of compensation expense allocated to employees and former employees who are entitled to a proportionate share of carried interest income in one or more funds. 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.

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

Other Income (Loss)

Net Gains (Losses) from Investment Activities—Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in the Company’s investment portfolio between the opening balance sheet date and the closing balance sheet date. Net unrealized gains (losses) are a result of changes in the fair value of investments that have not been realized as of the balance sheet date. The condensed consolidated financial statements include the net realized and unrealized gains (losses) of AAA, the Apollo fund that was consolidated during the three months ended March 31, 2011 and 2010 and the investment in HFA Holdings Limited (“HFA”) (see 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.

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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.

Private Equity Investments

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

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Capital Markets Investments

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

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

Real Estate Investments

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

Fair Value of Financial Instruments

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

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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 $751.8 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. However, the carrying value that is recorded on the condensed consolidated statement of financial condition is the amount for which we expect to settle the long term debt obligation.

Financial Instruments held by Consolidated VIEs

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

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

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

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

Under the two class method, net income is reduced by the amount of dividends declared in the current period for each class of stock. 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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. The guidance requires additional disclosure on transfers in and out of Levels I and II fair value measurements in the fair value hierarchy and the reasons for such transfers. In addition, for fair value measurements using significant unobservable inputs (Level III), the reconciliation of beginning and ending balances must be presented on a gross basis, with separate disclosure of gross purchases, sales, issuances, settlements and transfers in and transfers out of Level III. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. In addition, an entity is required to provide further disclosures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level II or Level III. Except for the Level III reconciliation disclosures, this guidance became effective for the Company beginning January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements. The Level III reconciliation disclosures became effective for the Company beginning January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2010, the FASB issued an update which includes amendments to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. As the Company’s reporting units do not currently have zero or negative carrying values, the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2010, the FASB issued an update which includes amendments to specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

3. INVESTMENTS

The following table represents Apollo’s investments:

 

     March 31,
2011
     December 31,
2010
 

Investments, at fair value

   $ 1,847,089       $ 1,637,091   

Other investments

     298,426         283,462   
                 

Total Investments

   $ 2,145,515       $ 1,920,553   
                 

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Investments at Fair Value

Investments at fair value consist of financial instruments held by AAA, consolidated VIEs as discussed further in note 4 and the investment in HFA. As of March 31, 2011 and December 31, 2010, the net assets of the consolidated funds and VIEs were $1,798.6 million and $1,951.6 million, respectively. The following investments, except the investment in HFA, are presented as a percentage of net assets of the consolidated funds and VIEs:

 

Investments, at Fair Value – Affiliates

  March 31, 2011     December 31, 2010  
  Fair Value     Cost     % of Net
Assets of
Consolidated
Funds and
VIEs
    Fair Value     Cost     % of Net
Assets of
Consolidated
Funds and
VIEs
 
  Private
Equity
   Capital
Markets
    Total         Private
Equity
    Capital
Markets
    Total      

Investments, at fair value:

                   

AAA

  $1,777,191   $ —        $ 1,777,191      $ 1,695,992        98.8   $ 1,637,091      $ —        $ 1,637,091      $ 1,695,992        83.9

HFA

  —       69,898        69,898        52,069        (1)      —          —            —          —     
                                                                              

Total

  $1,777,191   $ 69,898      $ 1,847,089      $ 1,748,061        98.8   $ 1,637,091      $ —        $ 1,637,091      $ 1,695,992        83.9
                                                                              

 

(1) Investment in HFA was not held by a consolidated fund or VIE.

Securities

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

 

     March 31, 2011  
     Instrument Type    Cost      Fair Value      % of Net
Assets  of
Consolidated
Funds  and
VIEs
 

Apollo Life Re Ltd.

   Equity    $ 201,098       $ 252,400         14.0

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      113,772         168,466         9.4   

Momentive Performance Materials Holdings Inc.

   Equity      76,007         163,709         9.1   

Rexnord Corporation

   Equity      37,461         141,800         7.9   

LeverageSource, L.P.

   Equity      139,851         120,935         6.7   

Charter Communications, Inc.

   Equity      44,579         115,818         6.4   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      98,247         104,441         5.8   

Caesars Entertainment Corporation

   Equity      176,729         97,400         5.4   
     December 31, 2010  
     Instrument Type    Cost      Fair Value      % of Net
Assets of
Consolidated
Funds and
VIEs
 

Apollo Life Re Ltd.

   Equity    $ 201,098       $ 249,900         12.8

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      113,772         160,262         8.2   

Momentive Performance Materials Holdings Inc.

   Equity      76,007         137,992         7.1   

Rexnord Corporation

   Equity      37,461         133,700         6.9   

LeverageSource, L.P.

   Equity      140,743         115,677         5.9   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      102,530         110,029         5.6   

Caesars Entertainment Corporation

   Equity      176,729         99,000         5.1   

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

In addition to AAA Investments’ private equity co-investment in Caesars Entertainment Corporation (formerly known as Harrah’s Entertainment, Inc.) (“Caesars”), as shown in the tables above, AAA Investments has an ownership interest in LeverageSource, L.P., which owns Caesars’ debt. AAA Investments’ combined share of these debt and equity investments is greater than 5% of the net asset of the consolidated funds and VIEs and is valued at $101.3 million and $102.8 million at March 31, 2011 and December 31, 2010, respectively. In addition to AAA Investments’ private equity co-investment in Momentive Performance Materials Holdings Inc. (“Momentive”) noted above, AAA Investments has an ownership interest in the debt of Momentive. AAA Investments’ combined share of these debt and equity investments is greater than 5% of the net assets of consolidated funds and VIEs and is valued at $164.6 million and $138.8 million at March 31, 2011 and December 31, 2010, respectively. Furthermore, AAA Investments owns equity, as a private equity co-investment, and debt, through its investment in Autumnleaf, L.P. and Apollo Fund VI BC, L.P., in CEVA Logistics. AAA Investments’ combined share of CEVA Logistics’ debt and equity investments was greater than 5% of the net assets of consolidated funds and was valued at $136.3 million and $124.6 million as of March 31, 2011 and December 31, 2010, respectively.

Apollo Strategic Value Offshore Fund, Ltd. (the “Apollo Strategic Value Fund”) primarily invests in the securities of leveraged companies in North America and Europe through three core strategies: distressed investments, value-driven investments and special opportunities. In connection with the redemptions requested by AAA Investments of its investment in the Apollo Strategic Value Fund, the remainder of AAA Investments’ investment in the Apollo Strategic Value Fund, was converted into liquidating shares issued by the Apollo Strategic Value Fund. The liquidating shares are generally allocated a pro rata portion of each of Apollo Strategic Value Fund’s existing investments and liabilities, and as those investments are sold, AAA Investments is allocated the proceeds from such disposition less its proportionate share of any expenses incurred by the Apollo Strategic Value Fund.

Apollo Asia Opportunity Offshore Fund, Ltd. (“Asia Opportunity Fund”) is an investment vehicle that seeks to generate attractive risk-adjusted returns across market cycles by capitalizing on investment opportunities created by the increasing demand for capital in the rapidly expanding Asian markets. In connection with a redemption requested by AAA Investments of its investment in Asia Opportunity Fund, a portion of AAA Investments’ investment was converted into liquidating shares issued by the Asia Opportunity Fund. The liquidating shares are generally allocated a pro rata portion of each of Asia Opportunity Fund’s existing investments and liabilities, and as those investments are sold, AAA Investments is allocated the proceeds from such disposition less its proportionate share of any expenses incurred or reserves set by Asia Opportunity Fund. At March 31, 2011, the liquidating shares of Asia Opportunity Fund had a fair value of $41.0 million.

Apollo Life Re Ltd. is an Apollo-sponsored vehicle that owns the majority of the equity of Athene Holding Ltd., the parent of Athene Life Re Ltd. (“Athene”), a Bermuda-based reinsurance company focusing on the life reinsurance sector and Athene Life Insurance Company, a recently organized Indiana-domiciled stock life insurance company focused on the Institutional Guaranteed Investment Contracts (GIC)-backed note and funding agreement markets and temporary investments. As a reinsurance company, Athene’s equity is naturally levered by the future policyholder obligations which allow Athene to purchase substantially more assets than its original equity base.

HFA

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

The terms of the convertible note allow the Company to convert the note, in whole or in part, into common shares of HFA at an exchange rate equal to the principal plus accrued payment-in-kind interest (or “PIK” interest) divided by US$0.98 at any time, and convey participation rights, on an as-converted basis, in any dividends declared in excess of $6.0 million per annum, as well as seniority rights over HFA common equity holders. Unless previously converted, repurchased or cancelled, the note shall be converted on the eighth anniversary of its issuance. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The PIK 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 was valued using an as converted basis. As a result, in the quarter ended March 31, 2011, the Company recorded an unrealized gain of approximately $17.4 million in net gains from investment activities 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, 2011) per stock option. The stock options became exercisable upon issuance and expire on the eighth anniversary of the issuance date. The stock options are accounted for as a derivative and are valued at their fair value under U.S. GAAP at each balance sheet date. As a result, for the three months ended March 31, 2011, the Company recorded an unrealized gain of approximately $0.4 million related to the stock options in net gains from investment activities in the condensed consolidated statements of operations.

The Company has presented all instruments associated with the HFA investment as Level III investments in accordance with our policy.

Net Gains from Investment Activities

Net gains from investment activities on the condensed consolidated statements of operations includes net realized gains from sales of investments, and the change in net unrealized gains resulting from changes in fair value of the affiliated funds’ investments and realization of previously unrealized gains. The following tables present Apollo’s net gains (losses) from investment activities for the three months ended March 31, 2011 and 2010:

 

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

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   
                         
     Three Months Ended
March 31, 2010
 
     Private Equity      Capital Markets     Total  

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

   $ 112,951       $ (1,230   $ 111,721   
                         

Net Gains (Losses) from Investment Activities

   $ 112,951       $ (1,230   $ 111,721   
                         

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Other Investments

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.

Income (loss) from equity method investments for the three months ended March 31, 2011 and 2010 consisted of the following:

 

     For the Three Months Ended
March 31,
 
     2011     2010  

Investments:

    

Private Equity Funds:

    

AAA Investments

   $ 80      $ 67   

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

     10        3   

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

     5        37   

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

     2,674        (380

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

     10,370        48   

Capital Markets Funds:

    

Apollo Special Opportunities Managed Account, L.P.

     294        207   

Apollo Value Investment Fund, L.P.

     15        6   

Apollo Strategic Value Fund, L.P.

     9        9   

Apollo Credit Liquidity Fund, L.P.

     693        475   

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

     466        704   

Apollo Credit Opportunity Fund I, L.P.

     4,185        (940

Apollo Credit Opportunity Fund II, L.P.

     615        535   

Apollo European Principal Finance Fund, L.P.

     1,347        1,603   

Apollo Investment Europe II, L.P.

     1,175        458   

Apollo Palmetto Strategic Partnership, L.P.

     348        122   

Real Estate:

    

Apollo Commercial Real Estate Finance, Inc.

     137        (143

Other Equity Method Investments:

    

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

     (623     (430

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

     46        5,524   

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

     (20     (25
                

Total Income from Equity Method Investments

   $ 21,826      $ 7,880   
                

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

 

     March 31,
2011
    % of
Ownership
    December 31,
2010
    % of
Ownership
 

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 1,010        0.056   $ 929        0.056

Fund IV

     52        0.005        48        0.005   

Fund V

     216        0.013        231        0.013   

Fund VI

     8,213        0.068        5,860        0.051   

Fund VII

     126,979        1.329        122,384        1.345   

Capital Markets Funds:

        

Apollo Special Opportunities Managed Account, L.P.

     6,151        0.545        5,863        0.537   

Apollo Value Investment Fund, L.P.

     167        0.087        152        0.085   

Apollo Strategic Value Fund, L.P.

     153        0.055        144        0.055   

Apollo Credit Liquidity Fund, L.P.

     17,309        2.302        18,736        2.450   

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

     7,609        6.156        7,143        6.156   

Apollo Credit Opportunity Fund I, L.P.

     45,075        1.961        41,793        1.949   

Apollo Credit Opportunity Fund II, L.P

     26,783        1.441        27,415        1.441   

Apollo European Principal Finance Fund, L.P.

     15,676        1.363        15,352        1.363   

Apollo Investment Europe II, L.P.

     9,329        2.045        8,154        2.045   

Apollo Palmetto Strategic Partnership, L.P.

     7,088        1.186        6,403        1.186   

Apollo Senior Floating Rate Fund (“AFT”)

     100        0.034        —          —     

Apollo/JH Loan Portfolio, L.P.

     100        0.201        —          —     

Real Estate:

        

Apollo Commercial Real Estate Finance, Inc.

     9,304 (2)      3.198 (2)      9,440 (1)      3.198 (1) 

AGRE U.S. Real Estate Fund

     5,963        7.365        —          —     

Other Equity Method Investments:

        

Vantium A

     1,596        12.498        2,219        12.240   

Vantium C

     8,513        2.165        10,135        2.166   

Vantium D

     1,040        6.345        1,061        6.345   
                    

Total Other Investments

   $ 298,426        $ 283,462     
                    

 

(1) Amounts are as of September 30, 2010.
(2) Amounts are as of December 31, 2010.

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

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Fair Value Measurements

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

 

    Level I     Level II     Level III     Totals  
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
 

Assets, at fair value:

               

Investment in AAA Investments, L.P.

  $ —        $ —        $ —        $ —        $ 1,777,191      $ 1,637,091      $ 1,777,191      $ 1,637,091   

Investment in HFA

    —          —          —          —          69,898        —          69,898        —     
                                                               

Total

  $ —        $ —        $ —        $ —        $ 1,847,089      $ 1,637,091      $ 1,847,089      $ 1,637,091   
                                                               
    Level I     Level II     Level III     Totals  
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
 

Liabilities, at fair value:

               

Interest rate swap agreements

  $ —        $ —        $ 9,807      $ 11,531      $ —        $ —        $ 9,807      $ 11,531   
                                                               

Total

  $ —        $ —        $ 9,807      $ 11,531      $ —        $ —        $ 9,807      $ 11,531   
                                                               

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,
2011
     For the
Three  Months
Ended
March  31,
2010
 

Balance, Beginning of Period

   $ 1,637,091       $ 1,324,939   

Purchases

     —           57   

Distributions

     —           —     

Change in unrealized gains, net

     140,100         112,951   
                 

Balance, End of Period

   $ 1,777,191       $ 1,437,947   
                 

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

 

     For the
Three  Months
Ended
March  31,
2011
 

Balance, Beginning of Period

   $ —     

Purchases

     52,069   

Change in unrealized gains, net

     17,829   
        

Balance, End of Period

   $ 69,898   
        

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

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

 

     Private Equity  
     March 31, 2011     December 31, 2010  
           % of
Investment
of AAA
          % of
Investment
of AAA
 

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

        

Comparable company and industry multiples

   $ 847,458        43.9   $ 782,775        42.6

Broker quotes

     318,170        16.5        504,917        27.5   

Discounted cash flow models

     492,177        25.5        490,024        26.6   

Listed quotes

     249,271        12.9        24,232        1.3   

Other net assets (liabilities)(1)

     22,773        1.2        37,351        2.0   
                                

Total Investments

     1,929,849        100.0     1,839,299        100.0
                    

Other net assets (liabilities)(2)

     (152,658       (202,208  
                    

Total Net Assets

   $ 1,777,191        $ 1,637,091     
                    

 

(1) Balances include other assets and liabilities of certain funds in which AAA Investments has invested. Other assets and liabilities at the fund level primarily includes 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 $537.5 million in long-term debt offset by cash and cash equivalents at the March 31, 2011 and December 31, 2010 balance sheet dates, respectively. Carrying values approximate fair value for other assets and liabilities (except for debt), and, accordingly, extended valuation procedures are not required.

4. VARIABLE INTEREST ENTITIES

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

Consolidated Variable Interest Entities

In accordance with the methodology described in note 2, Apollo consolidated four VIEs under the amended consolidation guidance during 2010.

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

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Two of the consolidated VIEs were formed for the sole purpose of issuing collateralized notes to investors, which included one Apollo fund. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt. Through its role as collateral manager of these VIEs, it was determined that Apollo had the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that the potential fees that it could receive 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.

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

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

Fair Value Measurements

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

 

    Level I     Level II     Level III     Totals  
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
 

Investments, at fair value

  $ —        $ —        $ 581,278      $ 1,172,242      $ 135,427      $ 170,369      $ 716,705 (1)    $ 1,342,611   
    Level I     Level II     Level III     Totals  
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
    March 31,
2011
    December 31,
2010
 

Liabilities, at fair value

  $ —        $ —        $ —        $ —        $ 723,232      $ 1,127,180      $ 723,232 (2)    $ 1,127,180   

 

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

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

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.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

 

     For the
Three  Months
Ended

March 31, 2011
    For the
Three  Months
Ended

March 31, 2010
 

Balance, Beginning of Period

   $ 170,369      $ —     

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

     —          1,102,114   

Purchases

     284,625        57,755   

Sale of investments

     (50,459     (58,844

Net realized gains (loss)

     1,288        (633

Net unrealized gains

     2,422        21,331   

Transfers in/out of Level III

     (272,818     —     
                

Balance, End of Period

   $ 135,427      $ 1,121,723   
                

During the period, $296.4 million and $23.6 million investments were transferred out of Level III into Level II and into Level III out of Level II, respectively as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services.

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

 

     For the
Three  Months
Ended

March 31, 2011
    For the
Three Months
Ended

March 31, 2010
 

Balance, Beginning of Period

   $ 1,127,180      $ —     

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

     —          706,027   

Borrowings

     —          —     

Repayments

     (412,057     (13,445

Net realized gains from debt

     (41,819     (998

Net unrealized losses from debt

     49,944        10,714   

Elimination of debt attributable to consolidated VIEs

     (16     —     
                

Balance, End of Period

   $ 723,232      $ 702,298   
                

Net Gains from Investment Activities of Consolidated Variable Interest Entities

The following table presents net gains from investment activities of the consolidated VIEs for the three months ended March 31, 2011 and 2010:

 

     For the
Three Months
Ended

March 31, 2011
    For the
Three Months
Ended
March 31, 2010
 

Net unrealized gains from investment activities

   $ 32,147      $ 21,331   

Net realized losses from investment activities

     (15,044     (633
                

Net gains from investment activities

     17,103        20,698   

Net unrealized losses from debt

     (49,944     (10,714

Net realized gains from debt

     41,819        998   
                

Net losses from debt

     (8,125     (9,716

Interest and other income

     14,761        11,265   

Other expenses

     (6,651     (3,080
                

Net Gains from Investment Activities of Consolidated VIEs

   $ 17,088      $ 19,167   
                

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Investments of Consolidated VIEs

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

 

    Fair Value
as of
March 31, 2011
    % of Net
Assets

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

of Consolidated
Funds and
VIEs
 

Corporate Loans:

       

North America

       

Communications

       

Intelsat Jackson term loan due February 1, 2014

  $ —          —     $ 105,659        5.4

Other

    85,471        4.8        221,383        11.3   
                               

Communications

    85,471        4.8        327,042        16.7   
                               

Chemicals

    27,165        1.5        13,950        0.7   

Consumer & Retail

    110,957        6.2        114,931        5.9   

Distribution & Transportation

    8,546        0.5        7,794        0.4   

Energy

    17,151        1.0        25,026        1.3   

Financial and Business Services

    95,686        5.3        85,713        4.4   

Healthcare

    70,680        3.9        144,343        7.4   

Manufacturing & Industrial

    80,203        4.5        200,290        10.3   

Media, Cable & Leisure

    91,699        5.1        93,798        4.8   

Metals & Mining

    19,425        1.1        14,025        0.7   

Packaging & Materials

    25,781        1.4        21,066        1.1   

Technology

    58,836        3.3        34,862        1.8   

Other

    5,773        0.3        9,539        0.5   
                               

Total Corporate Loans – North America (amortized cost $683,597 and $1,075,287)

    697,373        38.9        1,092,379        56.0   
                               

Europe

       

Manufacturing & Industrial

    7,706        0.4        7,696        0.4   

Healthcare

       

Alliance Boots seniors facility B1 due July 5, 2015

    —          —          143,105        7.3   

Consumer & Retail

    —          —          75,007        3.8   

Media, Cable & Leisure

    —          —          10,787        0.6   

Chemicals

    —          —          9,909        0.5   
                               

Total Corporate Loans – Europe (amortized cost $7,467 and $284,760)

    7,706        0.4        246,504        12.6   
                               

Total Corporate Loans (amortized cost $691,064 and $1,360,047)

    705,079        39.3        1,338,883        68.6   
                               

Corporate Bonds:

       

North America

       

Communications

    —          —          1,564        0.1   

Distribution & Transportation

    4,215        0.2        4,160        0.2   

Energy

    1,703        0.1        3,640        0.2   

Manufacturing & Industrial

    2,469        0.1        —          —     

Media, Cable & Leisure

    3,771        0.2        3,550        0.2   
                               

Total Corporate Bonds – North America (amortized cost $11,321 and $12,406)

    12,158        0.6        12,914        0.7   
                               

Europe

       

Media, Cable & Leisure

    1,579        0.1        1,599        0.1   
                               

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

    1,579        0.1        1,599        0.1   
                               

Total Corporate Bonds (amortized cost $12,840 and $13,925)

    13,737        0.7        14,513        0.8   

Elimination of equity investments attributable to consolidated VIE

    (2,111     (0.1     (10,785     (0.6
                               

Total Investments, at fair value, of Consolidated VIEs (amortized cost $703,904 and $1,373,972)

  $ 716,705        39.9   $ 1,342,611        68.8
                               

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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

 

    As of
March 31, 2011
    As of
December 31, 2010
           

Description

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

Interest Rate

Loans:

               

Term A Loan

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

Term B Loan

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

Term C Loan

    —          —          —          161,984        154,394        0.91     October 29, 2013      BBA 3 mo. LIBOR (USD) plus 0.5%
                                       
    (1)      (1)      —          453,876        408,650         
                                       

Notes:(2)(3)

               

Senior secured notes – A1

    215,400        215,400        1.60     215,400        215,400        2.02     May 20, 2020      BBA 3 mo LIBOR (USD) plus 1.7%

Senior secured notes – A1

    11,100        10,989        2.05     11,100        10,767        2.48     May 20, 2020      BBA 3 mo LIBOR (USD) plus 2.25%

Senior secured notes – B

    24,700        23,465        2.09     24,700        22,971        2.52     May 20, 2020      BBA 3 mo LIBOR (USD) plus 2.30%

Subordinated note(3)

    70,946        71,519        N/A        70,946        70,376        N/A        May 20, 2020      N/A
                                       
    322,146        321,373          322,146        319,514         
                                       

Notes:(2)(5)

               

Senior secured notes – A1

    262,000        262,786        2.13     262,000        261,371        2.22     November 20, 2020      BBA 3 mo LIBOR (USD) plus 1.7%

Senior secured notes – A1

    20,500        20,500        2.93     20,500        19,959        3.05     November 20, 2020      BBA 3 mo LIBOR (USD) plus 2.5%

Senior secured notes – B

    25,750        25,184        3.43     25,750        24,426        3.58     November 20, 2020      BBA 3 mo LIBOR (USD) plus 3.0%

Senior secured notes – C

    14,000        13,006        4.43     14,000        12,604        4.62     November 20, 2020      BBA 3 mo LIBOR (USD) plus 4.0%

Senior secured notes – D

    10,000        9,125        6.43     10,000        9,398        6.71     November 20, 2020      BBA 3 mo LIBOR (USD) plus 6.0%

Subordinated note(4)

    71,258        71,258        N/A        71,258        71,258        N/A        November 20, 2020      N/A
                                       
    403,508        401,859          403,508        399,016         
                                       

Total notes and loans

  $ 725,654      $ 723,232        $ 1,179,530      $ 1,127,180         
                                       

 

(1) At December 31, 2010, the cost and fair value of the term loans were $453.9 million and $408.7 million, respectively. The term loans were paid down in the first quarter of 2011, with payments totaling $412.1 million, resulting in a gain of $41.8 million. Combined with net unrealized depreciation on the term loans of $45.2 million, the consolidated VIE had a net loss on term loans of $3.4 million for the three months ended March 31, 2011, which is reflected in the net gains from investment activities of consolidated variable interest entities on the condensed consolidated statement of operations.
(2) Each class of notes will mature at par on the stated maturity, unless previously redeemed or repaid. Principal will not be payable on the notes except in certain limited circumstances. Interest on the notes is payable quarterly in arrears on the outstanding amount of the notes on scheduled payment dates. The subordinated note will be fully redeemed on the stated maturity unless previously redeemed. The subordinated note may be redeemed, in whole but not in part, on or after the redemption or repayment in full of principal and interest on the secured notes. No interest accrues or is payable on the subordinated note.
(3) The notes are subject to two coverage tests. These tests are primarily used to determine whether principal and interest may be paid on the secured notes and distributions may be made on the subordinated notes. The “Coverage Tests” consist of the Overcollateralization Ratio Test and the Interest Coverage Test; each test applies to each note. The Overcollateralization Ratio Test and Interest Coverage Test applicable to the indicated classes of secured notes will be satisfied as of any date on which such Coverage Test is applicable, if (1) the applicable Overcollateralization Ratio or Interest Coverage Ratio is at least equal to the applicable ratio or (2) the class or classes of secured notes is no longer outstanding. The applicable Interest Coverage Ratio for Class A Notes and B Notes is 110.0% and 105.0%, respectively. The applicable Overcollateralization Ratio for Class A Notes and B Notes is 137.5% and 126.4%, respectively.
(4) The subordinated notes were issued to an affiliate of the Company. Amount is reduced by approximately $2.1 million due to elimination of equity investment attributable to consolidated VIEs as of March 31, 2011 and December 31, 2010, respectively.
(5) The notes are subject to two coverage tests. These tests are primarily used to determine whether principal and interest may be paid on the secured notes and distributions may be made on the subordinated notes. The “Coverage Tests” consist of the Overcollateralization Ratio Test and the Interest Coverage Test; each test applies to each note. The Overcollateralization Ratio Test and Interest Coverage Test applicable to the indicated classes of secured notes will be satisfied as of any date on which such Coverage Test is applicable, if (1) the applicable Overcollateralization Ratio or Interest Coverage Ratio is at least equal to the applicable ratio or (2) the class or classes of secured notes is no longer outstanding. The applicable Interest Coverage Ratio for Class A Notes, Class B Notes, Class C Notes and Class D Notes is 110.0%, 105.0%, 102.0% and 101.0%, respectively. The applicable Overcollateralization Ratio for Class A Notes, Class B Notes, Class C Notes and Class D Notes is 135.59%, 124.76%, 120.13% and 117.39%, respectively.

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, 2011, the notes payable are classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the term loans and notes payable, which are not publicly traded, estimated values may differ significantly from the values that would have been reported had a ready market for such investments existed.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The 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, 2011  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 13,488,940      $ (33,539   $ 11,149   

Capital Markets

     3,164,022        (708,928     14,080   

Real Estate

     1,511,384        (1,219,554     —     
                        

Total

   $ 18,164,346 (1)    $ (1,962,021 )(2)    $ 25,229 (3) 
                        

 

(1) Consists of $83,774 in cash, $17,548,308 in investments and $532,264 in receivables.
(2) Represents $1,855,185 in debt and other payables, $97,104 in securities sold, not purchased, and $9,732 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.

 

     December 31, 2010  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

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

Capital Markets

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

Real Estate

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

Total

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

 

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

5. CARRIED INTEREST RECEIVABLE

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

 

     March 31, 2011      December 31, 2010  

Private equity

   $ 1,901,265       $ 1,578,135   

Capital markets

     332,395         288,938   
                 

Total Carried Interest Receivable

   $ 2,233,660       $ 1,867,073   
                 

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 in certain cases based on realizations or 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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The table below provides a roll-forward of the carried interest receivable balance for the three months ended March 31, 2011:

 

     Private
Equity
    Capital
Markets
    Total  

Carried interest receivable at January 1, 2011

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

Carried interest income from change in fair value of funds

     441,695        117,081        558,776   

Foreign exchange gain

     —          1,146        1,146   

Fund cash distributions

     (118,565     (74,770     (193,335
                        

Carried Interest Receivable at March 31, 2011

   $ 1,901,265      $ 332,395      $ 2,233,660   
                        

6. OTHER LIABILITIES

Other liabilities consist of the following:

 

     March 31,
2011
     December 31,
2010
 

Interest rate swap agreements

   $ 9,807       $ 11,531   

Deferred rent

     11,622         10,318   

Deferred taxes

     3,589         2,424   

Other

     1,139         1,422   
                 

Total Other Liabilities

   $ 26,157       $ 25,695   
                 

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 of 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 agreement 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, 2011 and December 31, 2010, the Company has recorded a liability of $9.8 million and $11.5 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 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 for under the provisions of U.S. GAAP.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The Company’s (provision) for income taxes totaled $(8.8) million and $(4.1) million for the three months ended March 31, 2011 and 2010, respectively. The Company’s effective tax rate was approximately 3.39% and (5.87)% for the three months ended March 31, 2011 and 2010, 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.

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. As of March 31, 2011 and December 31, 2010, Apollo and its predecessor entities’ U.S. federal, state, local and foreign income tax returns for the years 2008 through 2010 are open under the normal statute of limitations and therefore subject to examination.

8. DEBT

Debt consists of the following:

 

     March 31, 2011     December 31, 2010  
     Outstanding
Balance
     Annualized
Weighted
Average
Interest
Rate
    Outstanding
Balance
     Annualized
Weighted
Average
Interest
Rate
 

AMH credit agreement

   $ 728,273         5.66 %(1)    $ 728,273         3.78 %(1) 

CIT secured loan agreement

     22,907         3.44        23,252         3.50   
                      

Total Debt

   $ 751,180         5.59   $ 751,525         3.77
                      

 

(1) Includes the effect of interest rate swaps.

AMH Credit Agreement—On April 20, 2007, Apollo Management Holdings, L.P. (“AMH”) 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 $433 million of the debt for three years from the closing date of the AMH Credit Agreement and $167 million of the debt for five years from the closing date of the AMH Credit Agreement. The interest rate swap agreements related to the $433 million notional amount were comprised of two components: a $333 million portion and a $100 million portion. The interest rate swap agreement related to the $333 million portion expired in May 2010. The interest rate swap agreement related to the $100 million portion expired in November 2010. The interest rate swap agreement related to the $167 million notional amount 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, 2011 and December 31, 2010, respectively). 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 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.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

In addition, the Company 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 loans (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) of the loan at March 31, 2011 was 4.57% and the interest rate on the remaining $5.0 million portion of the loan at March 31, 2011 was 1.82%. The estimated fair value of the Company’s long-term debt obligation related to the AMH Credit Agreement is believed to be approximately $751.8 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 statement of financial condition at March 31, 2011 is the amount for which the Company expects to settle the AMH Credit Agreement.

As of March 31, 2011 and December 31, 2010, the AMH Credit Agreement is 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, 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 its consolidated subsidiaries were $127.1 million, $31.7 million, $42.0 million, $148.8 million and $(1,140.4) million, respectively. As of December 31, 2010, 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 were $123.1 million, $24.0 million, $39.0 million, $136.0 million and $(1,126.6) million, respectively.

In accordance with the AMH Credit Agreement, 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 are 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 will be: for 2011, 4.00 to 1.00; for 2012, 4.00 to 1.00; for 2013, 4.00 to 1.00; for 2014, 3.75 to 1.00; and for 2015 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 to the extent 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 2011, 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 2015, a Leverage Ratio of 3.00 to 1.00 and (iv) for all other years, a Leverage Ratio of 3.00 to 1.00.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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, 2011, 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 totaling $9.5 million due at the end of the terms in April 2013. At March 31, 2011, the interest rate was 3.44%. In December 2010, the Company committed to a plan to sell its ownership interests in certain assets related to the CIT secured loan agreement, which is expected to occur in April 2011. Upon the sale, the Company will satisfy the loan associated with the related asset which the Company approximates to be $11.9 million.

Apollo has determined that the carrying value of this debt approximates fair value as the loans are primarily variable rate in nature.

9. 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. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.

Under the two class method, net income is reduced by the amount of dividends declared in the current period for each class of stock. 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.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The table below presents basic and diluted net loss per Class A share using the two-class method for the three months ended March 31, 2011 and 2010:

 

     Basic and Diluted  
   For the Three Months Ended
March 31,
 
   2011     2010  

Numerator:

    

Net income (loss) attributable to Apollo Global Management, LLC

   $ 38,156      $ (60,682

Dividends declared on Class A shares

     (16,647 )(1)      —     

Dividend equivalents on participating securities

     (3,258     —     

Earnings allocable to participating securities

     (3,007     (2) 
                

Net Income (Loss) Attributable to Class A Shareholders

   $ 15,244      $ (60,682
                

Denominator:

    

Weighted average number of Class A shares outstanding

     98,215,736        95,784,872   
                

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

    

Distributable Earnings

   $ 0.17      $ —     

Undistributed income (loss)

     0.16        (0.63
                

Net Income (Loss) per Class A Share

   $ 0.33      $ (0.63
                

 

(1) The Company declared a $0.17 dividend on Class A shares on January 4, 2011. As a result, there is a reduction in net income attributable to Class A shareholders presented during the three months ended March 31, 2011.
(2) No allocation of losses was made to the participating securities as the holders do not have a contractual obligation to share in losses of the Company with the Class A shareholders.
(3) 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 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 the 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 2007 Omnibus Equity Incentive Plan. Certain RSU grants to Company 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 Company 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, 2011, approximately 15.7 million vested RSUs and 6.6 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 a 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.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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.

On March 12, 2010, the Company issued 0.7 million Class A shares in exchange for vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase to 28.6% from 28.5%. As Holdings did not participate in this Class A share issuance, its ownership interest in the Apollo Operating Group decreased from 71.5% to 71.4%.

On July 9, 2010 and July 23, 2010, the Company issued a total of 1.6 million Class A shares in exchange for vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase to 29.0% from 28.6%. As Holdings did not participate in this Class A share issuance, its ownership interest in the Apollo Operating Group decreased from 71.4% to 71.0%.

On September 16, 2010, the Company repurchased 7,135 Class A shares from an employee who left the firm. This repurchase did not cause a material change to the Company’s ownership interest in the Apollo Operating Group.

On September 30, 2010, the Company issued 11,405 Class A shares in exchange for vested RSUs. This issuance did not cause a material change to the Company’s ownership interest in the Apollo Operating Group.

On January 8, 2011, the Company issued 2,287 Class A shares in exchange for vested RSUs. This issuance did not cause a material change to the Company’s ownership interest in the Apollo Operating Group.

On March 15, 2011, the Company issued 1.5 million Class A shares in exchange for vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase to 29.3% from 29.0%. As Holdings did not participate in this Class A share issuance, its ownership interest in the Apollo Operating Group decreased from 71.0% to 70.7%.

10. EQUITY-BASED COMPENSATION

AOG Units

As a result of the service requirement, the fair value of the AOG Units of approximately $5.6 billion will be charged to compensation expense on a straight-line basis over the five or six year service period, as applicable. Accordingly, we have recognized $258.2 million and $258.3 million of compensation expense in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, 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, 2011, there was $1.3 billion of total unrecognized compensation cost related to unvested AOG Units that are expected to vest over the next three years.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

The following table summarizes AOG activity for the three months ended March 31, 2011:

 

     Apollo
Operating
Group Units
    Weighted
Average
Grant Date
Fair Value
 

Balance at January 1, 2011

     66,742,906      $ 23.13   

Granted

     —          —     

Forfeited

     —          —     

Vested at March 31, 2011

     (11,037,424     23.39   
          

Balance at March 31, 2011

     55,705,482      $ 23.08   
          

Units Expected to Vest—As of March 31, 2011, approximately 55,400,000 AOG Units are expected to vest over the next three years.

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. The fair value of Plan Grants made in 2011 was approximately $73.5 million, which is based on valuation methods that consider market comparables 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 will be charged to compensation expense on a straight-line basis over the vesting period, which generally can be up to 24 quarters or annual vesting over three years. The actual forfeiture rate was 0.6% and 5.1% for the three months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 2011 and 2010, $23.8 million and $14.5 million of compensation expense was recognized, respectively.

Delivery of Class A Shares

The delivery of RSUs does not cause a transfer of amounts in the Condensed Consolidated Statement 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, 2011, the Company delivered 1.6 million Class A shares (net of vested shares forfeited to cover withholding taxes) in settlement of vested RSUs, which caused the Company’s ownership interest in the Apollo Operating Group to increase to 29.3% from 29.0%. Upon conversion of the AOG units, there will be a transfer of amounts from Non-Controlling Interests to the Company’s equity.

The following table summarizes RSU activity for the three months ended March 31, 2011:

 

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

Balance at January 1, 2011

     23,442,916      $ 10.25         15,642,921        39,085,837   

Granted

     4,490,533        16.37         —          4,490,533   

Forfeited

     (169,309     9.81         —          (169,309

Delivered

     —          7.73         (2,027,155     (2,027,155

Vested at March 31, 2011

     (2,112,587     11.57         2,112,587        —     
                           

Balance at March 31, 2011

     25,651,553      $ 11.21         15,728,353 (1)      41,379,906   
                           

 

(1) Amount excludes RSUs which have vested and have been delivered.

Units Expected to Vest—As of March 31, 2011, approximately 24,100,000 RSUs are expected to vest.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Share Options

Under the Company’s 2007 Omnibus Equity Incentive Plan, 5,000,000 options were granted on December 2, 2010. These options shall vest and become exercisable with respect to 4/24 of the option shares on December 31, 2011 and the remainder 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. These options shall vest and become exercisable with respect to half of the option shares on December 31, 2011 and the other half on December 31, 2012. For the three months ended March 31, 2011, $1.3 million of compensation expense was recognized as a result of this grant.

Apollo measures 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  

Risk-free interest rate

     2.78

Weighted average expected dividend yield

     2.26

Expected volatility factor

     40.00

Expected life in years

     5.72   

Fair Value of options per share

   $ 8.51   

The Company determined its expected volatility based on comparable companies using daily stock prices.

The following table summarizes the share option activity for the three months ended March 31, 2011:

 

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

Balance at January 1, 2011

     5,000,000       $ 8.00       $ 28,100,000         9.67   

Granted

     555,556         9.00         4,727,782         9.83   

Exercised

     —           —           —           —     

Forfeited

     —           —           —           —     
                       

Balance at March 31, 2011

     5,555,556       $ 8.10       $ 32,827,782         9.68   
                       

Units Expected to VestAs of March 31, 2011, approximately 5,200,000 options are expected to vest.

The expected term 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, 2011 was $31.1 million and is expected to be recognized over a period of 5.6 years. None of the share options were vested or exercisable at March 31, 2011.

AAA RDUs

Incentive units that provide the right to receive AAA restricted depository 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 RDUs subject to 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 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). Vested AAA RDUs can be converted into ordinary common units of AAA. During the three months ended March 31, 2011 and 2010, the actual forfeiture rate was 0% and 2.0%, respectively. For the three months ended March 31, 2011 and 2010, $0.07 million and $0.6 million of compensation expense was recognized, respectively.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

During the three months ended March 31, 2011 and 2010, the Company delivered 389,785 and 389,892 RDUs, respectively, to individuals who had vested in these units. The delivery in 2011 resulted in a reduction of the accrued compensation liability of $3.8 million and the recognition of a net decrease of additional paid in capital of $2.7 million. These amounts are presented in the condensed consolidated statement of changes in shareholders’ equity. There was $0.1 million and $0.7 million of liability for undelivered RDUs included in accrued compensation and benefits in the condensed consolidated statements of financial condition as of March 31, 2011 and 2010, respectively. The following table summarizes RDU activity for the three months ended March 31, 2011:

 

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

Balance at January 1, 2011

     166,667       $ 7.20         389,785        556,452   

Granted

     82,107         10.50         —          82,107   

Forfeited

     —           —           —          —     

Delivered

     —           10.54         (389,785     (389,785

Vested

     —           —           —          —     
                            

Balance at March 31, 2011

     248,774       $ 8.29         —          248,774   
                            

Units Expected to Vest—As of March 31, 2011, approximately 219,000 RDUs are expected to vest over the next three years.

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

 

     RDUs
Available
For Future
Grants
 

Balance at January 1, 2011

     1,979,031   

Purchases

     24,936   

Granted

     (82,107

Forfeited

     —     
        

Balance at March 31, 2011

     1,921,860   
        

Restricted Stock and Restricted Stock Unit Awards—Apollo Commercial Real Estate Finance, Inc. (“ARI”)

On September 29, 2009, 97,500 and 140,000 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 a Company employee. 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 calendar 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. The awards granted to the Company are accounted for as investments and deferred revenue in the condensed consolidated statement 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. For the three months ended March 31, 2011 and 2010, $0.3 million and $0.4 million of management fees and $0.2 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 0% and 0% as of March 31, 2011 and 2010, respectively, as the forfeiture noted above was an exchange of securities and did not impact the overall expense recognized by the Company.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

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, 2011:

 

     ARI
RSUs
Unvested
    ARI
Restricted
Stock
Unvested
    Weighted
Average
Grant Date
Fair Value
     Vested      Total
Number of
Restricted
Stock Awards
and RSUs
Issued
 

Balance at January 1, 2011

     96,250        65,002      $ 17.57         81,248         242,500   

Granted to employees of the Company

     —          —          —           —           —     

Forfeited by employees of the Company

     —          —          —           —           —     

Vested awards for employees of the Company

     (11,875     —          16.97         11,875         —     

Vested awards for the Company

     —          (8,125     18.48         8,125         —     
                                          

Balance at March 31, 2011

     84,375        56,877      $ 17.57         101,248         242,500   
                                          

Units Expected to Vest—As of March 31, 2011, approximately 79,000 and 56,877 shares of ARI RSUs and ARI restricted stock, respectively, are expected to vest.

Equity-based compensation is allocated based on ownership interests. Therefore, the amortization of the AOG Units is allocated to Shareholders’ Equity 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 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, 2011:

 

     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

   $ 258,191         70.7   $ 183,222      $ 74,969   

RSUs and Share Options

     25,157         —          —          25,157   

ARI Restricted Stock Awards and ARI RSUs

     187         70.7     132        55   

AAA RDUs

     72         70.7     51        21   
                           

Total Equity-Based Compensation

   $ 283,607           183,405        100,202   
               

Less AAA RDUs, ARI Restricted Stock Awards and ARI RSUs

          (183     (76
                     

Capital Increase Related to Equity-Based Compensation

        $ 183,222      $ 100,126   
                     

 

(1) Calculated based on average ownership percentage for the period considering Class A share issuance in March 2011.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC for the three months ended March 31, 2010:

 

     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

   $ 258,336         71.4   $ 184,630      $ 73,706   

RSUs

     14,470         —          —          14,470   

ARI Restricted Stock Awards

     218         71.4     156        62   

AAA RDUs

     622         71.4     444        178   
                           

Total Equity-Based Compensation

   $ 273,646           185,230        88,416   
               

Less AAA RDUs, ARI Restricted Stock Awards

          (600     (240
                     

Capital Increase Related to Equity-Based Compensation

        $ 184,630      $ 88,176   
                     

 

(1) Calculated based on average ownership percentage for the period considering Class A share issuance in March 2010.

11. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED ENTITIES

As a management company, the Company is responsible for paying for certain operating costs incurred by the funds that it manages as well as their affiliates. These costs are normally reimbursed by such funds and are included in due from affiliates.

Due from affiliates and due to affiliates are comprised of the following:

 

     As of
March 31,
2011
     As of
December 31,
2010
 

Due from Affiliates:

     

Due from private equity funds

   $ 17,272       $ 52,128   

Due from portfolio companies

     53,693         42,933   

Management and advisory fees receivable from capital markets funds

     22,367         19,095   

Due from capital markets funds

     14,732         13,612   

Due from Contributing Partners, employees and former employees

     7,764         8,496   

Due from real estate funds

     7,548         5,887   

Other

     3,870         2,212   
                 

Total Due from Affiliates

   $ 127,246       $ 144,363   
                 

Due to Affiliates:

     

Due to Managing Partners and Contributing Partners in connection with the tax receivable agreement

   $ 491,402       $ 491,402   

Due to private equity funds

     9,638         20,890   

Due to real estate funds

     1,200         1,200   

Other

     3,661         4,153   
                 

Total Due to Affiliates

   $ 505,901       $ 517,645   
                 

Tax Receivable Agreement

Subject to certain restrictions, each of the Managing Partners and Contributing Partners has the right to exchange their vested AOG Units for the Company’s Class A shares. Certain Apollo Operating Group entities have made an election under Section 754 of the U.S. Internal Revenue Code, as amended, which will result in an adjustment to the tax basis of the assets owned by Apollo Operating Group at the time of the exchange. These exchanges will result in increases in tax deductions that will reduce the amount of tax that APO Corp. will otherwise be required to pay in the future. Additionally, the further acquisition of AOG Units from the Managing Partners and Contributing Partners also may result in increases in tax deductions and tax basis of assets that will further reduce the amount of tax that APO Corp. will otherwise be required to pay in the future.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

APO Corp. entered into a tax receivable agreement with the Managing Partners and Contributing Partners that provides for the payment to the Managing Partners and Contributing Partners of 85% of the amount of cash savings, if any, in U.S. Federal, state, local and foreign income taxes that APO Corp. would realize as a result of the increases in tax basis of assets that resulted from the Reorganization. These payments are expected to occur approximately over the next 20 years.

Special Allocation

In December 2009, the AMH partnership agreement was amended to provide for special allocations of income to APO Corp. and a reduction of income allocated to Holdings for the 2009 and 2010 calendar years. In connection with the amendment of the AMH partnership agreement in April of 2010, the tax receivable agreement was revised to reflect the Managing Partners’ agreement to defer 25% of required payments pursuant to the tax receivable agreement that is attributable to the 2010 fiscal year for a period of four years. The amendment allows for a maximum allocation of income from Holdings of approximately $22.1 million in 2009 and eliminates any income allocation to Holdings in 2010. There was no extension of the special allocation after December 31, 2010. Therefore as a result, the Company did not allocate any additional income from AMH to APO Corp. related to the special allocation. However, the Company will continue to allocate income to APO Corp. based on the current economic sharing percentage.

Due from Contributing Partners, Employees and Former Employees

The Company has accrued a receivable from the Contributing Partners and certain employees and former employees for the potential return of carried interest income that would be due if the private equity funds were liquidated at the balance sheet date. Also see Due to Private Equity Funds.

Management Fee Waiver and Notional Investment Program

Apollo has forgone a portion of management fee revenue that it would have been entitled to receive in cash and instead received profits interests and assigned these profits interests to employees and partners. The amount of management fees waived and related compensation expense amounted to $7.7 million and $7.3 million for the three months ended March 31, 2011 and 2010, respectively.

Distributions

The table below presents the determination , declaration, and payment of the amount of quarterly distributions which are at the sole discretion of the company (in millions, except per share amounts):

 

Distributions Declaration Date

   Distributions
per Class A
Share
Amount
     Distributions
Payment Date
     Distributions
to AGM
Class A
Shareholders
     Distributions to
Non-Controlling
Interest Holders
in the Apollo
Operating
Group
     Total
Distributions
from Apollo
Operating
Group
     Accrual for
Distributions
Equivalents on
Participating
Securities
 

January 4, 2011

   $ 0.17         January 14, 2011       $ 16.6       $ 40.8       $ 57.4       $ 3.3   

Indemnity

Carried interest income from certain funds that the Company manages can be distributed to us on a current basis, but is subject to repayment by the subsidiary of the Apollo Operating Group that acts as general partner of the fund in the event that certain specified return thresholds are not ultimately achieved. The Managing Partners, Contributing Partners and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligation of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular Managing Partner’s or Contributing Partner’s distributions. An existing shareholders agreement includes clauses that indemnify each of the Company’s Managing Partners and certain Contributing Partners against all amounts that they pay pursuant to any of these personal guarantees in favor of certain funds that the Company manages (including costs and expenses related to investigating the basis for or objecting to any claims made in respect of the guarantees) for all interests that the Company’s Managing Partners and Contributing Partners have contributed or sold to the Apollo Operating Group.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Accordingly, in the event that the Company’s Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation for the return of previously made distributions, we will be obligated to reimburse the Company’s Managing Partners and certain Contributing Partners for the indemnifiable percentage of amounts that they are required to pay even though we did not receive the certain distribution to which that general partner obligation related. As of March 31, 2011, the Company has not recorded an obligation for any previously made distributions.

Due to Private Equity Funds

On June 30, 2008, the Company entered into a credit agreement with Fund VI, pursuant to which Fund VI advanced $18.9 million of carried interest income to the limited partners of Apollo Advisors VI, L.P., who are also employees of the Company. The loan obligation accrues interest at an annual fixed rate of 3.45% and terminates on the earlier of June 30, 2017 or the termination of Fund VI. At December 31, 2010, the total outstanding loan aggregated $20.5 million, including accrued interest of $1.6 million, which approximated fair value, of which approximately $6.5 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees. In March 2011, a right of offset for the indemnified portion of the loan obligation was established between the Company and Fund VI, therefore the loan was reduced in the amount of $10.9 million, which is offset in carried interest receivable on the condensed consolidated statement of financial condition. As of March 31, 2011, the total outstanding loan aggregated $8.8 million, including accrued interest of $0.8 million which approximated fair value, of which approximately $6.3 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees.

Due to Strategic Investor/Strategic Relationship Agreement

On April 20, 2010, the Company announced that it entered into a new strategic relationship agreement with CalPERS (“Strategic Investor”). The strategic relationship agreement provides that Apollo will reduce management and other fees charged to CalPERS on funds it manages, or in the future will manage, solely for CalPERS by $125 million over a five-year period or as close a period as required to provide CalPERS with that benefit. The agreement further provides that Apollo will not use a placement agent in connection with securing any future capital commitments from CalPERS.

Underwriting Fee Paid for ARI

The Company incurred $8.0 million in underwriting expenses for the benefit of ARI, which may be repaid to the Company if during any period of four consecutive calendar quarters during the sixteen full calendar quarters after the consummation of ARI’s initial public offering on September 29, 2009, ARI’s core earnings, as defined in the corresponding management agreement, for any such four-quarter period exceeds an 8% performance hurdle rate. During the last four quarters ending March 31, 2011, the core earnings had reached a 7.97% hurdle rate.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except share data)

 

Interests in Consolidated Entities

These amounts