10-K 1 cifc1231201210-k1.htm 10-K CIFC 12.31.2012 10-K (1)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
 
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: 1-32551
CIFC CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-2008622
 (I.R.S. Employer Identification No.)
250 Park Avenue, 4th Floor, New York, NY
 (Address of principal executive offices)
 
10177
 (Zip code)
Registrant's telephone number, including area code: 212-624-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each class:
 
Name of Exchange on Which Registered:
Common Stock, par value $0.001 per share
 
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 ý    No o
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ý
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 o
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of the outstanding common equity held by non-affiliates of the registrant was $44.6 million based on the number of shares held by non-affiliates of the registrant as of June 30, 2012, and based on the reported last sale price of the common stock on June 30, 2012, which is the last business day of the registrant's most recently completed second fiscal quarter.
There were 20,705,658 shares of the registrant's common stock outstanding as of March 22, 2013.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement for the registrant's 2013 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III.
 




CIFC CORP.
2012 ANNUAL REPORT ON FORM 10-K
INDEX

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



CERTAIN DEFINITIONS
Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. as "CIFC," to CIFC and its subsidiaries as "we," "us," "our," "our company" or "the Company," to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as "CIFCAM," to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as "DCM," to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as "CypressTree," to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as "CNCIM" and to CIFCAM, DCM, CypressTree and CNCIM together as the "Advisers."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this annual report on Form 10-K (the "Annual Report"), and the information incorporated by reference into this Annual Report are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include, but are not limited to, statements regarding future results or expectations. Forward-looking statements can be identified by forward-looking language, including words such as "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "projects," "will" and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made, various operating assumptions and predictions as to future facts and conditions, which may be difficult to accurately make and involve the assessment of events beyond our control. Caution must be exercised in relying on forward-looking statements. Our actual results may differ materially from the forward-looking statements contained in this Annual Report. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov.

The forward-looking statements contained in this Annual Report are made as of the date hereof, and we do not undertake any obligation to update any forward-looking statement to reflect subsequent events, new information or circumstances arising after the date of this Annual Report. All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referenced above. In addition, it is our policy generally not to make any specific projections as to future earnings, and we do not endorse any projections regarding future performance that may be made by third parties.

PART I.
Item 1.    Business
Overview
CIFC Corp. (“CIFC” and, together with its subsidiaries, “we” or "us" ) is a Delaware corporation that specializes in managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments.
We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located across the world. Our existing investment products are primarily collateralized loan obligations ("CLOs") and also include collateralized debt obligations ("CDOs") and other investment vehicles. We also make investments in certain investment products we manage and SSCLs that we warehouse to launch new investment products.
The investment advisory fees paid to us by these investment products is our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of management fees based on the amount of assets held in the investment product and, in some cases, incentive fees based on the returns generated for certain investors. We also earn net investment income and incur gains/losses from our investments in CLOs, warehouses and other investment products we manage.
History of Operations
On April 13, 2011 (the “Merger Closing Date”), we completed a merger (the “Merger”) with Commercial Industrial Finance Corp. (“Legacy CIFC”), an asset manager focused primarily on management of corporate credit investments for third party investors. Following the Merger, we focused on our core asset management business and exited non-core activities and assets. We have and expect to continue to devote capital to initiate and support our asset management business. The Merger made CIFC one of the largest independent CLO managers globally.

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The Merger was primarily effected as a stock transaction with the result that we are more strongly capitalized as we acquired Legacy CIFC, including the rights to manage the Legacy CIFC CLO management contracts, without significantly increasing our long-term debt (see Item 8—"Financial Statements and Supplementary Data—Note 4" for additional details on the Merger). In acquiring Legacy CIFC, we also acquired CypressTree, a credit asset manager that Legacy CIFC acquired in December 2010, and CypressTree’s CLO management contracts. We now have four asset management subsidiaries: CIFC Asset Management LLC ("CIFCAM"), Columbus Nova Credit Investments Management LLC (“CNCIM”), CypressTree Investment Management, LLC ("CypressTree") and Deerfield Capital Management LLC ("DCM"). All are operated jointly on Legacy CIFC’s investment management platform.
 
Following the Merger, management re-focused on our core business as a fee-based corporate credit asset manager for third party investors. In a process that began in 2011, and most of which was completed during 2012, we exited non-core activities and assets, through the sales of (1) our residential mortgage-backed securities (“RMBS”) portfolio in 2011, (2) our rights to manage our sole European CLO, Gillespie CLO PLC (“Gillespie”) in January 2012, and (3) our investments in (and our rights to manage) the DFR Middle Market CLO Ltd. (“DFR MM CLO”) in February 2012. While the Gillespie management contract did relate to the core business, we do not have a presence in Europe at this time. Our investments in and rights to manage the DFR MM CLO likewise were related to our core expertise in corporate credit obligations, but management decided to sell these interests in the DFR MM CLO because (i) the DFR MM CLO did not generate contractual investment advisory fee revenues, (ii) the risk profile of the loans underlying our investment in the DFR MM CLO were not deemed suitable, and (iii) the investment tied up a substantial amount of capital.

As we focus on growing our core asset management business, we utilize and expect to continue to utilize our cash to seed new investment vehicles generating investment advisory fee revenues, including warehouses to facilitate issuing new CLOs or other investment products. Additionally, we may also utilize our liquidity to acquire SSCLs directly to warehouse such SSCLs until they can be included as collateral for new CLOs and other funds we manage. We may also utilize cash and other sources of liquidity to consummate further strategic business combinations. During 2012, we issued three CLOs and entered into a five year strategic relationship with General Electric Capital Corporation's (“GE Capital”) Bank Loan Group. The Company believes that this strategic relationship could provide CIFC with significant opportunities to create new CIFC-managed investment products, including those involving GE Capital loan originations and/or vehicles for which GE Capital provides financing. Further, partnering with GE Capital positions the Company for unique opportunities given GE Capital's strength as a leading corporate lender coupled with CIFC's loan asset management platform. In addition, as part of this transaction, we were assigned the role as manager of four “Navigator” CLOs (see Item 8—"Financial Statements and Supplementary Data—Note 4").

CNCIM Acquisition—During 2010, we acquired CNCIM (the "CNCIM Acquisition"), an investment manager with four CLOs under management from Bounty Investments, LLC ("Bounty"). In connection with the acquisition,we issued 4,545,455 shares of common stock to Bounty and Bounty purchased, for cash, $25.0 million in aggregate principal amount of our then newly-issued senior subordinated convertible notes (the "Convertible Notes"), convertible into 4,132,231 shares of common stock. Bounty subsequently transferred the Convertibles Notes to DFR Holdings, LLC ("DFR Holdings"). In addition, in 2010, we also restructured our long-term debt by (i) replacing our $120.0 million of trust preferred securities with $120.0 million of junior subordinated notes ("Junior Subordinated Notes"), all of which contain significantly reduced covenant requirements, and $95.0 million of which are subject to the significantly lower interest rate of 1.0% through April 30, 2015, and (ii) discharging $73.9 million of our senior secured notes at a significant discount, in part with the cash from the issuance of the Convertible Notes.

Investment Approach

Our investment processes are overseen by our Investment Research, Portfolio Management and Trading teams. Once a potential investment has been identified, our Investment Research team is responsible for the initial credit underwriting and the ongoing monitoring of the investments. Each new underwriting opportunity is first screened and subsequently approved for inclusion in our portfolio by the firm's Investment Committee, which is comprised of senior investment professionals from both the Investment Research and Portfolio Management teams, which helps shape the due diligence and analytical framework the relevant investment analyst pursues in completing the underwriting process. When evaluating the suitability of an investment and subject to an accounts individual investment objectives and parameters, we typically:

employ underwriting discipline, based on fundamental credit analysis which assesses each borrower's debt servicing capability, fundamental value, as well as the magnitude and prospective volatility of the “value cushion” (a CIFC term for junior capital supporting each investment), identify and select investment candidates whose value cushion is robust and durable;

utilize internally-developed risk ratings based on individual obligor assessment without undue reliance on credit rating agencies;

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diversify investment portfolios by avoiding concentration imbalances, on-going active portfolio management and utilization of proprietary tools; and

continuously re-assess and adjust portfolios by identifying relative value differentials, market inefficiencies and technical imbalances.

When problem loans are identified, we will decide whether to sell or hold and regularly re-evaluate with the intention to maximize our recovery. Our credit and portfolio management function is responsible for working with our investment professionals from the date on which an investment is made until the time it is exited in order to ensure that strategic and operational objectives are accomplished and that the performance of the investment is closely monitored.

Core Asset Management Activities

We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located across the world. Our existing investment products are primarily CLOs and also include CDOs and other investment vehicles. For additional information on the structure of a CLO see below—Collateralized Loan Obligations for further details. These investment products are special purpose entities that pool the capital of multiple investors. The investment advisory fees paid to us by these investment products are our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of senior and subordinated management fees based on the amount of assets held in the investment product and, in certain cases, include incentive fees based on the returns generated for certain investors.
 
Investment advisory fees differ from product to product, but in general for CLOs, the primary investment product we manage, consist of the following:
 
Senior management fees (payable before the interest payable on the debt securities issued by such CLOs) that generally range from 12.5 to 20 basis points annually on the principal balance of the underlying collateral of such CLOs.

Subordinated management fees (payable after the interest payable on the debt securities issued by such CLOs and certain other expenses) that generally range from 15 to 35 basis points annually on the principal balance of the underlying collateral of such CLOs.

Incentive fees vary based on the terms of each CLO. Certain CLOs do not pay incentive fees at all or have only an incentive fee that is paid to the manager thereof after certain investors’ returns exceed an internal rate of return hurdle. Upon achievement of this hurdle, the manager is paid a percentage (generally 20%) of residual cash flows in excess of this hurdle. A limited number of CLOs also have an incentive fee which is paid to the manager thereof after investors’ annual cash on cash returns exceed a hurdle. Upon achievement of this hurdle, the manager is paid an additional fee (generally 15 basis points annually on the principal balance of the underlying collateral of the CLO).
 
Investment advisory fees on the CDOs we manage also differ from product to product, but in general they consist of a senior management fee (payable before the interest payable on the debt securities issued by such CDOs) that ranges from 5 to 25 basis points annually of the principal balance of the underlying collateral of such CDOs and a subordinated management fee (payable after the interest payable on the debt securities issued by such CDOs and certain other expenses) that ranges from 5 to 35 basis points annually of the principal balance of the underlying collateral of such CDOs. Only a limited number of the CDOs we manage are currently paying subordinated management fees.

Collateralized Loan Obligations

The term CLO (which for purposes of this section also includes the term CDO unless otherwise noted) generally refers to a special purpose vehicle that owns a portfolio of investments (SSCLs in the case of CLOs and typically asset-backed or other securities in the case of CDOs) and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period which they are allowed to make investments and reinvest capital as it becomes available. As each CLO's investments are pledged to the holder of the debt securities (further described below) in such CLO, the investments are also sometimes referred to herein as "collateral."
 

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CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” While the CLOs themselves, not us, issue these securities, in accordance with standard practice in our industry we sometimes refer to "CIFC" or "we" as issuing CLOs and/or CLO securities. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is generally issued at a specified spread over LIBOR and normally has the first claim on the earnings on the CLO’s investments after payment of certain "senior" fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO’s investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is commonly referred to as the CLO’s “subordinated notes” or "equity." The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLOs’ investments after all of the other tranches of notes and certain other fees and expenses are paid. While the majority of the subordinated notes of the CLOs we manage are owned by third parties, we do own a portion of the subordinated note tranches of certain of the CLOs we manage. Our investments and beneficial interests in the Consolidated CLOs we manage amounted to $47.5 million and $7.0 million as of December 31, 2012 and 2011, respectively. See Item 8—"Financial Statements and Supplementary Data—Note 5" for additional details on CLOs and other Consolidated Variable Interest Entities ("VIEs" or "VIE").
 
CLOs, which are designed to serve as investments for third party investors, generally have an investment manager to select and actively manage the underlying assets to achieve target investment performance. In exchange for these services, CLO managers typically receive three types of investment advisory fees: senior management fees, subordinated management fees and incentive fees. CLOs also generally appoint a custodian, trustee and collateral administrator, who are responsible for holding the CLOs' investments, collecting investment income and distributing that income in accordance with the respective CLO's waterfall.

Fee Earning Assets Under Management

The following table summarizes the Fee Earning AUM, for which we are paid a management fee by significant investment product category (1):

 
As of December 31, 2012
 
As of December 31, 2011
 
Number of Accounts
 
Fee Earning AUM (2)
 
Number of Accounts
 
Fee Earning AUM (2)
 
 
 
(In thousands)
 
 
 
(In thousands)
Post 2011 CLOs
3

 
$
1,579,558

 

 
$

Legacy CLOs (3)
29

 
9,599,220

 
29

 
10,555,255

     Total CLOs
32

 
11,178,778

 
29

 
10,555,255

Other Loan-Based Products
3

 
666,120

 
1

 
73,249

Total Loan-Based AUM
35

 
11,844,898

 
30

 
10,628,504

ABS CDOs
10

 
2,402,088

 
10

 
2,931,478

Corporate Bond CDOs
4

 
67,053

 
4

 
271,072

Total Fee Earning AUM
49

 
$
14,314,039

 
44

 
$
13,831,054


Explanatory Notes:
_________________________________
(1)
We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs are expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM numbers generally reflect the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLOs and CDOs and are as of the date of the last trustee report received for each CLO and CDO prior to the respective AUM date.
(3)
Legacy CLOs represents all CLO management contracts issued prior to 2011 including the acquisition of CLOs since 2011.


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Competition
We compete for asset management clients and AUM with numerous other asset managers, including those affiliated with major commercial banks, broker-dealers and other financial institutions. The factors considered by clients in choosing us or a competitor include the past performance of the products we manage, the background and experience of our key portfolio management personnel, our experience in managing a particular product type, our reputation in the fixed income asset management industry, our investment advisory fees and the structural features of the investment products that we offer. Some of our competitors have greater portfolio management resources than us, have managed client accounts for longer periods of time, have experience over a wider range of products than us or have other competitive advantages over us.
Operating and Regulatory Structure
Exclusion from Regulation under the 1940 Act—We have operated, and intend to continue to operate, in such a way as to be excluded from registration under the Investment Company Act of 1940, as amended (the "1940 Act"). We and our wholly-owned subsidiaries are primarily excluded from registration under the 1940 Act because we are not engaged, and do not propose to engage, in the business of investing, reinvesting, owning, holding or trading in securities and do not own or propose to acquire "investment securities" having an aggregate value exceeding 40% of our total assets, on an unconsolidated basis, excluding cash and government securities (the "40% Test"). "Investment securities" excludes, among other things, majority-owned subsidiaries that rely on the 40% Test. Certain of our subsidiaries rely on the 40% Test or on an exemption under Section 3(c)(7), which is for entities owned by "qualified purchases" under the 1940 Act.
    
Governmental Regulations—Each of CIFCAM, DCM, CypressTree and CNCIM (collectively, referred to herein as the "Advisers") are registered with the U.S. Securities and Exchange Commission's (the "SEC") as investment advisers. In these capacities, the Advisers are subject to various regulatory requirements and restrictions with respect to our asset management activities, periodic regulatory examinations and other laws and regulations. In addition, investment vehicles managed by the Advisers are subject to various securities and other laws. Parts 1 and 2 of the Advisers Form ADV is publicly available on the SEC Investment Advisers Public Disclosure website (www.adviserinfo.sec.gov) or upon request to the Company using the contact information below.
Employees
As of December 31, 2012, we had 59 full-time employees.
Available Information
Our website is www.cifc.com. We make available free of charge, on or through the "Our Shareholders/SEC Filings" section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC. Also posted on our website, and available in print upon request to our Compliance Department, are the charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and our Code of Ethics, which governs our directors, officers and employees. Within the time period required by the SEC and the NASDAQ Stock Market LLC ("NASDAQ"), we will post on our website any amendment to our Code of Ethics and any waiver applicable to our senior financial officers, and our executive officers or directors. In addition, information concerning purchases and sales of our equity securities by our directors and Section 16 reporting officers is posted on our website. Information on our website is not part of this Annual Report and is not deemed incorporated by reference into this Annual Report of any other public filing made with the SEC.

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Item 1A.    Risk Factors
        Our business, financial condition, operating results and cash flows may be impacted by a number of factors. The following sets forth the most significant factors that make an investment in our company speculative or risky. In addition to the following risk factors, please also refer to the section entitled "Special Note Regarding Forward-Looking Statements."
Risks Related to Our Business
We operate in highly competitive markets, compete with larger institutions and we may not be able to grow our assets under management ("AUM").
        The alternative asset management industry is intensely competitive and subject to rapid change. Many firms offer similar and additional asset management products and services to the same types of clients that we target. We currently focus almost exclusively on managing SSCLs and related financial instruments, which is in contrast to numerous other asset managers with comparable AUM, which have significant background and experience in both the equity and debt markets. In addition, many of our competitors have or may in the future develop greater financial and other resources, more extensive distribution capabilities, more effective marketing strategies, more attractive investment vehicle structures and broader name recognition. Many of our competitors are substantially larger than us, have considerably more financial and other resources and may have investment objectives that overlap with ours, which may create competition for investment opportunities with limited supply. Some competitors may have a lower cost of funds and access to funding sources that are not available to us, and may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. The competitive pressures we face could adversely affect our business, financial condition and results of operations. Additionally, if other asset managers offer services and products at more competitive prices than us, we may not be able to maintain our current fee structure. Investment strategies and products, including CLOs, that had historically been attractive to investors may lose their appeal for various reasons. In such case, we would have to develop new strategies and products in order to remain competitive. It could be both expensive and difficult for us to develop new strategies and products, and we may not be successful in this regard. These competitive pressures could adversely affect our business, financial condition and results of operations.
        Currently, the substantial majority of our investment products are CLOs that cannot be redeemed or terminated by investors unless certain conditions are met or they are not yet redeemable or terminable by investors at all. However, with the passage of time or upon the satisfaction of such conditions, these investment products will be redeemed, and we will no longer receive investment advisory fees related to these products. In addition, the prepayment of the assets contained in the CLOs we manage and our inability to reinvest the proceeds of such prepayments in accordance with the investment guidelines of the CLOs will reduce the asset base on which our fees are paid and thus the amount of our investment advisory fees. If we are unable to launch new products and grow AUM to sufficiently replace lost AUM, our revenues will decline.
A reduction in the amount or value of assets in the investment products we manage could significantly reduce our investment advisory fees and incentive fees and adversely affect our financial performance.
        Our success depends on our ability to earn investment advisory fees from the investment products we manage for third party investors. Such fees generally consist of payments based on the amount of assets in the investment product (known as management fees and/or advisory fees) and, in certain cases, on the returns generated for certain investors in the investment product (incentive fees). If there is a reduction in a product's assets, there will be a corresponding reduction in our management fees from the account and a likely reduction in our incentive fees, if any, relating to the product, since the smaller the product's asset base, the smaller the potential profits earned by the product. There could be a reduction in a product's assets resulting from the prepayment of the assets in the product if we are unable to reinvest the prepayment proceeds, due to a forced liquidation of the assets in the product or due to poor investment performance, including downgrades of ratings assigned to the assets and/or portfolios the Advisers manage. As a result, a reduction in the value of assets in the investment products we manage and investment advisory fees, and the failure of the Advisers' investment products to perform well both on an absolute basis and in relation to competing products, may adversely affect our business and financial performance.
Our existing recourse indebtedness and the inability to access capital markets could restrict our business activities or adversely affect our financial performance.
        As of December 31, 2012, we had approximately $145.0 million of outstanding recourse indebtedness, including long-term indebtedness in the form of $120.0 million principal outstanding of Junior Subordinated Notes and $25.0 million principal outstanding of Convertible Notes. $25.0 million of our Junior Subordinated Notes currently bear interest at a variable interest rate and the remainder will begin to bear interest at a variable interest rate after April 30, 2015, which may subject us to interest rate risk and increase our debt service obligations if such interest rate increases. In addition, the debt instruments governing our indebtedness contain covenants that may restrict our business activities, and our failure to comply with these covenants could result in a default under our indebtedness. Furthermore, we are permitted by the terms of our Junior Subordinated Notes and our other debt instruments to incur additional indebtedness, however the proceeds of such indebtedness are subject to the limits on restricted payments of the Junior Subordinated Notes. Our inability to generate sufficient cash flow to satisfy our debt obligations,

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to refinance our debt obligations or to access capital markets or otherwise obtain additional financing on commercially reasonable terms could adversely affect our financial condition, operating results and cash flows. Additionally, our return on investments and available cash flow may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the assets acquired.
Our business could be impaired if we are unable to attract and retain qualified personnel.
        We depend on the diligence, experience, skill and network of business contacts of our executive officers and employees for the evaluation, negotiation, structuring and monitoring of our investments and the operation of our business. Additionally, certain of our investment management contracts may be tied to the retention of certain key employees. The management of our investment products is undertaken by our Investment Research, Portfolio Management and Trading teams, consisting of various investment research and portfolio management and trading personnel, none of whom are bound by employment agreements. The loss of a particular member or members of such teams could cause investors in the product to withdraw all or a portion of their investment in the product, and adversely affect the marketing of the product to new investors and the product's performance. In the case of certain CLOs, we can be removed as investment adviser upon the loss of specified key employees. In addition to the loss of specific investment research and portfolio management and trading team members, the loss of one or more members of our senior management involved in supervising the teams and operating our business could have similar adverse effects on our investment products or our business. We have experienced turnover in certain members of our senior management over the past 12 months. If turnover continues, our business and financial performance could be adversely effected.
Accordingly, the inability to attract and retain qualified personnel could affect our ability to provide an acceptable level of service to our clients and take advantage of new opportunities, which could adversely affect our business and financial performance.
We may leverage our assets and a decline in the fair value of such assets may adversely affect our financial performance.
        We may leverage our assets through borrowings, generally through warehouse facilities, secured loans, derivative instruments such as total return swaps, securitizations (including the issuance of CLOs), private funds and other borrowings. Certain leverage we may employ may have market value based lending triggers, such that lenders may require us to post additional collateral to support the borrowing if asset prices decline. If we cannot post the additional collateral, we may have to rapidly liquidate assets, which we may be unable to do on favorable terms or at all. Even after liquidating assets, we may still be unable to post the required collateral, further harming our liquidity and subjecting us to liability to our lenders for the declines in the fair values of the collateral. A reduction in credit availability may reduce our earnings, liquidity and available cash.
We expect to enter into warehouse agreements in connection with our potential investment in and management of CLOs and other investment products, which may expose us to substantial risks.
        In connection with our potential investment in and management of new CLOs and other investment products, we expect to enter into warehouse agreements with warehouse providers such as banks or other financial institutions, pursuant to which the warehouse provider will finance the purchase of investments that will be ultimately included in a CLO or other investment product. We will typically select the investments in the warehouse subject to the approval of the warehouse provider. If the relevant CLO transaction or other investment product is not issued or consummated, as applicable, the warehouse investments may be liquidated, and we may be required to pay any amount by which the purchase price of the investments exceeds its sale price and may be liable for certain of the expenses associated with the warehouse or planned CLO or other investment product. In addition, regardless of whether the CLO or other investment product is issued or consummated, if any of the warehoused investments are sold before such issuance or consummation, we may have to bear any resulting loss on the sale. The amount at risk in connection with a warehouse agreement will vary and may not be limited to the amount, if any, that we invest in the related CLO or other investment product upon its issuance or consummation, as applicable. Although we would expect to complete the issuance of a particular CLO or other investment product within six to nine months after establishing a related warehouse, we may not be able to complete the issuance within such expected time period or at all.
Our business and financial performance may be adversely affected by market, economic and other industry conditions.
        Our business and financial performance may be adversely affected by market, economic and other industry conditions, such as the economic slowdown and recessions that were experienced in the United States in 2008, which could lead to losses on our investments or in the assets held in the products we manage and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in lenders not extending credit to us, all of which could impair our operating results. While our business environment and that of many of the entities in which we invest was extremely challenging in 2008 and 2009, we saw improvements in our business as the markets stabilized in 2010, 2011 and 2012. There is no assurance that these conditions will continue to improve in the near term or at all. If the economic slowdown and adverse business conditions resume or get worse, we expect our results of operations to be adversely affected.

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Our quarterly results could fluctuate and may not be indicative of our future quarterly performance.
        Our quarterly operating results could fluctuate; therefore investors should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause our quarterly operating results to fluctuate include, among other things, variations in quarterly fair value determinations of our assets and liabilities, impairments on our intangible assets (including goodwill), changes in interest rates affecting our interest income and interest expense, distributions from our investments in CLOs and private funds and our provision for income tax.
Because the values we record for certain investments and liabilities are based on estimates of fair value made by management, we are exposed to substantial risks.
        Some of our investments and liabilities are not publicly traded. The fair value of such investments and liabilities are not readily determinable. Each of these carrying values is based on an estimate of fair value. Management reports estimated fair value of these investments and liabilities quarterly, which may cause our quarterly operating results to fluctuate. Therefore, our past quarterly results may not be indicative of our performance in future quarters. In addition, because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments and liabilities existed and we may be unable to realize the carrying value upon a sale of these investments.
We may in the future issue shares of additional capital stock to raise proceeds for a wide variety of purposes, which could dilute and therefore reduce the value of our existing outstanding capital stock.
        We may seek to issue shares of our capital stock, either in public offerings, private transactions or both, to raise additional capital or enter into strategic transactions. Such issuances could substantially dilute the stock of our existing stockholders without a corresponding increase in value. We may raise capital for a wide variety of purposes, such as implementing our business plan and repaying indebtedness. Our management will have broad discretion over how we use the proceeds of any capital raise. We may not be able to raise capital at the time or times that we wish, in the amounts we wish, or on the terms or at the prices we consider favorable to us and our stockholders. We may use the proceeds of any future offering in ways in which holders of our capital stock disagree and that yield less than our expected return, or no return at all, which could result in substantial losses to us.
Loss of our 1940 Act exemption could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business and the price of our shares.
        We rely primarily on section 3(a)(1)(C) for our exclusion from the registration requirements of the 1940 Act. This provision requires that we neither engage nor propose to engage in the business of investing, reinvesting, owning, holding or trading in securities nor own or propose to acquire "investment securities" having a value exceeding 40% of the value of our total assets on an unconsolidated basis, which is referred to herein as the “40% Test”. "Investment securities" excludes U.S. government securities and securities of majority-owned subsidiaries that rely on the 40% Test. If we fail to meet our current exemption and another exemption is not available, we may be required to register as an investment company. If we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and would have a material adverse effect on our business.
The accounting rules applicable to certain of our transactions are highly complex and require the application of significant judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact our financial statements.
        Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by management. The consolidation of Variable Interest Entities ("VIEs") is subject to periodic reassessment which could lead to the deconsolidation of previously consolidated entities or the consolidation of entities that were previously not required to be consolidated. Deferred tax assets are subject to the establishment of a valuation allowance in the event management concludes that the tax benefits of certain timing differences may not be realized. Business acquisitions require the valuation of assets acquired and liabilities assumed. Assets acquired include intangible assets, including goodwill, that will be subject to periodic testing and evaluation for impairment. These complexities could lead to a delay in the preparation of our financial information. In addition, changes in accounting rules, interpretations or assumptions could materially impact the presentation, disclosure and usability of our financial statements.

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Failure to develop effective business continuity plans could disrupt our operations and cause financial losses.
        We operate in an industry that is highly dependent on information systems and technology. We depend to a substantial degree on the availability of our office facilities and the proper functioning of our computer and telecommunications systems. Although we have established a significant disaster recovery program, including pursuant to which data is backed up at secured off-site locations and is accessible remotely, a disaster, such as water damage to our office, an explosion or a prolonged loss of electrical power, could materially interrupt our business operations and cause material financial loss, regulatory actions, reputational harm or legal liability, which, in turn, could depress our stock price. Additionally, we cannot assure holders of our stock that the cost of maintaining those services and technology will not materially increase from its current level. Such an increase in costs related to these information systems could have a material and adverse effect on us.
CIFC Parent Holdings LLC and DFR Holdings, LLC exercise significant influence over us, including through the ability of each to elect three members of our Board of Directors.
        Our common stock owned by (i) CIFC Parent, an entity in which Charlesbank Capital Partners holds a majority interest, represented approximately 43.75% of the outstanding shares of our common stock as of December 31, 2012 and (ii) DFR Holdings, an indirect wholly owned subsidiary of Columbus Nova Private Equity Partners, represented approximately 21.88% of the outstanding shares of our common stock as of December 31, 2012, in each case excluding the shares of common stock issuable upon conversion or exercise of the Convertible Notes, restricted stock units, stock options or warrants. Assuming DFR Holdings elects to convert the entire principal amount of the Convertible Notes on the business day immediately preceding the maturity date of such notes, and we have not elected to pay PIK Interest, the common stock owned by (i) CIFC Parent will represent approximately 36.49% of the outstanding shares of our common stock as of December 31, 2012 and (ii) DFR Holdings will represent approximately 34.84% of the outstanding shares of our common stock as of December 31, 2012, in each case excluding the exercise of restricted stock units, stock options or warrants. In addition, the Second Amended and Restated Stockholders Agreement provides that CIFC Parent and DFR Holdings together may block the election of any director nominated by the nominating committee of our Board of Directors (the "Board").
        The Second Amended and Restated Stockholders Agreement provides that CIFC Parent and DFR Holdings each has the right to designate three directors to the Board. As a result, the directors elected to the Board by CIFC Parent and DFR Holdings may exercise significant influence on matters considered by the Board. Each of CIFC Parent and DFR Holdings may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.
        Other than requirements to support the nomination, election and removal of directors in accordance with the Second Amended and Restated Stockholders Agreement and to support maintaining our status as a "controlled company" under applicable NASDAQ rules, there are no restrictions on CIFC Parent's or DFR Holdings' ability to vote the common stock owned by them. In accordance with the Second Amended and Restated Stockholders Agreement, CIFC Parent and DFR Holdings will form a "group" for purposes of holding their shares of common stock and vote their shares as a group in respect of the election and removal of directors and maintenance of our status as a "controlled company" under applicable NASDAQ rules. As a result, CIFC Parent and DFR Holdings, acting alone, may have the ability to significantly influence (or, if acting together, would control) the outcome of any matter submitted for the vote of our stockholders, including the amendment of our organizational documents, acquisitions or other business combinations involving us and potentially the ability to prevent extraordinary transactions such as a takeover attempt.
        The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of us, may deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our business and may have a material adverse affect on the market price of our common stock.
We have goodwill and other intangible assets that may become impaired and have a material adverse effect on our financial condition and results of operations.
        At December 31, 2012, we had $76.0 million of goodwill and $43.1 million of intangible assets. Goodwill and other intangible assets are tested for impairment on an annual basis, or when facts and circumstances indicate that impairment may have occurred. If these tests indicate that an asset has been impaired, we will recognize a charge to results of operations, which may have a material adverse effect on our financial condition and results of operations.
We are subject to substantial risk from litigation and potential securities laws liability and may face significant damage to our professional reputation as a result of such allegations and negative publicity associated therewith.
        Many aspects of our business involve substantial risks of litigation and/or arbitration, and from time to time, we are involved in various legal proceedings in the course of operating our business. We may be exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other regulatory bodies. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational harm to us, and have a material adverse effect on our financial performance. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management's attention from operations. Asset managers such as the Advisers also are particularly vulnerable to losing clients because of adverse publicity. Accordingly, allegations or an

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adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us, could materially harm our financial performance.
Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Legislative or regulatory changes could adversely affect us.
        The Advisers are heavily regulated as investment advisers, primarily at the federal level. Many of these regulators, including the SEC, as well as state securities commissions, are empowered to conduct examinations, investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or investment adviser from registration or memberships. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new asset management or financial advisory clients.
        Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market, or the revocation of licenses. Non-compliance with applicable laws or regulations could also adversely affect our reputation, prospects, revenues and earnings.
        In addition, changes in current legal, regulatory, accounting, tax or compliance requirements or in governmental policies could adversely affect our operations, revenues and earnings by, among other things, increasing expenses and reducing investor interest in certain products we offer. Additionally, our profitability could be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing state and federal taxation.
        In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act imposes significant restrictions on the proprietary trading activities of certain banking entities and subjects other systemically significant organizations regulated by the U.S. Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the CLO market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. While the full impact of the Dodd-Frank Act cannot be assessed until implementing regulations are released and fully implemented, the Dodd-Frank Act's extensive requirements may have a significant effect on the financial markets, and may affect our ability to issue new CLOs, which may have an adverse effect on our business.
        In addition, we regularly rely on exemptions from various requirements of the U.S. Securities Act of 1933, as amended, the Exchange Act, the 1940 Act, and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third party claims and our business could be materially and adversely affected.
        Lastly, the requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our investment products and are not designed to protect our common stockholders. Consequently, these regulations often serve to limit our activities and impose burdensome compliance requirements.
We do not know the impact on our business caused by actions by U.S. and foreign governments, central banks and other governmental and regulatory bodies attempting to stabilize and strengthen the financial market or their increased focus on the regulation of our industry.
        In recent years, U.S. and foreign governments, central banks and other governmental and regulatory bodies have taken a number of steps to attempt to stabilize and strengthen the U.S. and global financial markets and economies. In particular, in the U.S., these efforts have included direct government investments in, and guarantees of, troubled financial institutions as well as government-sponsored programs such as the Troubled Asset Relief Program in 2008 and the Emergency Economic Stabilization Act of 2008. In addition, the Dodd-Frank Act imposes new regulations and significant investment restrictions and capital requirements on banking entities and other organizations that are significant to the U.S. financial markets and could increase our costs of operating as a public company. Furthermore, many key aspects of the Dodd-Frank Act will be established by various regulatory bodies and other groups over the next several years. We are not able to predict the impact on our business, results of operations and financial condition of these efforts by U.S. and foreign governments, central banks or other governmental and regulatory bodies or the impact of future regulation of our industry.

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Changes in the fixed income markets could adversely affect our financial performance.
        Adverse changes in the fixed income markets could reduce the Advisers' AUM and therefore affect our financial performance. Such changes could include increased volatility in the prices of fixed income instruments, periods of illiquidity in the fixed income trading markets, changes in the taxation of fixed income instruments and significant changes in the "spreads" in the fixed income markets (the amount by which the yields on particular fixed income instruments exceed the yields on benchmark U.S. Treasury securities or other indexes).
Changes in CLO spreads and an adverse market environment could continue to make it difficult for the Advisers and other investment managers to launch new CLOs.
        The ability to issue new CLOs is dependent, in part, on the amount by which the interest earned on the investments held by the CLO exceeds the interest payable by the CLO on the debt obligations it issues to investors and the CLO's other expenses, as well as other factors. If this excess (also known as a CLO's “arbitrage”) is not sufficient, the proposed CLO will not be attractive to investors and thus cannot be issued. There may be sustained periods when CLO arbitrage will not be sufficient for the Advisers to issue new CLOs, which could materially impair the Advisers' business. During the recent financial crisis, there was a dislocation in the credit market that significantly impeded CLO formation. Although market conditions have improved, the dislocation in credit markets could return and continue for a significant period of time. Renewed dislocation of these markets could adversely impact our results of operations and financial condition.
Foreign corporate entities in which we have invested could be subject to federal income tax at the entity level, which would greatly reduce the amounts those entities would have available to distribute to us.
        From time to time, we invest in investment products managed by the Advisers. Those investments typically are in the form of interests in foreign corporate entities. There is a specific exemption from federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We intend that our foreign corporate investments will rely on that exemption or otherwise operate in a manner so that they will not be subject to federal income tax on their net income at the entity level. If the IRS successfully challenged the qualification of our foreign corporate investment for the exemption from federal income tax described above, that could greatly reduce the amount that our foreign corporate entities would have available to pay to their creditors and to distribute to us.
Our results of operations may be negatively affected by our future tax liabilities.
        As a result of the stock issuance to DFR Holdings in connection with the CNCIM Acquisition and the Merger, the Company and Legacy CIFC, respectively, each experienced an ownership change under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, which severely limit our ability to use our existing net operating losses ("NOLs") and net capital losses ("NCLs") to offset our taxable income and capital gains. Accordingly, to the extent we have taxable income, we anticipate that we will incur federal corporate income tax liabilities, which may have a significant impact on our results of operations.
The Advisers' incentive fees may increase the volatility of our cash flows, which could adversely affect our financial performance.
        Historically, a portion of the Advisers' revenues have been derived from incentive fees on the various investment products that they manage. Incentive fees are generally based on the returns generated for certain investors in the investment product. With respect to the Advisers' CLOs, the Advisers are entitled to incentive fees only if the returns on the related portfolios exceed agreed-upon return targets. Incentive fees, if any, may vary from period to period in relation to volatility in investment returns, causing the Advisers' cash flows to be more volatile than if it did not manage assets on an incentive fee basis. Adverse credit and capital markets conditions could significantly increase the volatility of the investment products managed by the Advisers and decrease the likelihood that they will earn incentive fees. Also, alternative asset managers typically derive a greater portion of their revenues from incentive fees than traditional asset managers, thus increasing the potential volatility in the Advisers' cash flows. The volatility in the Advisers' cash flows and decreases in incentive fees could harm our financial performance.
We derive much of our revenues from investment management agreements that may be terminated on short notice.
        Each Adviser derives a substantial portion of its revenues from investment management agreements that may be terminated on short notice. The “non-call” periods on a significant portion of the CLOs the we manage have elapsed, enabling investors to “call” (i.e., initiate liquidation of) such CLOs on relatively short notice. If a CLO is liquidated, we will cease to earn investment advisory fees in respect of such CLO. In addition, with respect to the Advisers' agreements with certain of the funds they manage, an Adviser can be removed without cause by investors that hold a specified amount of the interests issued by the fund. Additionally, the Advisers' agreements with CLOs allow investors that hold a specified amount of securities issued by the CLO to remove the Adviser for "cause," which typically includes an Adviser's violation of the management agreement or the related indenture; an Adviser's breach of its representations and warranties under the agreement; an Adviser's bankruptcy or insolvency; fraud or the commitment of a criminal offense by an Adviser or its employees; the failure of certain of the CLOs' performance tests; and willful misconduct, bad faith or gross negligence by the Adviser. These "cause" provisions may be triggered from time to time, and as a

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result, investors could elect to remove the relevant Adviser as the investment manager of such fund. The termination of an Adviser's investment management agreements could adversely affect our financial performance.
We may be unable to maintain adequate liquidity to support our ongoing operations and planned growth.
        As of December 31, 2012, we had unrestricted cash and cash equivalents of $47.7 million and $26.7 million of warehouse investments. Cash generated from operations and outstanding indebtedness, may not provide sufficient liquidity to fund our operations and pay general corporate expenses. Declines in the fair value of our assets may additionally adversely affect our liquidity. If we are unable to maintain adequate liquidity, we may be unable to support our ongoing operations and planned growth, which would have a material adverse effect on our financial condition.
Certain of the CIFCAM CLO management agreements are subject to minimum ownership requirements, which if not met, could result in CIFCAM's removal as manager.
        The CIFCAM CLO management agreements require that CIFCAM, or an affiliate of CIFCAM or certain employees of CIFCAM, at all times maintain a minimum ownership of securities issued by the related CLO issuers. A breach of the foregoing minimum ownership requirement may allow a CLO issuer to remove CIFCAM or its successor as the manager of the corresponding CIFCAM CLO. Currently, CIFC Parent, as an affiliate of CIFCAM, owns such securities in respect of the Legacy CIFC CLOs thereby satisfying the minimum ownership requirement. As a result, in order to comply with the foregoing requirements under such CIFCAM CLO management agreements, for so long as the minimum ownership requirements in the applicable CIFCAM CLO management agreements remain in effect, CIFC Parent has agreed not to transfer any securities of the related CIFCAM CLO issuers that it owns to any person other than us or one of our subsidiaries, and has agreed to, among other things, use commercially reasonable efforts to remain our affiliate. Despite this covenant, such minimum ownership and affiliate requirements may fail to be satisfied in the future, which may result in the removal of CIFCAM as manager under the applicable Legacy CIFC CLO management agreements.
Defaults, downgrades and depressed market values of the collateral underlying CLOs may cause the decline in and deferral of investment advisory income and the reduction of AUM.
        Under the investment management agreements between the Advisers and the CLOs they manage, payment of an Adviser's investment advisory fees is generally subject to a "waterfall" structure. Pursuant to these "waterfalls," all or a portion of an Adviser's fees may be deferred if, among other things, the CLOs do not generate sufficient cash flows to pay the required interest on the notes they have issued to investors and certain expenses they have incurred. Deferrals could occur if the issuers of the collateral underlying the CLOs default on or defer payments of principal or interest relating to such collateral. Due to severe levels of defaults and delinquencies on the assets underlying certain of the CLOs managed by the Advisers, in the past, we have both experienced declines in and deferrals of investment advisory fees. Further, during such periods and pursuant to the waterfalls, the CLOs may be required to repay certain of these liabilities, which repayment permanently reduces our AUM and related investment advisory fees pursuant to which we can recoup deferred subordinated fees. If similar defaults and delinquencies resume, the Advisers could experience additional declines in and deferrals of their investment advisory fees.
        Additionally, all or a portion of an Adviser's investment advisory fees from the CLOs that it manages may be deferred if such CLOs fail to satisfy certain “over-collateralization” tests. Pursuant to the "waterfall" structure discussed above, such failures generally require cash flows to be diverted to prepay certain of the CLO's liabilities resulting in similar permanent reductions in AUM and investment advisory fees in respect of such CLOs. Defaulted assets and assets that have been severely downgraded are generally carried at a reduced value for purposes of the over-collateralization tests. In some CLOs, these assets are required to be carried at their market values for purposes of the over-collateralization tests. Due to exceptionally high levels of defaults, severe downgrades and depressed market values of the collateral underlying certain CLOs managed by the Advisers, some CLOs have breached their over-collateralization tests, and the Advisers have therefore experienced, and may continue to experience, declines in and deferrals of their investment advisory fees which could have a material and adverse effect on us.
The Advisers could lose investment advisory income or AUM from the CLOs they manage as a result of the triggering of certain structural protections built into such CLOs.
        The CLOs managed by the Advisers generally contain structural provisions including, but not limited to, the over-collateralization tests discussed above and/or market value triggers that are meant to protect investors from deterioration in the credit quality of the underlying collateral pool. In certain cases, non-compliance with these structural provisions can lead to events of default under the indenture governing a CLO followed by the acceleration of the CLO's obligation to repay the notes issued by the CLO and, ultimately, liquidation of the underlying collateral. In the event of a liquidation of the collateral underlying a CLO, the relevant Adviser will lose AUM and therefore investment advisory fees, which could have a material and adverse effect on us. Three of the CDOs of asset backed securities that DCM manages have triggered events of default primarily resulting from downgrades of their underlying collateral. The notes issued by these CDOs have been accelerated. However, pursuant to the indentures governing these CDOs, the CDOs will not be liquidated unless either the proceeds of such liquidation will be sufficient to pay off all of the notes issued by the CDO, the accrued investment advisory fees and certain administrative expenses or the

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holders of a supermajority (or, in the case of one of the CDOs that has triggered an event of default but not an acceleration of notes, a majority) of the notes direct the liquidation.
An Adviser's failure to comply with investment guidelines set by its clients or the provisions of the management agreement and other agreements to which it is a party could result in damage awards against such Adviser and a loss of AUM, either of which could have a material adverse effect on us.
        As an investment adviser, each Adviser has a fiduciary duty to its clients. When clients retain an Adviser to manage assets on their behalf, they may specify certain guidelines regarding investment allocation and strategy that such Adviser is required to observe in the management of its portfolios. In addition, such Adviser is required to comply with the obligations set forth in the management agreements and other agreements to which it is a party. Although each Adviser utilizes procedures, processes and the services of experienced advisors to assist it in adhering to these guidelines and agreements, we cannot assure that such precautions will protect us from potential liabilities. An Adviser's failure to comply with these guidelines or the terms of these agreements could have a material adverse effect on us.
We could incur losses due to trading errors by the Advisers.
        The Advisers could make errors in placing transaction orders for investment products they manage, such as purchasing a security for a product whose investment guidelines prohibit the product from holding the security, purchasing an unintended amount of the security, or placing a buy order when an Adviser intended to place a sell order, or vice-versa. If the transaction resulted in a loss for the product, the relevant Adviser might be required to reimburse the product for the loss. Such reimbursements could be substantial. It is also possible that we could be subject to intentional misconduct by our employees or others that could result in severe negative consequences, including financial penalties and reputational harm. These errors and misconduct could affect trades on behalf of the Advisers, which could exacerbate the adverse financial impact on us.
The Advisers depend on third-party distribution channels to market their CLOs.
        The Advisers' CLO management services are marketed by institutions that act as selling or placement agents for CLOs. The potential investor base for CLOs is limited, and the Advisers' ability to access clients is highly dependent on access to these selling and placement agents. These channels may not be accessible to the Advisers, which could have a material and adverse effect on the Advisers' ability to launch new CLOs. In addition, the Advisers' existing relationships with third-party distributors and access to new distributors could be adversely impacted by recent consolidation in the financial services industry, which could result in increased distribution costs, a reduction in the number of third parties selling or placing the Advisers' CLOs or increased competition to access third-party distribution channels.
We may invest in the subordinated and mezzanine notes of CLOs, and such investments involve various risks, including that CLO subordinated notes receive distributions from the CLO only if the CLO generates enough income to first pay the holders of its debt securities and its expenses.
        Our assets include investments in subordinated and mezzanine notes of certain CLOs we manage, and we may buy subordinated and mezzanine notes of, or other interests in, other CLOs. The subordinated notes are usually entitled to all of the income generated by the CLO after the CLO pays all of the interest due on the debt notes and its expenses. However, there will be little or no income available to the CLO subordinated notes if there are defaults on the underlying collateral in excess of certain amounts or if the recoveries on such defaulted collateral are less than certain amounts. In that event, the value of our investment in the CLO's subordinated notes could decrease substantially. In addition, the subordinated notes of CLOs are generally illiquid, and because they represent a leveraged investment in the CLO's assets, their value will generally fluctuate more than the values of the underlying collateral. We are required to consolidate certain CLOs we manage, however, we have no right to the benefits from, nor do we bear the risk associated with, the assets held by such CLOs, beyond our minimal direct investments and beneficial interests in, and management fees generated from, them.
We elected to become a "controlled company" within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements intended to protect public stockholders' interests.
        CIFC Parent and DFR Holdings together control a majority of the voting power of our outstanding common stock. As a result, we elected to qualify as a "controlled company" within the meaning of the corporate governance standards of the NASDAQ rules. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:
the requirement that a majority of our Board consist of independent directors; 
the requirement that we have independent director oversight of executive officer compensation; and 
the requirement that we have independent director oversight of director nominations.
        We have agreed pursuant to the Second Amended and Restated Stockholders Agreement to utilize these exemptions. As a result, our Board does not have a majority of independent directors, and its nominating and corporate governance committee and compensation committee do not consist entirely of independent directors. Accordingly, our stockholders do not have the same

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protections afforded to stockholders of companies that are subject to all of the corporate governance requirements under the NASDAQ rules.
The market price of our common stock may decline as a result of the exercise of certain registration rights granted to CIFC Parent, DFR Holdings and GE Capital Equity Investments, Inc.
        We are unable to predict the potential effects of the exercise of previously granted registration rights on the trading activity and market price of our common stock. We have granted registration rights to CIFC Parent, DFR Holdings for the resale of certain shares received by them in the Merger and CNCIM Acquisition, respectively, and the shares of common stock issuable upon conversion of the Convertible Notes. In addition, we have granted registration rights to GE Capital Equity Investments, Inc. (“GECEI”) for the resale of certain shares received by them in connection with a strategic transaction that closed in September 2012. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by CIFC Parent, DFR Holdings or GECEI of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the market price of our common stock.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
Our headquarters are located in New York, New York. We lease office space at 250 Park Avenue, 4th Floor, New York, New York 10177. We do not own any real property.
Item 3.    Legal Proceedings
None.
Item 4.    Mine Safety Disclosures
None.


14


PART II.

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Effective March 25, 2013, our common stock is trading on NASDAQ under the trading symbol "CIFC." Our former ticker symbol was "DFR." As of March 22, 2013, we had approximately 1,401 holders of record. This does not include the number of shareholders that hold shares in “street name” through banks or broker-dealers.
The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported on the NASDAQ:
 
2012
 
2011
 
High
 
Low
 
High
 
Low
4th Quarter
$
8.00

 
$
6.25

 
$
5.60

 
$
2.01

3rd Quarter
$
7.79

 
$
5.89

 
$
7.25

 
$
3.54

2nd Quarter
$
7.40

 
$
5.40

 
$
8.11

 
$
5.87

1st Quarter
$
6.66

 
$
4.16

 
$
6.80

 
$
5.67

Dividends
We did not make any dividend distributions in the last two years and do not expect to make dividend distributions in the foreseeable future. Any dividend distributions will be subject to the restricted payment covenants contained in the indentures governing our Junior Subordinated Notes. See Item 8—"Financial Statements and Supplementary Data—Note 12" for more information regarding the restrictive covenants contained in our Junior Subordinated Notes.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The number and average price of shares of common stock purchased during the three months ended December 31, 2012 are set forth in the table below:
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as part of
Publicly Announced
Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1)
October 1 - October 31, 2012
47,231

 
6.99

 
47,231

 
5,900,483

November 1 - November 30, 2012
28,440

 
6.74

 
28,440

 
5,707,939

December 1 - December 31, 2012
12,797

 
7.01

 
12,797

 
5,617,842

Total
88,468

 
6.91

 
88,468

 
 

Explanatory Note:
_________________________________
(1)
On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. Shares may be repurchased from time to time and in such amounts as market conditions warrant, subject to price ranges set by management and regulatory considerations. The share repurchase program does not have an expiration date. The indentures governing our Junior Subordinated Notes contain limits on share repurchases, subject to a number of exceptions and conditions.  The share repurchases allowed under the share repurchase program are within these limits.


15


Equity Compensation Plan Information
The following table sets forth certain information, as of December 31, 2012, regarding our equity compensation plans (1):
Plan Category
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
Equity compensation plans approved by security holders - stock options
3,594,813

 
$
6.05

 
587,116


Explanatory Note:
_________________________________
(1)
See Item 8—"Financial Statements and Supplementary Data—Note 13" for a summary of our equity compensation plans.

Item 6.    Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by Item 6.

16


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The statements in this discussion regarding the industry outlook and our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Special Note Regarding Forward-Looking Statements and Part I—Item 1A—"Risk Factors". You should read the following discussion together with our consolidated financial statements and notes thereto included in Part II—Item 8— "Financial Statements and Supplementary Data."
Overview
 
CIFC Corp. (“CIFC” and, together with its subsidiaries, “we” or "us" ) is a Delaware corporation that specializes in managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. On April 13, 2011 (the “Merger Closing Date”), we completed a merger (the “Merger”) with Commercial Industrial Finance Corp. (“Legacy CIFC”).

Following the Merger, we re-focused on our core business as a fee-based corporate credit asset manager for third party investors. In a process that began in 2011, and most of which was completed during 2012, we exited non-core activities and assets, through the sales of (1) our residential mortgage-backed securities (“RMBS”) portfolio in 2011, (2) our rights to manage our sole European CLO, Gillespie CLO PLC (“Gillespie”) in January 2012, and (3) our investments in and rights to manage the DFR Middle Market CLO Ltd. (“DFR MM CLO”) in February 2012 as (i) the DFR MM CLO did not generate contractual investment advisory fee revenues, (ii) the risk profile of the loans underlying our investment in the DFR MM CLO were not deemed suitable, and (iii) the investment tied up a substantial amount of capital.
We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located across the world. Our existing investment products are primarily collateralized loan obligations ("CLOs") and also include collateralized debt obligations ("CDOs") and other investment vehicles. We also make investments in certain investment products we manage and SSCLs that we warehouse to launch new investment products.
The investment advisory fees paid to us by these investment products is our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of management fees based on the amount of assets held in the investment product and, in some cases, incentive fees based on the returns generated for certain investors. We also earn net investment income and incur gains/losses from our investments in CLOs, warehouses and other investment products we manage.
Executive Overview

2012 was a year of strong growth and positioning CIFC for the opportunities ahead. We issued three new CLOs totaling $1.6 billion, raised an additional $0.7 billion in Fee Earning Assets Under Management ("Fee Earning AUM") from other corporate loan-based products, and acquired four CLOs with $0.7 billion of loan-based AUM. This more than offset the normal course runoff of older CLOs resulting in a net increase of $1.2 billion in AUM from loan-based products. We also sold certain non-core assets, including our rights to manage our sole European CLO and our investments in the DFR MM CLO.  The latter sale, as expected, resulted in the Company having lower net investment and interest income in 2012 than in 2011 but, as a result of the sale proceeds, we are better positioned to seed and issue new funds in 2013.  We are excited for the upcoming year as we continue to seek growth opportunities in the current market environment.

CIFC reported GAAP net income (loss) attributable to CIFC Corp. of $(9.6) million for 2012, compared to $(32.6) million in the same period of the prior year. GAAP operating results increased $23.0 million primarily due to (i) prior year net losses from our investments in the DFR MM CLO, which were sold in February 2012, (ii) a full year of investment advisory fees results from the Legacy CIFC CLOs, which were acquired in April 2011, (iii) gains from the sale of the management contract of Gillespie CLO in January 2012, (iv) increases in net investment and interest income from our investment in CLOs compared to the prior year, and (v) increases in investment advisory fee revenue due to the issuance of three new CLOs and the acquisition of the rights to manage four CLOs from General Electric Capital Corporation ("GE Capital", also known as the "GECC Transaction") during 2012. These increases were slightly offset by (i) decreases in investment advisory fees from principal paydown, calls and redemptions of certain legacy CLOs and CDOs, (ii) decreases in net investment and interest income from the liquidation of our RMBS portfolio during the first half of 2011, (iii) decreases in net gains on an embedded derivative due to the expiration of the anti-dilution feature of our convertible notes, (iv) increase in net losses on liabilities due to changes in fair value of our contingent liabilities, (v) higher expenses to support the continued growth of the business and (vi) higher income tax expenses.


17


We are replacing our previous non-GAAP measure of Adjusted Earnings before Taxes (“AEBT”) with Economic Net Income ("ENI") to align our financial performance metric with other leading alternative asset managers and our evolving view of the business. The replacement did not significantly change our non-GAAP measure except to include unrealized gains/losses on our core investments. In the non-GAAP presentations that follow, we have provided comparable non-GAAP information for the prior comparative period. See Economic Net Income "ENI" (Non-GAAP Measures) below for further details and a reconciliation from net income (loss) attributable to CIFC Corp. (the most comparable GAAP measure) and ENI.

CIFC reported ENI of $25.3 million for 2012, compared to $29.5 million for the prior year. ENI results from the prior year included $25.3 million of net investment and interest income from the DFR MM CLO which was sold in February 2012 and the RMBS portfolio which was liquidated during the first half of 2011. Offsetting this decline, ENI increased year over year by approximately $21.1 million primarily due to (i) a full year of results from the Legacy CIFC CLOs, acquired in April 2011, (ii) increases in net investment and interest income from our investment in CLOs and warehouses, excluding the DFR MM CLO sale, (iii) increases in investment advisory fee and net investment and interest revenues from the issuance of three CLOs and from the acquisition of the rights to manage four CLOs from GE Capital as well as (iv) increases in incentive management fees earned on certain CLOs which reached their incentive fee hurdle during 2012. These increases were slightly offset by decreases in investment advisory fees from principal paydown, calls and redemptions of certain legacy CLOs and CDOs as well as higher expenses to support the continued growth of the Company.

Market and Economic Conditions

Market conditions improved during the year as the economy continued its stable but slow rate of growth. Price volatility in financial assets moderated in the absence of surprises, particularly with respect to the Euro zone. The syndicated loan market experienced generally larger volumes with a vast majority of the new loans brought to market used to refinance existing loans, while prices firmed in the absence of net new supply. The CLO market set a post crisis new issuance record and benefited from a number of new entrants, particularly in the senior most level of the capital structure. As CLO tranche yields tightened throughout the year all aspects of our business benefited from favorable market and economic conditions.

Fee Earning AUM

The following table summarizes the Fee Earning AUM, for which we are paid a management fee by significant investment product category (1):

 
 
As of December 31, 2012
 
As of December 31, 2011
 
Number of Accounts
 
Fee Earning AUM (2)
 
Number of Accounts
 
Fee Earning AUM (1)
 
 
 
(In thousands)
 
 
 
(In thousands)
Post 2011 CLOs
3

 
$
1,579,558

 

 
$

Legacy CLOs (3)
29

 
9,599,220

 
29

 
10,555,255

     Total CLOs
32

 
11,178,778

 
29

 
10,555,255

Other Loan-Based Products
3

 
666,120

 
1

 
73,249

Total Loan-Based AUM
35

 
11,844,898

 
30

 
10,628,504

ABS CDOs
10

 
2,402,088

 
10

 
2,931,478

Corporate Bond CDOs
4

 
67,053

 
4

 
271,072

Total Fee Earning AUM
49

 
$
14,314,039

 
44

 
$
13,831,054


Explanatory Notes:
_________________________________
(1)
We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs are expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM numbers generally reflect the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLOs and CDOs and are as of the date of the last trustee report received for each CLO and CDO prior to the respective AUM date.
(3)
Legacy CLOs represents all CLO management contracts issued prior to 2011 including the acquisition of CLOs since 2011.


18


Total loan-based Fee Earning AUM activity for the year ended December 31, 2012 is as follows:
 
 
(In thousands)
Total loan-based AUM - December 31, 2011
 
$
10,628,504

CLO New Issuances
 
1,579,558

CLO Acquisitions
 
718,583

CLO Principal Paydown
 
(760,289
)
CLO Calls, Redemptions and Sales
 
(936,009
)
Fund Subscriptions
 
713,889

Fund Redemptions
 
(121,624
)
Other (1)
 
22,286

Total loan-based AUM - December 31, 2012
 
11,844,898

Total CDOs
 
2,469,141

Total Fee Earning AUM - December 31, 2012
 
$
14,314,039


Explanatory Note:
_________________________________
(1)     Other includes changes in collateral balances of CLOs between periods and market appreciation on other Loan-Based products.

During the year ended December 31, 2012, total AUM increased by $0.5 billion primarily as a result of increases in loan-based AUM of $1.2 billion, offset by the decreases in CDO AUM of $(0.7) billion. The increase in loan-based AUM was primarily a result of the issuance of three CLOs, the acquisition of the rights to manage four CLOs through the completion of the GECC Transaction and an increase in other loan-based products we managed. These increases were offset by the calls and redemptions of two CLOs: Primus CLO I, Ltd. and Long Grove CLO Ltd., the sale of the management contracts of two CLOs: DFR MM CLO and Gillespie CLO as well as declines in AUM from certain CLOs which have reached the end of their contractual reinvestment periods. Most of the CLOs and CDOs we manage have passed their first optional call date and are generally callable by their subordinated note holders, subject to satisfaction of certain conditions. CDO AUM declined during the year ended December 31, 2012, primarily due to the exit of their scheduled “reinvestment periods.” We do not expect to issue new CDOs so we expect CDO AUM to continue to decline going forward as these funds run-off per their contractual terms.
    
    

19


The structure of the CLOs we manage affects the investment advisory fees paid to us. The following summarizes select details of the structure of each of the CLOs we manage:
 
 
Issuance Date
 
December 31, 2012
Fee Earning AUM
 
First Optional
Call Date (1)
 
Termination of
Reinvestment
Period (2)
 
Maturity
Year (3)
 
 
Month/Year
 
(In thousands)
 
Month/Year
 
 
Post 2011 CLOs
 
 
 
 
 
 
 
 
 
 
CIFC Funding 2011-I, Ltd. ("CIFC CLO 2011-I")
 
01/12
 
$
402,838

 
01/14
 
01/15
 
2023
CIFC Funding 2012-I, Ltd. ("CIFC CLO 2012-I")
 
07/12
 
451,529

 
08/14
 
08/16
 
2024
CIFC Funding 2012-II, Ltd. ("CIFC CLO 2012-II")
 
11/12
 
725,191

 
12/14
 
12/16
 
2024
Total Post 2011 CLOs
 
 
 
1,579,558

 
 
 
 
 
 
Legacy CLOs
 
 
 
 
 
 
 
 
 
 
Rosemont CLO, Ltd. 
 
01/02
 
7,296

 
10/05
 
01/07
 
2013
Forest Creek CLO Ltd. 
 
05/03
 
31,912

 
07/07
 
07/08
 
2015
Navigator 2003 CLO, Ltd. (4)
 
12/03
 
28,430

 
02/07
 
11/08
 
2015
Navigator 2004 CLO, Ltd. (4)
 
10/04
 
102,913

 
01/11
 
01/11
 
2017
Hewett's Island CLO II, Ltd. 
 
12/04
 
72,646

 
12/08
 
12/10
 
2016
Market Square CLO Ltd. 
 
05/05
 
107,145

 
07/07
 
04/11
 
2017
Navigator 2005 CLO, Ltd. (4)
 
07/05
 
206,925

 
10/11
 
10/11
 
2017, 2021
Hewett's Island CLO III, Ltd. 
 
08/05
 
173,597

 
08/09
 
08/11
 
2017
Cumberland II CLO Ltd. 
 
09/05
 
213,354

 
02/10
 
11/11
 
2019
Marquette Park CLO Ltd. 
 
12/05
 
221,330

 
04/10
 
01/12
 
2020
Bridgeport CLO Ltd. 
 
06/06
 
482,187

 
10/09
 
07/13
 
2020
CIFC Funding 2006-I, Ltd. 
 
08/06
 
516,445

 
10/10
 
10/12
 
2020
Columbus Nova 2006-I, Ltd.
 
08/06
 
389,068

 
10/09
 
10/12
 
2018
Navigator 2006 CLO, Ltd. (4)
 
09/06
 
322,893

 
09/10
 
09/13
 
2020
CIFC Funding 2006-I B, Ltd. 
 
10/06
 
394,536

 
12/10
 
12/12
 
2020
Burr Ridge CLO Plus Ltd. 
 
12/06
 
283,415

 
06/12
 
03/13
 
2023
CIFC Funding 2006-II, Ltd. 
 
12/06
 
617,522

 
3/11
 
03/13
 
2021
Columbus Nova 2006-II, Ltd.
 
12/06
 
495,198

 
02/10
 
02/13
 
2018
Hewett's Island CLO V, Ltd. 
 
12/06
 
361,751

 
12/09
 
12/12
 
2018
CIFC Funding 2007-I, Ltd. 
 
02/07
 
396,011

 
05/11
 
11/13
 
2021
CIFC Funding 2007-II, Ltd. 
 
03/07
 
591,066

 
04/11
 
04/14
 
2021
Columbus Nova 2007-I, Ltd.
 
03/07
 
478,594

 
05/10
 
05/13
 
2019
Hewett's Island CLO VI, Ltd. 
 
05/07
 
365,327

 
06/10
 
06/13
 
2019
Schiller Park CLO Ltd. 
 
05/07
 
411,311

 
07/11
 
04/13
 
2021
Bridgeport CLO II Ltd. 
 
06/07
 
493,675

 
12/10
 
09/14
 
2021
CIFC Funding 2007-III, Ltd. 
 
07/07
 
439,273

 
07/10
 
07/14
 
2021
Primus CLO II, Ltd. 
 
07/07
 
368,820

 
10/11
 
07/14
 
2021
CIFC Funding 2007-IV, Ltd. 
 
09/07
 
593,374

 
09/10
 
09/12
 
2019
Columbus Nova 2007-II, Ltd.
 
11/07
 
433,206

 
10/10
 
10/14
 
2021
Total Legacy CLOs
 
 
 
9,599,220

 
 
 
 
 
 
Total CLOs
 
 
 
$
11,178,778

 
 
 
 
 
 
Explanatory Notes:
_________________________________
(1)
CLOs are generally callable by equity holders once per quarter beginning on the "first optional call date" and subject to satisfaction of certain conditions. 
(2)
Termination of reinvestment period refers to the date after which we can no longer use certain principal collections to purchase additional collateral, and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO. 
(3)
Represents the contractual maturity of the CLO. Generally, the actual maturity of the deal is expected to occur in advance of contractual maturity. 
(4)
Represents acquisition of rights to manage four CLOs through the completion of the GECC transaction. See "Item 8 - Financial Statements and Supplementary Data - Note 4" for further details.

20


Results of Consolidated Operations
 
We are required to consolidate into our financial statements certain variable interest entities (“Consolidated VIEs”) which we are deemed to be the primary beneficiary in accordance with GAAP consolidation guidance. This includes certain of the CLOs, CDOs and other entities we manage. See below—Consolidated VIEs for the additional information. The following table presents our comparative Consolidated Statements of Operations for the years ended December 31, 2012 and 2011:

 
For the Year Ended December 31,
 
2012 vs. 2011
 
2012
 
2011
 
Variance
 
% Variance
 
(in thousands)
 
 
Revenues
 

 
 

 
 

 
 
Investment advisory fees
$
10,696

 
$
11,455

 
$
(759
)
 
(7
)%
Net investment and interest income:
 

 
 

 
 

 
 
Investment and interest income
227

 
3,332

 
(3,105
)
 
(93
)%
Interest expense
1

 
350

 
(349
)
 
(100
)%
Net investment and interest income
226

 
2,982

 
(2,756
)
 
(92
)%
Total net revenues
10,922

 
14,437

 
(3,515
)
 
(24
)%
Expenses
 

 
 

 
 

 
 
Compensation and benefits
22,945

 
19,993

 
2,952

 
15
 %
Professional services
6,221

 
9,111

 
(2,890
)
 
(32
)%
General and administrative expenses
6,096

 
6,783

 
(687
)
 
(10
)%
Depreciation and amortization
17,931

 
16,423

 
1,508

 
9
 %
Impairment of intangible assets
1,771

 
1,822

 
(51
)
 
(3
)%
Restructuring charges
5,877

 
3,686

 
2,191

 
59
 %
Total expenses
60,841

 
57,818

 
3,023

 
5
 %
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 
Net gain (loss) on investments, loans, derivatives and liabilities
(9,565
)
 
1,915

 
(11,480
)
 
>(100)%

Corporate interest expense
(5,912
)
 
(5,678
)
 
(234
)
 
4
 %
Net gain on the sale of management contract
5,772

 

 
5,772

 
100
 %
Strategic transactions expenses
(657
)
 
(1,459
)
 
802

 
(55
)%
Net other income (expense) and gain (loss)
(10,362
)
 
(5,222
)
 
(5,140
)
 
98
 %
Operating income (loss)
(60,281
)
 
(48,603
)
 
(11,678
)
 
24
 %
 
 
 
 
 
 
 
 
Results of Consolidated VIEs
 

 
 

 
 

 
 
Net gain (loss) from activities of Consolidated VIEs
(144,472
)
 
(281,459
)
 
136,987

 
(49
)%
Expenses of Consolidated VIEs
(23,908
)
 
(6,712
)
 
(17,196
)
 
>100%

Net results of Consolidated VIEs
(168,380
)
 
(288,171
)
 
119,791

 
(42
)%
Income (loss) before income tax expense (benefit)
(228,661
)
 
(336,774
)
 
108,113

 
(32
)%
Income tax expense (benefit)
11,667

 
6,980

 
4,687

 
67
 %
Net income (loss)
(240,328
)
 
(343,754
)
 
103,426

 
(30
)%
Net (income) loss attributable to noncontrolling interest and Consolidated VIEs
230,712

 
311,162

 
(80,450
)
 
(26
)%
Net income (loss) attributable to CIFC Corp.
$
(9,616
)
 
$
(32,592
)
 
$
22,976

 
(70
)%
Earnings (loss) per share:
 

 
 

 
 

 
 
Basic and diluted
$
(0.47
)
 
$
(1.82
)
 
$
1.35

 
(74
)%
Weighted-average number of shares outstanding:
 

 
 

 
 

 
 
Basic and diluted
20,355,807

 
17,892,184

 
2,463,623

 
14
 %
     
Net loss attributable to CIFC Corp. was $(9.6) million, or $(0.47) per fully diluted share, for the year ended December 31, 2012, compared to $(32.6) million, or $(1.82) per fully diluted share, in the prior year. Operating results increased by $23.0 million from the prior year predominantly due to the following:

    

21


Net Revenues—During the second quarter of 2011, we liquidated our investment in the RMBS portfolio which resulted in a decrease in net investment and interest income in the current year.

Total Expenses—Our total expenses increased year over year primarily as a result of increased compensation and benefits, restructuring charges and depreciation and amortization expenses. These increases were offset by decreased professional fees.
    
Compensation and benefits increased by $3.0 million from the prior year, primarily as a result of the amortization of stock options granted during 2012 and a portion of non-cash compensation related to profits interests of CIFC Parent Holdings LLC ("CIFC Parent," one of our significant shareholders). See Item 8—"Financial Statements and Supplementary Data—Note 13" for additional information.

During 2012, restructuring charges included the termination of our Rosemont, Illinois lease related to the consolidation of operations at the corporate headquarters in New York, the disposal of the related fixed assets from the lease termination and additional severance costs from the final integration of management teams after the Merger. In the prior year, restructuring costs included severance and other termination benefits directly resulting from the Merger.

Depreciation and amortization increased year over year primarily due to a full year of amortization expense recognized in 2012 from intangibles related to management contracts acquired from the Merger in April 2011. This increase was slightly offset by a decrease in amortization expense from the run-off of certain management contracts acquired as part of our DCM acquisition.

During 2011, we incurred certain "one-time" expenses related to the issuance of our first CLO since 2007, CIFC CLO 2011-I, and professional fees from the sale of our investments in and rights to manage the DFR MM CLO.

Net other income (expense) and gain (loss)—Total Net other income (expense) and gain (loss) decreased primarily related to a decrease in Net gains (losses) on investments, loans, derivatives and liabilities, partially offset by increases in Net gain on sale of management contracts and a reduction in strategic transactions expenses.

The components of total Net gain (loss) on investments, loans, derivatives and liabilities for the years ended December 31, 2012 and 2011 are as follows:
 
 
For the Year Ended December 31,
 
2012 vs. 2011
 
 
2012
 
2011
 
Variance
 
% Variance
 
(In thousands)
 
 
Net gain (loss) on investments at fair value
 
$
2,308

 
$
2,209

 
$
99

 
4
 %
Net gain (loss) on liabilities at fair value
 
(11,452
)
 
(7,469
)
 
(3,983
)
 
53
 %
Net gain (loss) on loans
 

 
(38
)
 
38

 
(100
)%
Net gain (loss) on derivatives
 

 
7,208

 
(7,208
)
 
(100
)%
Other, net
 
(421
)
 
5

 
(426
)
 
>(100)%

     Net gain (loss) on investments, loans, derivatives and liabilities
 
$
(9,565
)
 
$
1,915

 
$
(11,480
)
 
>(100)%


Total Net gain (loss) on investments, loans, derivatives and liabilities decreased by $(11.5) million from the prior year predominantly due to a decrease in Net gains on our derivatives and increases in Net losses on our liabilities. The option to convert our senior subordinated convertible notes (the “Convertible Notes”) was deemed to be an embedded derivative instrument (the “Embedded Derivative”) and was required to be recorded at fair value. In December 2011, this feature expired resulting in a reduction of Net gain (loss) on derivatives. In addition, net losses on liabilities increased predominately as a result of an increase in the fair value of our contingent liabilities related to fee sharing due to better than expected performance on CLOs.

The total decrease in our Net gain (loss) on investments, loans, derivatives and liabilities was offset by a gain on the sale of our rights to manage Gillespie during 2012 and decreases in strategic transaction expenses. Strategic transactions expenses related to the GECC Transaction in 2012 was lower than strategic transaction expenses related to the Merger in 2011 (see Item 8—"Financial Statements and Supplementary Data—Note 4" for further details).

Net results of Consolidated VIEs—During the year ended December 31, 2012 and 2011, we had $62.3 million and $23.0 million, respectively,  of  Consolidated VIE investment advisory fees related to the Consolidated CLOs and net investment interest income related to our investment in the equity of CLOs we manage (see  below - Consolidated VIEs for further details).

22


The increase in Net results of Consolidated VIEs is primarily due to an increase in Consolidated VIE investment advisory fees from the inclusion of a full year of results from CLOs acquired through the Merger in 2011, the close of three new CLOs during 2012 and the acquisition of the management rights of four CLOs from our strategic transaction with GE Capital. In addition, in February 2012, we sold our investment in DFR MM CLO which incurred net losses during the year ended December 31, 2011, and as a result total Consolidated VIE net investment and interest income increased year over year.

Income tax expense (benefit)—We recognized an increase of $4.7 million in income tax expense from the prior year. Our effective tax rate for the year ended December 31, 2012 was 5.10%, compared to our effective tax rate for the year ended December 31, 2011 of 2.07%. The difference between our statutory federal tax rate and the effective tax rate for the years ended December 31, 2012 and 2011 is primarily attributable to the impact of the Consolidated VIEs noncontrolling interest loss, which is included in our pre-tax income (loss) but is not taxable to CIFC. Additionally, during the year ended December 31, 2012, state income taxes and certain discrete and permanent items during the year, including fair value changes of certain contingent liabilities related to the Merger, significantly contributed to the difference between the statutory and the effective tax rate.

Economic Net Income "ENI" (Non-GAAP Measures)
 
ENI is a non-GAAP financial measure of profitability which we use in addition to GAAP to measure the performance of our core business. We believe ENI reflects the nature and substance of the business and the economic results driven by investment advisory fee revenues from the management of client funds and earnings on our investments. ENI represents net income (loss) attributable to CIFC Corp. before taxes, realized and unrealized gain (loss) on dispositions of non-core assets, a portion of non-cash compensation related to profits interests of CIFC Parent (one of our significant shareholders), amortization and impairments of intangible assets, gains (losses) on derivatives and liabilities, certain non-recurring operating expenses and strategic transaction expenses (such as those associated with the GECC Transaction and the merger with Legacy CIFC). ENI also presents investment advisory fee revenues net of any fee-sharing arrangements.

     ENI provided herein may not be comparable to similar measures presented by other companies, and is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore, may be defined differently by other companies. In addition, ENI should be considered in addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP. The following is a reconciliation of GAAP Net income (loss) attributable to CIFC Corp. to ENI:

 
 
For the Year Ended December 31,
 
 
2012
 
2011
 
 
(in thousands)
GAAP Net income (loss) attributable to CIFC Corp.
 
$
(9,616
)
 
$
(32,592
)
     Advisory fee sharing arrangements (1)
 
(10,201
)
 
(6,519
)
     Impairment and amortization of intangibles
 
19,213

 
17,694

     Restructuring charges
 
5,877

 
3,686

     Strategic transaction costs and other gains/losses (2)
 
6,757

 
(457
)
     Professional services and other compensation costs (3)
 
1,478

 
3,550

     Net adjustment for DFR MM CLO (4)
 
169

 
37,144

     Income tax expense (benefit)
 
11,667

 
6,980

Total reconciling and non-recurring items
 
34,960

 
62,078

ENI
 
$
25,344

 
$
29,486


Explanatory Notes:
______________________________
(1)
We share advisory fees on certain of the CLOs we manage (for example, advisory fees on certain acquired funds are shared with the party that sold the fund to CIFC). These amounts are netted from investment advisory fees in the computation of ENI.
(2)
Adjustment includes the elimination of strategic transaction costs, non-core gains (losses), gains (losses) on derivatives and liabilities as well as gains on the sale of management contracts.
(3)
Excludes (a) certain one-time professional fees related to the issuance of the first post 2011 CLO, (b) professional fees related to the sale of our investments in the DFR MM CLO, (c) elimination of an one-time insurance settlement received related to legal fees during the year ended December 31, 2011 and (d) a portion of non-cash compensation related to profits interests of CIFC Parent (one of our significant shareholders) during the year ended December 31, 2012.
(4)
Amount includes net distributions received and changes in fair value on our investment in the DFR MM CLO. Pursuant to GAAP, this investment was not recorded on a fair value basis therefore the ENI adjustment includes the adjustment to remove the GAAP consolidated profit and loss, and to establish the changes in fair market value of the investment for the reporting period. The DFR MM CLO was sold in February 2012.

23



The following table presents our components of ENI for the years ended December 31, 2012 and 2011:
 
 
For the Year Ended December 31,
 
Variance 2012 vs. 2011
 
2012
 
2011
 
Variance
 
% Variance
 
(in thousands)
 
 
Adjusted revenues
 

 
 

 
 

 
 
Investment advisory fees (1)
$
52,152

 
$
40,878

 
$
11,274

 
28
 %
Net investment and interest income:
 

 
 

 
 

 
 
Investment and interest income
13,519

 
28,854

 
(15,335
)
 
(53
)%
Interest expense
142

 
1,680

 
(1,538
)
 
(92
)%
Net investment and interest income (1)
13,377

 
27,174

 
(13,797
)
 
(51
)%
Total adjusted net revenues
65,529

 
68,052

 
(2,523
)
 
(4
)%
Adjusted expenses
 

 
 

 
 

 
 
Compensation and benefits
20,810

 
19,719

 
1,091

 
6
 %
Professional services
6,878

 
5,835

 
1,043

 
18
 %
General and administrative expenses
6,096

 
6,783

 
(687
)
 
(10
)%
Depreciation and amortization
489

 
551

 
(62
)
 
(11
)%
Corporate interest expense
5,912

 
5,678

 
234

 
4
 %
Total adjusted expenses
40,185

 
38,566

 
1,619

 
4
 %
ENI
$
25,344

 
$
29,486

 
$
(4,142
)
 
(14
)%

Explanatory Note:
______________________________
(1)
See ENI investment advisory fees and net investment and interest income tables below for details of revenue components.

Adjusted investment advisory fees—The following table presents our components of ENI for adjusted investment advisory fees for the years ended December 31, 2012 and 2011
 
 
For the Year Ended December 31,
 
 
 
 
 
2012
 
2011
 
Variance 2012 vs. 2011
 
CLOs
 
CDOs
 
Total
 
CLOs
 
CDOs
 
Total
 
Variance
 
% Variance
 
(In thousands)
 
 
Senior management fees
$
16,783

 
$
2,582

 
$
19,365

 
$
14,366

 
$
3,228

 
$
17,594

 
$
1,771

 
10
%
Subordinated management fees
29,533

 
72

 
29,605

 
21,957

 
508

 
22,465

 
7,140

 
32
%
Incentive management fees
2,490

 

 
2,490

 
287

 

 
287

 
2,203

 
>100%

   Total adjusted investment advisory fees
$
48,806

 
$
2,654

 
$
51,460

 
$
36,610

 
$
3,736

 
$
40,346

 
11,114

 
28
%
Other advisory fees

 

 
692

 

 

 
532

 
160

 
30
%
   Total adjusted investment advisory fee revenues
$
48,806

 
$
2,654

 
$
52,152

 
$
36,610

 
$
3,736

 
$
40,878

 
$
11,274

 
28
%
   
Total adjusted advisory fee revenue increased by $11.3 million or 28% from the prior year primarily due to the inclusion of a full year of results from CLOs acquired through the Merger in April 2011, the issuance of three new CLOs: CIFC CLO 2011-I, CIFC CLO 2012-I and CIFC CLO 2012-II during 2012 and the acquisition of rights to manage four CLOs from our strategic transaction with GE Capital. In addition, during 2012, we earned incentive fees on certain CLOs which reached their incentive fee hurdle during the year. These increases were offset by the principal paydowns, calls and redemptions of certain legacy CLOs and CDOs.

During the years ended December 31, 2012 and 2011, adjusted investment advisory fees from CLOs comprised of 94% and 90%, respectively, of adjusted total investment advisory fee revenues.



24


Adjusted net investment and interest income—Adjusted net investment and interest income decreased by $(13.8) million or (51)% from the prior year. The decline was primarily due to $25.3 million of adjusted net investment and interest income from the DFR MM CLO, which was sold in February 2012 and our RMBS portfolio which was liquidated during the first half of 2011. Offsetting these items, adjusted net investment and interest income increased by $11.5 million during the year. The increase was primarily a result of (i) increases in adjusted net investment and interest income from our investments in equity of CLOs issued: CIFC CLO 2011-I, CIFC CLO 2012-I and CIFC CLO 2012-II and (ii) increases in the total net investment and interest income from warehouses utilized to issue new CLOs.

Adjusted expenses—Adjusted expenses increased $1.6 million or 4% from the prior year primarily due to the increase in adjusted compensation and benefits and adjusted professional fees to support the continued growth of the business. Compensation and benefits increased during 2012 primarily as a result of the amortization of stock options granted during 2012 under the 2011 Stock Plan.

Liquidity and Capital Resources
 
As of December 31, 2012, total liquidity was comprised of unrestricted cash and cash equivalents of $47.7 million and $26.7 million of warehouse investments. The increase of $11.7 million in cash and cash equivalents from the prior year balance of $36.0 million is primarily attributable to operating income, cash proceeds from the sales of investments in and the management contracts of certain CLOs (including DFR MM CLO and Gillespie CLO) and a net reduction of our warehouse investments. These increases were offset by our additional investment in equity of CLOs we managed, a cash payment for the GECC Transaction and stock repurchases.

Other Sources and Uses of Funds

Deferred Purchase Payments—In April 2011, we completed the Merger with Legacy CIFC. As a result of the Merger, Legacy CIFC became CIFCAM, a wholly-owned subsidiary of CIFC. The consideration for the Merger includes the payment to CIFC Parent, the sole stockholder of Legacy CIFC, $7.5 million of cash payable in three equal installments of $2.5 million (subject to certain adjustments) (see Item 8—"Financial Statements and Supplementary Data—Note 5" for further details). During the year ended December 31, 2012, we made a $2.5 million payment for the second installment of the deferred purchase payments related to the Merger. The final remaining deferred purchase payment related to the Merger is $2.5 million and payable on April 13, 2013.

In March 2010, we entered into an acquisition and investment agreement with DFR Holdings LLC ("DFR Holdings") and CNCIM pursuant to which we agreed to acquire all of the equity interests in CNCIM from DFR Holdings. The consideration for the acquisition includes deferred purchase payments totaling $7.5 million in cash payable in five equal annual installments beginning in December 2010. During the year ended December 31, 2012, we made a $1.5 million payment for the third installment of the deferred purchase payments related to the acquisition. The remaining two deferred purchase payments aggregate to $3.0 million, with the next $1.5 million payable on December 9, 2013.

The present value of the remaining deferred purchase payments of $4.8 million is included in the Consolidated Balance Sheets as of December 31, 2012.
 
Contingent Liabilities and Other Commitments—In connection with the Merger, we established or assumed certain contingent liabilities that combine to have an estimated fair value of $33.8 million as of December 31, 2012.

The contingent liabilities that resulted from the contingent deferred payments for the Merger have an estimated fair value of $29.2 million as of December 31, 2012 and are payable to CIFC Parent. The terms of these payments are as follows: (i) the first $15.0 million of incentive fees received by the combined company from six of the CLOs managed by CIFCAM as of the Merger Closing Date (the "Legacy CIFC CLOs"), (ii) 50% of any incentive fees in excess of $15.0 million in aggregate received by the combined company over the next ten years from the Legacy CIFC CLOs and (iii) payments relating to the present value of any such incentive fees from the Legacy CIFC CLOs that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. During the years ended December 31, 2012 and 2011, we made payments of $6.1 million and $2.9 million, respectively, related to these contingent liabilities. As of December 31, 2012, the remaining payments under item (i) was $6.0 million.
 
In addition, there were contingent liabilities assumed in the Merger that primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree on December 1, 2010 and contingent liabilities Legacy CIFC assumed in its acquisition of CypressTree related to required payments to the prior sellers of CypressTree and the broker of that sale. The assumed contingent liabilities have an estimated fair value of $4.6 million as of December 31, 2012 and are based on a fixed percentage of certain advisory fees from the CypressTree CLOs. These fixed percentages vary by CLO and have a minimum fixed percentage of 55%.

25


During the year ended December 31, 2012 and 2011, we made payments of $10.8 million and $7.2 million, respectively, related to these contingent liabilities.  These payments during the year ended December 31, 2012, included $6.2 million of one-time earn out payments for three of the CypressTree management contracts which will reduce the required payments going forward related to such management contracts.
 
Long-Term Debt—The following table summarizes our long-term debt:
 
As of December 31, 2012
 
 
As of December 31, 2011
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
(In thousands)
 
 
 
(In years)
 
 
(In thousands)
 
 
 
(In years)
Recourse debt:
 

 
 

 
 
 
 
 
 
 
 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
22.8
 
 
$
95,000

 
1.00
%
 
23.9
October Junior Subordinated Notes (2)
25,000

 
3.81
%
 
22.8
 
 
25,000

 
3.93
%
 
23.9
Convertible Notes (3)
18,233

 
9.00
%
 
4.9
 
 
17,455

 
8.00
%
 
6.0
Total recourse debt
138,233

 
2.56
%
 
20.4
 
 
137,455

 
2.42
%
 
21.6
Non recourse Consolidated VIE debt:
 

 
 

 
 
 
 
 
 
 
 
 
CIFC 2012-III Warehouse (4)
270,452

 
2.12
%
 
n/m
 
 

 
n/a

 
n/a
DFR MM CLO (5)

 
n/a

 
n/a
 
 
93,269

 
1.68
%
 
7.6
Consolidated CLOs (6)
9,325,982

 
1.16
%
 
8.1
 
 
7,559,568

 
1.01
%
 
7.3
Total non recourse Consolidated VIE debt
9,596,434

 
1.19
%
 
7.9
 
 
7,652,837

 
1.02
%
 
7.3
Total long-term debt
$
9,734,667

 
1.21
%
 
8.1
 
 
$
7,790,292

 
1.04
%
 
7.6

Explanatory Notes:
________________________________
(1)
March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015 and LIBOR plus 2.58% thereafter until maturity, October 30, 2035.
(2)
October Junior Subordinated Notes bear interest at an annual rate of LIBOR plus 3.50% and mature on October 30, 2035.
(3)
As of December 31, 2012 and 2011, Convertible Notes was net of discount of $6.8 million and $7.5 million, respectively. The Convertible Notes currently pay interest at the 9.00% stated rate; however, including the discount, the effective rate of interest is 18.14%. The Convertible Notes will mature on December 9, 2017.
(4)
Long-term debt of CIFC 2012-III Warehouse is recorded at fair value. This includes the fair value of the preferred shares issued by CIFC 2012-III Warehouse which are not held by us. These preferred shares which are not held by us have a par value of $25.6 million and do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate.
(5)
As of December 31, 2011, amount excludes $19.0 million of DFR MM CLO Class D Notes and $50.0 million of subordinated notes that were held by us and eliminated upon consolidation. The weighted-average borrowing rate including the Class D Notes was 2.14% as of December 31, 2011. The subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate.
(6)
Long-term debt of the Consolidated CLOs is recorded at fair value. This includes the fair value of the subordinated notes issued by the Consolidated CLOs. However, the subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate. The par value of the Consolidated CLOs long-term debt (including subordinated notes) was $9.8 billion and $8.9 billion as of December 31, 2012 and 2011, respectively.

Recourse Debt
Junior Subordinated Notes—The $95.0 million aggregate principal amount of junior subordinated notes (the "March Junior Subordinated Notes") are governed by a junior subordinated indenture (the "March Note Indenture"), dated March 4, 2010, between CIFC Corp. and The Bank of New York Mellon Trust Company, National Association, as trustee. The $25.0 million aggregate principal amount of junior subordinated notes (the "October Junior Subordinated Notes") are governed by a junior subordinated indenture (the "October Note Indenture"), dated October 20, 2010, between CIFC Corp. and The Bank of New York Mellon Trust Company, National Association, as trustee. The covenants contained in the March Note Indenture and October Note Indenture (together, the "Note Indentures") contain certain restrictive covenants including (i) a requirement that all asset management activities to be conducted by CIFC Corp. and its subsidiaries, and which permits us to sell equity and material assets of DCM only if all investment advisory fees and proceeds from equity and asset sales are subject to the limits on restricted payments set forth in the Note Indentures, (ii) a debt covenant that permits CIFC Corp. and DCM to incur indebtedness only if the proceeds of such indebtedness are subject to the limits on restricted payments set forth in the Note Indentures and (iii) a restricted payments covenant that restricts our ability to pay dividends or make distributions in respect of our equity securities, subject to a number of exceptions and conditions.

26


Convertible Notes—The $25.0 million aggregate principal amount of Convertible Notes are held by a related party, DFR Holdings and are convertible into 4,132,231 shares of common stock (as such amount may be adjusted in certain events or increased in connection with the payment of interest-in-kind ("PIK Interest")) at an initial conversion price of $6.05 per share, subject to adjustment. The Convertible Notes will mature on December 9, 2017. Interest is paid in cash at a per annum rate, currently at 9% and will increase incrementally to 11% on June 9, 2014; provided, that we may, at our sole discretion and upon notice to the holders of the Convertible Notes, elect to pay up to 50% of the interest payment due to any holder of the Convertible Notes in PIK Interest, subject to certain conditions.
The Convertible Notes are redeemable at the Company's option at a price equal to 100% of their principal amount plus (i) if the redemption occurs prior to June 9, 2013, an amount equal to the then outstanding interest rate multiplied by the outstanding principal amount, (ii) if the redemption occurs after June 9, 2013 and prior to June 9, 2014, an amount equal to 50% of the then outstanding interest rate multiplied by the outstanding principal amount.  The Convertible Notes are redeemable at the Company's option on or after June 9, 2014 without prepayment penalty.
The Convertible Notes Agreement contains customary events of default and covenants including (i) that we will not, and will not permit any of our subsidiaries to, incur any indebtedness that is contractually subordinated in right of payment to our other indebtedness unless such indebtedness is also contractually subordinated in right of payment to the Convertible Notes on substantially similar terms; (ii) that we will not consolidate or merge with or into another person or sell, transfer or otherwise dispose of all or substantially all of our assets to another person unless certain conditions are satisfied; (iii) that, upon a change of control, we will offer to repurchase all or any part of the Convertible Notes of each holder of Convertible Notes at a purchase price in cash equal to 100% of the aggregate principal amount of the Convertible Notes repurchased, plus accrued and unpaid interest; and (iv) that we will use commercially reasonable efforts to keep the Conversion Shares listed on the NASDAQ Stock Market or another securities exchange on which our common stock is listed or quoted.
Lease Commitments—We entered into a new lease agreement related to our corporate headquarters at 250 Park Avenue, New York (the “Lease”), which commenced on July 6, 2012 and has a term of 10.5 years. The Lease replaced the prior lease for our corporate headquarters, which expired on July 20, 2012. The future minimum commitments under the Lease are as follows:
 
 
(In thousands)
2013
$
1,205

2014
1,607

2015
1,607

2016
1,607

2017
1,607

Thereafter
8,690

 
$
16,323

 
Share Repurchase Program—On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. The share repurchase program does not have an expiration date. During the year ended December 31, 2012, we repurchased 661,076 shares in open-market transactions for an aggregate cost (including transaction costs) of $4.4 million with an average price per share of $6.60.  As of December 31, 2012 we were authorized to repurchase up to $5.6 million of our common stock.

Consolidated VIEs

Although we consolidate all of the assets, liabilities and subordinated notes of the Consolidated VIEs, our maximum exposure to loss is limited to our investments and beneficial interests in the Consolidated VIEs, receivables and future investment advisory fees. All these items are eliminated upon consolidation. The assets of each of the Consolidated VIEs are held solely as collateral to satisfy the obligations of the Consolidated VIEs. If we were to liquidate, the assets of the Consolidated VIEs would not be available to our general creditors, and as a result, we do not consider them our assets. Additionally, the investors in the Consolidated VIEs have no recourse to our general assets for the debt issued by the Consolidated VIEs. Therefore, this debt is not our obligation.

Consolidated CLOs—As of December 31, 2012, we consolidated 24 CLOs and CDOs (the "Consolidated CLOs"). See "Item 8—Financial Statements and Supplementary Data—Note 2" for additional information. The following table summarizes our consolidated assets and non-recourse liabilities of the Consolidated CLOs included in the Consolidated Balance Sheets and the total maximum exposure to loss on these Consolidated CLOs, as follows:


27


 
As of December 31,
 
2012
 
2011
 
(In thousands)
Total Assets
$
9,933,495

 
$
8,037,207

Total Liabilities (non-recourse)
9,806,010

 
7,724,244

 
 
 
 
Maximum exposure to loss:
 
 
 
     Investments and beneficial interests
$
47,454

 
$
6,960

     Receivables
2,674

 
2,315

Total maximum exposure to loss
$
50,128

 
$
9,275


Other Consolidated Entities—The following table summarizes our consolidated assets and non-recourse liabilities of other consolidated VIEs included in the Consolidated Balance Sheets:

 
 
As of December 31, 2012
 
As of December 31, 2011
 
 
Consolidated Assets
 
Consolidated Total Non-Recourse Liabilities
 
Maximum Exposure to Loss (1)
 
Consolidated Assets
 
Consolidated Total Non-Recourse Liabilities
 
Maximum Exposure to Loss (1)
 
 
(In thousands)
CIFC 2012-III Warehouse
 
$
334,420

 
$
307,025

 
$
26,723

 
$

 
$

 
$

DFR MM CLO (2)
 
$

 
$

 
$

 
$
130,267

 
$
93,588

 
$
69,000

Warehouse SPV (3)
 
$

 
$

 
$

 
$
46,520

 
$
650

 
$
46,514


Explanatory Notes: 
________________________________
(1)
Maximum exposure to loss is generally limited to our investment in the entity.
(2)
Our investments in and rights to manage the DFR MM CLO were sold in February 2012. See "Item 8 - Financial Statements and Supplementary Data - Note 2" for further details.
(3)
We settled Warehouse TRS with the closing of CIFC CLO 2011-I and deconsolidated Warehouse SPV in January 2012. See "Item 8 - Financial Statements and Supplementary Data - Note 2" for further details.

    
Total net results of consolidated VIEs included on our Consolidated Statements of Operations was as follows:
 
 
For the Years Ended December 31,
 
 
2012
 
2011
 
 
(In thousands)
Consolidated CLOs
 
$
(171,966
)
 
$
(274,295
)
CIFC 2012-III Warehouse
 
2,325

 

DFR MM CLO (1)
 
(170
)
 
(14,747
)
Warehouse SPV (2)
 
1,431

 
871

   Net results of Consolidated VIEs
 
(168,380
)
 
(288,171
)
Net (income) loss attributable to noncontrolling interest and Consolidated VIEs
 
230,712

 
311,162

   Net results of Consolidated VIEs attributable to CIFC Corp.
 
$
62,332

 
$
22,991

 
 
 
 
 
Characteristics of net results of Consolidated VIEs attributable to CIFC Corp:
 
 
 
 
Consolidated VIE investment advisory fees
 
$
51,657

 
$
35,942

Consolidated VIE net investment and interest income
 
10,675

 
(12,951
)
 Net results of Consolidated VIEs attributable to CIFC Corp.
 
$
62,332

 
$
22,991



28


Explanatory Notes: 
________________________________
(1)
Our investments in and rights to manage DFR MM CLO were sold during February 2012. See "Item 8 - Financial Statements and Supplementary Data - Note 2" for further details.
(2)
Warehouse TRS was eliminated with the closing of CIFC CLO 2011-I during January 2012. See "Item 8 - Financial Statements and Supplementary Data - Note 2" for further details.

Unconsolidated VIEs—As of December 31, 2012, we had variable interests in 22 additional CLOs and CDOs and other investment products that were not consolidated (the "Unconsolidated VIEs") as we were not the primary beneficiary with respect to those VIEs. As of December 31, 2012, our maximum exposure to loss associated with the Unconsolidated VIEs was limited to $5.1 million of investments made by us in an Unconsolidated VIE and future investment advisory fees and receivables from Unconsolidated VIEs of $0.6 million and $0.9 million as of December 31, 2012 and 2011, respectively.

Related Party Transactions

DFR Holdings—DFR Holdings is considered a related party as a result of its ownership of 4.5 million shares of our common stock, issued as part of the consideration for the CNCIM Acquisition. In addition, DFR Holdings owns $25.0 million aggregate principal amount of the Company's Convertible Notes which is convertible into 4,132,231 shares of our common stock. As such, related party transactions include (i) the accrual and payment of interest on the Convertible Notes, (ii) the deferred purchase payments, (iii) DFR Holdings' investments in two CLOs managed by CNCIM as of December 31, 2011, (iv) the management agreement to provide certain administrative and support services to DFR Holdings, and (v) fees paid to members of the Board prior to the Merger who were representatives of DFR Holdings of $46,000 for the year ended December 31, 2011.

CIFC Parent—CIFC Parent is considered a related party as a result its ownership of 9.1 million shares of our common stock, issued as part of the consideration for the Merger. As such, related party transactions include (i) the deferred purchase payments (including those classified as contingent liabilities), (ii) CIFC Parent's investments in nine CLOs of which seven are Consolidated CLOs as of December 31, 2012 and investments in ten CLOs of which eight were Consolidated CLOs as of December 31, 2011, and (iii) management agreement to provide certain administrative and support services to CIFC Parent.

Total related party receivables and investment advisory fee revenue related to the management agreements noted above are as follows:
 
 
Receivables
 
Investment Advisory Fees
 
 
As of December 31,
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in thousands)
DFR Holdings
 
$
17

 
$
7

 
$
68

 
$
57

CIFC Parent
 
19

 
17

 
199

 
138

Total Related Party Investment Advisory Fees
 
$
36

 
$
24

 
$
267

 
$
195

Off-Balance Sheet Arrangements—As of December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of December 31, 2012, we did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
Subsequent Events

Subsequent to the year ended December 31, 2012, we issued two new CLOs, CIFC CLO 2012-III and CIFC Funding 2013-I, Ltd. representing approximately $1.0 billion of aggregate additional Loan-Based Fee Earning AUM.

Critical Accounting Policies and Estimates
Our significant accounting policies are disclosed in Item 8—"Financial Statements and Supplementary Data—Note 3." Our most critical accounting policies involve judgments and estimates that could affect our reported assets and liabilities, as well as our reported revenues and expenses. These accounting policies and estimates are discussed below. We believe that all of the judgments and estimates inherent in our financial statements were reasonable as of the date thereof, based upon information available to us at the time. We rely on management's experience and analysis of historical and current market data in order to

29


arrive at what we believe to be reasonable estimates. Under varying conditions, we could report materially different amounts arising under these critical accounting policies.
Fair Value Measurements and Presentation—The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial and nonfinancial assets and liabilities that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.
See Item 8—"Financial Statements and Supplementary Data—Notes 3 and 6" for a complete discussion on how we determine fair value of financial and non-financial assets and financial liabilities and the related measurement techniques and estimates involved.
Variable Interest Entities—Assessing if an entity has a variable interest and is the primarily beneficiary involves judgment and analysis on a structure-by-structure basis. For CLOs and CDOs, if we are deemed to (i) have the power to direct the activities of the CLO or CDO that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the CLO or CDO, then we are deemed to be the primary beneficiary of the CLO or CDO and are required to consolidate the CLO or CDO. Generally, our contractual relationship as collateral manager of the CLOs and CDOs described herein satisfies criteria (i) of the prior sentence, and our ownership interests in and/or ability to earn certain incentive or other management fees in certain of its CLOs and CDOs can (but does not always) satisfy criteria (ii). We have a variable interest in each of the CLOs and CDOs we manage due to the provisions of the respective management agreements and direct investments we hold in certain of the CLOs.
Business Combinations—We are required to allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation firms, when necessary, to assist in the fair value determination of significant acquired long-lived assets. This includes estimates and judgments as to the expectations of future cash flows of the acquired business, the allocation of these cash flows to identifiable intangible assets, and the estimated useful lives of intangible assets. If actual results differ from the estimates and judgments used in these estimates, this could result in possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. Contingent consideration for business combinations and contingent liabilities assumed in business combinations are remeasured at fair value at each reporting date with changes in fair value recorded within net gain (loss) on investments, loans, derivatives and liabilities on the Consolidated Statements of Operations.
Goodwill—Goodwill represents the excess cost of a business combination over the fair value of the net assets acquired. We periodically, at least on an annual basis in the fourth quarter of each year, review goodwill, considering factors such as our projected cash flows and revenues and earnings multiples of comparable companies, to determine whether the carrying value of the goodwill is impaired. If the goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs. We have one reporting unit for which goodwill is tested for impairment. In evaluating the recoverability of goodwill, we derive the fair value of our reporting unit utilizing both the income and market approaches. Under the income approach we make various assumptions regarding estimated future cash flows and other factors in determining the fair value of the reporting unit. Under the market approach, we determined the fair value of the reporting unit based on multiples of EBITDA of comparable publicly-traded companies and guideline acquisitions.
We must make various assumptions regarding estimated future cash flows and other factors in determining the fair value of the reporting unit. Key assumptions used in the income approach include, but are not limited to, the discount rate, revenue growth rates over the next five years, and the terminal growth rate. If these estimates or their related assumptions change in the future, or if we change our reporting structure, we may be required to record impairment charges. If we are not successful in achieving our expected cash flow levels, or if global economic conditions deteriorate from current levels, or if other events or changes in circumstances occur that indicate that the carrying amount of our assets may not be recoverable, a portion or all of goodwill may become impaired in future periods.
During the fourth quarter of 2012, we performed our annual impairment reviews and determined that none of the goodwill recorded on the Consolidated Balance Sheet was impaired. The underlying assumptions and estimates used in the impairment test are made as of a point in time. Subsequent changes in these assumptions and estimates could change the result of the impairment

30


test. Based on the reviews performed as of December 31, 2012 , we concluded that our sole reporting unit had an estimated fair value in excess of carrying value. If our reporting unit expected revenue growth over the next five years falls below our current expected growth rate a portion or all of our goodwill may be impaired in future periods.
Intangible Assets—Intangible assets are comprised of finite-lived assets acquired in a business combination. The largest component of our intangible assets are those associated with the CLO investment management contracts. The intangible assets associated with CLO investment management contracts are amortized over their useful lives, either on a straight line basis (intangible assets associated with the 2007 acquisition of Deerfield and Company ("Deerfield")) or based on a ratio of expected discounted cash flows from the contracts (intangible assets associated with the GECC Transaction, acquisition of CNCIM and the Merger with Legacy CIFC). We consider our own assumptions in the underlying investment advisory fee projections which include the structure of the CLOs and estimates related to loan default rates, recoveries and discount rates. A change in those projections could have a significant impact on our amortization expense.
Finite-lived intangible assets are tested for impairment if events or changes in circumstances indicate that the asset might be impaired. An impairment charge is recorded if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Impairment testing for the intangible assets associated with our CLO investment management contracts includes a comparison of the estimated remaining undiscounted cash flows related to those CLO management contracts to the carrying value of the intangible asset. If the carrying value of the intangible asset is less than the estimated remaining undiscounted cash flows, no further testing is performed and the intangible asset is not deemed impaired. If the carrying value of the intangible asset is greater than the estimated remaining undiscounted cash flows, then further analysis is performed to determine if the asset is impaired, including an analysis of the estimated remaining discounted cash flows.
During the year ended December 31, 2012, we received notice that a holder of the majority of the subordinated notes of Primus CLO I, Ltd. (“Primus I”) exercised their rights to call the CLO for redemption. As a result, we recorded a $1.8 million expense to fully impair the intangible asset associated with the Primus I management contract.
Income Taxes—Deferred tax assets and liabilities are recognized for the future income tax consequences (temporary differences) attributable to the difference between the carrying amounts of assets and liabilities and their respective income tax bases. When evaluating the realizability of our deferred tax assets, we consider, among other matters, estimates of expected future taxable income, nature of current and cumulative losses, existing and projected book/tax differences, and forecasts of our business operations. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount that is more likely than not to be realized.
GAAP provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. It requires us to evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more likely than not threshold would be recorded as tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income taxes.
Our provision for income taxes represents our total estimate of the liability that we have incurred for doing business each year. Annually, we file tax returns that represent our filing positions within each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable income determinations. Because determinations of our annual provisions are subject to judgments and estimates, it is possible that actual results will vary from those recognized in our financial statements. As a result, it is likely that additions to, or reductions of, income tax expense will occur each year for prior reporting periods as actual tax returns and tax audits are settled.
Net deferred tax assets have been recognized based on management's belief that taxable income of the appropriate character, more likely than not, will be sufficient to realize the benefits of these assets over time. In the event that actual results differ from our expectations, we may be required to record additional valuation allowances on our deferred tax assets, which may have a significant effect on our financial condition and results of operations.
Recent Accounting Updates
See Part II—Item 8—"Financial Statements and Supplementary Data - Note 3" to our consolidated financial statements for our discussion of recent accounting updates.
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by Item 7A.

31


Item 8.    Financial Statements and Supplementary Data

CIFC CORP.
Index to Financial Statements




32


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
CIFC Corp.
New York, New York

We have audited the accompanying consolidated balance sheets of CIFC Corp. and subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the two years in the period ended December 31, 2012. We also have audited the Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CIFC Corp. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ DELOITTE & TOUCHE LLP

New York, New York
April 1, 2013


33


CIFC CORP. AND ITS SUBSIDIARIES
Consolidated Balance Sheets
 
As of December 31,
 
2012
 
2011
 
(In thousands, except share
and per share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
47,692

 
$
35,973

Due from brokers
1,150

 

Restricted cash and cash equivalents
1,612

 
2,229

Investments at fair value
5,058

 

Receivables
2,432

 
2,197

Prepaid and other assets
5,392

 
5,248

Deferred tax asset, net
50,545

 
57,756

Equipment and improvements, net
3,979

 
1,697

Intangible assets, net
43,136

 
55,574

Goodwill
76,000

 
67,924

     Subtotal
236,996

 
228,598

Assets of Consolidated Variable Interest Entities:
 

 
 
Due from brokers
103,008

 
19,114

Restricted cash and cash equivalents
1,059,283

 
512,495

Investments and derivative assets at fair value
9,066,779

 
7,554,053

Loans held for sale

 
99,595

Receivables
38,845

 
26,858

Prepaid and other assets

 
1,879

Total assets of Consolidated Variable Interest Entities
10,267,915

 
8,213,994

TOTAL ASSETS
$
10,504,911

 
$
8,442,592

LIABILITIES
 
 
 
Accrued and other liabilities
$
15,734

 
$
15,840

Deferred purchase payments
4,778

 
8,221

Contingent liabilities at fair value
33,783

 
39,279

Long-term debt
138,233

 
137,455

   Subtotal
192,528

 
200,795

Non Recourse Liabilities of Consolidated Variable Interest Entities:
 
 
 
Due to brokers
494,641

 
147,367

Derivative liabilities

 
6,252

Accrued and other liabilities
5,207

 
50

Interest payable
16,753

 
11,975

Long-term debt

 
93,269

Long-term debt at fair value
9,596,434

 
7,559,568

Total Non Recourse Liabilities of Consolidated Variable Interest Entities
10,113,035

 
7,818,481

TOTAL LIABILITIES
10,305,563

 
8,019,276

EQUITY
 
 
 
Common stock, par value $0.001:
 
 
 
500,000,000 shares authorized; 20,778,053 issued and 20,682,604 outstanding as of December 31, 2012 and 20,255,430 shares issued and outstanding as of December 31, 2011
21

 
20

Treasury stock, at cost; 95,449 shares as of December 31, 2012
(664
)
 

Additional paid-in capital
955,407

 
943,440

Accumulated other comprehensive income (loss)
(3
)
 
(6
)
Retained earnings (deficit)
(833,442
)
 
(823,826
)
TOTAL CIFC CORP. STOCKHOLDERS’ EQUITY
121,319

 
119,628

Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities
78,029

 
303,688

TOTAL EQUITY
199,348

 
423,316

TOTAL LIABILITIES AND EQUITY
$
10,504,911

 
$
8,442,592

   See notes to consolidated financial statements.

34


CIFC CORP. AND ITS SUBSIDIARIES
Consolidated Statements of Operations

 
For the Year Ended December 31,
 
2012
 
2011
 
(In thousands, except share
and per share amounts)
Revenues
 
 
 
Investment advisory fees
$
10,696

 
$
11,455

Net investment and interest income:
 
 


Investment and interest income
227

 
3,332

Interest expense
1

 
350

Net investment and interest income
226

 
2,982

Total net revenues
10,922

 
14,437

Expenses
 
 
 
Compensation and benefits
22,945

 
19,993

Professional services
6,221

 
9,111

General and administrative expenses
6,096

 
6,783

Depreciation and amortization
17,931

 
16,423

Impairment of intangible assets
1,771

 
1,822

Restructuring charges
5,877

 
3,686

Total expenses
60,841

 
57,818

Other Income (Expense) and Gain (Loss)
 
 
 
Net gain (loss) on investments, loans, derivatives and liabilities (Note 8)
(9,565
)
 
1,915

Corporate interest expense
(5,912
)
 
(5,678
)
Net gain on sale of management contract
5,772

 

Strategic transactions expenses
(657
)
 
(1,459
)
Net other income (expense) and gain (loss)
(10,362
)
 
(5,222
)
Operating income (loss)
(60,281
)
 
(48,603
)
 
 
 
 
Results of Consolidated Variable Interest Entities
 
 
 
Net gain (loss) from activities of Consolidated Variable Interest Entities
(144,472
)
 
(281,459
)
Expenses of Consolidated Variable Interest Entities
(23,908
)
 
(6,712
)
Net results of Consolidated Variable Interest Entities (Note 8)
(168,380
)
 
(288,171
)
Income (loss) before income tax expense (benefit)
(228,661
)
 
(336,774
)
   Income tax expense (benefit)
11,667

 
6,980

Net income (loss)
(240,328
)
 
(343,754
)
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities (Note 5)
230,712

 
311,162

Net income (loss) attributable to CIFC Corp.
$
(9,616
)
 
$
(32,592
)
Earnings (loss) per share—
 
 
 
Basic and diluted
$
(0.47
)
 
$
(1.82
)
Weighted-average number of shares outstanding—
 
 
 
Basic and diluted
20,355,807

 
17,892,184

   
See notes to consolidated financial statements.


35


CIFC CORP. AND ITS SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)


 
 
For the Year Ended December 31,
 
 
2012
 
2011
 
(In thousands)
Net income (loss)
 
$
(240,328
)