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 JUNE 30, 2013 OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 001-35107

 

 

APOLLO GLOBAL MANAGEMENT, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8880053

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9 West 57th Street, 43rd Floor

New York, New York 10019

(Address of principal executive offices) (Zip Code)

(212) 515-3200

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (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 August 9, 2013 there were 141,811,799 Class A shares and 1 Class B share outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

  FINANCIAL INFORMATION   

Item 1.

 

FINANCIAL STATEMENTS

  
 

Unaudited Condensed Consolidated Financial Statements

  
 

Condensed Consolidated Statements of Financial Condition (Unaudited) as of June  30, 2013 and December 31, 2012

     6   
 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June  30, 2013 and 2012

     7   
 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012

     8   
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012

     9   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June  30, 2013 and 2012

     10   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     13   

ITEM 2.

 

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

     79   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     158   

ITEM 4.

 

CONTROLS AND PROCEDURES

     160   

PART II

 

OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     160   

ITEM 1A.

 

RISK FACTORS

     162   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     162   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     162   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     162   

ITEM 5.

 

OTHER INFORMATION

     162   

ITEM 6.

 

EXHIBITS

     163   

SIGNATURES

     168   

 

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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, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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, credit 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 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 1, 2013, 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 quarterly report and in other filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Terms Used in This Report

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

“AMH” refers to Apollo Management Holdings, L.P., a Delaware limited partnership owned by APO Corp. and Holdings;

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

“Apollo Operating Group” refers to (i) the limited partnerships through which our Managing Partners currently operate our businesses and (ii) one or more limited partnerships formed for the purpose of, among other activities, holding certain of our gains or losses on our principal investments in the funds, which we refer to as our “principal investments”;

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

 

  (i) the fair value of our private equity investments plus the capital that we are entitled to call from our investors pursuant to the terms of their capital commitments 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 credit funds, other than certain collateralized loan obligations (“CLOs”), which we measure by using the mark-to-market value of the aggregate principal amount of the underlying CLO and collateralized debt obligation (“CDO”) credit funds that have a fee generating basis other than mark-to-market assets or liabilities, plus used or available leverage and/or capital commitments;

 

  (iii) the gross asset value or net asset value of our real estate entities and the structured portfolio company investments included within the funds we manage, which includes the leverage used by such structured portfolio companies;

 

  (iv) the incremental value associated with the reinsurance investments of the portfolio company assets that we manage; and

 

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

 

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Our AUM measure includes Assets Under Management for which we charge either no or nominal fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our operating agreement or in any of our Apollo fund management agreements. We consider multiple factors for determining what should be included in our definition of AUM. Such factors include but are not limited to (1) our ability to influence the investment decisions for existing and available assets; (2) our ability to generate income from the underlying assets in our funds; and (3) the AUM measures that we use internally or believe are used by other investment managers. Given the differences in the investment strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers;

Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds. Management fees are normally based on “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees, also referred to as advisory fees, generally are based on the total value of certain structured portfolio company investments, which normally includes 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:

 

  (i) fair value above invested capital for those funds that earn management fees based on invested capital;

 

  (ii) net asset values related to general partner and co-investment ownership;

 

  (iii) unused credit facilities;

 

  (iv) available commitments on those funds that generate management fees on invested capital;

 

  (v) structured portfolio company investments that do not generate monitoring fees; and

 

  (vi) the difference between gross asset and net asset value for those funds that earn management fees based on net asset value.

We use non-fee generating AUM combined with fee-generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income;

“carried interest,” “carried interest income,” and “incentive income” refer to interests granted to Apollo by an Apollo fund that entitle Apollo to receive allocations, distributions or fees which are based on the performance of such fund or its underlying investments;

“Contributing Partners” refer to those of our partners and their related parties (other than our Managing Partners) who indirectly own (through Holdings) Apollo Operating Group units;

“feeder funds” refer to funds that operate by placing substantially all of their assets in, and conducting substantially all of their investment and trading activities through, a master fund, which is designed to facilitate collective investment by the participating feeder funds. With respect to certain of our funds that are organized in a master-feeder structure, the feeder funds are permitted to make investments outside the master fund when deemed appropriate by the fund’s investment manager;

“gross IRR” of a private equity fund represents the cumulative investment-related cash flows for all of the investors in the fund on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on June 30, 2013 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, carried interest and certain other fund expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors;

“Holdings” means AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our Managing Partners and Contributing Partners hold their interests in the Apollo Operating Group units;

“Managing Partners” refer 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;

 

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

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

“our manager” means AGM Management, LLC, a Delaware limited liability company that is controlled by our Managing Partners;

“permanent capital” means capital of publicly traded vehicles that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, such as AP Alternative Assets, L.P. (“AAA”), Apollo Investment Corporation, Apollo Commercial Real Estate Finance, Inc., Apollo Residential Mortgage, Inc., Apollo Tactical Income Fund Inc., and Apollo Senior Floating Rate Fund Inc.; such publicly traded vehicles may be required, or elect, to return all or a portion of capital gains and investment income;

“private equity investments” refer to (i) direct or indirect investments in existing and future private equity funds managed or sponsored by Apollo, (ii) direct or indirect co-investments with existing and future private equity funds managed or sponsored by Apollo, (iii) direct or indirect investments in securities which are not immediately capable of resale in a public market that Apollo identifies but does not pursue through its private equity funds, and (iv) investments of the type described in (i) through (iii) above made by Apollo funds; and

“Strategic Investors” refer to the California Public Employees’ Retirement System, or “CalPERS,” and an affiliate of the Abu Dhabi Investment Authority, or “ADIA.”

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF FINANCIAL CONDITION (UNAUDITED)

(dollars in thousands, except share data)

 

     June 30,
2013
    December 31, 2012  

Assets:

    

Cash and cash equivalents

   $ 1,203,090      $ 946,225   

Cash and cash equivalents held at Consolidated Funds

     410        1,226   

Restricted cash

     8,356        8,359   

Investments

     2,134,061        2,138,096   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     1,517,488        1,682,696   

Investments, at fair value

     12,221,322        12,689,535   

Other assets

     411,661        299,978   

Carried interest receivable

     2,014,745        1,878,256   

Due from affiliates

     209,280        173,312   

Fixed assets, net

     50,945        53,452   

Deferred tax assets

     631,579        542,208   

Other assets

     53,384        36,765   

Goodwill

     48,894        48,894   

Intangible assets, net

     114,809        137,856   
  

 

 

   

 

 

 

Total Assets

   $ 20,620,024      $ 20,636,858   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 43,381      $ 38,337   

Accrued compensation and benefits

     77,152        56,125   

Deferred revenue

     296,455        252,157   

Due to affiliates

     546,970        477,451   

Profit sharing payable

     908,193        857,724   

Debt

     728,273        737,818   

Liabilities of consolidated variable interest entities:

    

Debt, at fair value

     10,835,271        11,834,955   

Other liabilities

     888,577        634,053   

Other liabilities

     58,700        44,855   
  

 

 

   

 

 

 

Total Liabilities

     14,382,972        14,933,475   
  

 

 

   

 

 

 

Commitments and Contingencies (see note 12)

    

Shareholders’ Equity:

    

Apollo Global Management, LLC shareholders’ equity:

    

Class A shares, no par value, unlimited shares authorized, 141,722,471 shares and 130,053,993 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     —          —     

Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at June 30, 2013 and December 31, 2012

     —          —     

Additional paid in capital

     2,931,769        3,043,334   

Accumulated deficit

     (1,876,068     (2,142,020

Appropriated partners’ capital

     1,667,453        1,765,360   

Accumulated other comprehensive income

     139        144   
  

 

 

   

 

 

 

Total Apollo Global Management, LLC shareholders’ equity

     2,723,293        2,666,818   

Non-Controlling Interests in consolidated entities

     2,229,350        1,893,212   

Non-Controlling Interests in Apollo Operating Group

     1,284,409        1,143,353   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     6,237,052        5,703,383   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 20,620,024      $ 20,636,858   
  

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Advisory and transaction fees from affiliates

   $ 65,085      $ 69,777      $ 112,504      $ 97,013   

Management fees from affiliates

     155,070        143,326        305,517        270,504   

Carried interest income (loss) from affiliates

     277,106        (1,475     1,388,313        620,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     497,261        211,628        1,806,334        988,371   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Compensation and benefits:

        

Equity-based compensation

     43,501        142,114        88,787        290,980   

Salary, bonus and benefits

     69,282        74,948        142,678        140,019   

Profit sharing expense

     124,229        19,851        547,849        268,875   

Incentive fee compensation

     3,015        (27     3,015        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

     240,027        236,886        782,329        699,882   

Interest expense

     7,594        10,567        15,112        21,947   

Professional fees

     21,665        16,832        37,725        28,359   

General, administrative and other

     26,037        23,575        48,978        42,782   

Placement fees

     3,120        8,131        12,478        9,052   

Occupancy

     10,149        8,990        19,954        17,716   

Depreciation and amortization

     14,195        11,981        28,813        20,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

     322,787        316,962        945,389        840,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (Loss) Income:

        

Net gains (losses) from investment activities

     1,116        (28,214     53,249        129,494   

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

     (35,198     31,763        12,663        15,562   

Income (loss) from equity method investments

     20,090        (839     47,880        42,412   

Interest income

     3,049        2,202        6,140        3,816   

Other income, net

     2,778        1,945,549        4,076        1,951,365   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other (Loss) Income

     (8,165     1,950,461        124,008        2,142,649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     166,309        1,845,127        984,953        2,290,828   

Income tax provision

     (18,139     (10,650     (36,718     (25,210
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     148,170        1,834,477        948,235        2,265,618   

Net income attributable to Non-Controlling Interests

     (89,433     (1,875,863     (640,520     (2,208,961
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 58,737      $ (41,386   $ 307,715      $ 56,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared per Class A Share

   $ 0.57      $ 0.25      $ 1.62      $ 0.71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Class A Share:

        

Net Income (Loss) Per Class A Share – Basic

   $ 0.32      $ (0.38   $ 1.94      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Class A Share – Diluted

   $ 0.32      $ (0.38   $ 1.93      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Basic

     137,289,147        126,457,443        134,285,776        125,863,348   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Diluted

     137,289,147        126,457,443        138,104,463        126,260,767   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended 
June 30,
    Six Months Ended 
June 30,
 
     2013     2012     2013     2012  

Net Income

   $ 148,170      $ 1,834,477      $ 948,235      $ 2,265,618   

Other Comprehensive Income, net of tax:

        

Net unrealized gain on interest rate swaps (net of taxes of $0 and $237 for Apollo Global Management, LLC for the three months ended June 30, 2013 and 2012, respectively, and $0 and $237 for Apollo Global Management, LLC for the six months ended June 30, 2013 and 2012, respectively, and $0 for Non-Controlling Interests in Apollo Operating Group for both the three and six months ended June 30, 2013 and 2012)

     —          1,223        —          2,825   

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

     (3     (5     (5     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive (Loss) Income, net of tax

     (3     1,218        (5     2,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

     148,167        1,835,695        948,230        2,268,440   

Comprehensive (Income) Loss attributable to Non-Controlling Interests

     (129,676     86,283        (642,521     (278,318
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to Apollo Global Management, LLC

   $ 18,491      $ 1,921,978      $ 305,709      $ 1,990,122   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(dollars in thousands, except share data)

 

    Apollo Global Management, LLC Shareholders                          
    Class A
Shares
    Class B
Shares
    Additional
Paid in
Capital
    Accumulated
Deficit
    Appropriated
Partners’
Capital
    Accumulated
Other
Comprehensive
(Loss) Income
    Total Apollo
Global
Management,
LLC Total
Shareholders’
Equity
    Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Apollo
Operating
Group
    Total
Shareholders’
Equity
 

Balance at January 1, 2012

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

Capital increase related to equity-based compensation

    —          —          137,305        —          —          —          137,305          152,412        289,717   

Capital contributions

    —          —          —          —          —          —          —          63,560        —          63,560   

Cash distributions

    —          —          —          —          —          —          —          (206,751     —          (206,751

Distributions

    —          —          (106,131     —          (49,598     —          (155,729     —          (181,423     (337,152

Distributions related to deliveries of Class A shares for RSUs

    2,537,698        —          45        (16,915     —          —          (16,870     —          —          (16,870

Purchase of AAA shares

    —          —          —          —          —          —          —          (100,046     —          (100,046

Non-cash distributions

    —          —          —          (801     —          —          (801     (9,499     —          (10,300

Non-cash contribution to Non-Controlling Interests

    —          —          —          —          —          —          —          1,247        280        1,527   

Capital increase related to business acquisition

    —          —          14,001        —          —          —          14,001        —          —          14,001   

Non-Controlling Interests in consolidated entities at acquisition date

    —          —            —          —          —          —          306,351        —          306,351   

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

    —          —          88        —          —          —          88        (88     —          —     

Satisfaction of liability related to AAA RDUs

    —          —          (455     —          —          —          (455     —          —          (455

Net income

    —          —          —          56,657        1,932,653        —          1,989,310        127,749        148,559        2,265,618   

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

    —          —          —          —          —          (3     (3     —          —          (3

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

    —          —          —          —          —          815        815        —          2,010        2,825   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    126,460,740        1      $ 2,984,345      $ (2,387,256   $ 2,096,649      $ 324      $ 2,694,062      $ 1,627,290      $ 598,991      $ 4,920,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

    130,053,993        1      $ 3,043,334      $ (2,142,020   $ 1,765,360      $ 144      $ 2,666,818      $ 1,893,212      $ 1,143,353      $ 5,703,383   

Dilution impact of issuance of Class A shares

    —          —          4,545        —          —          —          4,545        —          —          4,545   

Capital increase related to equity-based compensation

    —          —          68,058        —          —          —          68,058        —          19,163        87,221   

Capital contributions

    —          —          —          —          —          —          —          444,678        —          444,678   

Distributions

    —          —          (258,816     —          (95,906     —          (354,722     (78,927     (439,017     (872,666

Distributions related to deliveries of Class A shares for RSUs

    2,899,114        —          10,911        (41,763     —          —          (30,852     —          —          (30,852

Purchase of AAA shares

    —          —          —          —          —          —          —          (62,326     —          (62,326

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

    —          —          (1,921     —          —          —          (1,921     1,921        —          —     

Satisfaction of liability related to AAA RDUs

    —          —          1,027        —          —          —          1,027        —          —          1,027   

Exchange of AOG Units for Class A Shares

    8,769,364        —          64,631        —          —          —          64,631        —          (50,819     13,812   

Net income (loss)

    —          —          —          307,715        (2,001     —          305,714        30,792        611,729        948,235   

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

    —          —          —          —          —          (5     (5     —          —          (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    141,722,471        1      $ 2,931,769      $ (1,876,068   $ 1,667,453      $ 139      $ 2,723,293      $ 2,229,350      $ 1,284,409      $ 6,237,052   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(dollars in thousands, except share data)

 

     2013     2012  

Cash Flows from Operating Activities:

    

Net income

   $ 948,235      $ 2,265,618   

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

    

Equity-based compensation

     88,787        290,980   

Depreciation and amortization

     5,766        4,793   

Amortization of intangible assets

     23,047        15,661   

Amortization of debt issuance costs

     320        255   

Unrealized losses from investment in HFA and other investments

     2,092        10,024   

Non-cash interest income

     (1,656     (1,562

Income from equity awards received for directors’ fees

     (516     (2,563

Income from equity method investment

     (47,880     (42,412

Unrealized gain on market value on derivatives

     (284     —     

Waived management fees

     —          (13,581

Non-cash compensation expense related to waived management fees

     —          13,581   

Change in fair value of contingent obligations

     9,919        —     

Deferred taxes, net

     31,509        18,230   

Loss on disposal of assets

     29        911   

Gain on business acquisitions

     —          (1,951,169

Changes in assets and liabilities:

    

Carried interest receivable

     (136,488     (398,151

Due from affiliates

     (34,517     (69,059

Other assets

     (16,938     4,614   

Accounts payable and accrued expenses

     5,044        10,728   

Accrued compensation and benefits

     19,778        19,915   

Deferred revenue

     44,298        43,512   

Due to affiliates

     (37,598     51,640   

Profit sharing payable

     40,550        195,318   

Other liabilities

     501        (3,541

Apollo Funds related:

    

Net realized gains from investment activities

     (84,326     (14,770

Net unrealized losses (gains) from investment activities

     58,505        (191,058

Net realized gains on debt

     (83,397     —     

Net unrealized losses on debt

     156,249        102,825   

Distributions from investment activities

     62,189        99,675   

Change in cash held at consolidated variable interest entities

     165,208        (30,215

Purchases of investments

     (4,512,398     (2,913,760

Proceeds from sale of investments and liquidating distributions

     4,967,429        2,406,277   

Change in other assets

     (111,683     119,755   

Change in other liabilities

     254,558        (101,947
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     1,816,332        (59,476
  

 

 

   

 

 

 

 

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Cash Flows from Investing Activities:

    

Purchases of fixed assets

     (4,669     (4,286

Acquisition of Stone Tower (net of cash assumed)

     —          (99,190

Proceeds from disposals of fixed assets

     1,381        —     

Purchase of investments in HFA and other

     —          (1,889

Cash contributions to equity method investments

     (52,040     (103,382

Cash distributions from equity method investments

     95,781        50,820   

Change in restricted cash

     3        (81
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Investing Activities

   $ 40,456      $ (158,008
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Principal repayments on debt and repurchase of debt

   $ (9,545   $ (376

Distributions related to deliveries of Class A shares for RSUs

     (41,763     (16,915

Distributions to Non-Controlling Interests in consolidated entities

     (6,448     (4,368

Contributions from Non-Controlling Interests in consolidated entities

     304        2,535   

Distributions paid

     (230,008     (94,801

Distributions paid to Non-Controlling Interests in Apollo Operating Group

     (439,017     (181,423

Apollo Funds related:

    

Issuance of debt

     332,250        929,532   

Principal repayment of debt

     (1,420,175     (246,134

Purchase of AAA shares

     (62,326     (100,046

Distributions paid

     (95,906     (49,598

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

     (72,479     (202,383

Contributions from Non-Controlling Interests in consolidated variable interest entities

     444,374        61,025   
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Financing Activities

     (1,600,739     97,048   
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     256,049        (120,436

Cash and Cash Equivalents, Beginning of Period

     947,451        744,731   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 1,203,500      $ 624,295   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Interest paid

   $ 23,746      $ 27,612   

Interest paid by consolidated variable interest entities

     63,219        62,356   

Income taxes paid

     2,513        658   

Supplemental Disclosure of Non-Cash Investing Activities:

    

Non-cash contributions on equity method investments

   $ 904      $ 1,626   

Non-cash distributions from equity method investments

     (1,364     (468

Change in accrual for purchase of fixed assets

     —          285   

 

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Supplemental Disclosure of Non-Cash Financing Activities:

    

Declared and unpaid distributions

   $ (28,809   $ (12,131

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

     —          (9,499

Non-cash contributions from Non-Controlling Interests in Apollo Operating Group

     —          280   

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

     —          2,010   

Satisfaction of liability related to AAA RDUs

     1,027        (455

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

     1,921        (88

Net transfer of AAA ownership interest from Apollo Global Management, LLC

     (1,921     88   

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

     19,163        152,412   

Unrealized gain on interest rate swaps

     —          1,052   

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

     (5     (3

Capital increases related to equity-based compensation

     68,058        137,305   

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

     —          1,247   

Dilution impact of issuance of Class A shares

     4,545        —     

Deferred tax asset related to interest rate swaps

     —          (237

Tax benefits related to deliveries of Class A shares for RSUs

     (10,911     (45

Non-Controlling Interests in consolidated entities related to acquisition

     —          306,351   

Capital increase related to business acquisition

     —          14,001   

Net Assets Transferred from Consolidated Variable Interest Entity:

    

Cash and cash equivalents

     —          1,161,016   

Investments, at fair value

     —          8,581,827   

Other assets

     —          394,026   

Debt, at fair value

     —          (7,255,172

Other liabilities

     —          (560,262

Net Assets Transferred from Consolidated Fund:

    

Investments, at fair value

     —          46,147   

Adjustments related to exchange of Apollo Operating Group units:

    

Deferred tax assets

   $ 92,080      $ —     

Due to affiliates

     (78,268     —     

Additional paid in capital

     (13,812     —     

Non-controlling Interest in Apollo Operating Group

     50,819        —     

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

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

 

   

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

 

   

Credit—primarily invests in non-control corporate and structured debt instruments; and

 

   

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

During the third quarter of 2012, the Company changed the name of its capital markets business segment to the credit segment. The Company believes this new name provides a more accurate description of the types of assets which are managed within this segment. In addition, this segment name change is consistent with the Company’s management reporting and organizational structure as well as the manner in which resource deployment and compensation decisions are made.

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 the Quarterly Report on 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 only of 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 (“VIEs”) and for which the Company is considered the primary beneficiary, and certain entities which are not considered variable interest entities but which the Company controls through a majority voting interest. Intercompany accounts and transactions have been eliminated upon consolidation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Certain reclassifications, when applicable, have been made to the prior period’s condensed consolidated financial statements and notes to conform to the current period’s presentation and are disclosed accordingly.

Reorganization of the Company

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

As of June 30, 2013, the Company owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC, a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC, an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the “Intermediate Holding Companies”), 38.0% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group through its wholly-owned subsidiaries.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Holdings, is the entity through the “Contributing Partners” indirectly beneficially own, interests in Apollo Operating Group represented by units in each of the partnerships that comprise the Apollo Operating Group (“AOG Units”) that represent 62.0% of the economic interests in the Apollo Operating Group as of June 30, 2013. 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 (as amended, the “Exchange Agreement”) that allows the holders of the AOG Units (and certain permitted transferees thereof), subject to the applicable vesting and minimum retained ownership requirements and transfer restrictions to exchange, upon notice (subject to the terms of the Exchange Agreement), 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, distributions and reclassifications. Under the Exchange Agreement, a holder of AOG Units must simultaneously exchange one partnership unit in each of the Apollo Operating Group partnerships to effectuate an exchange for one Class A share. As a holder exchanges its AOG Units, the Company’s indirect interest in the Apollo Operating Group partnerships will be correspondingly increased.

On May 15, 2013, the Company completed its public offering for resale of approximately 24.3 million Class A shares owned by its Strategic Investors and certain of its Managing Partners, Contributing Partners and employees (collectively, the “Selling Shareholders”) at a price to the public of $25.00 per Class A share, which included approximately 3.2 million Class A shares sold by the Selling Shareholders upon the exercise in full of the underwriters’ option to purchase additional shares (the “Secondary Offering”). In connection with the Secondary Offering, certain holders of AOG Units exchanged their AOG Units for Class A shares and approximately 8.8 million Class A shares were issued by the Company in the exchange. No proceeds were received by the Company from the sale of Class A shares by the Selling Shareholders in the Secondary Offering. All underwriting costs were borne by the Selling Shareholders. The Company incurred approximately $3.0 million of fees, consisting of legal and professional fees and filing costs, as a result of the Secondary Offering.

As a result of the exchange of AOG Units into Class A shares, the Company’s economic interests in the Apollo Operating Group increased from 35.6% to 38.0% and Holdings’ economic interests in the Apollo Operating Group decreased from 64.4% to 62.0%. The dilution of Holdings’ economic interests in Apollo Operating Group is reflected in the condensed consolidated statements of changes in shareholders’ equity in the line titled Exchange of AOG Units for Class A Shares, where $50.8 million was transferred to Apollo Global Management, LLC’s shareholders’ equity from Non-Controlling Interests in the Apollo Operating Group. Additionally, as a result of the exchange of AOG Units into Class A shares, the Company recognized a step-up in tax basis of certain assets and liabilities. Similar to its 2007 Reorganization, the Company recognized an increase in its deferred tax asset, tax receivable agreement liability and additional paid in capital as a result of the exchange of AOG Units into Class A shares. Refer to note 7 and note 11 for a discussion of the increase in deferred taxes, tax receivable agreement liability and additional paid in capital as a result of the exchange of AOG Units into Class A shares.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Certain of the Company’s subsidiaries hold equity interests in and/or receive fees qualifying as variable interests from the entities 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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Under both the previous and amended consolidation rules, the determination of whether an entity in which Apollo holds a variable interest is a VIE requires judgments which include determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, determining whether two or more parties’ equity interests should be aggregated, and determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. Under both the previous and amended consolidation rules, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continuously. The consolidation analysis can generally be performed qualitatively. However, if it is not readily apparent whether Apollo is the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Apollo, affiliates of Apollo or third parties) or amendments to the governing documents of the respective Apollo fund may affect an entity’s status as a VIE or the determination of the primary beneficiary.

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

Certain of the consolidated VIEs were formed to issue collateralized notes in the legal form of debt backed by financial assets. The difference between the fair value of the assets and liabilities of these VIEs is presented within appropriated partners’ capital in the condensed consolidated statements of financial condition as these VIEs are funded solely with debt. Changes in the fair value of the assets and liabilities of these VIEs and the related interest and other income is presented within net gains from investment activities of consolidated variable interest entities and net (income) loss attributable to Non-Controlling Interests in the condensed consolidated statements of operations. Such amounts are recorded within appropriated partners’ capital as, in each case, the VIE’s note holders, not Apollo, will ultimately receive the benefits or absorb the losses associated with the VIE’s assets and liabilities.

Assets and liability amounts of the consolidated VIEs are shown in separate sections within the condensed consolidated statements of financial condition as of June 30, 2013 and December 31, 2012.

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

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

Non-Controlling Interests—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 Interests in the condensed consolidated financial statements. As of June 30, 2013, the Non-Controlling Interests relating to Apollo Global Management, LLC primarily includes the 62.0% 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 approximately 97% ownership interest held by limited partners in AAA as of June 30, 2013. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s condensed consolidated statements of financial condition. The primary components of Non-Controlling Interests are separately presented in the Company’s condensed consolidated statements of changes in shareholders’ equity to clearly distinguish the interest in the Apollo Operating Group and other ownership interests in the consolidated entities. Net income (loss) includes the net income (loss) attributable to the holders of Non-Controlling Interests on the Company’s condensed consolidated statements of operations. Profits and losses are allocated to Non-Controlling Interests in proportion to their relative ownership interests regardless of their basis.

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

Advisory and Transaction Fees from Affiliates—Advisory and transaction fees, including directors’ fees, are recognized when the underlying services rendered are substantially completed in accordance with the terms of the transaction and advisory agreements. Additionally, during the normal course of business, the Company incurs certain costs related to certain transactions that are not consummated (“broken deal costs”). These costs (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) are determined to be broken deal costs upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is deemed broken, all of the costs are reimbursed by the funds and then included in the calculation of the Management Fee Offset described below. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company of all costs incurred and no offset is generated.

Advisory and transaction fees from affiliates also include underwriting fees. Underwriting fees include gains, losses and fees, net of syndicate expenses, arising from securities offerings in which one of the Company’s subsidiaries participates in the underwriter syndicate. Underwriting fees are recognized at the time the underwriting is completed and the income is reasonably assured and are included in the condensed consolidated statements of operations. Underwriting fees recognized but not received are included in other assets on the condensed consolidated statements of financial condition.

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

Management Fees from Affiliates—Management fees for private equity, real estate and credit funds are recognized in the period during which the related services are performed in accordance with the contractual terms of the related agreement, and are generally based upon (1) a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments, or (2) net asset value, gross assets or as otherwise defined in the respective agreements.

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

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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

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

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

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

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

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

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 close price on the date of determination.

Valuation approaches used to estimate the fair value of investments that are less liquid include the market approach and the income approach. 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, including actual trading levels of similar companies and, to the extent available, actual transaction data of similar companies. Judgment is required by management when assessing which companies are similar to the subject company being valued. 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,

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

weaknesses, expectations relating to the market’s receptivity to an offering of the Company’s securities, applicable restrictions on transfer, industry and market information and assumptions, general economic and market conditions and other factors deemed relevant. 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.

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

Credit Investments

The majority of the investments in Apollo’s credit funds are valued based on quoted market prices and valuation models. 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 credit funds also enter into foreign currency exchange contracts, total return swap 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. Total return swap contracts and 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 total return or credit default swap 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 credit 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.

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

Real Estate Investments

The estimated fair value of commercial mortgage-backed securities (“CMBS”) in Apollo’s funds 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 for certain investments. For Apollo’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.

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Except for the Company’s debt obligation related to the AMH Credit Agreement (as defined in note 8), Apollo’s financial instruments are recorded at fair value or at amounts whose carrying value approximates fair value. See “Investments, at Fair Value” above. While Apollo’s valuations of portfolio investments are based on assumptions that Apollo believes are reasonable under the circumstances, the actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may ultimately differ significantly from the assumptions on which the valuations were based. Other financial instruments’ carrying values generally approximate fair value because of the short-term nature of those instruments or variable interest rates related to the borrowings. As disclosed in note 8, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $770.4 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities as of June 30, 2013. However, the carrying value that is recorded on the condensed consolidated statements of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy.

Fair Value Option—Apollo has elected the fair value option for the convertible notes issued by HFA Holdings Limited (“HFA”) and for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. Apollo has applied the fair value option for certain corporate loans, other investments and debt obligations held by the consolidated VIEs that otherwise would not have been carried at fair value. For the convertible notes issued by HFA, Apollo has elected to separately present interest income from other changes in the fair value of the convertible notes in the condensed consolidated statements of operations. Refer to notes 3 and 4 for further disclosure on the investment in HFA and financial instruments of the consolidated VIEs for which the fair value option has been elected.

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. When market quotations are not available, a model based approach is used to determine fair value.

The consolidated VIEs also have debt obligations that are recorded at fair value. The primary valuation methodology used to determine fair value for debt obligation is market quotation. Prices are based on the average of the “bid” and “ask” prices. In the event that market quotations are not available, a model based approach is used. The valuation approach used to estimate the fair values of debt obligations for which market quotations are not available 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.

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Goodwill and Intangible AssetsGoodwill and indefinite-life intangible assets must be reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. Identifiable finite-life intangible assets, by contrast, are amortized over their estimated useful lives, which are periodically re-evaluated for impairment or when circumstances indicate an impairment may have occurred. Apollo amortizes its identifiable finite-life intangible assets using a method of amortization reflecting the pattern in which the economic benefits of the finite-life intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, Apollo uses the straight-line method of amortization. At June 30, 2013, the Company performed its annual impairment testing. As the fair value of the Company’s reporting units was well in excess of the carrying value as of June 30, 2013, there was no impairment of goodwill or indefinite life intangible assets at such time.

Compensation and Benefits

Equity-Based Compensation—Equity-based awards granted to employees as compensation are 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 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 include base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are generally accrued over the related service period.

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

The Company sponsors a 401(k) Savings Plan whereby U.S. based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the three and six months ended June 30, 2013 and 2012.

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

Changes in the fair value of the contingent obligations that were recognized in connection with certain Apollo acquisitions are reflected in the Company’s condensed consolidated statements of operations as profit sharing expense.

Profit sharing expense is also the result of profits interests issued to certain employees whereby they are entitled to a share in earnings of and any appreciation of the value in a subsidiary of the Company during their term of employment. Profit sharing expense related to these profits interests is recognized ratably over the requisite service period and thereafter will be recognized at the time the distributions are determined.

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

Incentive Fee Compensation—Certain employees are entitled to receive a discretionary portion of incentive fee income from certain of our credit funds, based on performance for the year. Incentive fee compensation expense is recognized on an accrual basis as the related carried interest income is earned. Incentive fee compensation expense may be subject to reversal until the carried interest income becomes crystallized.

Other Income (Loss)

Net Gains (Losses) from Investment Activities—Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in the Company’s investment portfolio between the opening balance sheet date and the closing balance sheet date. The condensed consolidated financial statements include the net realized and unrealized gains (losses) of investments, at fair value.

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Net Gains (Losses) 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.

Other Income (Loss), Net—Other income (loss), net includes the recognition of bargain purchase gains as a result of Apollo acquisitions, gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities of foreign subsidiaries, gains (losses) arising from the remeasurement of derivative instruments associated with fees from certain of the Company’s affiliates and other miscellaneous non-operating income and expenses.

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

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

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

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to enhance disclosures about financial instruments and derivative instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Under the guidance, an entity is required to disclose quantitative information relating to recognized assets and liabilities that are offset or subject to an enforceable master netting arrangement or similar agreement, including the gross amounts of those recognized assets and liabilities, the amounts offset to determine the net amount presented in the statement of financial position, and the net amount presented in the statement of financial position. With respect to amounts subject to an enforceable master netting arrangement or similar agreement which are not offset, disclosure is required of the amounts related to recognized financial instruments and other derivative instruments, the amount related to financial collateral (including cash collateral), and the overall net amount after considering amounts that have not been offset. The guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospective application is required. As the amendments are limited to disclosure only, the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2013, the FASB issued guidance to clarify the scope of disclosures about offsetting assets and liabilities. The amendments clarify that the scope of guidance issued in December 2011 to enhance disclosures around financial instruments and derivative instruments that are either (1) offset, or (2) subject to a master netting arrangement or similar agreement, irrespective of whether they are offset, applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for interim and annual periods beginning on or after January 1, 2013. As the amendments are limited to disclosure only, the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

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FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the revised guidance, entities have the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not to be less than the carrying amount, then the entity must perform the quantitative impairment test; otherwise, further testing would not be required. The amendments are effective for all entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. In conjunction with the annual goodwill impairment test as of June 30, 2013, utilizing the two step method described above, the Company concluded these amendments did not have an impact on the Company’s condensed consolidated financial statements.

In February 2013, the FASB issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance does not change the requirement for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for periods beginning after December 15, 2012. As the amendments are limited to presentation and disclosure only, the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2013, the FASB issued guidance that requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The financial statements prepared using the liquidation basis of accounting should present relevant information about the expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities. Liabilities should be recognized and measured in accordance with U.S. GAAP that otherwise applies to those liabilities. The guidance requires an entity to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with the sale or settlement of those assets and liabilities. Additionally, the amended guidance requires disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The guidance is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In June 2013, the FASB issued guidance to change the assessment of whether an entity is an investment company by developing a new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company must have include the following: (1) it obtains funds from one or more investors and provides the investor(s) with investment management services; (2) it commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and (3) it does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests. The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following: (1) it has more than one investment; (2) it has more than one investor; (3) it has investors that are not related parties of the parent or the investment manager; (4) it has ownership interests in the form of equity or partnership interests; and (5) it manages substantially all of its investments on a fair value basis. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity’s status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. Earlier application is prohibited. The Company is in the process of evaluating the impact that this guidance will have on its consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

In July 2013, the FASB issued guidance to eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the new guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carry forward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statement as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date (e.g. an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled). The guidance does not require new recurring disclosures. The guidance applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is in the process of evaluating the impact that this guidance will have on its condensed consolidated financial statements.

3. INVESTMENTS

The following table represents Apollo’s investments:

 

     June 30,
2013
     December 31,
2012
 

Investments, at fair value

   $ 1,736,703       $ 1,744,412   

Other investments

     397,358         393,684   
  

 

 

    

 

 

 

Total Investments

   $ 2,134,061       $ 2,138,096   
  

 

 

    

 

 

 

 

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(dollars in thousands except share data)

 

Investments, at Fair Value

Investments, at fair value, consist of financial instruments held by AAA, investments held by the Apollo Senior Loan Fund, the Company’s investment in HFA and other investments held by the Company at fair value. As of June 30, 2013 and December 31, 2012, the net assets of the consolidated funds (excluding VIEs) were $1,683.4 million and $1,691.3 million, respectively. The following investments, except the investment in HFA and Other Investments, are presented as a percentage of net assets of the consolidated funds:

 

    June 30, 2013     December 31, 2012  
    Fair Value                 Fair Value              
Investments, at Fair Value –
Affiliates
  Private
Equity
    Credit     Total     Cost     % of Net
Assets of
Consolidated
Funds
    Private
Equity
    Credit     Total     Cost     % of Net
Assets of
Consolidated
Funds
 

Investments held by:

                   

AAA

  $ 1,659,093      $ —        $ 1,659,093      $ 1,498,965        98.6   $ 1,666,448      $ —        $ 1,666,448      $ 1,561,154        98.5

Apollo Senior Loan Fund

    —          27,218        27,218        27,131        1.6        —          27,653        27,653        27,296        1.5   

HFA

    —          48,658        48,658        59,472        N/A        —          48,723        48,723        57,815        N/A   

Other Investments

    1,734        —          1,734        3,272        N/A        1,588        —          1,588        3,563        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,660,827      $ 75,876      $ 1,736,703      $ 1,588,840        100.2   $ 1,668,036      $ 76,376      $ 1,744,412      $ 1,649,828        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

At June 30, 2013 and December 31, 2012, the sole investment held by AAA was its investment in AAA Investments, L.P. (“AAA Investments”), which is measured based on AAA’s share of net asset value of AAA investments. The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the funds that the Company consolidates (excluding VIEs) as of the aforementioned dates:

 

    June 30, 2013     December 31, 2012  
    Instrument
Type
    Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
    Instrument
Type
    Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
 

Athene Holding Ltd.(1)

    Equity      $ 1,617,445      $ 1,276,366        96.1     Equity      $ 1,578,954      $ 1,276,366        93.4

 

(1) Two subsidiaries of AAA Investments, AAA Guarantor-Athene, L.P. and Apollo Life Re Ltd., own the majority of the equity of Athene Holding Ltd.

AAA Investments owns through its subsidiaries the majority of the equity of Athene Holding Ltd. (together with its subsidiaries, “Athene”), the direct or indirect parent of the following principal operating subsidiaries: Athene Life Re Ltd., a Bermuda-based reinsurance company focused on the fixed annuity reinsurance sector, Athene Annuity & Life Assurance Company (formerly Liberty Life Insurance Company), a Delaware-domiciled (formerly South Carolina-domiciled) stock life insurance company focused on retail sales and reinsurance in the retirement services market, Athene Life Insurance Company, a Delaware-domiciled (formerly Indiana-domiciled) stock life insurance company focused on the institutional funding agreement backed note and funding agreement markets, and Presidential Life Insurance Company, a New-York-domiciled stock life insurance company focused on retail sales of fixed annuity products principally in New York.

During the fourth quarter of 2012, AAA and AAA Investments consummated a transaction whereby a wholly-owned subsidiary of AAA Investments contributed substantially all of its investments to Athene Holding Ltd. in exchange for common shares of Athene Holding Ltd., cash and a short term promissory note (the “AAA Transaction”). After the AAA Transaction, Athene Holding Ltd. was AAA’s only material investment and as of June 30, 2013 and December 31, 2012, AAA through its investment in AAA Investments was the largest shareholder of Athene Holding Ltd. with an approximate 72% and 77%, respectively, ownership stake (without giving to effect to restricted common shares issued under Athene’s management equity plan).

Apollo Senior Loan Fund

On December 31, 2011, the Company invested $26.0 million in the Apollo Senior Loan Fund. As a result, the Company became the sole investor in the fund and therefore consolidated the assets and liabilities of the fund. The fund invests

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

in U.S. denominated senior secured loans, senior secured bonds and other income generating fixed-income investments. At least 90% of the Apollo Senior Loan Fund’s portfolio of investments must consist of senior secured, floating rate loans or cash or cash equivalents. Up to 10% of the Apollo Senior Loan Fund’s portfolio may consist of non-first lien fixed income investments and other income generating fixed income investments, including but not limited to senior secured bonds. The Apollo Senior Loan Fund may not purchase assets rated (tranche rating) at B3 or lower by Moody’s, or equivalent rating by another nationally recognized rating agency.

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

HFA

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

The terms of the convertible note allow the Company to convert the note, in whole or in part, into common shares of HFA at an exchange rate equal to the principal plus accrued payment-in-kind interest (or “PIK” interest) divided by US$0.98 at any time, and convey participation rights, on an as-converted basis, in any dividends declared in excess of $6.0 million per annum, as well as seniority rights over HFA common equity holders. Unless previously converted, repurchased or canceled, the note will be converted on the eighth anniversary of its issuance on March 11, 2019. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion. The PIK interest provides for the Company to receive additional common shares of HFA if the note is converted. The Company has elected the fair value option for the convertible note. The convertible note is valued using an “if-converted basis,” which is based on a hypothetical exit through conversion to common equity (for which quoted price exists) as of the valuation date. The Company separately presents interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible note. For the three and six months ended June 30, 2013, the Company recorded $0.8 million and $1.7 million, respectively, in PIK interest income included in interest income in the condensed consolidated statements of operations. For the three and six months ended June 30, 2012, the Company recorded $0.8 million and $1.6 million, respectively, in PIK interest income included in interest income in the condensed consolidated statements of operations. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $0.91 as of June 30, 2013) 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 six months ended June 30, 2013 and 2012, the Company recorded an unrealized loss of approximately $1.7 million and $9.7 million, respectively, related to the convertible note and stock options within net gains from investment activities in the condensed consolidated statements of operations. For the three months ended June 30, 2013 and 2012, the Company recorded an unrealized loss of $5.8 million and $13.1 million, respectively, related to the convertible note and stock options within net gains (losses) from investment activities in the condensed consolidated statements of operations.

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

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Net Gains (Losses) from Investment Activities

Net gains (losses) from investment activities in the condensed consolidated statements of operations include net realized gains from sales of investments, and the change in net unrealized gains (losses) resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized gains (losses). Additionally net gains (losses) from investment activities include changes in the fair value of the investment in HFA and other investments held at fair value. The following tables present Apollo’s net gains (losses) from investment activities for the three and six months ended June 30, 2013 and 2012:

 

     For the Three Months Ended 
June 30, 2013
 
     Private Equity     Credit     Total  

Realized gains on sales of investments

   $ —        $       167      $ 167   

Change in net unrealized gains (losses) due to changes in fair values

     7,064        (6,115     949   
  

 

 

   

 

 

   

 

 

 

Net Gains (Losses) from Investment Activities

   $            7,064      $ (5,948   $    1,116   
  

 

 

   

 

 

   

 

 

 

 

     For the Three Months Ended 
June 30, 2012
 
     Private Equity     Credit     Total  

Realized gains on sales of investments

   $             —        $ 45      $ 45   

Change in net unrealized losses due to changes in fair values

     (15,149     (13,110     (28,259
  

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities

   $ (15,149   $ (13,065   $ (28,214
  

 

 

   

 

 

   

 

 

 

 

     For the Six Months Ended 
June 30, 2013
 
     Private Equity     Credit     Total  

Realized gains on sales of investments

   $ —        $       408      $ 408   

Change in net unrealized gains (losses) due to changes in fair values

     54,833        (1,992     52,841   
  

 

 

   

 

 

   

 

 

 

Net Gains (losses) from Investment Activities

   $         54,833      $ (1,584   $  53,249   
  

 

 

   

 

 

   

 

 

 

 

     For the Six Months Ended 
June 30, 2012
 
     Private Equity     Credit     Total  

Realized gains on sales of investments

   $ —        $ 136      $ 136   

Change in net unrealized gains (losses) due to changes in fair values

     138,543        (9,185     129,358   
  

 

 

   

 

 

   

 

 

 

Net Gains (Losses) from Investment Activities

   $        138,543      $ (9,049   $ 129,494   
  

 

 

   

 

 

   

 

 

 

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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

The following table presents income (loss) from equity method investments for the three and six months ended June 30, 2013 and 2012:

 

    For the Three Months Ended 
June 30,
    For the Six Months Ended 
June 30,
 
    2013     2012     2013     2012  

Investments:

       

Private Equity Funds:

       

AAA Investments

  $ 6      $ (1   $ 33      $ 83   

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

    —          (2     —          (2

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

    (1     24        6        29   

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

    (5     (64     1,073        2,548   

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

    11,064        (858     31,477        23,223   

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

    152        137        163        174   

AION Capital Partners Limited (“AION”)

    369        —          553        —     

Apollo Asia Private Credit Fund, L.P. (“APC”)

    2        —          3        —     

Credit Funds:

       

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

    30        (30     414        666   

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

    (1     (4     6        15   

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

    (2     (3     1        12   

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

    (36     78        668        1,966   

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

    (2     (104     (2     291   

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

    563        (1,851     4,137        7,168   

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

    (304     522        584        2,955   

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

    (11     —          (11     —     

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

    3,079        150        2,748        794   

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

    349        (400     406        503   

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

    259        38        842        549   

Apollo Senior Floating Rate Fund Inc. (“AFT”)

    (3     1        5        11   

Apollo Residential Mortgage, Inc. (“AMTG”)

    22  (1)      403  (2)      508  (1)      555  (2) 

Apollo European Credit, L.P. (“AEC”)

    71        (8     147        27   

Apollo European Strategic Investments, L.P. (“AESI”)

    106        (31     258        162   

Apollo Centre Street Partnership, L.P. (“ACSP”)

    108        (67     289        (67

Apollo Investment Corporation (“AINV”)

    2,037  (1)      —          1,410        —     

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

    23        316        86        316   

Apollo SK Strategic Investments, L.P. (“SK”)

    23        —          49        —     

Apollo SPN Investments I, L.P.

    501        —          88        —     

Apollo Tactical Income Fund Inc. (“AIF”)

    (10     —          (5     —     

Apollo Franklin Partnership, L.P.

    (7     —          (7     —     

Real Estate:

       

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

    93  (1)      268  (2)      316  (1)      516  (2) 

AGRE U.S. Real Estate Fund, L.P.

    227        (33     241        (86

CPI Capital Partners North America LP

    16        (10     74        (31

CPI Capital Partners Asia Pacific, L.P.

    (6     32        (4     37   

Apollo GSS Holding (Cayman), L.P.

    (1     —          (5     —     

BEA/AGRE China Real Estate Fund, L.P.

    (8     —          (8     —     

Other Equity Method Investments:

       

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

    —          (1     13        (306

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

    1,333        17        1,325        (133

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

    46        190        (1     432   

Other

    8        452        —          5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Income (Loss) from Equity Method Investments

  $ 20,090      $ (839   $ 47,880      $ 42,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts are as of March 31, 2013.
(2) Amounts are as of March 31, 2012.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Other investments as of June 30, 2013 and December 31, 2012 consisted of the following:

 

     Equity Held as of  
     June 30, 2013     % of
Ownership
    December 31,
2012
    % of
Ownership
 

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 997        0.058   $ 998        0.057

Fund IV

     9        0.015        9        0.015   

Fund V

     113        0.017        173        0.014   

Fund VI

     8,746        0.094        9,814        0.094   

Fund VII

     158,104        1.280        164,773        1.316   

ANRP

     2,782        0.832        2,355        0.903   

AION

     1,178        10.000        625        10.000   

APC

     19        0.059        17        0.058   

Credit Funds:

        

SOMA

     6,298        0.826        5,887        0.643   

VIF

     148        0.105        141        0.093   

SVF

     23        0.078        137        0.076   

ACLF

     9,723        2.573        9,281        2.579   

Artus

     665        6.156        667        6.156   

COF I

     30,210        1.918        39,416        1.924   

COF II

     10,362        1.404        19,654        1.429   

COF III

     526        2.439        —          —     

EPF I

     21,520        1.363        18,329        1.363   

AIE II

     6,734        2.269        7,207        2.205   

Palmetto

     14,491        1.186        13,614        1.186   

AFT

     103        0.034        98        0.034   

AMTG(3)

     4,527  (1)      0.623  (1)      4,380  (2)      0.811  (2) 

AEC

     2,070        1.061        1,604        1.079   

AESI

     3,368        1.006        3,076        0.991   

ACSP

     7,484        2.456        5,327        2.457   

AINV(4)

     53,172  (1)      3.095        51,761        2.955   

EPF II

     11,764        2.268        5,337        1.316   

SK

     1,449        0.992        1,002        0.988   

Apollo SPN Investments I, L.P.

     2,611        0.845        90        0.083   

CION Investment Corporation

     1,000        2.900        1,000        22.207   

AIF

     95        0.036        —          —     

Apollo Franklin Partnership, L.P.

     4,993        9.099        —          —     

Real Estate:

        

ARI(3)

     11,737  (1)      1.500  (1)      11,469  (2)      2.729  (2) 

AGRE U.S. Real Estate Fund, L.P.

     10,873        1.845        5,210        1.845   

CPI Capital Partners North America

     334        0.414        455        0.413   

CPI Capital Partners Europe

     5        0.001        5        0.001   

CPI Capital Partners Asia Pacific

     171        0.039        186        0.039   

Apollo GSS Holding (Cayman), L.P.

     3,013        4.946        2,428        4.621   

BEA/AGRE China Real Estate Fund, L.P.

     72        1.031        —       

Other Equity Method Investments:

        

Vantium A/B

     67        6.450        54        6.450   

Vantium C

     3,870        2.071        5,172        2.071   

Vantium D

     1,932        6.345        1,933        6.345   
  

 

 

     

 

 

   

Total Other Investments

   $ 397,358        $ 393,684     
  

 

 

     

 

 

   

 

(1) Amounts are as of March 31, 2013.
(2) Amounts are as of September 30, 2012.
(3) Investment value includes the fair value of RSUs granted to the Company as of the grant date. These amounts are not considered in the percentage of ownership until the RSUs are vested, at which point the RSUs are converted to common stock and delivered to the Company.
(4) The value of the Company’s investment in AINV was $49,767 and $51,351 based on the quoted market price as of June 30, 2013 and December 31, 2012, respectively.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

As of June 30, 2013 and December 31, 2012 and for the six months ended June 30, 2013 and 2012, no single equity method investee held by Apollo exceeded 20% of its total consolidated assets or income. As such, Apollo is not required to present summarized income statement information for any of its equity method investees.

Fair Value Measurements

The following table summarizes the valuation of Apollo’s investments in fair value hierarchy levels as of June 30, 2013 and December 31, 2012:

 

    Level I     Level II     Level III     Totals  
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
 

Assets, at fair value:

               

Investment in AAA Investments

  $ —        $ —        $ —        $ —        $ 1,659,093      $ 1,666,448      $ 1,659,093      $ 1,666,448   

Investments held by Apollo Senior Loan Fund

    —          —          26,781        27,063        437        590        27,218        27,653   

Investments in HFA and Other

    —          —          —          —          50,392        50,311        50,392        50,311   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ —        $ 26,781      $ 27,063      $ 1,709,922      $ 1,717,349      $ 1,736,703      $ 1,744,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were transfers of investments from Level II into Level III and from Level III into Level II relating to investments held by the Apollo Senior Loan Fund during the three months ended June 30, 2013 and 2012, respectively. There were transfers of investments from Level III into Level II and from Level II into Level III relating to investments held by the Apollo Senior Loan Fund during the six months ended June 30, 2013 and 2012. These transfers were 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. For the three and six months ended June 30, 2013 and 2012, there were no transfers between Level I and Level II investments.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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

 

     For the Three Months Ended 
June 30,
    For the Six Months Ended 
June 30,
 
     2013      2012     2013     2012  

Balance, Beginning of Period

   $ 1,652,029       $ 1,581,773      $ 1,666,448      $ 1,480,152   

Distributions

     —           (49,724     (62,188     (101,795

Change in unrealized gains (losses), net

     7,064         (15,150     54,833        138,542   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,659,093       $ 1,516,899      $ 1,659,093      $ 1,516,899   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

     For the Three Months Ended 
June 30,
    For the Six Months Ended 
June 30,
 
     2013     2012     2013     2012  

Balance, Beginning of Period

   $ 55,407      $ 52,571      $ 50,311      $ 47,757   

Acquisition of consolidated fund

     —          46,147        —          46,147   

Purchases

     833        2,809        2,268        3,959   

Sale of Investments

     —          —          (902     —     

Change in unrealized losses, net

     (5,848     (13,688     (1,285     (10,024
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 50,392      $ 87,839      $ 50,392      $ 87,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

The change in unrealized gains (losses), net has been recorded within the caption “Net gains (losses) 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

(dollars in thousands except share data)

 

The following table summarizes the changes in the investments in the investments in the Apollo Senior Loan Fund, which are measured at fair value and characterized as Level III investments for the three and six months ended June 30, 2013 and 2012:

 

     For the Three Months Ended 
June 30,
    For the Six Months Ended 
June 30,
 
     2013      2012     2013     2012  

Balance, Beginning of Period

   $ —         $ 484      $ 590      $ 456   

Purchases of investments

     —           —          22        —     

Sale of investments

     —           (2     —          (461

Realized gains

     —           —          —          9   

Change in unrealized gains (losses), net

     —           (1     9        (6

Transfers into Level III

     437         —          437        483   

Transfers out of Level III

     —           (481     (621     (481
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 437       $ —        $ 437      $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

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  
     June 30, 2013     December 31, 2012  
           % 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:

         

Discounted cash flow models

   $ 1,617,445        97.1   $ 1,581,975         98.6

Listed quotes

     48,579        2.9        22,029         1.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Investments

     1,666,024        100     1,604,004         100
    

 

 

      

 

 

 

Other net (liabilities) assets(1)

     (6,931       62,444      
  

 

 

     

 

 

    

Total Net Assets

   $ 1,659,093        $ 1,666,448      
  

 

 

     

 

 

    

 

(1) Balances include other assets, liabilities and general partner interests of AAA Investments. Balance at June 30, 2013 and December 31, 2012 is primarily comprised of $51.3 million and $113.3 million in notes receivable from an affiliate, respectively, less the obligation to the general partner. Carrying values approximate fair value for other assets and liabilities and, accordingly, extended valuation procedures are not required.

4. VARIABLE INTEREST ENTITIES

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

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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

Consolidated Variable Interest Entities

Apollo has consolidated VIEs in accordance with the methodology described in note 2. The majority of the consolidated VIEs were formed for the sole purpose of issuing collateralized notes to investors. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt. Through its role as collateral manager of these VIEs, it was determined that Apollo had the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that the potential fees that it could receive directly and indirectly from these VIEs represent rights to returns that could potentially be significant to such VIEs. As a result, Apollo determined that it is the primary beneficiary and therefore should consolidate the VIEs.

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

Fair Value Measurements

The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of June 30, 2013 and December 31, 2012:

 

    Level I     Level II     Level III     Totals  
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
 

Investments, at fair value

  $ 60      $ 168      $ 10,463,405      $ 11,045,902      $   1,757,857      $   1,643,465      $ 12,221,322      $ 12,689,535   
    Level I     Level II     Level III     Totals  
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
    June 30,
2013
    December 31,
2012
 

Liabilities, at fair value

  $ —        $ —        $ —        $ —        $ 10,835,271      $ 11,834,955      $ 10,835,271      $ 11,834,955   

Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs. Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2. All Level II investments were valued using broker quotes. Transfers of investments out of Level III and into Level II or Level I, if any, are accounted for as of the end of the reporting period in which the transfer occurred. For the three and six months ended June 30, 2013, there were no transfers between Level I and Level II investments. For the three and six months ended June 30, 2012, transfers from Level II into Level I totaled $164. Transfers into Level I represent those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset.

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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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

The following table summarizes the quantitative inputs and assumptions used for investments, at fair value, categorized as Level III in the fair value hierarchy as of June 30, 2013. The disclosure below excludes Level III investments, at fair value, as of June 30, 2013, for which the determination of fair value is based on broker quotes:

 

     Fair Value at
June 30, 2013
    

Valuation Techniques

  

Unobservable

Inputs

   Ranges   Weighted
Average
 

Financial Assets:

             

Bank Debt Term Loans

   $ 56,566       Discounted Cash Flow –
Comparable Yields
   Discount Rates    10.7%–30.4%     15.7

Stocks

     603       Market Comparable 
Companies
   Comparable
Multiples
   6.6x     6.6x   
  

 

 

            

Total

   $ 57,169              
  

 

 

            

The significant unobservable inputs used in the fair value measurement of the bank debt term loans and stocks include the discount rate applied and the multiples applied in the valuation models. These unobservable inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of an investment; conversely, decreases in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks. When a comparable multiple model is used to determine fair value, the comparable multiples are generally multiplied by the underlying companies’ earnings before interest, taxes, depreciation and amortization (“EBITDA”) to establish the total enterprise value of the company. The comparable multiple is determined based on the implied trading multiple of public industry peers.

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

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Balance, Beginning of Period

   $ 1,765,988      $ 215,246      $ 1,643,465      $ 246,609   

Acquisition of VIEs

     —          1,482,057        —          1,482,057   

Elimination of investments attributable to consolidation of VIEs

     19,302        (59,764     15,400        (59,764

Purchases

     538,507        210,721        922,668        437,666   

Sale of investments

     (319,231     (935,739     (506,092     (975,013

Net realized (losses) gains

     (2,566     5,850        (7,008     1,192   

Changes in net unrealized gains (losses)

     6,304        (9,377     4,951        2,215   

Transfers out of Level III

     (444,462     (55,913     (782,135     (346,430

Transfers into Level III

     194,015        144,885        466,608        209,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,757,857      $ 997,966      $ 1,757,857      $ 997,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 3,850      $ (2,063   $ (6,916   $ 5,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Balance, Beginning of Period

   $ 11,347,332      $ 3,700,536      $ 11,834,955      $ 3,189,837   

Acquisition of VIEs

     —          7,317,144        —          7,317,144   

Borrowings

     —          503,848        332,250        929,532   

Repayments

     (508,400     (243,343     (1,420,175     (246,134

Net realized gains on debt

     (91,000     —          (83,397     —     

Changes in net unrealized losses from debt

     68,013        14,247        156,249        102,825   

Elimination of debt attributable to consolidated VIEs

     19,326        (59,772     15,389        (60,544
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 10,835,271      $ 11,232,660      $ 10,835,271      $ 11,232,660   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (17,662   $ 8,456      $ 75,214      $ 93,021   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

The following table presents net (losses) gains from investment activities of the consolidated VIEs for the three and six months ended June 30, 2013 and 2012, respectively:

 

     For the Three Months 
Ended 
June 30,
    For the Six Months 
Ended 
June 30,
 
     2013     2012     2013     2012  

Net unrealized (losses) gains from investment activities

   $ (138,181   $ (18,021   $ (113,061   $ 51,998   

Net realized gains from investment activities

     32,988        12,349        83,918        14,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (losses) gains from investment activities

     (105,193     (5,672     (29,143     66,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized losses from debt

     (68,013     (14,247     (156,249     (102,825

Net realized gains from debt

     91,000        —          83,397        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) from debt

     22,987        (14,247     (72,852     (102,825
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other income

     152,501        171,229        329,626        216,860   

Other expenses

     (105,493     (119,547     (214,968     (165,105
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Losses) Gains from Investment Activities of Consolidated VIEs

   $ (35,198   $ 31,763      $ 12,663      $ 15,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

Senior Secured Notes and Subordinated Notes—Included within debt are amounts due to third-party institutions of the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013      December 31, 2012  
     Principal
Outstanding
     Weighted
Average
Interest
Rate
    Weighted
Average
Remaining
Maturity in
Years
     Principal
Outstanding
     Weighted
Average
Interest
Rate
    Weighted
Average
Remaining
Maturity in
Years
 

Senior Secured Notes(2)(3)

   $ 10,379,364         1.04     7.0       $ 11,409,825         1.30     7.3   

Subordinated Notes(2)(3)

     929,278         N/A  (1)      7.6         1,074,904         N/A  (1)      7.7   
  

 

 

         

 

 

      

Total

   $ 11,308,642            $ 12,484,729        
  

 

 

         

 

 

      

 

(1) The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs.
(2) The fair value of Senior Secured and Subordinated Notes as of June 30, 2013 and December 31, 2012 was $10,835 million and $11,835 million, respectively.
(3) The debt at fair value of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another. As of June 30, 2013 and December 31, 2012, the fair value of the consolidated VIE assets was $14,150 million and $14,672 million, respectively. This collateral consisted of cash and cash equivalents, investments, at fair value, and other assets.

The following table provides a summary of the quantitative inputs and assumptions used for liabilities, at fair value, categorized as Level III in the fair value hierarchy as of June 30, 2013. The disclosure below excludes Level III liabilities, at fair value, as of June 30, 2013 for which the determination of fair value is based on broker quotes:

 

     As of 
June 30, 2013
 
     Fair Value      Valuation
Technique
   Unobservable
Input
   Ranges   Weighted
Average
 

Subordinated Notes

   $ 766,611       Discounted Cash    Discount Rate    10.0%-12.0%     10.3
      Flow    Default Rate    1.0%-1.5%     1.2
         Recovery Rate    75.0%     75.0

Senior Secured Notes

   $ 2,071,470       Discounted Cash    Discount Rate    1.9%–2.1%     2.0
      Flow    Default Rate    2.0%     2.0
         Recovery Rate    30.0%–65.0%     59.9

The significant unobservable inputs used in the fair value measurement of the subordinated and senior secured notes include the discount rate applied in the valuation models, default and recovery rates applied in the valuation models. These inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of subordinated and senior secured notes; conversely, decreases in the discount rate can significantly increase the fair value of subordinated and senior secured notes. The discount rate is determined based on the market rates an investor would expect for similar subordinated and senior secured notes with similar risks.

The consolidated VIEs have elected the fair value option to value the notes payable. The general partner uses its discretion and judgment in considering and appraising relevant factors in determining valuation of these loans. As of June 30, 2013, the debt, at fair value, is classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the 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

(dollars in thousands except share data)

 

The consolidated VIEs’ debt obligations contain various customary loan covenants as described above. As of June 30, 2013, the Company is 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 as of June 30, 2013 and December 31, 2012. In addition, the tables present the maximum exposure to loss relating to those VIEs.

 

     June 30, 2013  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 10,490,123      $ (49,067   $ 5,802   

Credit

     2,926,982        (255,900     15,967   

Real Estate

     1,562,431        (1,143,349     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 14,979,536  (1)    $ (1,448,316 ) (2)    $ 21,769  (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $435,924 in cash, $14,022,771 in investments and $520,841 in receivables.
(2) Represents $1,402,393 in debt and other payables, $45,824 in securities sold, not purchased, and $99 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, 2012  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 13,498,100      $ (34,438   $ 7,105   

Credit

     3,276,198        (545,547     12,605   

Real Estate

     1,685,793        (1,237,462     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 18,460,091  (1)    $ (1,817,447 ) (2)    $ 19,710  (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $452,116 in cash, $17,092,814 in investments and $915,161 in receivables.
(2) Represents $1,752,294 in debt and other payables, $32,702 in securities sold, not purchased, and $32,451 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.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

5. CARRIED INTEREST RECEIVABLE

Carried interest receivable from private equity, credit and real estate funds consists of the following:

 

     June 30,
2013
     December 31,
2012
 

Private equity

   $ 1,601,253       $ 1,413,306   

Credit

     408,882         454,155   

Real Estate

     4,610         10,795   
  

 

 

    

 

 

 

Total Carried Interest Receivable

   $ 2,014,745       $ 1,878,256   
  

 

 

    

 

 

 

The table below provides a roll-forward of the carried interest receivable balance for the six months ended June 30, 2013:

 

     Private Equity     Credit     Real Estate     Total  

Carried interest receivable, January 1, 2013

   $ 1,413,306      $ 454,155      $ 10,795      $ 1,878,256   

Change in fair value of funds (1)

     1,219,583        154,741        (5,329     1,368,995   

Fund cash distributions to the Company

     (1,031,636     (200,014     (856     (1,232,506
  

 

 

   

 

 

   

 

 

   

 

 

 

Carried Interest Receivable, June 30, 2013

   $ 1,601,253      $ 408,882      $ 4,610      $ 2,014,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in change in fair value of funds for the six months ended June 30, 2013 was a reversal of $19.3 million of the entire general partner obligation to return previously distributed carried interest income with respect to SOMA. The general partner obligation is recognized based upon a hypothetical liquidation of the fund’s net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund.

6. OTHER LIABILITIES

Other liabilities consist of the following:

 

     June 30,
2013
     December 31,
2012
 

Deferred taxes

   $ 27,061       $ 13,717   

Deferred rent

     14,754         14,829   

Unsettled trades and redemption payable

     6,605         3,986   

Other

     10,280         12,323   
  

 

 

    

 

 

 

Total Other Liabilities

   $ 58,700       $ 44,855   
  

 

 

    

 

 

 

7. INCOME TAXES

The Company is treated as a partnership for income tax purposes and is therefore not subject to U.S. Federal and State income taxes; however, APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal, State and Local 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. 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 income tax return, as well as file standalone corporate state and local income tax returns in California, New York State and New York City. The Company’s provision for income taxes is accounted for in accordance with U.S. GAAP.

 

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

The Company’s provision for income taxes totaled $18.1 million and $10.7 million for the three months ended June 30, 2013 and 2012, respectively, and $36.7 million and $25.2 million for the six months ended June 30, 2013 and 2012, respectively. The Company’s effective tax rate was approximately 10.90% and 0.58% for the three months ended June 30, 2013 and 2012, respectively, and 3.73% and 1.10% for the six months ended June 30, 2013 and 2012, respectively.

Under U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company determined that 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. With a few exceptions, as of June 30, 2013, Apollo and its predecessor entities’ U.S. Federal, state, local and foreign income tax returns for the years 2008 through 2012 are open under the general statute of limitations provisions and therefore subject to examination. In addition, the State of New York is examining APO Corp.’s tax returns for tax years 2008 to 2010 and the Internal Revenue Service is examining APO Corp.’s tax returns for tax years 2010 and 2011 in connection with the NOL carryback claim from tax year 2011 to tax year 2010.

The Company has recorded a deferred tax asset for the future amortization of tax basis intangibles as a result of the 2007 Reorganization. In connection with the Secondary Offering, as disclosed in note 1, the Company recognized an additional step-up in tax basis of intangibles as a result of the exchange of AOG units for Class A shares in May 2013, resulting in an increase of $92.1 million in the deferred tax asset established from the 2007 Reorganization which was recorded in deferred tax assets in the condensed consolidated statements of financial condition for the expected tax benefit associated with this increase. A related tax receivable agreement liability of $78.3 million was recorded in due to affiliates in the condensed consolidated statements of financial condition for the expected payments under the tax receivable agreement entered into by and among APO Corp., the Managing Partners, the Contributing Partners, and other parties thereto (as amended, the “tax receivable agreement”) (see note 11). The increase in the deferred tax asset less the related liability resulted in the increase to additional paid-in capital of $13.8 million which was recorded in the condensed consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2013. The amortization period for these tax basis intangibles is 15 years. Accordingly, the related deferred tax assets will reverse over the same period.

8. DEBT

Debt consists of the following:

 

     As of June 30, 2013     As of 
December 31, 2012
 
     Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
    Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
 

AMH Credit Agreement

   $ 728,273         4.02   $ 728,273         4.95 % (1) 

CIT secured loan agreements

     —           —          9,545         3.47   
  

 

 

      

 

 

    

Total Debt

   $ 728,273         4.02   $ 737,818         4.93
  

 

 

      

 

 

    

 

(1) Includes the effect of interest rate swaps.

AMH Credit Agreement—On April 20, 2007, Apollo Management Holdings, L.P. (“AMH”), a subsidiary of the Company which is a Delaware limited partnership owned by APO Corp. and Holdings, entered into a $1.0 billion seven year credit agreement (the “AMH Credit Agreement”). Interest payable under the AMH Credit Agreement may from time to time be based on Eurodollar London Interbank Offered Rate (“LIBOR”) or Alternate Base Rate (“ABR”) as determined by the

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

borrower. Through the use of interest rate swaps, AMH irrevocably elected three-month LIBOR for $167 million of the debt for five years from the closing date of the AMH Credit Agreement, which expired in May 2012. The interest rate of the Eurodollar loan, which was amended as discussed below, is the daily Eurodollar rate plus the applicable margin rate (3.75% for $995 million of the loan, as discussed below, and 1.00% for $5 million of the loan as of June 30, 2013 and 3.75% for $995 million of the loan and 1.00% for $5 million of the loan as of December 31, 2012). 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 loan from April 20, 2014 to January 3, 2017 and modified certain other terms of the AMH Credit Agreement. Pursuant to this amendment, AMH or an affiliate was required to purchase from each lender that elected to extend the maturity date of its term loan a portion of such extended term loan equal to 20% thereof. In addition, AMH or an affiliate is required to repurchase at least $50.0 million aggregate principal amount of the term loan by December 31, 2014 and at least $100.0 million aggregate principal amount of the term loan (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 the term loan in connection with the extension of the maturity date of such loan and thus the AMH Credit Agreement (excluding the portions held by AMH affiliates) had a remaining balance of $728.3 million. The Company determined that the amendments to the AMH Credit Agreement resulted in a debt extinguishment which did not result in any gain or loss.

The interest rate on the $723.3 million, net ($995.0 million portion less amount repurchased by the Company) of the loan at June 30, 2013 was 3.99% and the interest rate on the remaining $5.0 million portion of the loan at June 30, 2013 was 1.24%. The estimated fair value of the Company’s long-term debt obligation related to the AMH Credit Agreement is believed to be approximately $770.4 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. The $728.3 million carrying value of debt that is recorded on the condensed consolidated statements of financial condition at June 30, 2013 is the amount for which the Company expects to settle the AMH Credit Agreement.

As of June 30, 2013 and December 31, 2012, the AMH Credit Agreement was guaranteed by, and collateralized by, substantially all of the assets of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH, as well as cash proceeds from the sale of assets or similar recovery events and any cash deposited pursuant to the excess cash flow covenant, which will be deposited as cash collateral to the extent necessary as set forth in the AMH Credit Agreement. As of June 30, 2013, 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 $156.6 million, $111.4 million, $48.1 million, $195.6 million and $(736.9) million, respectively. As of December 31, 2012, the consolidated net assets (deficit) of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and its consolidated subsidiaries were $94.9 million, $91.1 million, $62.3 million, $217.5 million and $(858.9) million, respectively.

In accordance with the AMH Credit Agreement as of June 30, 2013, Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and their respective subsidiaries were subject to certain negative and affirmative covenants. Among other things, the AMH Credit Agreement includes an excess cash flow covenant and an asset sales covenant. The AMH Credit Agreement does not contain any financial maintenance covenants.

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

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

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

If AMH receives net cash proceeds from certain non-ordinary course asset sales, then such net cash proceeds shall be deposited in the cash collateral account as necessary to reduce its Leverage Ratio on a pro forma basis as of the last day of the most recently completed fiscal quarter (after giving effect to such non-ordinary course asset sale and such deposit) to (the following specified levels for the specified years, the “Sweep Leverage Ratio”) (i) for 2013, a Leverage Ratio of 3.50 to 1.00, (ii) for 2014, a Leverage Ratio of 3.25 to 1.00 and (iii) for 2015 and for all years thereafter, a Leverage Ratio of 3.00 to 1.00.

The AMH Credit Agreement contains customary events of default, including events of default arising from non-payment, material misrepresentations, breaches of covenants, cross default to material indebtedness, bankruptcy and changes in control of AMH. As of June 30, 2013, the Company was not aware of any instances of non-compliance with the AMH Credit Agreement.

CIT Secured Loan Agreements—During the second quarter of 2008, the Company entered into four secured loan agreements with CIT Group/Equipment Financing Inc. (CIT) to finance the purchase of certain fixed assets. In April 2013, the CIT loan balance of $9,438 was repaid. During the six months ended June 30, 2013 and 2012, the Company incurred $0.1 million and $0.2 million of interest expense related to the CIT loan, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

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. Under the two-class method, during periods of net income, the net income is first reduced for distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.

The remaining earnings are allocated to 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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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(dollars in thousands except share data)

 

The table below presents basic and diluted net income (loss) per Class A share using the two-class method for the three and six months ended June 30, 2013 and 2012:

 

     Basic and Diluted  
     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Numerator:

        

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

   $ 58,737     $ (41,386 )   $ 307,715      $ 56,657   

Distributions declared on Class A shares

     (80,782 )  (1)     (31,615 )  (2)     (219,529 )  (1)     (89,695 )  (2)

Distributions on participating securities

     (14,300     (6,192     (39,292     (16,498

Earnings allocable to participating securities

     —     (3)     —     (3)     (7,723     —     (3)
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed (loss) income attributable to class A shareholder