FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

OR

 

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

Commission File Number: 001-35107

 

 

APOLLO GLOBAL MANAGEMENT, LLC

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8880053

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9 West 57th Street, 43rd Floor

New York, New York 10019

(Address of principal executive offices) (Zip Code)

(212) 515-3200

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of November 9, 2012 there were 130,024,284 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 September  30, 2012 and December 31, 2011

     6   
  

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011

     7   
  

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011

     8   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2012 and 2011

     9   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September  30, 2012 and 2011

     10   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     13   

ITEM 2.

  

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

     76   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     149   

ITEM 4.

  

CONTROLS AND PROCEDURES

     152   

PART II

   OTHER INFORMATION   

ITEM 1.

  

LEGAL PROCEEDINGS

     153   

ITEM 1A.

  

RISK FACTORS

     154   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     155   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     155   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     155   

ITEM 5.

  

OTHER INFORMATION

     155   

ITEM 6.

  

EXHIBITS

     156   

SIGNATURES

     160   

 

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Forward-Looking Statements

This quarterly report may contain forward looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, its liquidity and capital resources and the other non-historical statements in the discussion and analysis. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this quarterly report, the words “believe,” “anticipate,” “estimate,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions, including risks relating to our dependence on certain key personnel, our ability to raise new private equity, 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 Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933 on March 9, 2012, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in other filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Terms Used in This Report

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

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

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

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

“Gross IRR” of a fund represents the cumulative investment-related cash flows for all of the investors in the fund on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on September 30, 2012 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, carried interest and certain other fund expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors;

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

“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.

 

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“Committed Capital Less unfunded capital commitments” represents capital commitments from limited partners to invest in a particular fund less capital that is available for investment or reinvestment subject to the provisions of the limited partnership agreements.

“Distressed debt investments” in our private equity funds typically result in one of two outcomes. In both cases our original investment objective was predicated around gaining control of the company:

 

i) “Distressed for Control”: We succeed in taking control of a company through its distressed debt. By working proactively through the restructuring process, we are able to equitize our debt position, resulting in a well-financed buyout. Once we control the company, the investment team works closely with management toward an eventual exit, typically over a three- to five-year period as with a traditional buyout.

 

ii) “Non-Control Distressed”: A restructuring does not occur and we do not gain control of the company. This is typically driven by an increase in the price of the debt beyond what is considered an attractive acquisition valuation. The increase in bond prices is usually a result of market interest or a strategic investor’s interest in the company at a higher valuation than we are willing to pay. In these cases, we typically sell our securities for cash and seek to realize a high short-term internal rate of return.

“Portfolio Company Debt” refers to debt securities such as corporate bonds and loans for existing portfolio companies in our private equity funds.

“Other Credit” for our private equity funds refers to portfolios of levered senior loans secured with attractive financing during the depths of the global financial crisis in 2008 and 2009.

“Classic Distressed” for our private equity funds refers to our investments in debt securities at distressed prices.

“Traditional buyouts” or “Buyout Equity” have historically comprised the majority of our investments. We generally target investments in companies where an entrepreneurial management team is comfortable operating in a leveraged environment. We also pursue acquisitions where we believe a non-core business owned by a large corporation will function more effectively if structured as an independent entity managed by a focused, stand-alone management team. Our leveraged buyouts have generally been in situations that involved consolidation through merger or follow-on acquisitions; carveouts from larger organizations looking to shed non-core assets; situations requiring structured ownership to meet a seller’s financial goals; or situations in which the business plan involved substantial departures from past practice to maximize the value of its assets.

The “Average Entry Multiple” for a private equity fund is the average of the total enterprise value over an applicable EBITDA that captures the true economics for our purchases of portfolio companies.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF FINANCIAL CONDITION (UNAUDITED)

(dollars in thousands, except share data)

 

     September 30,
2012
    December 31,
2011
 

Assets:

    

Cash and cash equivalents

   $ 752,496      $ 738,679   

Cash and cash equivalents held at Consolidated Funds

     694        6,052   

Restricted cash

     8,931        8,289   

Investments

     2,025,242        1,857,465   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     1,584,143        173,542   

Investments, at fair value

     12,090,672        3,301,966   

Other assets

     373,445        57,855   

Carried interest receivable

     1,627,936        868,582   

Due from affiliates

     272,410        176,740   

Fixed assets, net

     53,916        52,683   

Deferred tax assets

     550,601        576,304   

Other assets

     28,597        26,976   

Goodwill

     48,894        48,894   

Intangible assets, net

     151,427        81,846   
  

 

 

   

 

 

 

Total Assets

   $ 19,569,404      $ 7,975,873   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 46,911      $ 33,545   

Accrued compensation and benefits

     93,408        45,933   

Deferred revenue

     272,537        232,747   

Due to affiliates

     658,117        578,764   

Profit sharing payable

     825,583        352,896   

Debt

     737,986        738,516   

Liabilities of consolidated variable interest entities:

    

Debt, at fair value

     11,291,860        3,189,837   

Other liabilities

     600,853        122,264   

Other liabilities

     49,780        33,050   
  

 

 

   

 

 

 

Total Liabilities

     14,577,035        5,327,552   
  

 

 

   

 

 

 

Commitments and Contingencies (see note 13)

    

Shareholders’ Equity:

    

Apollo Global Management, LLC shareholders’ equity:

    

Class A shares, no par value, unlimited shares authorized, 129,874,286 shares and 123,923,042 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     —          —     

Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at September 30, 2012 and December 31, 2011

     —          —     

Additional paid in capital

     3,015,240        2,939,492   

Accumulated deficit

     (2,313,381     (2,426,197

Appropriated partners’ capital

     1,894,446        213,594   

Accumulated other comprehensive income (loss)

     168        (488
  

 

 

   

 

 

 

Total Apollo Global Management, LLC shareholders’ equity

     2,596,473        726,401   

Non-Controlling Interests in consolidated entities

     1,591,946        1,444,767   

Non-Controlling Interests in Apollo Operating Group

     803,950        477,153   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     4,992,369        2,648,321   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 19,569,404      $ 7,975,873   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS (UNAUDITED)

(dollars in thousands, except share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Revenues:

        

Advisory and transaction fees from affiliates

   $ 15,149      $ 16,837      $ 112,162      $ 59,809   

Management fees from affiliates

     147,611        122,666        418,115        362,003   

Carried interest income (loss) from affiliates

     549,613        (1,619,083     1,170,467        (896,174
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     712,373        (1,479,580     1,700,744        (474,362
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Compensation and benefits:

        

Equity-based compensation

     144,407        288,208        435,387        859,173   

Salary, bonus and benefits

     64,647        68,433        204,666        204,788   

Profit sharing expense

     237,433        (563,255     506,308        (275,437

Incentive fee compensation

     364        (3,876     372        2,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

     446,851        (210,490     1,146,733        791,213   

Interest expense

     7,136        9,790        29,083        30,999   

Professional fees

     11,490        6,965        39,849        37,318   

General, administrative and other

     24,028        16,566        66,810        55,675   

Placement fees

     4,292        1,991        13,344        3,105   

Occupancy

     9,644        10,391        27,360        25,542   

Depreciation and amortization

     16,567        6,687        37,021        19,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

     520,008        (158,100     1,360,200        963,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income:

        

Net gains (losses) from investment activities

     20,463        (371,647     149,957        (150,407

Net losses from investment activities of consolidated variable interest entities

     (45,475     (4,760     (29,913     (41

Income (loss) from equity method investments

     40,779        (56,438     83,191        (29,242

Interest and dividend income

     3,277        670        7,093        1,540   

Other income (loss), net

     8,304        (10,135     1,959,669        11,039   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Loss)

     27,348        (442,310     2,169,997        (167,111
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     219,713        (1,763,790     2,510,541        (1,604,960

Income tax (provision) benefit

     (21,917     19,847        (47,127     7,477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     197,796        (1,743,943     2,463,414        (1,597,483

Net (income) loss attributable to Non-Controlling Interests

     (115,005     1,277,017        (2,323,966     1,117,724   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 82,791      $ (466,926   $ 139,448      $ (479,759
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared per Class A Share

   $ 0.24      $ 0.24      $ 0.95      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Class A Share:

        

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

   $ 0.55      $ (3.86   $ 0.93      $ (4.33
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Basic

     128,980,438        122,381,069        126,909,962        113,941,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Number of Class A Shares – Diluted

     131,635,202        122,381,069        129,309,716        113,941,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net Income (Loss)

   $ 197,796      $ (1,743,943   $ 2,463,414      $ (1,597,483

Other Comprehensive Income, net of tax:

        

Net unrealized (loss) gain on interest rate swaps (net of taxes of $172 and $260 for Apollo Global Management, LLC for the three months ended September 30, 2012 and 2011, respectively, and $410 and $605 for Apollo Global Management, LLC for the nine months ended September 30, 2012 and 2011, respectively, and $0 for Non-Controlling Interests in Apollo Operating Group for both the three and nine months ended September 30, 2012 and 2011)

     (172     1,894        2,653        5,040   

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

     16        (52     13        (161
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive (Loss) Income, net of tax

     (156     1,842        2,666        4,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

     197,640        (1,742,101     2,466,080        (1,592,604

Comprehensive (Income) Loss Attributable to Non-Controlling Interests

     (174,245     1,271,024        (452,563     1,099,701   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 23,395      $ (471,077   $ 2,013,517      $ (492,903
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(dollars in thousands, except share data)

 

    Apollo Global Management, LLC Shareholders                          
    Class A
Shares
    Class B
Shares
    Additional
Paid in
Capital
    Accumu-
lated

Deficit
    Appro-
priated
Partners’
Capital
    Accumu-
lated
Other
Compre-
hensive
(Loss)
Income
    Total
Apollo
Global
Manage-
ment,

LLC
Total
Share-
holders’
Equity
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Apollo
Operating
Group
    Total
Shareho-
lders’
Equity
 

Balance at January 1, 2011

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

Issuance of Class A shares

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

Dilution impact of issuance of Class A shares

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

Capital increase related to equity-based compensation

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

Cash distributions

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

Distributions

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

Distributions related to deliveries of Class A shares for RSUs

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

Non-cash distributions

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

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

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

Satisfaction of liability related to AAA RDUs

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

Net loss

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

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

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

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          205,370        —          —          —          205,370        —          227,973        433,343   

Capital contributions

    —          —          —          —          —          —          —          267,642        —          267,642   

Cash distributions to Non-Controlling Interests

    —          —          —          —          —          —          —          (394,954     —          (394,954

Distributions

    —          —          (142,616     —          (192,561     —          (335,177     —          (239,022     (574,199

Distributions related to deliveries of Class A shares for RSUs

    5,951,244        —          (83     (25,852     —          —          (25,935     —          —          (25,935

Purchase of AAA units

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

Non-cash distributions

    —          —          —          (780     —          —          (780     (2,728     —          (3,508

Non-cash contribution to Non-Controlling Interests

    —          —          —          —          —          —          —          1,247        —          1,247   

Capital increase related to business acquisition (note 3)

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

Non-Controlling Interests in consolidated entities at acquisition date

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

Deconsolidation

    —          —          —          —          —          —          —          (46,148     —          (46,148

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

    —          —          (1,098     —          —          —          (1,098     1,098        —          —     

Satisfaction of liability related to AAA RDUs

    —          —          174        —          —          —          174        —          —          174   

Net income

    —          —          —          139,448        1,873,413        —          2,012,861        114,717        335,836        2,463,414   

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

    —          —          —          —          —          13        13        —          —          13   

Net unrealized gain on interest rate swaps (net of taxes of $410 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively)

    —          —          —          —          —          643        643        —          2,010        2,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    129,874,286        1      $ 3,015,240      $ (2,313,381   $ 1,894,446      $ 168      $ 2,596,473      $ 1,591,946      $ 803,950      $ 4,992,369   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(dollars in thousands, except share data)

 

     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 2,463,414      $ (1,597,483

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

    

Equity-based compensation

     435,387        859,173   

Depreciation and amortization

     7,582        8,380   

Amortization of intangible assets

     29,439        11,255   

Amortization of debt issuance costs

     383        383   

Losses from investment in HFA and other investments

     7,774        14,535   

Non-cash interest income

     (2,370     —     

Income from equity awards received for directors’ fees

     (2,469     (2,808

(Income) loss from equity method investment

     (83,191     29,242   

Waived management fees

     (18,460     (19,490

Non-cash compensation expense related to waived management fees

     18,460        19,490   

Non-cash change in profit sharing payable

     16,880        —     

Deferred taxes, net

     38,029        (6,945

Loss on disposal of assets

     911        570   

Gain on business acquisitions

     (1,951,133     —     

Changes in assets and liabilities:

    

Carried interest receivable

     (723,258     1,232,373   

Due from affiliates

     (95,741     (29,332

Other assets

     (1,001     (7,603

Accounts payable and accrued expenses

     8,168        (5,933

Accrued compensation and benefits

     45,605        45,034   

Deferred revenue

     35,352        3,532   

Due to affiliates

     63,332        67,404   

Profit sharing payable

     338,107        (393,598

Other liabilities

     (2,002     3,171   

Apollo Funds related:

    

Net realized (gains) losses from investment activities

     (23,144     12,581   

Net unrealized (gains) losses from investment activities

     (340,463     156,128   

Net realized gains on debt

     —          (41,819

Net unrealized losses on debt

     356,890        9,261   

Distributions from investment activities

     99,675        28,000   

Change in cash held at consolidated variable interest entities

     (249,585     55,212   

Purchases of investments

     (4,658,417     (991,189

Sale of investments

     4,650,584        1,185,930   

Change in other assets

     78,435        21,049   

Change in other liabilities

     (82,740     (12,685
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     460,433        653,818   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of fixed assets

     (8,101     (19,931

Acquisition of Stone Tower (net of cash assumed) (see note 3)

     (99,190     —     

Proceeds from disposals of fixed assets

     —          367   

Purchase of investments in HFA and other

     —          (52,069

Cash contributions to equity method investments

     (109,076     (40,868

Cash distributions from equity method investments

     82,027        46,872   

Change in restricted cash

     (642     (1,742
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

   $ (134,982   $ (67,371
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

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

NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(dollars in thousands, except share data)

 

     2012     2011  

Cash Flows from Financing Activities:

    

Issuance of Class A shares

   $ —        $ 383,990   

Issuance costs

     —          (1,502

Principal repayments on debt

     (530     (1,832

Distributions related to deliveries of Class A shares for RSUs

     (25,852     (16,980

Distributions paid to Non-Controlling Interests in consolidated entities

     (6,595     (10,431

Contributions from Non-Controlling Interests in consolidated entities

     2,535        —     

Distributions paid

     (127,614     (76,550

Distributions paid to Non-Controlling Interests in Apollo Operating Group

     (239,022     (151,200

Apollo Funds related:

    

Issuance of debt

     929,532        454,356   

Principal repayment on term loans

     (433,587     (412,057

Purchase of AAA units

     (100,046     —     

Distributions paid

     (192,561     —     

Distributions paid to Non-Controlling Interests in consolidated entities

     —          (27,284

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

     (388,359     (300,921

Contributions from Non-Controlling Interests in consolidated variable interest entities

     265,107        —     
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (316,992     (160,411
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     8,459        426,036   

Cash and Cash Equivalents, Beginning of Period

     744,731        382,269   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 753,190      $ 808,305   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Interest paid

   $ 39,138      $ 36,974   

Interest paid by consolidated variable interest entities

     79,371        13,852   

Income taxes paid

     4,225        8,821   

Supplemental Disclosure of Non-Cash Investing Activities:

    

Change in accrual for purchase of fixed assets

     (1,624     967   

Non-cash contributions on equity method investments

     3,478        6,296   

Non-cash distributions from equity method investments

     (468     (703

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

     —          (11,069

Non-cash purchases of other investments, at fair value

     —          2,808   

Non-cash distributions from investing activities

     2,170        1,522   

Supplemental Disclosure of Non-Cash Financing Activities:

    

Non-cash distributions

     (15,782     (9,441

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

     (2,728     (1,522

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

     1,247        —     

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

     227,973        525,910   

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

     2,010        3,826   

Satisfaction of liability related to AAA RDUs

     174        3,845   

Dilution impact of issuance of Class A shares

     —          134,364   

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

     —          (127,096

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

     1,098        6,524   

Net transfers of AAA ownership from Apollo Global Management, LLC

     (1,098     (6,524

Unrealized gain on interest rate swaps

     1,053        1,819   

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

     13        (161

Deferred taxes related to interest rate swaps

     (410     (605

Capital increases related to equity-based compensation

     205,370        332,038   

Tax benefits related to deliveries of Class A shares for RSUs

     83        (7,588

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

     1,307        848   

Non-cash accrued compensation related to AAA RDUs

     737        377   

Non-Controlling interests in consolidated entities related to acquisition

     260,203        —     

Capital increase related to business acquisition

     14,001        —     

Satisfaction of liability related to repayment of CIT loan

     —          11,069   

See accompanying notes to condensed consolidated financial statements.

 

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APOLLO GLOBAL MANAGEMENT, LLC

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

NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(dollars in thousands, except share data)

 

     2012     2011  

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     —     

See accompanying notes to condensed consolidated financial statements.

 

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1. ORGANIZATION AND BASIS OF PRESENTATION

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

 

   

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

 

   

Credit—primarily invests in non-control debt and non-control equity investments, including distressed debt securities and non-performing loans; and

 

   

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

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 Form 10-Q. The condensed consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Company is considered the primary beneficiary, and certain entities which are not considered variable interest entities but 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, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Reorganization of the Company

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

 

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As of September 30, 2012, the Company owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC (“APO Asset”), a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC (“APO (FC)”), an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the “Intermediate Holding Companies”), 35.1% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group through its wholly-owned general partners.

AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership (“Holdings”), is the entity through which the Managing Partners and certain of the Company’s other partners (the “Contributing Partners”) indirectly own (through Holdings) Apollo Operating Group units (“AOG Units”) that represent 64.9% of the economic interests in the Apollo Operating Group as of September 30, 2012. The Company consolidates the financial results of the Apollo Operating Group and its consolidated subsidiaries. Holdings’ ownership interest in the Apollo Operating Group is reflected as a Non-Controlling Interest in the accompanying condensed consolidated financial statements.

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—Apollo consolidates those entities it controls through a majority voting interest or through other means, including those funds in which the general partner is presumed to have control (e.g., AP Alternative Assets, L.P., a Guernsey limited partnership that, through AAA Investments L.P., its investment partnership, generally invests alongside certain of the Company’s private equity funds and directly in certain of its credit funds and in other transactions that the Company sponsors and manages (“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 funds that the Company manages. The amended consolidation rules require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would give it a controlling financial interest. When the VIE has qualified for the deferral of the amended consolidation rules in accordance with U.S. GAAP, the analysis is based on previous consolidation rules, which require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would be expected to absorb a majority of the variability of the entity.

 

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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.

Assets and liability amounts of the consolidated VIEs are shown in separate sections within the condensed consolidated statements of financial condition as of September 30, 2012 and December 31, 2011.

Refer to additional disclosures regarding VIEs in note 5. Intercompany transactions and balances, if any, have been eliminated in consolidation.

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

Non-Controlling Interest—For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in Non-Controlling Interest in the condensed consolidated financial statements. The Non-Controlling Interests relating to Apollo primarily includes the 64.9% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings and other ownership interests in consolidated entities, which primarily consist of the approximate 97% ownership interest held by limited partners in AAA as of September 30, 2012. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

 

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

Revenues—Revenues are reported in three separate categories that include (i) advisory and transaction fees from affiliates, which relate to the investments of the funds and may include individual monitoring agreements with the portfolio companies and debt investment vehicles of the private equity funds and 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 upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is broken, all of the costs are reimbursed by the funds and then included in the calculation of the Management Fee Offset described below. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company of all costs incurred.

As a result of providing advisory services to certain private equity and credit portfolio companies, Apollo is generally entitled to receive fees for transactions related to the acquisition and disposition of portfolio companies as well as ongoing monitoring of portfolio company operations. The amounts due from portfolio companies are included in “Due from Affiliates,” which is discussed further in note 12. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may be subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to Advisory and Transaction Fees from Affiliates in the condensed consolidated statements of operations.

Management Fees from Affiliates—Management fees for private equity funds, real estate funds and certain 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 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

 

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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.

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

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

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

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

 

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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 last sales price on the date of determination.

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

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

Credit Investments

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

 

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

Real Estate Investments—For the CMBS portfolio of Apollo’s funds, the estimated fair value is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the funds would receive in an actual trade for the applicable instrument. 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.

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

Fair Value of Financial Instruments

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

Except for the Company’s debt obligation related to the AMH Credit Agreement (as defined in note 9), 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 9, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $795.5 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. However, the carrying value that is recorded on the condensed consolidated statements of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy.

 

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Fair Value Option—Apollo has elected the fair value option for the convertible notes issued by HFA and for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. For the convertible notes issued by HFA, Apollo has elected to separately present interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible notes. 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. Refer to note 4 and note 5 for further disclosure on financial instruments of the consolidated VIEs and the investment in HFA 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.

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

Compensation and Benefits

Equity-Based Compensation—Equity-based compensation is measured based on the grant date fair value of the award. Equity-based awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are expensed over the relevant service period. The Company estimates forfeitures for equity-based awards that are not expected to vest. Equity-based awards granted to non-employees for services provided to the affiliates are remeasured to fair value at the end of each reporting period and expensed over the relevant service period.

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

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

The Company sponsors a 401(k) Savings Plan whereby U.S.-based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the three and nine months ended September 30, 2012 and 2011, respectively.

Profit Sharing Expense—Profit sharing expense 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 paid may be subject to clawback from employees, former employees and the Contributing Partners.

 

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

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

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 period. Incentive fee compensation expense is recognized on an accrual basis as the related carried interest income is earned. Incentive fee compensation expense may be subject to reversal until the carried interest income crystallizes.

Other Income (Loss)

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

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

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

Use of Estimates—The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, the disclosure of contingent assets and

 

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

In July 2012, the 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. The adoption of this guidance is not expected to have an impact on the Company’s condensed consolidated financial statements.

3. ACQUISITIONS AND BUSINESS COMBINATIONS

Business Combinations

Stone Tower

On April 2, 2012 (the “Acquisition Date”), the Company completed its previously announced acquisition (the “Acquisition”) of the membership interests of Stone Tower Capital LLC and its related management companies (“Stone Tower”), a leading alternative credit manager. The Acquisition was consummated by the Company for total consideration at fair value of approximately $237.2 million. The transaction added significant scale and several new credit product capabilities and increased the Assets Under Management of the credit segment.

Consideration exchanged at closing included a payment of approximately $105.5 million, which the Company funded from its existing cash resources, and equity granted to the former owners of Stone Tower with grant date fair value of $14.0 million valued using the Company’s closing stock price on April 2, 2012 of $14.40. Additionally, the Company will also make payments to the former owners of Stone Tower under a contingent consideration obligation which requires the Company to transfer cash to the former owners of Stone Tower based on a specified percentage of carried interest income. The contingent consideration obligation has an Acquisition Date fair value of approximately $117.7 million, which was determined based on the present value of the estimated range of undiscounted carried interest income cash flows of approximately $139.4 million using a discount rate of 9.5%, and is reflected in profit sharing payable in the condensed consolidated statements of financial condition.

 

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As a result of the Acquisition, the Company incurred $4.6 million in acquisition costs, of which $2.8 million was incurred in the nine months ended September 30, 2012.

Tangible assets acquired in the Acquisition consisted of management and carried interest receivable and other assets. Intangible assets acquired consisted primarily of certain management contracts providing economic rights to management fees, senior fees, subordinate fees, and carried interest from existing CLOs, funds and separately managed accounts managed by Stone Tower.

The Company has performed an analysis and an evaluation of the net assets acquired and liabilities assumed. The estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed as of the Acquisition Date resulting in a bargain purchase gain of approximately $1,951.1 million. The bargain purchase gain is reflected in other income, net within the condensed consolidated statements of operations with corresponding amounts reflected as components of appropriated partners’ capital within the condensed consolidated statements of changes in shareholders’ equity. The estimated fair values for the net assets acquired and liabilities assumed are summarized in the following table:

 

Tangible Assets:

  

Cash

   $ 6,310   

Carried Interest Receivable

     36,097   

Due from Affiliates

     1,642   

Other Assets

     2,492   

Total assets of consolidated variable interest entities

     10,136,869   

Intangible Assets:

  

Management Fees Contracts

     9,658   

Senior Fees Contracts

     568   

Subordinate Fees Contracts

     2,023   

Carried Interest Contracts

     85,071   

Non-Compete Covenants

     200   
  

 

 

 

Fair Value of Assets Acquired

     10,280,930   

Liabilities Assumed:

  

Accounts payable and accrued expenses

     3,570   

Due to Affiliates

     4,410   

Other Liabilities

     8,979   

Total liabilities of consolidated variable interest entities

     7,815,434   
  

 

 

 

Fair Value of Liabilities Assumed

     7,832,393   
  

 

 

 

Fair Value of Net Assets Acquired

     2,448,537   

Less: Net assets attributable to Non-Controlling Interests in consolidated entities

     260,203   

Less: Fair Value of Consideration Transferred

     237,201   
  

 

 

 

Gain on Acquisition

   $ 1,951,133   
  

 

 

 

The bargain purchase gain was recorded in other income, net in the condensed consolidated statements of operations. During the one year measurement period, any changes resulting from facts and circumstances that existed as of the Acquisition Date will be reflected as a retrospective adjustment to the bargain purchase gain and the respective asset acquired or liability assumed.

The Acquisition related intangible assets valuation and related amortization are as follows:

 

     Weighted
Average
Useful
Life in
Years
   As of
September 30,
2012
 

Management Fees contracts

   2.2    $ 9,658   

Senior Fees Contracts

   2.4      568   

Subordinate Fees Contracts

   2.5      2,023   

Carried Interest Contracts

   3.7      85,071   

Non-Compete Covenants

   2.0      200   
     

 

 

 

Total Intangible Assets

        97,520   

Less: Accumulated amortization

        (12,183
     

 

 

 

Net Intangible Assets

      $ 85,337   
     

 

 

 

 

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The results of operations of the acquired business since the Acquisition Date included in the Company’s condensed consolidated statements of operations for the period from April 2, 2012 to September 30, 2012 and for the three months ended September 30, 2012 were as follows:

 

     For the
Three Months Ended
September 30, 2012
    For the Period from
April 2, 2012 to
September 30, 2012
 

Total Revenues

   $ 24,176      $ 35,709   

Net Income Attributable to Non-Controlling Interest

   $ (49,520   $ (1,936,240

Net Income Attributable to Apollo Global Management, LLC

   $ 7,128      $ 12,771   

Unaudited Supplemental Pro Forma Information

Unaudited supplemental pro forma results of operations of the combined entity for the nine months ended September 30, 2012 assuming the Acquisition had occurred as of January 1, 2012 are presented below. There were no pro forma impacts during the three months ended September 30, 2012. This pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the Acquisition been completed on January 1, 2012, nor does it purport to be indicative of any future results.

 

     For the
Nine Months Ended
September 30, 2012
 

Total Revenues

   $ 1,715,094   

Net Income Attributable to Non-Controlling Interest

   $ (2,298,862

Net Income Attributable to Apollo Global Management, LLC

   $ 154,915   

Net Income per Class A Share:

  

Net Income per Class A Share – Basic and Diluted

   $ 1.05   

Weighted Average Number of Class A Shares – Basic

     126,909,962   

Weighted Average Number of Class A Shares – Diluted

     129,309,716   

The nine months supplemental pro forma earnings include an adjustment to exclude $5.5 million of compensation expense not expected to recur due to termination of certain contractual arrangements as part of the closing of the Acquisition.

Intangible Assets

Intangible assets, net consists of the following:

 

     September 30,
2012
    December 31,
2011
 

Finite-lived intangible assets

   $ 240,020      $ 141,000   

Accumulated amortization

     (88,593     (59,154
  

 

 

   

 

 

 

Intangible assets, net

   $ 151,427      $ 81,846   
  

 

 

   

 

 

 

Amortization expense related to intangible assets was $29.4 million and $11.3 million for the nine months ended September 30, 2012 and 2011, respectively and $13.8 million and $3.6 million for the three months ended September 30, 2012 and 2011, respectively.

 

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Expected amortization of these intangible assets for each of the next 5 years and thereafter is as follows:

 

     Remaining
2012
     2013      2014      2015      2016      There-
After
     Total  

Amortization of intangible assets

   $ 13,571       $ 41,351       $ 36,246       $ 33,714       $ 7,881       $ 18,664       $ 151,427   

4. INVESTMENTS

The following table represents Apollo’s investments:

 

     September 30,
2012
     December 31,
2011
 

Investments, at fair value

   $ 1,604,011       $ 1,552,122   

Other investments

     421,231         305,343   
  

 

 

    

 

 

 

Total Investments

   $ 2,025,242       $ 1,857,465   
  

 

 

    

 

 

 

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 September 30, 2012 and December 31, 2011, the net assets of the consolidated funds (excluding VIEs) were $1,559.7 million and $1,505.5 million, respectively. The following investments, except the investment in HFA and other investments, are presented as a percentage of net assets of the consolidated funds:

 

Investments,

at Fair Value –

Affiliates

  September 30, 2012     December 31, 2011  
  Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
    Fair Value     Cost     % of Net
Assets of
Consolidated
Funds
 
  Private
Equity
    Credit     Total         Private
Equity
    Credit     Total      

Investments held by:

                   

AAA

  $ 1,534,801      $ —        $ 1,534,801      $ 1,561,154        98.4   $ 1,480,152      $ —        $ 1,480,152      $ 1,662,999        98.4

Investments held by Apollo Senior Loan Fund

    —          26,243        26,243        25,881        1.6        —          24,213        24,213        24,569        1.6   

HFA

    —          41,461        41,461        56,998        N/A        —          46,678        46,678        54,628        N/A   

Other Investments

    1,506        —          1,506        3,497        N/A        1,079        —          1,079        2,881        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,536,307      $ 67,704      $ 1,604,011      $ 1,647,530        100.0   $ 1,481,231      $ 70,891      $ 1,552,122      $ 1,745,077        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities

At September 30, 2012 and December 31, 2011, the sole investment held by AAA was its investment in AAA Investments, L.P. (“AAA Investments”), which is measured based on AAA’s share of net asset value of AAA Investments. The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the funds that the Company consolidates (excluding VIEs) as of the aforementioned dates:

 

     September 30, 2012  
     Instrument Type    Cost      Fair Value      % of Net
Assets of
Consolidated
Funds
 

Apollo Life Re Ltd.

   Equity    $ 358,241       $ 480,500         30.8

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      93,000         150,382         9.6   

Rexnord Corporation

   Equity      37,461         142,467         9.1   

NCL Corporation

   Equity      98,906         115,600         7.4   

Berry Plastics, Inc.

   Equity      9,947         103,800         6.7   

 

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

Apollo Life Re Ltd.

   Equity    $ 358,241       $ 430,800         28.6

Apollo Strategic Value Offshore Fund, Ltd.

   Investment Fund      105,889         164,811         10.9   

Rexnord Corporation

   Equity      37,461         139,100         9.2   

LeverageSource, L.P.

   Equity      139,913         102,834         6.8   

Apollo Asia Opportunity Offshore Fund, Ltd.

   Investment Fund      88,166         86,329         5.7   

Momentive Performance Materials Holdings, Inc.

   Equity      80,657         85,300         5.7   

Apollo Strategic Value Offshore Fund, Ltd. (the “Apollo Strategic Value Fund”) has an ownership interest in a special purpose vehicle, Apollo VIF/SVF Bradco LLC, which owns interests in Bradco Supply Corporation. AAA Investments’ share of this investment is valued at $91.0 million and $80.9 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, AAA Investments’ combined share of this investment was greater than 5.0% of the net assets of the consolidated funds. In addition to the AAA Investments’ private equity co-investment in Momentive Performance Materials Holdings Inc. (“Momentive”) noted above, AAA Investments had an ownership interest in the debt of Momentive. AAA Investments’ combined share of these debt and equity investments is greater than 5% of the net assets of the consolidated funds and is valued at $85.9 million at December 31, 2011.

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

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

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

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 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

 

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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 cancelled, the note will be converted on the eighth anniversary of its issuance on March 11, 2019. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion. The PIK interest provides for the Company to receive additional common shares of HFA if the note is converted. The Company has elected the fair value option for the convertible note. The convertible note is valued using an “if-converted basis”, which is based on a hypothetical exit through conversion to common equity (for which quoted price exists) as of the valuation date. The Company separately presents interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible note. For the three and nine months ended September 30, 2012, the Company recorded $0.8 million and $2.4 million, respectively, in PIK interest income included in interest income in the condensed consolidated statements of operations. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $1.04 as of September 30, 2012) per stock option. The stock options became exercisable upon issuance and expire on the eighth anniversary of the issuance date. The stock options are accounted for as a derivative and are valued at their fair value under U.S. GAAP at each balance sheet date. As a result, for the nine months ended September 30, 2012 and 2011, the Company recorded an unrealized loss of approximately $(7.6) million and $(13.3) 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 September 30, 2012 and 2011, the Company recorded an unrealized gains of approximately $2.1 million and an unrealized loss of $(33.4) million, respectively, related to the convertible note and stock options within net gains from investment activities in the condensed consolidated statements of operations.

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

 

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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 resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized gains. Additionally net gains from investment activities include changes in the fair value of the investment in HFA and other investments held at fair value. The following tables present Apollo’s net gains from investment activities for the three and nine months ended September 30, 2012 and 2011:

 

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

Realized gains on sales of investments

   $ —        $ 106      $ 106   

Change in net unrealized gains due to changes in fair values

     17,951        2,406        20,357   
  

 

 

   

 

 

   

 

 

 

Net gains from Investment Activities

   $ 17,951      $ 2,512      $ 20,463   
  

 

 

   

 

 

   

 

 

 
     For the Three Months Ended
September 30, 2011
 
     Private Equity     Credit     Total  

Change in net unrealized losses due to changes in fair value

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

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities

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

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended
September 30, 2012
 
     Private Equity     Credit     Total  

Realized gains on sales of investments

   $ —        $ 242      $ 242   

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

     156,494        (6,779     149,715   
  

 

 

   

 

 

   

 

 

 

Net Gains (Losses) from Investment Activities

   $ 156,494      $ (6,537   $ 149,957   
  

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended
September 30, 2011
 
     Private Equity     Credit     Total  

Change in net unrealized losses due to changes in fair value

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

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities

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

 

 

   

 

 

   

 

 

 

 

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Other Investments

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

The following table presents income (loss) from equity method investments for the three and nine months ended September 30, 2012 and 2011:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 14      $ (185   $ 97      $ (66

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

     —          (1     (2     11   

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

     (13     (16     16        1   

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

     (63     (996     2,485        1,900   

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

     24,243        (28,646     47,466        (14,981

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

     153        (101     327        (101

Credit Funds:

        

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

     233        (1,024     899        (882

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

     5        (28     20        (24

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

     3        (21     15        (18

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

     1,659        (3,360     3,625        (2,864

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

     318        (535     609        (166

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

     8,633        (13,851     15,801        (9,491

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

     1,455        (3,574     4,410        (2,636

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

     1,795        (1,461     2,589        1,402   

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

     804        (1,558     1,307        (148

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

     553        (962     1,102        (441

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

     9        —          20        —     

Apollo Residential Mortgage, Inc. (“AMTG”)

     (103 )(1)      —          452 (1)      —     

Apollo European Credit, L.P. (“AEC”)

     90        —          117        —     

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

     242        —          404        —     

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

     386        —          319        —     

Apollo Investment Corporation (“AINV”)

     (336     —          (336     —     

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

     241        —          557        —     

Apollo SK Strategic Investments, L.P.

     5        —          5        —     

Real Estate:

        

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

     299 (1)      212 (2)      815 (1)      524 (2) 

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

     (38     —          (124     —     

CPI Capital Partners NA Fund

     2        4        (29     85   

CPI Capital Partners Asia Pacific Fund

     13        18        50        32   

Apollo GSS Holding (Cayman), L.P.

     (36     —          (36     —     

Other Equity Method Investments:

        

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

     —          (554     (306     (1,860

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

     270        244        137        464   

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

     (57     (43     375        17   

Other

     —          —          5        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Income (Loss) from Equity Method Investments

   $ 40,779      $ (56,438   $ 83,191      $ (29,242
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts are as of June 30, 2012.
(2) Amounts are as of June 30, 2011.

 

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Other investments as of September 30, 2012 and December 31, 2011 consisted of the following:

 

     Equity Held as of  
     September 30,
2012
    % of
Ownership
    December 31,
2011
    % of
Ownership
 

Investments:

        

Private Equity Funds:

        

AAA Investments

   $ 901        0.058   $ 859        0.057

Fund IV

     9        0.014        15        0.010   

Fund V

     169        0.014        202        0.014   

Fund VI

     10,010        0.095        7,752        0.082   

Fund VII

     179,646        1.311        139,765        1.318   

ANRP

     2,517        1.291        1,982        2.544   

Credit Funds:

        

SOMA

     5,945        0.585        5,051        0.525   

VIF

     142        0.085        122        0.081   

SVF

     138        0.061        123        0.059   

ACLF

     14,390        2.473        14,449        2.465   

Artus

     5,780        6.156        6,009        6.156   

COF I

     46,839        1.930        37,806        1.977   

COF II

     21,475        1.440        22,979        1.472   

EPF I

     19,388        1.363        14,423        1.363   

AIE II

     9,076        2.186        7,845        2.076   

Palmetto

     12,677        1.186        10,739        1.186   

AFT

     103        0.034        84        0.034   

Apollo/JH Loan Portfolio, L.P.

     —          —          100        0.189   

AMTG(3)

     4,052 (1)      0.805 (1)      4,000 (2)      1.850 (2) 

AEC

     1,301        0.975        542        1.053   

AESI

     2,825        1.041        1,704        1.035   

ACSP

     4,956        2.458        —          —     

AINV

     49,664        2.895        —          —     

EPF II

     3,736        2.178        —          —     

Apollo SK Strategic Investments, L.P.

     511        0.989        —          —     

APC

     30        0.062        —          —     

Real Estate:

        

ARI(3)

     11,750 (1)      2.729 (1)      11,288 (2)      2.730 (2) 

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

     3,206        1.845        5,884        2.065   

CPI Capital Partners NA Fund

     442        0.334        564        0.344   

CPI Capital Partners Europe Fund

     5        0.001        5        0.001   

CPI Capital Partners Asia Pacific Fund

     164        0.039        256        0.039   

Apollo GSS Holding (Cayman), L.P.

     2,134        5.409        —          —     

Other Equity Method Investments:

        

Vantium A/B

     54        6.450        359        6.450   

Vantium C

     5,437        2.071        6,944        2.300   

Vantium D

     1,720        6.345        1,345        6.300   

Portfolio Company Holdings

     —          N/A (4)      2,147        N/A (4) 

Other

     39        —          —          —     
  

 

 

     

 

 

   

Total Other Investments

   $ 421,231        $ 305,343     
  

 

 

     

 

 

   

 

(1) Amounts are as of June 30, 2012.
(2) Amounts are as of September 30, 2011.
(3) Investment value includes the fair value of RSUs granted to the Company as of the grant date. These amounts are not considered in the percentage of ownership until the RSUs are vested, at which point the RSUs are converted to common stock and delivered to the Company.
(4) Ownership percentages are not presented for these equity method investments in our portfolio companies as we only present ownership percentages for the funds in which we are the general partner. All equity method investments were sold during the three months ended September 30, 2012.

 

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Table of Contents

As of September 30, 2012 and December 31, 2011 and for the nine months ended September 30, 2012 and 2011, no single equity method investee held by Apollo exceeded 20% of its total consolidated assets or income. As such, Apollo is not required to present summarized income statement information for any of its equity method investees.

Fair Value Measurements

The following table summarizes the valuation of Apollo’s investments in fair value hierarchy levels as of September 30, 2012 and December 31, 2011:

 

    Level I     Level II     Level III     Totals  
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
 

Assets, at fair value:

               

Investment in AAA Investments, L.P.

  $ —        $ —        $ —        $ —        $ 1,534,801      $ 1,480,152      $ 1,534,801      $ 1,480,152   

Investments held by Apollo Senior Loan Fund

    —          —          24,387        23,757        1,856        456        26,243        24,213   

Investments in HFA and Other

    —          —          —          —          42,967        47,757        42,967        47,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ —        $ 24,387      $ 23,757      $ 1,579,624      $ 1,528,365      $ 1,604,011      $ 1,552,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Level I     Level II     Level III     Totals  
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
 

Liabilities, at fair value:

               

Interest rate swap agreements

  $ —        $ —        $ —        $ 3,843      $ —        $ —        $ —        $ 3,843   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ —        $ —          3,843      $ —        $ —        $ —          3,843   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There was a transfer of investments from Level III into Level II as well as a transfer from Level II into Level III relating to investments held by the Apollo Senior Loan Fund during the three and nine months ended September 30, 2012, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. There were no transfers between Level I, II or III during the three and nine months ended September 30, 2011 relating to assets and liabilities, at fair value, noted in the tables above.

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

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Balance, Beginning of Period

   $ 1,516,899      $ 1,810,577      $ 1,480,152      $ 1,637,091   

Purchases

     —          125        —          432   

Distributions

     (50     (1,522     (101,845     (29,522

Change in unrealized gains (losses), net

     17,952        (337,051     156,494        (135,872
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,534,801      $ 1,472,129      $ 1,534,801      $ 1,472,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Balance, Beginning of Period

   $ 87,839      $ 72,498      $ 47,757      $ —     

Acquisition of consolidated fund

     —          —          46,148        —     

Purchases

     915        370        4,873        54,876   

Deconsolidation(1)

     (48,037     —          (48,037     —     

Change in unrealized gains (losses), net

     2,250        (34,596     (7,774     (14,535

Expenses incurred

     —          —          —          (2,069
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 42,967      $ 38,272      $ 42,967      $ 38,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During the third quarter of 2012, the Company deconsolidated GSS Holding (Cayman), L.P., which was consolidated by the Company during the second quarter of 2012.

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.

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

 

     For the Three Months Ended
September 30, 2012
     For the Nine Months Ended
September 30, 2012
 

Balance, Beginning of Period

   $ —         $ 456   

Purchases of investments

     496         496   

Sale of investments

     —           (461

Realized gains

     7         16   

Change in unrealized losses

     —           (6

Transfers out of Level III

     —           (481

Transfers into Level III

     1,353         1,836   
  

 

 

    

 

 

 

Balance, End of Period

   $ 1,856       $ 1,856   
  

 

 

    

 

 

 

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

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

 

     Private Equity  
     September 30, 2012     December 31, 2011  
           % of
Investment
of AAA
          % of
Investment
of AAA
 

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

        

Comparable company and industry multiples

   $ 529,288        32.7   $ 749,374        44.6

Discounted cash flow models

     674,891        41.7        643,031        38.4   

Listed quotes

     199,290        12.3        139,833        8.3   

Broker quotes

     237,629        14.7        179,621        10.7   

Other net liabilities(1)

     (22,569     (1.4     (33,330     (2.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

     1,618,529        100.0     1,678,529        100.0
    

 

 

     

 

 

 

Other net liabilities(2)

     (83,728       (198,377  
  

 

 

     

 

 

   

Total Net Assets

   $ 1,534,801        $ 1,480,152     
  

 

 

     

 

 

   

 

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(1) Balances include other assets and liabilities of certain funds in which AAA Investments has invested. Other assets and liabilities at the fund level primarily include cash and cash equivalents, broker receivables and payables and amounts due to and from affiliates. Carrying values approximate fair value for other assets and liabilities, and accordingly, extended valuation procedures are not required.
(2) Balances include other assets, liabilities and general partner interests of AAA Investments and are primarily comprised of $305.3 million and $402.5 million in long-term debt offset by cash and cash equivalents at the September 30, 2012 and December 31, 2011 balance sheet dates, respectively. Carrying values approximate fair value for other assets and liabilities and, accordingly, extended valuation procedures are not required.

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

5. 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.

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

Consolidated Variable Interest Entities

In accordance with the methodology described in note 2, Apollo has twenty-nine consolidated VIEs as of September 30, 2012, of which six were consolidated in connection with the Company’s October 2011 acquisition of Gulf Stream Asset Management, LLC (“Gulf Stream”) and fifteen were consolidated in connection with the Company’s April 2012 acquisition of Stone Tower. Refer to note 3 for further discussion of the Stone Tower acquisition.

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.

 

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

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

Fair Value Measurements

The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of September 30, 2012 and December 31, 2011:

 

     Level I      Level II      Level III      Totals  
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
 

Investments, at fair value

   $ 194       $ —         $ 11,002,938       $ 3,055,357       $ 1,087,540       $ 246,609       $ 12,090,672       $ 3,301,966   
     Level I      Level II      Level III      Totals  
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
 

Liabilities, at fair value

   $ —         $ —         $ —         $ —         $ 11,291,860       $ 3,189,837       $ 11,291,860       $ 3,189,837   

Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs, while the Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2. All Level II 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.

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

The following table summarizes the fair value transfers between Level I and Level II:

 

     Three Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2012
 

Transfers from Level II into Level I(1)

   $ —         $ 164   

 

(1) Transfers into Level I represents those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset.

 

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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 September 30, 2012. The disclosure below excludes Level III Investments, at fair value as of September 30, 2012, for which the determination of fair value is based on broker quotes:

 

     Fair Value at
September 30,
2012
    

Valuation Techniques

   Unobservable Inputs    Ranges    Weighted
Average
 

Financial Assets:

              

Bank Debt Term Loans

     49,127       Discounted Cash Flow – Comparable Yields    Discount Rates    9.0%-15.4%      13.1

Stocks

     11,506       Market Comparable Companies    Comparable Multiples    6.5x-6.5x      6.5x   
  

 

 

             

Total

     60,633               
  

 

 

             

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 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
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Balance, Beginning of Period

   $ 997,966      $ 272,991      $ 246,609      $ 170,369   

Acquisition of VIEs

     —          —          1,482,057        —     

Elimination of investments attributable to consolidated VIEs

     (7,360     —          (67,124     —     

Purchases of investments

     375,165        85,764        812,831        571,279   

Sale of investments

     (313,650     (18,135     (1,288,663     (98,724

Net realized (losses) gains

     (20,342     111        (19,150     1,945   

Net unrealized gains (losses)

     1,224        (9,443     3,439        (6,753

Transfers out of Level III and into Level II

     (309,843     (274,795     (656,273     (673,776

Transfers into Level III and out of Level II

     364,380        17,669        573,814        109,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 1,087,540      $ 74,162      $ 1,087,540      $ 74,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 5,305      $ (2,337   $ 3,083      $ (1,886
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Balance, Beginning of Period

   $ 11,232,660      $ 1,174,568      $ 3,189,837      $ 1,127,180   

Acquisition of VIEs (see note 3)

     —          —          7,317,144        —     

Elimination of equity investments attributable to consolidated VIEs

     (7,412     1        (67,956     5   

Additions

     —          —          929,532        454,356   

Repayments

     (187,453     —          (433,587     (412,057

Net realized gains on debt

     —          —          —          (41,819

Net unrealized losses (gains) on debt

     254,065        (37,643     356,890        9,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 11,291,860      $ 1,136,926      $ 11,291,860      $ 1,136,926   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 250,255      $ (37,643   $ 340,278      $ (35,966
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities of Consolidated Variable Interest Entities

The following table presents losses from investment activities of the consolidated VIEs for the three and nine months ended September 30, 2012 and 2011, respectively:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net unrealized gains (losses) from investment activities

   $ 130,921      $ (45,446   $ 182,919      $ (20,256

Net realized gains (losses) from investment activities

     8,268        38        22,902        (12,581
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) from investment activities

     139,189        (45,408     205,821        (32,837
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (losses) gains from debt

     (254,065     37,643        (356,890     (9,261

Net realized gains from debt

     —          —          —          41,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (losses) gains from debt

     (254,065     37,643        (356,890     32,558   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other income

     178,528        14,831        395,388        39,779   

Other expenses

     (109,127     (11,826     (274,232     (39,541
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Losses from Investment Activities of Consolidated VIEs

   $ (45,475   $ (4,760   $ (29,913   $ (41
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Senior Secured Notes and Subordinated Notes—Included within liabilities of consolidated VIEs debt, at fair value are amounts due to third-party institutions with respect to the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of September 30, 2012 and December 31, 2011:

 

     September 30, 2012      December 31, 2011  
     Principal
Outstanding
     Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years
     Principal
Outstanding
     Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years
 

Senior Secured Notes(2)(3)

   $ 11,048,698         1.27     7.3       $ 3,121,126         1.35     8.9   

Subordinated Notes(2)(3)

     1,022,404         N/A (1)      7.8         416,275         N/A (1)      8.8   
  

 

 

         

 

 

      
   $ 12,071,102            $ 3,537,401        
  

 

 

         

 

 

      

 

(1) The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs.
(2) The fair value of Senior Secured and Subordinated Notes as of September 30, 2012 and December 31, 2011 was $11,292 million and $3,190 million, respectively.
(3) The debt at fair value of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another. As of September 30, 2012 and December 31, 2011, the fair value of the consolidated VIE assets was $14,048 million and $3,533 million, respectively. This collateral consisted of cash and cash equivalents, investments as fair value and other assets.

The following table summarizes the quantitative inputs and assumptions used for Liabilities, at fair value categorized as Level III in the fair value hierarchy as of September 30, 2012. The disclosure below excludes Level III Liabilities, at fair value as of September 30, 2012, for which the determination of fair value is based on broker quotes:

 

     As of
September 30, 2012
     Fair Value      Valuation
Technique
   Unobservable Input    Ranges

Subordinated Notes

   $ 196,024       Discounted Cash
Flow
   Discount Rate    17.0%–17.0%
         Default Rate    1.5%–4.0%
         Recovery Rate    80.0%–80.0%

Senior Secured Notes

   $ 2,036,344       Discounted Cash
Flow
   Discount Rate    2.26%–2.66%
         Default Rate    2.0%–2.0%
         Recovery Rate    64.0%–64.0%

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 decrease 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 a similar subordinated and senior secured notes with similar risks.

The consolidated VIEs have elected the fair value option to value the term loans and notes payable. The general partner uses its discretion and judgment in considering and appraising relevant factors in determining valuation of these loans. As of September 30, 2012, the debt, at fair value is classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the debt, at fair value, 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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The consolidated VIEs’ debt obligations contain various customary loan covenants. As of September 30, 2012, the Company was not aware of any instances of noncompliance with any of the covenants.

Variable Interest Entities Which are Not Consolidated

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

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

 

     September 30, 2012  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

   $ 14,029,504      $ (39,870   $ 7,211   

Credit

     3,078,633        (192,459     16,643   

Real Estate

     1,697,262        (1,263,823     —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 18,805,399 (1)    $ (1,496,152 )(2)    $ 23,854 (3) 
  

 

 

   

 

 

   

 

 

 

 

(1) Consists of $229,025 in cash, $18,158,473 in investments and $417,901 in receivables.
(2) Represents $1,489,543 in debt and other payables, $3,815 in securities sold, not purchased, and $2,794 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, 2011  
     Total Assets     Total Liabilities     Apollo Exposure  

Private Equity

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

Credit

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

Real Estate

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

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

 

 

(1) Consists of $383,017 in cash, $16,507,142 in investments and $480,947 in receivables.
(2) Represents $2,874,394 in debt and other payables, $86,102 in securities sold, not purchased, and $32,424 in capital withdrawals payable.
(3) Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest.

 

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At September 30, 2012, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P. and AutumnLeaf, L.P. At September 30, 2012, the aggregate amount of such investments was $60.5 million. The Company’s ownership interest in AAA was 2.63% at September 30, 2012.

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

6. CARRIED INTEREST RECEIVABLE

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

 

     September 30,
2012
     December 31,
2011
 

Private equity

   $ 1,169,295       $ 672,952   

Credit

     452,181         195,630   

Real estate

     6,460         —     
  

 

 

    

 

 

 

Total Carried Interest Receivable

   $ 1,627,936       $ 868,582   
  

 

 

    

 

 

 

The table below provides a roll-forward of the carried interest receivable balance for the nine months ended September 30, 2012:

 

     Private Equity     Credit     Real Estate     Total  

Carried interest receivable, January 1, 2012

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

Change in fair value of funds/subadvisory income(1)

     889,214        351,235        10,738        1,251,187   

Stone Tower acquisition (see note 3)

     —          36,097        —          36,097   

Fund cash distributions to the Company

     (392,871     (130,781     (4,278     (527,930
  

 

 

   

 

 

   

 

 

   

 

 

 

Carried Interest Receivable, September 30, 2012(2)

   $ 1,169,295      $ 452,181      $ 6,460      $ 1,627,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During the nine months ended September 30, 2012, the Company recorded a $94.9 million increase in the general partner obligation to return previously distributed carried interest income or fees relating to Fund VI and reversal of $14.2 million of the general partner obligation to return previously distributed carried interest income with respect to SOMA. Additionally, with respect to the Company’s real estate business, the Company receives carried interest income from a subadvisory agreement.
(2) As of September 30, 2012, the Company had a general partner obligation to return previously distributed carried interest income of $170.2 million and $3.9 million relating to Fund VI and SOMA, respectively. The general partner obligation is recognized based upon a hypothetical liquidation of the fund as of September 30, 2012. The actual determination and any required payment of a general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund.

The timing of the payment of carried interest due to the general partner or investment manager varies depending on the terms of the applicable fund agreements. Generally, carried interest with respect to the private equity funds is payable and is distributed to the fund’s general partner upon realization of an investment if the fund’s cumulative returns are in excess of the preferred return. For most credit funds, carried interest is payable based on realizations after the end of the relevant fund’s fiscal year or fiscal quarter, subject to high watermark provisions.

 

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7. OTHER LIABILITIES

Other liabilities consist of the following:

 

     September 30,
2012
     December 31,
2011
 

Deferred taxes

   $ 15,592       $ 2,774   

Deferred rent

     15,020         14,798   

Deferred payment related to acquisition

     6,914         3,858   

Unsettled trades and redemption payable

     3,984         2,902   

Interest rate swap agreements

     —           3,843   

Other

     8,270         4,875   
  

 

 

    

 

 

 

Total Other Liabilities

   $ 49,780       $ 33,050   
  

 

 

    

 

 

 

Interest Rate Swap Agreements—The principal financial instruments used for cash flow hedging purposes are interest rate swaps. Apollo entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively converted a portion of the Company’s variable rate debt under the AMH Credit Agreement (discussed in note 9) to a fixed rate, without exchanging the notional principal amounts. Apollo entered into an interest rate swap agreement whereby Apollo received floating rate payments in exchange for fixed rate payments based on 5.175%, on the notional amount of $167.0 million, effectively converting a portion of its floating rate borrowings to a fixed rate. The interest rate swap expired in May 2012. Apollo had hedged only the risk related to changes in the benchmark interest rate (three month LIBOR). As of December 31, 2011, the Company has recorded a liability of $3.8 million to recognize the fair value of this derivative.

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

8. INCOME TAXES

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

The Company’s (provision) benefit for income taxes totaled $(21.9) million and $19.8 million for the three months ended September 30, 2012 and 2011, respectively and $(47.1) million and $7.5 million for the nine months ended September 30, 2012 and 2011, respectively. The Company’s effective tax rate was approximately 10.0% and 1.1% for the three months ended September 30, 2012 and 2011, respectively and 1.9% and 0.5% for the nine months ended September 30, 2012 and 2011, respectively.

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

 

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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 September 30, 2012, Apollo and its predecessor entities’ U.S. federal, state, local and foreign income tax returns for the years 2009 through 2011 are open under the normal statute of limitations and therefore subject to examination.

9. DEBT

Debt consists of the following:

 

     September 30, 2012     December 31, 2011  
     Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
    Outstanding
Balance
     Annualized
Weighted
Average
Interest Rate
 

AMH Credit Agreement

   $ 728,273         5.20 %(1)    $ 728,273         5.39 %(1) 

CIT secured loan agreement

     9,713         3.48     10,243         3.39
  

 

 

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