Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
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Gulf Stream Asset Management, LLC: | | | | |
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| Audited Consolidated Statement of Financial Condition of Gulf Stream Asset Management, LLC as of December 31, 2010, and the Consolidated Statements of Income, Changes in Equity and Cash Flows for the year ended December 31, 2010 | | | F-3 | |
F-1
Independent Auditors’ Report
The Members of
Gulf Stream Asset Management LLC:
We have audited the accompanying consolidated statement of financial condition of Gulf Stream Asset Management, LLC as of December 31, 2010, and the related consolidated statement of income, changes in equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulf Stream Asset Management LLC as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board accounting guidance that addresses the consolidation of variable interest entities effective January 1, 2010.
/s/ KPMG LLP
October 4, 2011
F-2
GULF STREAM ASSET MANAGEMENT LLC
Consolidated Statement of Financial Condition
December 31, 2010
(dollars in thousands)
| | | | |
Assets: | | | | |
Cash | | $ | 482 | |
Furniture, equipment and leasehold improvements, net | | | 126 | |
Asset management fees receivable | | | 498 | |
Other assets | | | 76 | |
Assets held in Consolidated Funds: | | | | |
Restricted cash | | | 104,240 | |
Investments, at fair value | | | 2,214,441 | |
Accrued interest on loans | | | 6,903 | |
Due from brokers | | | 12,128 | |
| | | | |
Total assets | | $ | 2,338,894 | |
| | | | |
Liabilities and Equity | | | | |
Liabilities: | | | | |
Compensation payable | | $ | 2,220 | |
Accounts payable and other accrued expenses | | | 34 | |
Loan payable | | | 1,500 | |
Interest payable | | | 2 | |
Guaranteed amount payable to former member | | | 120 | |
Amount payable to retired member | | | 7,471 | |
Liabilities of Consolidated Funds: | | | | |
Due to note holders, at fair value | | | 2,016,269 | |
Accrued interest on notes | | | 2,250 | |
Accounts payable and other accrued expenses | | | 490 | |
Due to brokers | | | 49,927 | |
| | | | |
Total liabilities | | $ | 2,080,283 | |
| | | | |
Commitments and contingencies: (Note 9) | | | | |
Equity: | | | | |
Gulf Stream Asset Management – Members’ Equity (Deficit) | | | | |
Members’ capital contributions (distributions) | | $ | (13,899 | ) |
Accumulated earnings | | | 5,242 | |
| | | | |
Total members’ equity (deficit) | | | (8,657 | ) |
Equity attributable to Consolidated Funds | | | 267,268 | |
| | | | |
Total equity | | | 258,611 | |
| | | | |
Total liabilities and equity | | $ | 2,338,894 | |
| | | | |
See accompanying notes to consolidated financial statements.
F-3
GULF STREAM ASSET MANAGEMENT LLC
Consolidated Statement of Income
Year ended December 31, 2010
(dollars in thousands)
| | | | |
Revenues: | | | | |
Asset management fees | | $ | 5,759 | |
Consolidated Funds: | | | | |
Interest income | | | 95,650 | |
Interest expense | | | 63,652 | |
| | | | |
Net interest income of Consolidated Funds | | | 31,998 | |
| | | | |
Total net revenues | | | 37,757 | |
| | | | |
Expenses: | | | | |
Compensation and benefits | | | 11,219 | |
General and administrative | | | 1,457 | |
Interest expense | | | 167 | |
Other operating expenses of Consolidated Funds | | | 3,069 | |
| | | | |
Total expenses | | | 15,912 | |
| | | | |
Other income (expense) and gain (loss) | | | | |
Net loss on investments and due to note holders at fair value | | | (11,082 | ) |
Loss on accretion of imputed interest – amount payable to retired member | | | (789 | ) |
Gain on prepayment of guaranteed amounts payable to former members | | | 808 | |
Other income | | | 42 | |
| | | | |
Total other income (expense) and gain (loss) | | | (11,021 | ) |
| | | | |
Net Income | | | 10,824 | |
Less: Net income attributable to Consolidated Funds | | | (2,449 | ) |
| | | | |
Net Income Attributable to Members | | $ | 8,375 | |
| | | | |
See accompanying notes to consolidated financial statements.
F-4
GULF STREAM ASSET MANAGEMENT LLC
Consolidated Statement of Changes in Equity
For the year ended December 31, 2010
(dollars in thousands)
| | | | | | | | | | | | | | | | |
| | | Gulf Stream Asset Management LLC
Members | | | | | | | |
| | | Members’ Capital
Contributions
(Distributions) | | | Accumulated
Earnings (Deficit) | | | Equity
Attributable to
Consolidated
Funds | | | Total Equity
(Deficit) | |
Equity (Deficit) at December 31, 2009 | | $ | (5,064 | ) | | $ | (2,092 | ) | | $ | — | | | $ | (7,156 | ) |
Transition adjustment relating to consolidation of Consolidated Funds | | | — | | | | — | | | | 264,819 | | | | 264,819 | |
Net income attributable to Consolidated Funds | | | — | | | | — | | | | 2,449 | | | | 2,449 | |
Net income attributable to members | | | — | | | | 8,375 | | | | — | | | | 8,375 | |
Redemption of retired member | | | (8,835 | ) | | | — | | | | — | | | | (8,835 | ) |
Distributions to members | | | — | | | | (1,041 | ) | | | — | | | | (1,041 | ) |
| | | | | | | | | | | | | | | | |
Equity (Deficit) at December 31, 2010 | | $ | (13,899 | ) | | $ | 5,242 | | | $ | 267,268 | | | $ | 258,611 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-5
GULF STREAM ASSET MANAGEMENT LLC
Consolidated Statement of Cash Flows
Year ended December 31, 2010
(dollars in thousands)
| | | | |
Cash Flows from Operating Activities | | | | |
Net Income | | $ | 10,824 | |
Adjustments to reconcile Net Income to Net Cash provided by Operating Activities | | | | |
Depreciation | | | 58 | |
Accretion of imputed interest on amount payable to retired member | | | 789 | |
Cash flow due to changes in operating assets and liabilities | | | | |
Asset management fees receivable | | | (355 | ) |
Other assets | | | 47 | |
Compensation payable | | | (2,432 | ) |
Accounts payable and other accrued expenses | | | (49 | ) |
Interest payable | | | (48 | ) |
Consolidated Funds: | | | | |
Net gain on investments | | | (124,717 | ) |
Unrealized loss on due to note holders | | | 135,799 | |
Purchases of investments | | | (1,226,835 | ) |
Sales of investments and repayments | | | 1,195,521 | |
Net increase in restricted cash | | | (18,991 | ) |
Change in accrued interest on loans and due from brokers | | | 3,108 | |
Change in accrued interest on notes, due to brokers, accounts payable and other accrued expenses | | | 29,666 | |
| | | | |
Net Cash provided by Operating Activities | | | 2,385 | |
| | | | |
Cash Flows from Financing Activities | | | | |
Principal repayments on loan | | | (1,200 | ) |
Payment of guaranteed amounts payable to former members | | | (2,976 | ) |
Distributions to members | | | (1,041 | ) |
Payments to retired member | | | (2,153 | ) |
Consolidated Funds: | | | | |
Proceeds from revolving note holders | | | 4,000 | |
| | | | |
Net Cash used in Financing Activities | | | (3,370 | ) |
| | | | |
Net Decrease in Cash | | | (985 | ) |
Cash – Beginning of Period | | | 1,467 | |
| | | | |
Cash – End of Period | | $ | 482 | |
| | | | |
Supplemental Disclosure of Cash Flow Information: | | | | |
Interest paid | | | 216 | |
Interest paid by Consolidated Funds | | | 65,121 | |
Assets and Liabilities of Consolidated Funds as of January 1, 2010 | | | | |
Investments, at fair value | | | 2,058,410 | |
Restricted cash | | | 85,251 | |
Other assets | | | 22,140 | |
Due to note holders at fair value | | | 1,876,469 | |
Other liabilities | | | 24,511 | |
See accompanying notes to consolidated financial statements.
F-6
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
| (1) | BUSINESS, ORGANIZATION AND OPERATIONS |
Gulf Stream Asset Management LLC (“Gulf Stream”) was formed as a limited liability company under the laws of the state of North Carolina on March 5, 2002. Gulf Stream provides asset management services for collateralized loan obligations (“CLOs”), which includes providing management of the underlying collateral of CLOs pursuant to asset management agreements. As of December 31, 2010, Gulf Stream provided collateral management services to ten CLOs with assets with an aggregate par value of approximately $3.3 billion.
In February 2009, Gulf Stream became a registered investment adviser with the Securities and Exchange Commission under the Investment Advisors Act of 1940.
Although Gulf Stream does not have any economic interest in the CLOs other than its asset management fees and related asset management fee receivables, the consolidated financial statements include the accounts of six CLOs that are deemed variable interest entities (“VIEs”) for which Gulf Stream is deemed to be the primary beneficiary (with such CLOs being referred to as the “Consolidated Funds”). Gulf Stream and the Consolidated Funds are collectively referred to as the “Company”. See Note 2, “Summary of Significant Accounting Policies –Principles of Consolidation and Variable Interest Entities”.
| (2) | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation –These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company adopted the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles in the preparation of the consolidated financial statements in conformity with GAAP effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC is an aggregation of previously issued authoritative GAAP guidance organized by subject area in one comprehensive set. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).
Principles of Consolidation – The consolidated financial statements include the financial statements of Gulf Stream and the Consolidated Funds, which are VIEs for which Gulf Stream is deemed the primary beneficiary. As of January 1, 2010, Gulf Stream has consolidated six of the ten CLOs to which it provides asset management services. All intercompany balances and transactions, including asset management fees earned by Gulf Stream from the Consolidated Funds, and the related asset management receivables, have been eliminated upon consolidation.
Variable Interest Entities – The consolidated financial statements reflect the Company’s adoption of ASC Topic 810,Consolidation (“ASC Topic 810”) effective January 1, 2010. ASC Topic 810 modified the previous analysis required to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in entities that are VIEs. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company is required to consolidate the VIE if it is determined to be the primary beneficiary.
Gulf Stream’s current involvement with VIEs is as the asset manager for the CLOs. Gulf Stream performed an analysis to determine whether it is the primary beneficiary under ASC Topic 810. The analysis indicated that in its role as asset manager, Gulf Stream has the power to direct the activities of each CLO. Although, Gulf
F-7
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
Stream does not own any of the residual or equity tranches of the CLOs, the analysis indicates that for the Consolidated Funds, Gulf Stream’s variable interests in the CLOs (the senior, subordinated and incentive fees) could receive benefits in the CLOs that could potentially be significant to the VIE. As a result, for these CLOs, the analysis concluded that Gulf Stream is the primary beneficiary of such CLOs, and such Consolidated Funds are required to be consolidated in the Company’s consolidated financial statements.
Although the Consolidated Funds are consolidated as of December 31, 2010, the assets of such CLOs are not available to Gulf Stream for its general operations or in satisfaction of its debt obligations. Gulf Stream does not have any rights to or ownership of these assets. The assets of the CLOs are restricted solely to satisfy the liabilities and obligations of the CLOs. All of the assets of each CLO are held in custody by the custodian and trustee for the respective CLO fund. Similarly, Gulf Stream does not have any duty to settle the liabilities and obligations of any of the CLOs it manages, and has no contractual duty to fund or provide any financial support to any such CLO.
The assets and liabilities of the Consolidated Funds are reflected on the consolidated statement of financial condition as “Assets held in” and “Liabilities of” the Consolidated Funds, respectively, and the difference between the fair value of the assets and liabilities of the Consolidated Funds is reflected as “Equity attributable to Consolidated Funds”. With respect to the Consolidated Funds, management fees and management fees receivable were eliminated in consolidation. The net change in the fair value of the Consolidated Funds’ assets and liabilities has been recorded as net income (loss) attributable to the Consolidated Funds in the consolidated statement of income, and as an adjustment to equity attributable to Consolidated Funds in the Company’s consolidated statement of changes in equity.
As of December 31, 2010, the consolidation of the Consolidated Funds increased assets by $2.338 billion, liabilities by $2.069 billion (net of asset management fees payable to Gulf Stream of $1.508 million that were eliminated in consolidation), and equity attributable to Consolidated Funds by $0.267 billion to the Company’s consolidated statement of financial condition.
Unconsolidated Funds – As of December 31, 2010, Gulf Stream had variable interests in four additional CLOs that were not consolidated since Gulf Stream was not the primary beneficiary of those VIEs (the “Unconsolidated Funds”). Gulf Stream’s maximum exposure to loss associated with the Unconsolidated Funds was limited to asset management fee receivables totaling $0.498 million from the Unconsolidated Funds as of December 31, 2010.
Fair Value Measurements and Presentation –GAAP establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
The Company has elected the fair value option for the assets and liabilities of the Consolidated Funds upon the adoption of ASC Topic 810. The reason for fair value option election was to create operational and financial reporting efficiencies with respect of the Consolidated Funds. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. The fair value of the investments and amounts due note holders (including the Residual Tranches – see Note 3, “CLOs and the Consolidated Funds”) of the Consolidated Funds are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. In some cases the Company may use internally developed models.
F-8
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
A description of the fair value hierarchy as well as its application to the Company’s portfolios can be found in Note 4, Fair Value Measurements.
Cash – Cash represents cash on hand and cash held in banks.
Restricted Cash in Consolidated Funds –Restricted cash in Consolidated Funds represents cash and cash equivalents held by the respective Consolidated Fund for reinvestment and payment of interest and, if applicable, principal, to note holders.
Due to/from Brokers – The investment activity of the Consolidated Funds is recorded on a trade date basis. Unsettled trades at the end of the period will create receivables/payables to the counterparties which have been recorded as due from brokers or due to brokers on the Company’s consolidated statement of financial condition.
Asset Management Fees – Gulf Stream earns asset management fees for services provided under asset management agreements. The agreements specify that Gulf Stream is eligible to earn a senior base management fee, a subordinated management fee and a contingent (incentive) management fee. Both the subordinated management fees and the contingent management fees are contingent upon the economic performance of the respective CLO transactions. Accordingly, Gulf Stream may not earn subordinated or contingent management fees should the underlying collateral in the CLO transactions deteriorate in performance. In accordance with ASC Topic 605 –Revenue Recognition,Gulf Stream’s policy with respect to recognition of asset management fees is that such fees are recognized only when all performance contingencies have been met.
During the year ended December 31, 2010, Gulf Stream recognized aggregate asset management fees of $21.157 million, including $15.398 million of asset management fees relating to the Consolidated Funds and $5.759 million of asset management fees relating to the Unconsolidated Funds. Included in the aggregate asset management fees are $5.169 million of subordinated asset management fees that relate to prior periods that were not earned until the year ended December 31, 2010 ($3.665 million relating the Consolidated Funds and $1.504 million relating to the Unconsolidated Funds). The asset management fees (and related receivables/payables) relating to the Consolidated Funds have been eliminated in consolidation.
Income Taxes – Gulf Stream – Gulf Stream is treated as a partnership subject to the provisions of Chapter 1, Subchapter K of the Internal Revenue Code of 1986, as amended. Generally, partnerships are not subject to entity-level federal or state income taxation and, as such, Gulf Stream is not required to provide for income taxes. Gulf Stream’s taxable income primarily becomes taxable to its respective members due to the treatment of Gulf Stream as a nontaxable flow-through partnership entity for federal income tax purposes.
Income Taxes – Consolidated Funds – The Consolidated Funds are foreign entities that are exempt from entity level U.S. federal and state income taxes. Income taxes, if any, are the responsibility of the holders of the respective entity’s Residual Tranche. Consequently, the Company’s consolidated statements of income do not include a provision for income tax expense (benefit) related to the net income of the Consolidated Funds.
F-9
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
Use of Estimates – The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are primarily for valuation of investments and of the liabilities for the Consolidated Funds, and with respect to Gulf Stream, for the estimated obligations of Gulf Stream relating to the Redemption Agreement (See Note 6, “Borrowings and Amounts Owed to Former Members – Amount Owed to Retired Member”), and the Deferred Subordinated Fee Plan (See Note 7, “Deferred Subordinated Fee Compensation Plan – Deferred Subordinated Asset Management Fee Incentive Plan”). Although these estimates are based upon best available information, actual results could be materially different from these estimates.
| (3) | CLOs AND THE CONSOLIDATED FUNDS |
Collateralized Loan Obligations – The term CLO generally refers to a special purpose vehicle that owns a diversified portfolio of loan investments and issues various tranches of debt and equity securities to finance the initial purchase of those investments. The investments purchased by a CLO are governed by extensive investment guidelines, including limits on the CLO’s exposure to any single industry or issuer and limits on the ratings of the CLO’s assets.
In order to finance the acquisition of its portfolio, CLOs typically issue multiple classes of notes with varying ratings and levels of credit support primarily provided through subordination of subordinated classes. The notes receive payments of interest at defined rates (generally at a specified spread to LIBOR) and principal pursuant to the provisions of the applicable indenture, including the waterfall for payments of interest and principal received from the CLO’s investments. The most senior class of notes, generally rated AAA/Aaa, typically represent the majority of the total liabilities issued by the CLO. This senior tranche of notes is issued with an interest rate at a specified spread over LIBOR and generally has the first claim on the earnings and principal of the CLO’s assets after payment of certain fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are typically issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically entitled to payments of interest and principal after payments are made on the more senior tranche(s) of notes. The most junior notes are generally issued in either the form of preference shares or subordinated notes and are commonly referred to as the CLO’s “equity” tranche (the “Residual Tranche(s)”). The Residual Tranches are not issued with a specified interest rate, but are entitled to receive any residual cash flow from the CLO’s investments after all other classes of liabilities are paid interest and principal pursuant to the applicable waterfalls.
CLOs generally appoint an asset manager to manage their investments. In exchange for their services, CLO managers typically receive three types of fees: senior management fees, subordinated fees and performance or incentive/contingent fees. CLOs also generally appoint a trustee and collateral administrator, who is responsible for holding the CLO’s investments, collecting investment income and distributing that income in accordance with the waterfall. U.S. Bank National Association, a national banking association, acts as trustee and collateral administrator for all of the CLOs for which Gulf Stream acts as asset manager.
Under the provisions of the asset management agreements with the CLOs for which it is the asset manager, Gulf Stream can be removed as the asset manager at any time at the direction of the holders of at least 66-2/3% of each class of notes (or in certain cases only the senior most class) outstanding and at least 66-2/3% of the Residual Tranches, voting separately by class. In addition, Gulf Stream can be removed as the collateral manager for the CLOs for “cause” as defined in the respective collateral management agreement, which
F-10
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
generally includes uncured material violations or breaches of contract by Gulf Stream, certain events of bankruptcy or insolvency of Gulf Stream, or the occurrence of a “Key Person Event” as defined in the respective asset management agreement.
The Consolidated Funds – The Company’s consolidated financial statements include the financial results of the six CLOs that are the Consolidated Funds. Gulf Stream does not own any of the Residual Tranches in the Consolidated Funds. Although 100% of the assets, liabilities and equity of the Consolidated Funds have been consolidated, Gulf Stream’s maximum exposure to loss related to the Consolidated Funds is limited to asset management fee receivables from the six CLOs equal to $1.508 million at December 31, 2010, which were eliminated in consolidation.
For the year ended December 31, 2010, the net income of $2.449 million recorded in our consolidated statement of income attributable to the Consolidated Funds was not indicative of the net cash flow distributions that Gulf Stream received from the Consolidated Funds in the form of asset management fees. During the year ended December 31, 2010, Gulf Stream earned asset management fees of $15.398 million from the Consolidated Funds, which were eliminated in consolidation.
The assets of each of the Consolidated Funds are held solely as collateral to satisfy the obligations of the respective CLOs. The assets of one CLO are not available to satisfy the obligations of another CLO. Gulf Stream has no right to the benefits from, nor does it bear the risks associated with, the assets held by each CLO beyond the asset management fees generated from the Consolidated Fund. Similarly, the liabilities of the Consolidated Funds are not Gulf Stream’s liabilities and the investors in the Consolidated Funds have no recourse to Gulf Stream.
Gulf Stream has elected the fair value option for all investments and amount due note holders (including Residual Tranches) of the Consolidated Funds. Since the Residual Tranches of the Consolidated Funds have stated maturities, they are recorded as liabilities in the Company’s consolidated statement of financial condition. In cases where the Residual Tranche is in the form of preference shares, such preference shares are also recorded as liabilities in the Company’s consolidated statement of financial condition since redemption is required upon liquidation or termination of the CLO and not upon liquidation or termination of Gulf Stream.
FAIR VALUE MEASUREMENTS
FASB Topic 820,Fair Value Measurements and Disclosures (“ASC Topic 820”), establishes a single definition for fair value and a framework for measuring fair value. A fair value measurement represents the price at which a transaction would occur between market participants at the measurement date.
In accordance with ASC Topic 820, the Company has categorized its financial instruments, based upon the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level I) and the lowest priority to unobservable inputs (Level III). If the inputs used to measure the financial instruments fall within different levels of hierarchy, the categorization is based upon the lowest level input that is significant to the fair value measurement of the instrument. The categorization is as follows:
Level I – Quoted prices are available in active markets for identical investments as of the reporting date. Examples include listed equities.
F-11
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
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 which are generally included in this category include corporate bonds and loans that are considered by management to be liquid. These investments exhibit higher levels of liquid market observability as compared to Level III investment.
Level III – Pricing inputs are unobservable for the investment and includes situations where there is limited, if any, active market activity for the investment, or in the case of loans, are deemed by management to be less liquid than Level II loans. This category also includes less liquid and restricted equity securities and certain investments in tranches of CLOs which are not considered to be liquid. The inputs into determination of fair value require significant management judgment or estimation.
The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy described above based on their classification in the consolidated statement of financial condition. Management has maintained a consistent application of its valuation policy and process. From time to time, management may make adjustments to the valuation methodologies described below under certain market conditions. Management maintains a consistent policy and process for identifying when and how such adjustments should be made. To the extent that a significant fair value adjustment is made by management, the valuation classification would generally be considered Level III within the fair value hierarchy.
Investments of the Consolidated Funds
Investments of the Consolidated Funds held at fair value primarily consists of loans and corporate bonds and are generally priced at a composite of bid dealer quotes or based on the composite price of a different tranche of the same security if dealer quotes are unavailable for the specific tranche owned. As of December 31, 2010, the Company classified investments of the Consolidated Funds priced in this manner as Level II within the fair value hierarchy if three or more quotes were available. Where an insufficient number of such quotes are available, investments priced in this manner are classified as Level III within the fair value hierarchy.
As the result of the diversification (by industry and individual credits) of the portfolios of each of the Consolidated Funds, the Company believes that there are no significant concentrations of credit risk within the investment portfolios of the Consolidated Funds.
Due to Note Holders of the Consolidated Funds
Due to note holders of the Consolidated Funds includes both the senior note and Residual Tranches of the CLO’s capital structure. The fair value for the liabilities issued by the Consolidated Funds is generally determined based upon quotes from dealers that trade such securities. Liabilities issued by the Consolidated Funds valued in this manner are classified as Level III within the fair value hierarchy due to the limited observable market inputs for such securities. If any of the liabilities of the Consolidated Funds are not able to be priced in this manner, the liability is valued internally using internally developed models that utilize composite or other comparable market data that management believes would be used by market participants, and may include unobservable market inputs. Liabilities of the Consolidated Funds valued in this manner are also classified as Level III within the fair value hierarchy.
F-12
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
Summary of Fair Values for Consolidated Funds
As noted earlier, effective with the consolidation of the Consolidated Funds, the Company elected to adopt the fair value option for its financial instruments, including loans, corporate bonds, CLO securities and equities, and also for the amounts due to note holders of the Consolidated Funds (including the Residual Tranches).
The following table summarizes the financial instruments for which the fair value option has been elected as December 31, 2010 (dollars in thousands).
| | | | | | | | |
| | | | | | Fair Value
Measurement as of
December 31, 2010 | |
Assets held in Consolidated Funds: | | | | | | | | |
Corporate Loans | | | | | | $ | 2,116,808 | |
Corporate bonds & CLOs | | | | | | | 92,844 | |
Other | | | | | | | 4,789 | |
| | | | | | | | |
Total investments, at fair value | | | | | | $ | 2,214,441 | |
| | | | | | | | |
Related information: | | | | | | | | |
Aggregate principal amount of loans, corporate bonds and CLOs | | $ | 2,284,033 | | | | | |
Aggregate principal amount in excess of fair value | | | 74,382 | | | | | |
Aggregate principal amount of loans more than 90 days past due and non-accrual loans | | | 24,141 | | | | | |
Aggregate fair value of loans more than 90 days past due and non-accrual loans | | | 18,131 | | | | | |
Aggregate principal amount of loans more than 90 days past due and non-accrual loans in excess of fair value for such loans | | | 6,010 | | | | | |
Liabilities of Consolidated Funds: | | | | | | | | |
Due to note holders(1) | | | | | | $ | 2,016,269 | |
| | | | | | | | |
Related information: | | | | | | | | |
Aggregate principal amount of notes | | $ | 2,354,492 | | | | | |
| | (1) | The notes mature between 2019 and 2021. The senior and mezzanine classes of notes (see Note 3 – “CLOs and the Consolidated Funds –Collateralized Loan Obligations”) bear interest rates at spreads over the applicable LIBOR rate for such period. The Residual Tranches are not issued with a specified interest rate, but are entitled to receive any residual cash flow from the CLO’s investments after all other classes of liabilities are paid interest and principal pursuant to the applicable waterfalls. |
F-13
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
The following table presents the Consolidated Funds’ financial instruments carried at fair value on a recurring basis, by caption by level within the ASC Topic 820 valuation fair value hierarchy as of December 31, 2010 (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurement as of December 31, 2010 | |
| | | Level I | | | Level II | | | Level III | | | Total | |
Investments: | | | | | | | | | | | | | | | | |
Loans | | $ | — | | | $ | 1,524,254 | | | $ | 592,554 | | | $ | 2,116,808 | |
Corporate bonds & CLOs | | | — | | | | 70,905 | | | | 21,939 | | | | 92,844 | |
Other | | | 2,077 | | | | 2,025 | | | | 687 | | | | 4,789 | |
| | | | | | | | | | | | | | | | |
Total investments | | $ | 2,077 | | | $ | 1,597,184 | | | $ | 615,180 | | | $ | 2,214,441 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Due to Note Holders | | $ | — | | | $ | — | | | $ | 2,016,269 | | | $ | 2,016,269 | |
| | | | | | | | | | | | | | | | |
Change in Level III recurring fair value measurements
The following table includes a roll forward of the statement of financial condition amounts for the year ended December 31, 2010 (including the change in fair value) for investments classified within Level III of the valuation hierarchy for the Consolidated Funds (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | Bank Loans | | | Corporate
Debt & CLOs | | | Other | | | Total | |
Balance as of January 1, 2010 | | $ | 628,174 | | | $ | 16,108 | | | $ | 2,961 | | | $ | 647,243 | |
Net purchases & sales(1) | | | (19,433 | ) | | | 982 | | | | (1,589 | ) | | | (20,040 | ) |
Realized gain/loss and change in unrealized appreciation/depreciation(2) | | | 37,814 | | | | 4,849 | | | | (644 | ) | | | 42,019 | |
Net transfers in and/or out of Level III(3) | | | (54,001 | ) | | | — | | | | (41 | ) | | | (54,042 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2010 | | $ | 592,554 | | | $ | 21,939 | | | $ | 687 | | | $ | 615,180 | |
| | | | | | | | | | | | | | | | |
Net change in unrealized appreciation/depreciation from investments still held as of December 31, 2010 | | $ | 22,242 | | | $ | 4,828 | | | $ | 317 | | | $ | 27,387 | |
| | (1) | Net purchases/sales include paid-in-kind interest, principal redemptions and securities received from restructures. |
| | (2) | Net realized and unrealized gains (losses) are reported within the net loss on investments and due to note holders in the Company’s consolidated statement of income. |
| | (3) | Represents transfers of investments with fair value of $96.382 million as of January 1, 2010 from Level II designation at January 1, 2010 to Level III designation at December 31, 2010, and transfers of investments with fair value of $150.424 million as of January 1, 2010 from Level III designation at January 1, 2010 to Level II designation at December 31, 2010. See above “Investments of the Consolidated Funds” for discussion of application of fair value hierarchy for the investments. |
F-14
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
The following table includes a roll forward of the balance sheet amounts for the year ended December 31, 2010 (including the change in fair value) for due to note holders classified within Level III of the valuation hierarchy for the Consolidated Funds (dollars in thousands):
| | | | |
| | | Due to Note
Holders of
Consolidated Funds | |
Balance as of January 1, 2010 | | $ | 1,876,470 | |
Unrealized loss on due to note holders(1) | | | 135,799 | |
Proceeds from revolving note holders | | | 4,000 | |
Repayment of notes | | | — | |
Net transfers in and/or out of Level III | | | — | |
| | | | |
Balance as of December 31, 2010 | | $ | 2,016,269 | |
| | | | |
| | (1) | Unrealized loss is reported within the net gain (loss) on investments and due to note holders in the Company’s consolidated statement of income. |
| (5) | FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Furniture, equipment, and leasehold improvement at cost, consists of the following at December 31, 2010 (dollars in thousands):
| | | | |
Furniture and equipment | | $ | 230 | |
Office equipment | | | 16 | |
Communication and computer equipment | | | 155 | |
Leasehold improvements | | | 147 | |
| | | | |
| | $ | 548 | |
Less accumulated depreciation | | | (422 | ) |
| | | | |
Furniture, equipment and leasehold improvements, net | | $ | 126 | |
| | | | |
Fixed assets are capitalized and depreciated on a straight-line basis using estimated useful lives, which generally range from five to seven years. Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the term of the lease.
Depreciation expense for furniture, equipment and leasehold improvements amounted to $0.058 million for the year ended December 31, 2010, and was included within general and administrative expenses in the Company’s consolidated statement of income.
F-15
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
| (6) | BORROWINGS AND AMOUNTS OWED TO FORMER MEMBERS |
Loan Payable
As of December 31, 2010, loans payable was $1.500 million, which approximates fair value, representing the balance due to Lehman Commercial Paper Inc. (“LCPI”) pursuant to a loan agreement dated March 7, 2008 with LCPI, as amended (the “LCPI Loan”). The terms of the LCPI Loan provide for an interest rate of 3-month Eurodollar plus 6.0%, a maturity date of December 31, 2011, and quarterly amortization payments of $0.300 million through September 30, 2011, and $0.600 million due at maturity. Gulf Stream made principal payments of $1.200 million on the LCPI Loan during the year ended December 31, 2010.
Guaranteed Amounts Payable to Former Member
As of December 31, 2010, Guaranteed Amount Payable to Former Member was $0.120 million.
Amount Owed to Retired Member
In March 2010, Gulf Stream entered into a redemption agreement (the “Redemption Agreement”) with a former member (the “Retired Member”) pursuant to which Gulf Stream redeemed the Retired Member’s equity interest in Gulf Stream effective as of January 1, 2010. As consideration for such redemption, Gulf Stream agreed to make quarterly distributions to the Retired Member based upon a percentage of the asset management fees received by Gulf Stream from its 10 CLOs until such CLOs matured, with deduction for the Retired Member’s share of certain liabilities (such payments being the “Distribution Payments”).
Although there is no stated principal amount of the Distribution Payments, and the Distribution Payments are non-interest bearing, when the Redemption Agreement was executed in March 2010, Gulf Stream recognized the establishment of a liability for the present value of the amount payable to the Retired Member and a reduction in members’ capital contributions (distributions) for $8.835 million. The amount of the liability is based upon the present value of Gulf Stream’s estimated future payments to the Retired Member pursuant to the Redemption Agreement. During the year ended December 31, 2010, aggregate Distribution Payments of $2.153 million were paid to the Retired Member pursuant to the Redemption Agreement and $0.789 million was accounted for as interest accretion, resulting in an amount payable to the Retired Member of $7.471 million as of December 31, 2010.
| (7) | DEFERRED SUBORDINATED FEE COMPENSATION PLAN |
As noted in Note 2 –“Summary of Significant Accounting Policies –Asset Management Fees”, in order for Gulf Stream to earn subordinated and contingent asset management fees it is necessary for the specific CLO to pass various performance contingency tests. In cases where the tests are not passed and subordinated fees are not earned, such amounts may be earned or received in future periods if the performance contingency tests are passed. Although these deferred fees may be earned and received by Gulf Stream and recognized as revenues in future periods when and if the related CLO transaction(s) that relate to such deferred fees meet their respective performance contingency tests, there is no assurance that Gulf Stream will earn or receive any of these deferred fees in future periods – as a result, these deferred fees have not been recognized as revenue and are not accounted for as asset management fee receivables as of December 31, 2010.
F-16
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
As of December 31, 2010, Gulf Stream had aggregate unearned and deferred subordinated asset management fees of $3.148 million, all with respect to the Unconsolidated Funds. As of December 31, 2009, Gulf Stream had aggregate unearned and deferred subordinated asset management fees of $7.142 million, including $3.477 million with respect to the Unconsolidated Funds and $3.665 million with respect to the Consolidated Funds. As noted above, due to the contingent nature of the fees, these amounts were not recorded as asset management fee receivables as of December 31, 2010.
Deferred Subordinated Asset Management Fee Incentive Plan – Gulf Stream adopted the Deferred Subordinated Asset Management Fee Incentive Plan in September 2009 (the “Plan”). The Plan provides that when certain unearned and deferred subordinated fees specifically identified as “Vintage Pools” are earned and received by Gulf Stream, amounts will be allocated between Gulf Stream’s employees and members. Pursuant to the Plan, if and when the subordinated fees are earned and received by Gulf Stream, individual employees will be paid 57% of these subordinated fees, up to a specified dollar amount. Each employee’s right to receive these payments is subject to vesting over a two-year period. Under the vesting provisions, an employee would forfeit a portion of amounts payable under the Plan if they terminate employment with Gulf Stream and subsequently provide services to one of Gulf Stream’s competitors.
Although the Company’s obligation to pay compensation under the Plan is contingent upon Gulf Stream recognizing the related subordinated fees, Gulf Stream recognized compensation expense for the Plan when the Plan was established in 2009 based upon the present value of estimated future compensation payments under the Plan, with the related liability being revalued on a periodic basis. As of December 31, 2009, Vintage Pools aggregating $7.142 million were identified for the Plan, and the liability for compensation payments pursuant to the Plan was estimated by management to be $3.646 million.
During the year ended December 31, 2010, an additional Vintage Pool of $1.195 million was established. As of December 31, 2010, there was $2.406 million of remaining Vintage Pools under the Plan, and the present value of the remaining compensation payments pursuant to Plan was estimated by management to be $0.990 million. During the year ended December 31, 2010, Gulf Stream recognized an incremental $0.725 million of compensation expense, which is included in compensation and benefits expenses in the consolidated statement of income. During the year ended December 31, 2010, Gulf Stream paid $3.381 million in compensation out to Plan participants.
Gulf Stream provides medical, short-term and long term disability, and life insurance benefits to each employee through employer sponsored policies obtained from third party insurers at a cost for these benefits of $0.134 million for the year ended December 31, 2010. In addition, during 2010, Gulf Stream expensed $0.162 million related to its 401(K) matching plan. Such amounts are included in compensation and benefits expenses in the consolidated statement of income.
F-17
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
| (9) | COMMITMENTS AND CONTINGENCIES |
Gulf Stream leases office space under an operating lease scheduled to expire on February 28, 2013. Gulf Stream has two successive options to renew the lease for a term of 5 years each at a fair market rental as of the date the renewal term is to commence. A summary of minimum future lease payments under this lease is as follows (dollars in thousands):
| | | | |
Year ending December 31: | | | |
2011 | | $ | 255 | |
2012 | | | 263 | |
2013 (through February 28th) | | | 44 | |
| | | | |
Total | | $ | 562 | |
| | | | |
Rent expense during the year ended December 31, 2010 was $0.250 million, which is included within general and administrative expenses in the consolidated statement of income.
Members’ Equity – Gulf Stream operates pursuant to its Fifth Amended and Restated Operating Agreement which is effective as of January 1, 2010 (the “Fifth Agreement”). Membership Interests of Gulf Stream are divided into two (2) classes: the Class A Membership Interests and the Class B Membership Interests. The Members have no liability for obligations of Gulf Stream beyond their investment in Gulf Stream. As of December 31, 2010, the Class A and Class B Membership Interests represented approximately 51.8% and 48.2%, respectively, of the aggregate membership interests. The Class A Members have the voting rights, including the ability to select members of Gulf Stream’s Board of Directors. The Class B Membership Interests are owned by Gulf Stream Asset Management Class B LLC (“GSAM Class B LLC”). The Class A and Class B Members (the “Members”) have equal rights to share in distributions made by Gulf Stream and allocations of Gulf Stream’s profits, losses, gains, deductions and credits. All salary and bonus payments to Class A and GSAM Class B LLC Members are classified as compensation and benefit expense on the Company’s consolidated statement of income. Certain of Gulf Stream’s senior management have employment contracts that provide for such individual to redeem their membership interest with Gulf Stream at a formulaic price (equal to 7 times EBITDA for Gulf Stream for the 3 years immediately preceding the year of termination) which would be paid over a three year period in the event of certain events that Gulf Stream believes are within its control. In addition, in the event of the death or disability of such individuals, either Gulf Stream or such individual may redeem such member’s interest based upon an agreed upon appraised valuation of such interest. Gulf Stream maintains life insurance on certain of such individuals to provide liquidity in such event.
Equity Attributable to Consolidated Funds– As noted in “Note 2 – Summary of Significant Accounting Policies –Variable Interest Entities”, effective January 1, 2010 Gulf Stream consolidated six CLOs and recorded a cumulative effect adjustment to equity attributable to Consolidated Funds on the Company’s consolidated statement of financial condition equal to the difference between the fair value of the Consolidated Funds’ assets and the fair market value of their liabilities (including the “equity” class of such transactions). Such amounts are recorded as equity attributable to Consolidated Funds since the applicable CLO note holders, not Gulf Stream, will ultimately receive the benefits or absorb the losses associated with the applicable CLO’s assets and liabilities. Subsequent to adoption, the net change in the fair value of the Consolidated Funds’ assets and liabilities has been recorded as net income (loss) attributable to the Consolidated Funds and as an adjustment to equity attributable to Consolidated Funds.
F-18
GULF STREAM ASSET MANAGEMENT LLC
Notes to Consolidated Financial Statements
As of and for the Year Ended
December 31, 2010
Amendment to the Redemption Agreement
In February 2011, Gulf Stream and the Retired Member completed an Amendment to the Redemption Agreement (the “Amendment”) pursuant to which Gulf Stream paid the Retired Member an amount equal to $8.25 million less previously paid Distribution Payments relating to the 3rd and 4th quarters of 2010 – resulting in a net amount of $7.157 million (the “Accelerated Payment”) in exchange for terminating Gulf Stream’s obligations to make further Distribution Payments and any rights the Retired Member had pursuant to the Redemption Agreement. A Distribution Payment of $0.441 million was also paid to the Retired Member in February 2011.
Issuance of Subordinated Note
In February 2011 Gulf Stream issued a Subordinated Note to lenders that were all members of Gulf Stream or GSAM Class B LLC for $7.150 million in connection with the payment of the Accelerated Payment. The Subordinated Note is subordinated to the LCPI Loan and is senior to the members’ equity. The Subordinated Note requires quarterly principal amortization payments generally equal to 20% of the asset management fees from the Existing CLOs less 50% of the principal payments scheduled to be made on the LCPI Loan. The maturity date is October 31, 2013. The interest rate is initially 15% per annum, and will increase to 25% per annum after the April 30, 2012 payment date.
Sale of Gulf Stream to Apollo Global Management
On July 8, 2011 Apollo Global Management, LLC (NYSE:APO) and its subsidiaries announced that it has agreed to acquire Gulf Stream. The acquisition is subject to various closing conditions, and is expected to close during the 4th quarter of 2011.
Evaluation of Subsequent Events
Gulf Stream has evaluated the effects of subsequent events that have occurred subsequent to the period ended December 31, 2010 and through October 3, 2011, the date at which these consolidated financial statements were issued. The Company has determined that there have been no additional material events that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
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F-19
