EFTA00284269.pdf

Fortress Value Recovery Fund I LLC Consolidated Financial Statements December 31, 2010 EFTA00284269 Fortress Value Recovery Fund I LLC Index December 31, 2010 Page(s) Report of Independent Auditors Consolidated Financial Statements Consolidated Statement of Assets, Liabilities and Members' Equity 2 Consolidated Condensed Schedule ofInvestments 3-6 Consolidated Statement of Operations 7 Consolidated Statement of Changes in Members' Equity 8 Consolidated Statement of Cash Flows 9 Notes to Consolidated Financial Statements 10-28 EFTA00284270  _as pwc Report of Independent Auditors To the Members of Fortress Value Recovery Fund I LLC: In our opinion, the accompanying consolidated statement of assets, liabilities and members' equity, including the consolidated condensed schedule of investments, and the related consolidated statements of operations, of changes in members' equity and of cash flows present fairly, in all material respects, the financial position of Fortress Value Recovery Fund I LLC and its subsidiaries (collectively, the "fund") at December 31, 2010, and the results of their operations, the changes in their members' equity and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of these consolidated financial statements 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by the Fund's management, and evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, management continues an orderly disposition of the Fund's portfolio. April 21, 2011 PricewaterhouseCoo • aterhouseCoopers Center, 300 Madison Avenue, New York, NY 10017 T. F: www.pwc.com/us EFTA00284271 Fortress Value Recovery Fund I LLC Consolidated Statement of Assets, Liabilities and Members' Equity December 31, 2010 On U.S Dollars) Assets Cash and cash equivalents (including $5.2 million held by collateralized loan obligation) $ 34,701,651 Restricted cash (Note 5) 2,913,692 Investments owned, at fair value (cost $981,248,848) 488,485,147 Unrealized appreciation on derivative contracts (upfront fees $103,125) 413,607 Due from brokers 1,894,432 Interest receivable 1,482,619 Other assets 2,847,965 Total assets $ 532,739,113 Liabilities and Members' Equity Due to affiliates 37,133,188 Interest payable 117,960 Notes payable, at par 102,524,690 Withdrawals payable 82,053,572 Management fees payable 246,128 Taxes payable 448,194 Accrued expenses and other liabilities 14,855,803 Total liabilities 237,379,535 Members' equity Controlling interest 294,228,801 Non-controlling interest 1,130,777 Total liabilities and members' equity 532,739,113 The accompanying notes are an integral part of these consolidated financial statements. 2 EFTA00284272 Fortress Value Recovery Fund I LLC Consolidated Condensed Schedule of Investments December 31, 2010 (m U.S. Do/lars) Par Amount! % of Cost / Members' Quantity Description Equity Fair Value investments Owned Asset Backed Securities - North America (primarily United States) Financials 4.07% $ 11,980.04? Health Care 0.00% 11,389 Home Entity 0.01% 27,421 Total (cost 314497,937) 4.08% 12,018.863 Asset Backed Securities Total (cost 314,497,937) 4.08% 12,018863 Corporate and Distressed Debt - Europe Consume: Goods 0.00% 402 Total (cost 31,019) 0.00% 402 Corporate and Distressed Debt - North America (primarily United States) Transpottation 0.08% 240,000 Utilities 0.01% 15,400 Total (toss 51,261,505) 0.09% 255,400 Corporate and Distressed Debt Total (cost 51,262,524) 0.09% 255,802 Corporate and Real Estate Loans - Asia Real Estate 1.40% 4,109,508 Total (cost 36,706,651) 1.40% 4,109808 Corporate and Real Estate Loans -Europe Diversified E 17,736,744 Stepstone Acepisitice S.u.L, TennLoan A, 2313% Due 12/31/2011 5.93% 17,439,035 e 7270,504 Stepstege Acquisitiem S.az.1., Tam Loan B. 2.313%, Due 12/31/2011 2.31% 6,788,782 Other 0.03% 92.103 Total (cost 539,073,099) 8.27% 24,3215920 Corporate and Real Estate Loans- North America (primarily United States) Connunicaticos 2.84% 8,368,631 Consumer Goods 12.38% 36,413,915 Consumer Services 0.19% 546,331 Energy 230% 6,764294 EntaUlnment 3 32864280 CT1 Holdings. LW, Tenn Loan A, Libor + 11.00% Due 05/31/2009 9.72% 28.588,637 3 13,595,468 CT) Holdings, LW, Tenn Loan. Libor + 22.00% Due 08/30/2008 3.15% 9,263,462 $ 18,160,701 TTBO, LLC, Subordinated Los 15.009h Due 10/14/2012 3.01% 8,870337 3 4,078,973 TTBO, LLC, Tam Lan C, Liba + 12.00%, Due 10/14/2012 139% 4,078,973 5 4,336453 TIRO, LLC, Term Loan E, Libor + 410%, Due 10/14/2012 I A7% 4,336,653 $ 14243,750 Club One Casino, Inc.. Term Loan, Prime +7.00%, Due 0222/2012 5.64% 16,605,159 Other 7.21% 21,286855 Industrials 2.57% 7,562,544 Real Estate 2.34% 6,272932 Technology 5 20,6480500 cmsoeco Holding Company, LP, Tam Loan B, Libor + 8.7534, Due 01/23/2013 7.10% 20895898 Total (cod 5416.151.731) 41.33% 180,455227 The accompanying notes are an integral part of these consolidated financial statements. 3 EFTA00284273 Fortress Value Recovery Fund I LLC Consolidated Condensed Schedule of Investments (continued) December 31, 2010 Pa US. Donarp Par Amount % of Cost! Members' Quantity Description Equity Fair Valoe Investments Owned, continued Corporate and Real Estate Loans, continued Corporate and Real Estate Loans - Latin America Ageratum 0.00% $ Real Estate 0.0D% Total (con 55,200,590) 0.00% Corporate and Real Estate Loans Total (cost 5467332,071) 71.00% 208,890655 Option Asia Basic Materiah 0.00% Comma' Goods 0.00% Total (cost 540,034) 0.00% Options Total (cost S40,084) 0.00% Private Equity and Asset Investments - Asia Diversified 1.12% 3,288,064 Energy 0.84% 2,483,444 Finnish 0.21% 627,888 Other 0.02% 67,373 Private Equity Fusel 1.69% 4,946,440 Real Estate 0.64% 1,883,930 Total (cost $26.959,601) 4.52% 13,297339 Private Equity and Asset Investments - Europe Divasified 4,849,236 Stcpstone Acquisition S.a.r.l. 1.73% 5,093230 Other 4.45% 13,072323 Energy 0.02% 67,447 Financiah 1.79% 5,253,344 Real Estate 0.29% 866.174 Total (COO 562,061,910) 8.28% 24,357,723 The accompanying notes are an integral part of these consolidated financial statements. 4 EFTA00284274 Fortress Value Recovery Fund I LLC Consolidated Condensed Schedule of Investments (continued) December 31, 2010 U.S Dollars) Par Amount / % of Cost / Members' Quantity Description Equity Fair Value Investments Owned, continued Private Equity and Asset Investments, continued Private Equity aid Asset Investments - North America (primarily United States) Communications 0.19% $ 571,523 Continuer Goods 0.46% 1,342,461 Consumer Services 0.02% 53,097 Diversified S 52,393,320 Filth Colony Capital, LLC 16.33% 48,059,522 Energy 2.84% 8,348,782 Entertainment 2.58% 7,595,990 Financials S 79.378,952 Cecil Smith Family Survases, L/C 16.28% 47,901,430 S 21,082,203 Law Finance Group, Inc 640% 18,820,720 Other 085% 2,514,988 Home Equity 0.99% 2,905,916 Industrials 3.86% 11,342,718 Other 0.19% 568,633 Private Equity Fund S 36,719,794 Lifesource Funding, LLC 13.41% 39,442,431 Other 0.02% 65,321 Real Estate 9.75% 28,689,000 Technology 0.75% 2,218,199 Transportation 1.09% 3,219,364 Total (cost $377,441,643) 76.01% 223,660,095 Private Equity and Asset Investments - Latin America Financials 0.00% Total (cost $832,356) 0.00% Private Equity and Asset Investments Total (cost $467,295,510) 88.81% 261,314,957 Public Equities - Asia Real Estate 0.03% 89,415 Total (cost 513,892,142) 0.03% 89,415 Public Equities - Europe Financials 0.04% 114.912 Total am $168,342) 0.04% 114,912 Pablie Equities - North America (primarily United States) Consumer Services 0.23% 690,787 Health Care 0.23% 673,678 Total (cost $6,802,690) 0.46% 1,364,465 Public Equities Total (cost $20,863,174) 0.53% 1,568,792 Trade Claims - North America (primarily United States) Financials 0.02% 67,000 Other 0.08% 221,698 Total (cost 5162,719) 0.10% 288,698 Trade Claims Total (cost $162,719) 0.10% 288,698 The accompanying notes are an integral part of these consolidated financial statements. 5 EFTA00284275 Fortress Value Recovery Fund I LLC Consolidated Condensed Schedule of Investments (continued) December 31, 2010 rut U.S. Dollars) Par Amount l % of Cost / Members' Quantity Description Equity Fair Valve Investments Owned, continued Warrants - North America (primarily United Slates) Energy 0.25% $ 732,466 Health Care 0.06% 17O85 Total (cost 5296876) 0.31% 909,251 Warrants Total (cost $296)176) 0.31% 909,251 Convertible Bonds - North America (primarily Wiled States) Health Care 0.00Yo Total (cost $2,754) 0.00% Convertible BOSS Total (cost 52,754) 0.00% Collateralbed Debt Obligations - North America (primarily United Slates) Airlines 0.90% 2,653,671 Diversified 2.09% 6,149,46$ Flourish* (includes CDO issued debt) (2.07%) (6,106,578) Health Care 0.01% 37,988 Home Eqtity 0.17% 503,583 Total (cost $9,595,199) 1.10% 3,238,129 Collateralitd Debt Obligations Total (cost 59,595.199) 1.10% 3,238,129 Investments Owned Total (cost $981,248,848) 166.02% 488,485,147 Derivative Contracts With Short Positions Credit Default Swaps, Indices and Trenches - North America (primarily United States) Diversified 0.14% 413,607 Total (upfront fees 5103325) 0.14% 413,607 Credit Default Soaps, Indicts and Traoches Total (upfront fees $103,125) 0.14% 413,607 Derivative Contracts With Short Positions Total (upfront fees $103,125) 0.14% S 413,607 The accompanying notes are an integral part of these consolidated financial statements. 6 EFTA00284276 Fortress Value Recovery Fund I LLC Consolidated Statement of Operations December 31, 2010 (In U.S. Dollars) Investment income Income Interest S 34,588,564 Other 6285,817 40,874,381 Expenses Interest 21,322,005 Management fees 1,338,827 Tax (Note 2) (2,204,027) Professional fees 3,714,965 Investment related 33,067,548 Investment Manager reimbursement 7,230,278 Original Manager transition 2,269,881 Other 2,570,093 69,309,570 Net investment loss (28,435,189) Net realized loss and change in unrealized loss on investments and derivative contracts Net realized loss on investments and derivative contracts (201,454,638) Net change in unrealized loss on investments and derivative contracts 249,001,350 Net realized loss and change in unrealized loss on investments and derivative contracts 47,546,712 Net increase in members' equity from operations before non-controlling interest 19,111,523 Share of net increase in members' equity attributable to non-controlling interest (418,283) Net increase in members' equity from operations $ 18.693,240 The accompanying notes are an integral part of these consolidated financial statements. 7 EFTA00284277 Fortress Value Recovery Fund I LLC Consolidated Statement of Changes in Members' Equity Year Ended December 31, 2010 Controlling Non-Controlling Interest Interest Total (in U.S. Dollars) Members' equity, December 31, 2009 $ 274,925,375 $ 2,490,277 $ 277,415,652 Contributions 1,000 1,000 Withholding tax distributions (70,291) (70,291) Other 679,477 679,477 Net investment loss (28,435,189) (28,435,189) Net realized loss on investments and derivative contracts (201,454,638) (201,454,638) Net change in unrealized loss on investments and derivative contracts 249,001,350 249,001,350 Share ofnet increase in members' equity attributable to non-controlling interest (418,283) 418,283 Transactions from non-controlling interest (1,777,783) (1,777,783) Members' equity, December 31, 2010 $ 294.228.801 $ 1,130,777 $ 295,359,578 The accompanying notes are an integral part of these consolidated financial statements. 8 EFTA00284278 Fortress Value Recovery Fund I LLC Consolidated Statement of Cash Flows Year Ended December 31, 2010 (in U.S. Dolion) Cash flows from operating activities: Net increase in membere equity from operations before non-controlling interest $ 19,111,523 Net increase in rnembeif equity tut ibutable to nomcontrolIng interest (418,283) Adjustments to reconcile net increase in manbers' equity from operations to net cads and cash equivalents provirkd by operating activities Purchases and drawdowns of investments (37,589,771) Payments to cover investments sold, but not yet purchased (168,760) Proceeds from investments sold and paid down 364.071,971 Net realized kiss on investments 202,728,576 Net change in unrealized loss on investments (249,576,991) Net change in unrealized appreciation on derivative confect; (290,232) Amortization of closing fees 2,503,398) Non•eesh interest from payment in-kind investments (4441,737) Non-centroling interest (1,359,500) (Increases) / decreases in operating assets Restricted cash 1,662,496 Cash collateral pledged 1,451,812 Due from brokers and counterpanes 4,258,181 interest receivable 1,983,980 Other assets 2,969,529 increases / (decreases) in operating liabilities Interest payable (40,088) Management fees payable (286,920) Taxes payable (2,204,027) Accrued expenses and otter liabilities 2,772,294 283,337,415 Not cash and cash equivalents provided by operating activities 302,030,655 Cash flows from financing activities: Contributions 1,000 Withholding tax distributions (70,291) Proceeds from issuance of notes payable 4,051,201 Repayment of notes payable (266,709,001) Payment to affiliates, net (86 84,323) Net cash and cash equivalents used in financing activities (349,111,414) Net decrease in cash and cash equivalents (47,080,7M Cash and cash emsivsiknts Beginning ofyear 81,782,410 find of year $ 34,701,651 Supplemental cash flow information Cash paid during the period for TotemsI $ 21,362,093 Non-cash supplemental Information Interest from payment in-kind investments 4,541,737 The accompanying notes are an integral pan of these consolidated financial statements. 9 EFTA00284279 Fortress Value Recovery Fund I LLC Notes to Consolidated Financial Statements December 31, 2010 1. Organization and Business Fortress Value Recovery Fund I LLC (the "Fund"), formerly known as D.B. Zwim Special Opportunities Fund, L.P. commenced operations on May 1, 2002. Prior to June 1, 2009, D.B. Zwim & Co., L.P. (the "Original Manager"), a Delaware limited partnership, was responsible for making investment decisions on behalf of the Fund. The Original Manager managed other funds and accounts (collectively, the "Other Accounts") with a similar investment objective to that of the Fund and allocated investment opportunities to the Fund and the Other Accounts, including, but not limited to, Fortress Value Recovery Fund I Ltd. ("Offshore Fund"), formerly known as the D.B. Zwirn Special Opportunities Fund, Ltd., Fortress Value Recovery Fund TE 1 LLC ("TE Fund"), formerly known as the D.B. Zwirn Special Opportunities Fund (TE), L.P., and Fortress Value Recovery Fund API LLC ("AP Fund"), formally known as the D.B. Zwirn Asia/Pacific Special Opportunities Fund, L.P. In March 2008, the Original Manager of the Fund began implementing an orderly disposition of the Fund and Offshore Fund portfolios. As of May 31, 2009, the Original Manager ceased to be the investment manager and as of June 1, 2009, Fortress VRF Advisors I LLC (the "Investment Manager"), an affiliate of Fortress Investment Group LLC, was engaged by the Fund as the new investment manager pursuant to the terms of the Investment Management Agreement ("1MA") as a part of an integrated series of transactions to replace the Original Manager. The Investment Manager is continuing to implement the orderly disposition of the Fund's portfolio. Pursuant to such transactions, the Fund and certain Other Accounts purchased certain assets of the Original Manager and agreed to fund directly and indirectly certain expenses of the Original Manager during a transition period through May 31, 2010. The Fund is a limited liability company which operates pursuant to its limited liability operating agreement dated as of June 1, 2009 (the "Agreement"). The managing member is Fortress VRF I LLC. Pursuant to the terms of the revised Offering Memorandum dated as of May 2005 (the "Memorandum"), the following sub-strategies represent the majority of the Fund's intended investment focus: 1) Lending: Corporate, Real Estate; 2) Assets: Commercial and Industrial Assets, Structured Finance, Consumer Assets; 3) Corporate Debt Distressed Debt, Credit Arbitrage, Credit Default Swaps, Trenches and Indices; 4) Public Equity: Event-driven Relative Value, Industry Relative Value, Merger Arbitrage and Strategic Block; and 5) Private Equity: Corporate Private Equity, Real Estate Private Equity, Structured Private Investments/PIPEs. 2. Summary of Significant Accounting Policies Principles of Consolidation The Fund owns all of the preferred shares of Bernard National Loan Investors, Ltd. ("Bernard"), a collateralized loan obligation ("CLO") (see Note 4) which is an exempted limited liability company incorporated in the Cayman Islands. The Fund also owns all of the preferred shares of Woodhaven Drive I, LLC ("Woodhaven"), a collateralized financing facility which is an exempted limited liability company incorporated in the Cayman Islands. The consolidated financial statements include the accounts of the Fund and its consolidated sub sidiaries (collectively, the "Fund"): 10 EFTA00284280 Fortress Value Recovery Fund I LLC Notes to Consolidated Financial Statements (continued) December 31, 2010 Bernard, Woodhaven, and certain Investment Platforms in which the Fund holds a controlling interest (see Note 8). The non-controlling interests in these Investment Platforms held by the various Investment Platform Partners are shown separately. All material intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents At December 31, 2010, the Fund's cash and cash equivalents balance consists of deposits held in banks and short term U.S. Treasury only money market funds. At December 31, 2010, the balance includes $5.2 million of cash held at Bank of America N.A. by Bernard. Such cash is not generally available for use by the Fund other than by Bernard. The Fund maintains cash deposits at amounts which generally exceed the FDIC insurable limits. In order to diversify the institutions holding the Fund's cash, $2 million is held in each of the following short term U.S. Treasury only money market funds at December 31, 2010: Blackrock Liquidity Treasury Trust Fund, Dreyfuss Treasury Prime Cash Management, and Federated U.S. Treasury Cash Reserves. These holdings are considered under Level 1 of the fair value hierarchy as defined by the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820 (See Note 7). Restricted Cash The restricted cash balance of $2.9 million is related to an indemnity trust established for future legal claims against the Original Manager as part of the management transition transaction (see Note 5). The Fund does not have any control over the use of such cash by the trust and there can be no assurance that any residual amounts will be available to be remitted to the Fund upon expiration of the trust. Due from Broken The Fund's due from brokers ba lance consists o f cash balances on deposit with b rokers. At December 31, 2010, the majority of these balances were held with J.P. Morgan. Valuation of Investments Securities that are listed on a national securities exchange and are freely transferable are valued at their closing price on the date of determination on the primary securities exchange on which such securities are listed. Securities which are not listed but are traded over-the-counter ("OTC") and are freely transferable are valued at their closing price as reported by the NASDAQ system. When price quotations are not available from unaffiliated market makers or other financial institutions that regularly trade similar investments, the Investment Manager determines the value of the investments by reviewing information provided by third party agents. Such information may be adjusted by the Investment Manager if a more accurate indication of fair value can be obtained from recent trading activity, or by incorporating other relevant information, such as, current and projected operating performance and expected cash flows, that may not have been reflected in information obtained from external sources. The valuation of investments that are illiquid and those that the Investment Manager believes lack a readily available market value are determined by the Investment Manager based on inputs which may include, but are not limited to, cash flows, discount rates and capitalization, EBITDA 11 EFTA00284281 Fortress Value Recovery Fund I LLC Notes to Consolidated Financial Statements (continued) December 31, 2010 multiples, a comparison of fair values for similar companies, yield to maturity analyses, discounted cash flow models, recent purchase and sales activity, completed or pending third-party transactions in the underlying investment or comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, changes in financial rates or cash flows, illiquidity and/or transferability risk, investment risk and/or potential and other factors the Investment Manager may deem appropriate. The valuations of almost all such investments are reviewed by independent valuation agents. Due to the nature of the Fund's strategy, the Fund's portfolio includes relatively illiquid investments having a greater amount of both market and credit risk than other investments. These investments trade in a limited market and may not be able to be immediately liquidated. Values assigned to these investments may differ from the values that would have been used had a broader market for such investments existed. See also Note 7, Fair Value Measurement. Consolidated Condensed Schedule ofInvestments The asset class, industry and geographical classifications included in the consolidated condensed schedule of investments represent the Investment Manager's belief as to the most meaningful presentation of the classification of the Fund's investments, whether held directly or indirectly through Investment Platforms discussed in Note 8. Investments of the Fund in any one issuer (including certain subsidiaries) or in certain Investment Platforms that exceed, in the aggregate, more than 5% of its members' equity are listed separately in the consolidated condensed schedule of investments. The Fund's investments are concentrated in the asset classes, industries and geographic regions presented in the consolidated condensed schedule of investments. Portfolios of non-performing loans ("NPLs") are reflected in the appropriate industry category under Private Equity and Asset Investments on the consolidated condensed schedule of investments. Foreign Currency Translation Investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar equivalents using year-end spot foreign currency exchange rates as sourced from Bloomberg. Purchases and sales of financial instruments and income and expense items are translated at the rate of exchange on the respective date of such transactions. Realized and unrealized gains and losses resulting from foreign currency changes are reflected in the consolidated statement of operations as a component of net realized loss and change in unrealized loss on investments and derivative contracts. However, in the consolidated statement of cash flows, realized and unrealized gains and losses resulting from foreign currency changes on other assets and liabilities are reflected as a component ofthe respective other asset or liability account. Derecognition of Investments The Fund derecognizes investments (including private investments and investments in or through the Investment Platforms discussed in Note 8) which are fully or partially transferred when it has surrendered control of the transferred investments or a portion thereof, as defined by FASB ASC 860. 12 EFTA00284282 Fortress Value Recovery Fund I LLC Notes to Consolidated Financial Statements (continued) December 31, 2010 The Fund considers the transfer of investments as a sale when the investments have been isolated from the Fund, even in bankruptcy or other receivership, the purchaser has the right to sell the investments transferred and the Fund does not have an option or any obligation to reacquire the investments. Investment Transactions and Related Income Purchases and sales of financial instruments, and their related income and expense, are recorded on a trade-date basis or, with respect to private investments, the date when the terms of the transaction are fully negotiated and known. Corresponding gains and losses are recognized in the consolidated statement of operations as a component of net realized loss and change in unrealized loss on investments and derivative contracts. Realized gains and losses are recognized on a first-in-first- out basis. Interest income on the debt of issuers who are currently paying in full is accrued and recognized. For those issuers who are not currently paying in full, interest is not accrued and is recognized only when estimable and collectible. Interest derived from payment-in-kind securities is accrued as an increase to the cost and to the fair value of the related investments when it is a compounding payment-in-kind, or as interest receivable when it is a simple payment-in-kind. Dividend income on investments owned is recognized on the ex-dividend date. Interest income on balances held in the Fund's brokerage and bank accounts is recognized on an accrual basis. When the Fund holds an interest in a loan, it may receive various fees during the life of the investment. Such fees include, but are not limited to, commitment, undrawn, administration, prepayment, maintenance and amendment fees which are paid to the Fund on an ongoing basis. Amendment fees (including break up fees) are recognized upon completion of the amendments or waivers, generally when such fees are receivable. Such fees are included in other income on the consolidated statement of operations. Origination fees received at the closing of a loan (i.e., closing fees) and certain amendment fees received during the life of a loan are amortized into interest income over the remaining life of the loan. Income Taxes The Fund itself is not subject to U.S. Federal income taxes. Accordingly, no provision for federal, state and local income taxes has been made in the accompanying consolidated financial statements, as the individual members arc responsible for their proportionate share of the Fund's taxable income. Interest, dividends and other income realized by the Fund from non-U.S. sources and capital gains realized on the sale of investments and net unrealized gain on investments of non-U.S. issuers may be subject to withholding and other taxes levied by the jurisdiction in which the income is sourced. Certain activities of the Fund may cause the Fund to be subject to New York City Unincorporated Business Tax at a rate of 4% of adjusted net taxable income. At December 31, 2010, due to investment losses, there were no amounts subject to such tax. In addition, certain activities may cause members in the Fund to be subject to state taxes. As a result, the Fund is required to withhold state taxes on behalf of certain members on the amount of state source income. An allocable portion of this state tax withholding of $70,291 has been shown as a pro rata reduction in the capital account of each member subject to the withholding. 13 EFTA00284283 Fortress Value Recovery Fund I LLC Notes to Consolidated Financial Statements (continued) December 31, 2010 The Investment Manager intends to conduct the business of the Fund so that the Fund's activities do not create a taxable presence in any of the foreign jurisdictions in which the Investment Manager has offices. In accordance with the authoritative guidance on accounting for and disclosure of uncertainty in tax positions included in FASB ASC 740, the Fund is required to determine whether a tax position is "more likely than not" to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the "more likely than not" threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. For the year ended December 31, 2010, taxes of this type amount to income of approximately $2.2 million, primarily due to the reversal of certain tax provisions. These amounts are a component of tax expense on the consolidated statement of operations and are reflected as a reduction in taxes payable on the consolidated statement of assets, liabilities and members' equity. This balance is comprised entirely of non-U.S. deferred tax. The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it realizes income. In the normal course of business, the Fund is subject to examination by federal, state, local and foreign jurisdictions, where applicable. As of December 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2004 through 2010 (with limited exceptions). Withdrawals and Distributions As described in its letter to investors dated March 7, 2008, the Original Manager elected in the first quarter of 2008 to dissolve the Fund and suspend withdrawals. Withdrawals fixed as of prior periods that have not been paid as of December 31, 2010 continue to be reflected as withdrawals payable at December 31, 2010. Of the aggregate $82 million in withdrawals payable reflected in the consolidated statement of assets, liabilities and members' equity at December 31, 2010, $45 million is currently the subject of a dispute which has been submitted to arbitration by the Fund and is therefore subject to change as further discussed below. Prior to the Investment Manager's being engaged to manage the Fund, there had been a dispute with a Fund investor which alleged it had made a withdrawal request for its capital. The Fund and the Original Manager disputed the validity of any such withdrawal request. The dispute was settled pursuant to a settlement agreement in April 2009, prior to the Investment Manager's being engaged to manage the Fund, and a corresponding withdrawal payable in the amount of $45 million was reflected in the financial statements of the Fund. In January 2010, the investor purported to terminate the settlement agreement, and the Fund was unable to reach agreement with the investor regarding amounts the investor may be entitled to receive. The F