10-K 1 cifc12311310-k.htm 10-K CIFC 12.31.13 10-K
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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
 
                               Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of the outstanding common equity held by non-affiliates of the registrant was $52.0 million based on the number of shares held by non-affiliates of the registrant as of June 30, 2013, and based on the reported last sale price of the common stock on June 30, 2013, which is the last business day of the registrant's most recently completed second fiscal quarter.
There were 20,790,889 shares of the registrant’s common stock outstanding as of March 25, 2014.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement for the registrant's 2014 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III.

 



CIFC CORP.

2013 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 originating and managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. We manage investments 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.
While Collateralized Loan Obligations ("CLOs") comprise the bulk of our assets under management ("AUM"), during the past 18 months, we utilized our expertise as a fundamentals-based, relative value credit asset manager to expand into additional product lines, including managing U.S. corporate credit and credit-based structured products for total return.  At the end of 2013, in addition to managing over 25 CLOs, we now also manage credit funds and separately managed accounts ("SMA", together "other-loan based products") with aggregate AUM greater than $1.0 billion. These credit products are opportunistic investment strategies where we seek to generate both current income and capital appreciation through SSCL investments and, to a lesser extent, other investments. We also manage Collateralized Debt Obligations ("CDOs") which we do not expect to issue in the future.
Investment advisory fees paid to us is our primary source of revenue and are generally paid on a quarterly basis for 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.
As the manager of these investment products, we generally invest in the investment products we sponsor. In addition, we also invest in SSCLs that we warehouse to launch new CLOs. We earn net investment income and incur gains/losses from these investments.
    

1


Since 2010, we have entered into the following significant transactions:
During 2010, we acquired Columbus Nova Credit Investments Management, LLC (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 it stock ownership and Convertible Notes to DFR Holdings, LLC ("DFR Holdings").
On April 13, 2011, 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. 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. With the Merger, we 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.
During 2013, DFR Holdings purchased 9,090,909 shares of our outstanding common stock from CIFC Parent Holdings LLC (“CIFC Parent”, which was a significant stockholder prior to this transaction) as well as 1,000,000 shares of our outstanding common stock and 2,000,000 warrants from an affiliate of General Electric Capital Corporation (“GE Capital”), which represented their entire shareholding in CIFC. Following the transactions, DFR Holdings, on a fully-diluted basis, owns approximately 73% of our shares. On February 25, 2014, we announced the appointment of Mr. Stephen Vaccaro, our Chief Investment Officer, and Mr. Oliver Wriedt, our Head of Capital Markets & Distribution, as Co-Presidents of CIFC. Concurrent with the appointments, Peter Gleysteen, formerly our Chief Executive Officer, President and member of our three-person management committee, resigned from such responsibilities but will continue to serve as the Vice Chairman of our Board of Directors and remain actively involved in managing certain legacy CIFC funds.
In connection with the transaction,  we entered into a Third Amended and Restated Stockholders Agreement  with DFR Holdings, dated December 2, 2013 (the “Stockholders Agreement”). Pursuant to the Stockholders Agreement, at each annual or special meeting of stockholders at which an election of directors is held, we agreed to nominate to our Board of Directors six directors designated by DFR Holdings. As detailed in our Form 8-K filed with the SEC on December 3, 2013, the number of directors that can be designated by DFR Holdings reduces as they decrease their ownership (on a diluted basis) in the Company. If DFR Holdings' ownership falls below 5%,  it loses the right to designate any director. Following the transaction, three directors designated by CIFC Parent resigned and were subsequently replaced by three designees of DFR Holdings.
Since the Merger, we have focused on growing our core asset management business as a fee-based corporate credit asset manager for third party investors. We exited non-core and other activities, 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. In late 2012, we started to reposition CIFC as a U.S. Credit Manager by increasing our product offering and utilizing our existing expertise. Since 2012, we invested an aggregate of $30.0 million to seed three credit funds which are open for subscriptions as of December 31, 2013. Across three SMAs and three credit funds, we have AUM of greater than $1.0 billion. Accordingly, management internally views the business as one reportable segment.

Recent DevelopmentsNew Funds—During the fourth quarter of 2013, we launched an open ended credit fund that initially shall invest primarily in second-lien loans ("the "Tactical Income Fund") and a structured credit fund that invests primarily in residual tranches of CLOs and, to a lesser extent, warehouses, managed by CIFC (the "Co-Investment Fund"). We invested $25.0 million to seed these two funds.

During the fourth quarter of 2012, we launched an open ended credit fund that invests in U.S. performing senior secured corporate loans ("the "Senior Secured Corporate Loan Fund") to provide capital appreciation and risk-adjusted returns to its investors. Through our investment in the general partner, we held a $10.8 million investment in the fund as of December 31, 2013.


2


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 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 for as long as we manage the products. Investment advisory fees on our CLOs 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 (before any fee sharing arrangements):
 
Senior management fees (payable before the interest payable on the debt securities issued by such CLOs) that generally range from 15 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 30 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 20 to 35 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 paid subordinated management fees. We do not expect to issue CDOs in the future.

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 during 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."
 

3


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”, "equity" or "residual interests." 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 was $49.5 million and $47.5 million as of December 31, 2013 and 2012, 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 (described above). 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):
 
 
December 31, 2013
 
December 31, 2012
 
Number of Accounts
 
Fee Earning AUM (2)
 
Number of Accounts
 
Fee Earning AUM (2)
 
 
 
(In thousands)
 
 
 
(In thousands)
Post 2011 CLOs
8

 
$
4,127,951

 
3

 
$
1,579,558

Legacy CLOs (3)
20

 
6,811,382

 
29

 
9,599,220

     Total CLOs
28

 
10,939,333

 
32

 
11,178,778

Other Loan-Based Products (4)
6

 
1,106,526

 
3

 
666,120

Total Loan-Based AUM
34

 
12,045,859

 
35

 
11,844,898

ABS CDOs
8

 
802,821

 
10

 
2,402,088

Corporate Bond CDOs

 

 
4

 
67,053

Total Fee Earning AUM
42

 
$
12,848,680

 
49

 
$
14,314,039


Explanatory Notes:
_________________________________
(1)
We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs is expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM generally reflects the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLO as of the date of the last trustee report received for each CLO prior to the respective AUM date.
(3)
Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.
(4)
Other loan-based products investment advisory fee structures vary by fund and may not be similar to a CLO.


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Investment Approach

Our investment processes are overseen by our Investment Research, Portfolio Management and Trading teams. Employing the firms's analytical framework, each new investment opportunity is first screened and, if it passes initial review, subsequently voted on by the firm's Investment Committee. Our investment team includes over 25 professionals with an average 15 years of credit experience and the Chief Investment Officer with over 35 years of experience. When evaluating the suitability of an investment and subject to an account's individual investment objectives and parameters, we typically:

employ underwriting discipline based on (i) fundamental credit analysis, which assesses each borrower's debt servicing capability, (ii) fundamental value, (iii) the magnitude and prospective volatility of the “value cushion” (a CIFC term for junior capital supporting each investment) and (iv) identifying and selecting 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

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 credits are identified, we will decide whether to sell or hold such loans and regularly re-evaluate with the intention to maximize our recovery. Our Portfolio Management and Trading Teams work closely with our investment professionals from the date on which an investment is made until the time it is exited in order to ensure that performance of each investment is closely monitored and our clients' investment objectives are met.
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 and larger, diversified managers. 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 purchasers" 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 us using the contact information below.
Employees
As of December 31, 2013, we had 75 full-time employees.

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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
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 and thereafter. 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.
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.
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.
      

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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, 2013 and 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, 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 affected.
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.
For example, on February 25, 2014, Peter Gleysteen resigned as our President and Chief Executive Officer. In connection with Mr. Gleysteen’s resignation, our Board of Directors appointed each of Stephen Vaccaro, our Chief Investment Officer, and Oliver Wriedt, our Head of Capital Markets & Distribution, as Co-Presidents of CIFC. The transition to Co-Presidents could result in disruptions to our operations, and our business and financial performance could be adversely affected.

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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. For CLOs these investments are primarily comprised of SSCLs rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade. 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 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.

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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.
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 face various security threats, including cyber security attacks to our information technology infrastructure that are intended to gain access to our proprietary information, destroy data or disable, degrade or sabotage our systems. These security threats could originate from a wide variety of sources, including unknown third parties outside the company. Although we have not yet been subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, have materially affected our operations or financial condition, there can be no assurance that the various procedures and controls we utilize to mitigate these threats will be sufficient to prevent disruptions to our systems. If any of these systems do not operate properly or are disabled for any reason or if there is any unauthorized disclosure of data, whether as a result of tampering, a breach of our network security systems, a cyber-incident or attack or otherwise, we could suffer substantial financial loss, increased costs, a disruption of our businesses, liability to our investors, regulatory intervention or reputational damage. In addition, we operate in businesses that are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.
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 (i) we have a dedicated offsite location for certain key staff and (ii) data is backed up at a 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.
DFR Holdings, LLC exercises significant influence over us, including through the ability to elect six members of our Board of Directors.
        As of December 31, 2013, our common stock owned by DFR Holdings, LLC represents over 70% of shares in CIFC on a fully diluted basis. The Third Amended and Restated Stockholders Agreement provides that DFR Holdings has the right to designate six directors to the Board. As a result, the directors elected to the Board by DFR Holdings may exercise significant influence on matters considered by the Board. DFR Holdings may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.
    

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    Other than requirements to support the nomination, election and removal of directors in accordance with the Third Amended and Restated Stockholders Agreement and to support maintaining our status as a "controlled company" under applicable NASDAQ rules, there are no restrictions on DFR Holdings' ability to vote the common stock owned by them. As a result, DFR Holdings, acting alone, 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 effect 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.
       We have goodwill and intangible assets that 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. For example, we are currently involved in a suit by a former employee that alleges, among other things, employment discrimination, sexual harassment, wrongful discharge, fraud, breach of fiduciary duty and various securities law violations. From time to time we, our funds and our portfolio companies have been and may be subject to class action suits by shareholders in public companies that we have agreed to acquire that challenge our acquisition transactions and/or attempt to enjoin them. Please see "Item 3—Legal Proceedings” section for additional discussion of certain proceedings to which we are currently a party. In addition, 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 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.
    

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    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 pursuant to the “Volker Rule” and other rules and regulations 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. These rules could adversely affect the availability of warehouse financing, the attractiveness of investments in funds we manage and/or the loan market generally. 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.  
    Under the U.S. Foreign Account Tax Compliance Act (“FATCA”), all entities in a broadly defined class of foreign financial institutions (“FFIs”), likely impacting CLOs, are required to comply with a complicated and expansive reporting regime or, beginning in 2014, be subject to a 30% United States withholding tax on certain U.S. payments (and beginning in 2017, a 30% withholding tax on gross proceeds from the sale of U.S. stocks and securities) and non-U.S. entities which are not FFIs are required to either certify they have no substantial U.S. beneficial ownership or to report certain information with respect to their substantial U.S. beneficial ownership or, beginning in 2014, be subject to a 30% U.S. withholding tax on certain U.S. payments (and beginning in 2017, a 30% withholding tax on gross proceeds from the sale of U.S. stocks and securities). The reporting obligations imposed under FATCA require FFIs to enter into agreements with the IRS to obtain and disclose information about certain investors to the IRS. In addition, the administrative and economic costs of compliance with FATCA may discourage some foreign investors from investing in CLOs or other funds, which could adversely affect our ability to raise funds from these investors.
        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.
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.

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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, we 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 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, 2013 and 2012, we had unrestricted cash and cash equivalents of $25.5 million and $47.7 million, respectively. Cash generated from operations 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.
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.
       

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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 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.

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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.
        DFR Holdings controls 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 Third 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 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 DFR Holdings.
        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 DFR Holdings for the resale of certain shares received by them in the CNCIM Acquisition and the shares of common stock issuable upon conversion of the Convertible Notes. 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 DFR Holdings 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

A suit was filed in June 2013 against us (and certain of our affiliates and directors) with the Supreme Court of the State of New York, County of New York, by Nga Tran-Pedretti, a former employee, alleging, among other things, employment discrimination, sexual harassment, wrongful discharge, fraud, breach of fiduciary duty and various securities law violations.  Such suit was removed to the United States District Court in the Southern District of New York on June 25, 2013.  We deny the allegations, intend to defend ourself vigorously, believe that the pending lawsuit is without merit and have filed counterclaims against the plaintiff.

Item 4.    Mine Safety Disclosures
None.

15



PART II.

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

Our common stock is traded on NASDAQ under the trading symbol "CIFC." Our former ticker symbol was "DFR." As of March 25, 2014, we had approximately1,119 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:
 
2013
 
2012
 
High
 
Low
 
High
 
Low
4th Quarter
$
8.30

 
$
7.30

 
$
8.00

 
$
6.25

3rd Quarter
$
8.37

 
$
6.77

 
$
7.79

 
$
5.89

2nd Quarter
$
8.49

 
$
6.60

 
$
7.40

 
$
5.40

1st Quarter
$
9.05

 
$
7.10

 
$
6.66

 
$
4.16

Dividends
Dividends per Common Share (declared):
 
 
 
 
 
 
 
 
 
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2013
 
n/a
 
n/a
 
$0.10
 
$0.10
2012
 
n/a
 
n/a
 
n/a
 
n/a
We paid a $0.10 quarterly dividend during the third and fourth quarter of the year to shareholders of record as of August 27, 2013 and November 25, 2013, respectively. Subsequent to year end, the Board of Directors declared a cash dividend of $0.10 per share. The dividend will be paid on April 25, 2014 to shareholders of record as of the close of business on April 4, 2014.
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 11" for more information regarding the restrictive covenants contained in our Junior Subordinated Notes.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

No common shares were repurchased during the three months ended December 31, 2013.


16


Equity Compensation Plan Information
The following table sets forth certain information, as of December 31, 2013, 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
3,879,813

 
$
6.33

 
222,789

Equity compensation plans approved by security holders - restricted stock units
11,250

 
n/a

 
n/a

   Total
3,891,063

 
 
 
222,789


Explanatory Note:
_________________________________
(1)
See Item 8—"Financial Statements and Supplementary Data—Note 12" 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.

17



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 originating and managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. We manage investments 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 asset management subsidiaries include: CIFC Asset Management LLC ("CIFCAM"), Columbus Nova Credit Investments Management LLC (“CNCIM”), CypressTree Investment Management, LLC ("CypressTree") and Deerfield Capital Management LLC ("DCM").
While Collateralized Loan Obligations ("CLOs") comprise the bulk of our assets under management ("AUM"), during the past 18 months, we utilized our expertise as a fundamentals-based, relative value credit asset manager to expand into additional product lines, including managing U.S. corporate credit and credit-based structured products for total return.  At the end of 2013, in addition to managing over 25 CLOs, we now also manage credit funds and separately managed accounts ("SMA", together "other-loan based products") with aggregate AUM greater than $1.0 billion. These credit products are opportunistic investment strategies where we seek to generate both current income and capital appreciation through SSCL investments and, to a lesser extent, other investments. We also manage Collateralized Debt Obligations ("CDOs") which we do not expect to issue in the future. Management internally views the business as one reportable segment.
Investment advisory fees paid to us is our primary source of revenue and are generally paid on a quarterly basis for 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.
As the manager of these investment products, we generally invest in the investment products we sponsor. In addition, we also invest in SSCLs that we warehouse to launch new CLOs. We earn net investment income and incur gains/losses from these investments.
Executive Overview

2013 was an important year for CIFC as we started repositioning CIFC from a monoline CLO manager to a broad based U.S. credit manager. CIFC now also manages multiple credit funds and separately managed accounts with aggregate AUM of greater than $1.0 billion. During 2013, we invested $25.0 million to seed two new credit funds. We saw growth in all revenue categories, especially incentive fees, which reflects continued strong performance relative to fund return targets, particularly for the CIFC family of CLOs. New CLO issuance has continued at a robust pace while loan-based AUM was relatively flat due to the high runoff rate of legacy CLOs driven by very high loan refinancing volumes and its impact on older, amortizing CLOs and calls.
During the year ended December 31, 2013, we recorded GAAP net income attributable to CIFC Corp. of $23.4 million, compared to $(8.7) million for the prior year. Our Economic Net Income ("ENI") was $41.9 million, compared to $22.2 million for the same period in the prior year. Overall, both our GAAP and ENI performance improved as a result of increased management and incentive fees earnings year over year. Incentive fees increased as (i) we earned 50% of incentive fees realized on legacy CIFC CLOs (previously, all incentive fees were paid to CIFC Parent in connection with the 2011 merger with Legacy CIFC) and (ii) more CLOs reached their incentive hurdles in the current year. Results from the current year included a full year of management fees from CLOs and funds launched since the fourth quarter of 2012. In addition, net interest income increased as we realized more gains from our warehouse investments in the current year. Prior year GAAP net income has been restated to reflect immaterial adjustments identified in the current year. See "Results of Operations" below for additional details.

18


Market and Economic Conditions

2013 saw leveraged loan issuance surging to record levels supported by CLO issuance, inflows into retail funds and increasing interest from cross-over buyers rotating from high yield and other fixed income products into loans. CLO issuance activity was robust with over 180 deals for over $85 billion in financing capacity, which is the third highest annual volume on record, trailing 2006 at $94 billion and 2007 at $90 billion. Loan retail mutual funds have recorded net inflows at $63 billion, surpassing the previous 2010 high of $18 billion by 3 times. We believe the strong demand for leveraged loans by CLOs and retail investors was driven, among other reasons by the floating rate nature of the asset class, which offers protection to investors in the event of rising interest rates and strong relative returns of the loan asset class.

Recent Developments

On December 18, 2013, DFR Holdings purchased 9,090,909 shares of our outstanding common stock from CIFC Parent Holdings LLC (“CIFC Parent”, a significant stockholder in ours prior to this transaction) as well as 1,000,000 shares of our outstanding common stock and 2,000,000 warrants from an affiliate of General Electric Capital Corporation ("GE Capital"), which represented their entire shareholding in CIFC. Following the transactions, DFR Holdings, on a fully-diluted basis, owns approximately 73% of our shares. In addition, three directors designated by CIFC Parent resigned and were subsequently replaced by three designees of DFR Holdings.

On February 25, 2014, we announced the appointment of  Mr. Stephen Vaccaro, our Chief Investment Officer, and Mr. Oliver Wriedt, our Head of Capital Markets & Distribution, as Co-Presidents of CIFC. Concurrent with the appointments, Peter Gleysteen, formerly our Chief Executive Officer, President and member of our three-person management committee, resigned from such responsibilities but will continue to serve as the Vice Chairman of our Board of Directors and remain actively involved in managing certain legacy CIFC funds.

New Funds—During the fourth quarter of 2013, we launched an open ended credit fund that initially shall invest primarily in second-lien loans (the "Tactical Income Fund") and a structured credit fund that invests primarily in residual tranches of CLOs and, to a lesser extent, warehouses, managed by CIFC (the "Co-Investment Fund"). We invested $25.0 million to seed these two funds.

During the fourth quarter of 2012, we launched an open ended credit fund that invests in U.S. performing senior secured corporate loans ("the "Senior Secured Corporate Loan Fund") to provide capital appreciation and risk-adjusted returns to its investors. Through our investment in the general partner, we held a $10.8 million investment in the fund as of December 31, 2013.

Fee Earning AUM

The following table summarizes the Fee Earning AUM ("Fee Earning AUM" or "AUM"), for which we are paid a management fee, by significant investment product category (1):
 
 
December 31, 2013
 
December 31, 2012
 
Number of Accounts
 
Fee Earning AUM (2)
 
Number of Accounts
 
Fee Earning AUM (2)
 
 
 
(In thousands)
 
 
 
(In thousands)
Post 2011 CLOs
8

 
$
4,127,951

 
3

 
$
1,579,558

Legacy CLOs (3)
20

 
6,811,382

 
29

 
9,599,220

     Total CLOs
28

 
10,939,333

 
32

 
11,178,778

Other Loan-Based Products (4)
6

 
1,106,526

 
3

 
666,120

Total Loan-Based AUM
34

 
12,045,859

 
35

 
11,844,898

ABS CDOs
8

 
802,821

 
10

 
2,402,088

Corporate Bond CDOs

 

 
4

 
67,053

Total Fee Earning AUM
42

 
$
12,848,680

 
49

 
$
14,314,039



19


Explanatory Notes:
_________________________________
(1)
We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs is expected to continue to decline as these funds run-off per their contractual terms.
(2)
Fee Earning AUM generally reflects the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLO as of the date of the last trustee report received for each CLO prior to the respective AUM date.
(3)
Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.
(4)
Other loan-based products investment advisory fee structures vary by fund and may not be similar to a CLO.

Fee Earning AUM activity for the years ended December 31, 2013 and 2012 are as follows:
 
 
For the Years Ended December 31,
 
 
2013
 
 
2012
 
 
(In thousands)
Total loan-based AUM - Beginning Balance
 
$
11,844,898

 
 
$
10,628,504

CLO New Issuances
 
2,530,869

 
 
1,579,558

CLO Acquisitions
 

 
 
718,583

CLO Principal Paydown
 
(2,013,497
)
 
 
(760,289
)
CLO Calls, Redemptions and Sales
 
(681,167
)
 
 
(936,009
)
Fund Subscriptions
 
494,161

 
 
713,889

Fund Redemptions
 
(10,354
)
 
 
(121,624
)
Other (1)
 
(119,051
)
 
 
22,286

Total loan-based AUM - Ending Balance
 
12,045,859

 
 
11,844,898

Total CDOs - Ending Balance
 
802,821

 
 
2,469,141

Total Fee Earning AUM - Ending Balance
 
$
12,848,680

 
 
$
14,314,039


Explanatory Note:
_________________________________
(1)     Other includes changes in collateral balances of CLOs between periods and market value changes in certain other loan-based products.

    
During the year ended December 31, 2013, total AUM decreased by $1.5 billion. AUM from CDOs decreased by $1.7 billion due to run-offs and redemptions which was partially offset by the increases in loan-based AUM of $0.2 billion. During the year, we sponsored the issuance of five CLOs, entered into management agreements for two SMAs, launched two credit funds and increased subscriptions to an existing credit fund, increasing total AUM by approximately $3.0 billion. New AUM was offset by calls and redemptions of nine CLOs and declines in AUM for certain Legacy CLOs, aggregating $2.7 billion, which have reached the end of their contractual reinvestment periods, after which capital is returned to investors as the loan assets underlying the CLOs repay principal.

Most of the CLOs and CDOs we manage and issued prior to 2011 have passed their first optional call date and are generally callable by their subordinated note holders, subject to satisfaction of certain conditions. As expected, CDO AUM continued to decline during the year ended December 31, 2013. We do not expect to sponsor new CDOs and expect CDO AUM to continue to decline going forward as these funds run-off per their contractual terms.


20


The structure of the CLOs we manage affects the investment advisory fees paid to us. The following table summarizes select details of the structure of each of the CLOs we manage:
 
 
Issuance Date
 
December 31, 2013
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.
 
01/12
 
$
403,553

 
01/14
 
01/15
 
2023
CIFC Funding 2012-I, Ltd.
 
07/12
 
453,432

 
08/14
 
08/16
 
2024
CIFC Funding 2012-II, Ltd.
 
11/12
 
732,391

 
12/14
 
12/16
 
2024
CIFC Funding 2012-III, Ltd.
 
01/13
 
503,348

 
01/15
 
01/17
 
2025
CIFC Funding 2013-I, Ltd.
 
03/13
 
504,687

 
04/15
 
04/17
 
2025
CIFC Funding 2013-II, Ltd.
 
06/13
 
626,520

 
07/15
 
07/17
 
2025
   CIFC Funding 2013-III, Ltd.
 
09/13
 
402,329

 
10/15
 
10/17
 
2025
   CIFC Funding 2013-IV, Ltd.
 
11/13
 
501,691

 
11/15
 
11/17
 
2024
Total Post 2011 CLOs
 
 
 
4,127,951

 
 
 
 
 
 
Legacy CLOs
 
 
 
 
 
 
 
 
 
 
Navigator 2005 CLO, Ltd. (4)
 
07/05
 
53,592

 
10/11
 
10/11
 
2017
Marquette Park CLO Ltd. 
 
12/05
 
100,745

 
04/10
 
01/12
 
2020
Bridgeport CLO Ltd. 
 
06/06
 
446,546

 
10/09
 
07/13
 
2020
CIFC Funding 2006-I, Ltd. 
 
08/06
 
292,769

 
10/10
 
10/12
 
2020
Columbus Nova 2006-I, Ltd.
 
08/06
 
341,145

 
10/09
 
10/12
 
2018
Navigator 2006 CLO, Ltd. (4)
 
09/06
 
319,387

 
09/10
 
09/13
 
2020
CIFC Funding 2006-I B, Ltd. 
 
10/06
 
252,818

 
12/10
 
12/12
 
2020
Burr Ridge CLO Plus Ltd. 
 
12/06
 
266,176

 
06/12
 
03/13
 
2023
CIFC Funding 2006-II, Ltd. 
 
12/06
 
455,146

 
03/11
 
03/13
 
2021
Columbus Nova 2006-II, Ltd.
 
12/06
 
439,430

 
02/10
 
02/13
 
2018
Hewett's Island CLO V, Ltd. 
 
12/06
 
166,506

 
12/09
 
12/12
 
2018
CIFC Funding 2007-I, Ltd. 
 
02/07
 
394,455

 
05/11
 
11/13
 
2021
CIFC Funding 2007-II, Ltd. 
 
03/07
 
587,805

 
04/11
 
04/14
 
2021
Columbus Nova 2007-I, Ltd.
 
03/07
 
373,868

 
05/10
 
05/13
 
2019
Hewett's Island CLO VI, Ltd. 
 
05/07
 
215,189

 
06/10
 
06/13
 
2019
Schiller Park CLO Ltd. 
 
05/07
 
383,303

 
07/11
 
04/13
 
2021
Bridgeport CLO II Ltd. 
 
06/07
 
489,553

 
12/10
 
09/14
 
2021
CIFC Funding 2007-III, Ltd. 
 
07/07
 
435,544

 
07/10
 
07/14
 
2021
Primus CLO II, Ltd. 
 
07/07
 
364,645

 
10/11
 
07/14
 
2021
Columbus Nova 2007-II, Ltd.
 
11/07
 
432,760

 
10/10
 
10/14
 
2021
Total Legacy CLOs
 
 
 
6,811,382

 
 
 
 
 
 
Total CLOs
 
 
 
$
10,939,333

 
 
 
 
 
 
Explanatory Notes:
_________________________________
(1)
CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) 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 these CLOs through the completion of the GECC transaction. See "Item 8 - Consolidated Financial Statements - Note 4" for further details.


21



Results of Consolidated Operations
 
The Consolidated Financial Statements include the financial statements of our wholly owned subsidiaries, the entities in which we have a controlling interest ("Consolidated Funds") and variable interest entities ("VIEs" or "Consolidated VIEs") for which we are deemed to be the primary beneficiary (together the "Consolidated Entities"). Consolidated VIEs includes certain CLOs, CDOs and other entities we manage. The following table presents our comparative Consolidated Statements of Operations for the years ended December 31, 2013 and 2012:

 
For the Years Ended December 31,
 
2013 vs. 2012
 
2013
 
2012
 
Variance
 
% Variance
 
(In thousands, except share and per share amounts)
 
 
Revenues
 

 
 

 
 

 
 
Investment advisory fees
$
8,400

 
$
10,696

 
$
(2,296
)
 
(21
)%
Net investment income
333

 
226

 
107

 
47
 %
Total net revenues
8,733

 
10,922

 
(2,189
)
 
(20
)%
Expenses
 

 
 

 
 

 
 
Compensation and benefits
30,339

 
22,945

 
7,394

 
32
 %
Professional services
5,277

 
6,221

 
(944
)
 
(15
)%
General and administrative expenses
7,707

 
6,096

 
1,611

 
26
 %
Depreciation and amortization
15,541

 
17,931

 
(2,390
)
 
(13
)%
Impairment of intangible assets
3,106

 
1,771

 
1,335

 
75
 %
Restructuring charges

 
5,877

 
(5,877
)
 
(100
)%
Total expenses
61,970

 
60,841

 
1,129

 
2
 %
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 
Net gain (loss) on investments at fair value
1,822

 
2,308

 
(486
)
 
(21
)%
Net gain (loss) on contingent liabilities at fair value
1,644

 
(11,452
)
 
13,096

 
n/m

Corporate interest expense
(5,865
)
 
(5,912
)
 
47

 
(1
)%
Net gain on the sale of management contract
1,386

 
5,772

 
(4,386
)
 
(76
)%
Strategic transactions expenses

 
(657
)
 
657

 
(100
)%
Other, net
(2
)
 
(421
)
 
419

 
(100
)%
Net other income (expense) and gain (loss)
(1,015
)
 
(10,362
)
 
9,347

 
90
 %
Operating income (loss)
(54,252
)
 
(60,281
)
 
6,029

 
10
 %
 
 
 
 
 
 
 


Net results of Consolidated Entities
169,869

 
(168,380
)
 
338,249

 
n/m

Income (loss) before income taxes
115,617

 
(228,661
)
 
344,278

 
(151
)%
Income tax (expense) benefit (1)
(18,782
)
 
(10,750
)
 
(8,032
)
 
75
 %
Net income (loss) (1)
96,835

 
(239,411
)
 
336,246

 
n/m

Net (income) loss attributable to noncontrolling interest in Consolidated Entities
(73,464
)
 
230,712

 
(304,176
)
 
(132
)%
Net income (loss) attributable to CIFC Corp. (1)
$
23,371

 
$
(8,699
)
 
$
32,070

 
(369
)%
Earnings (loss) per share (1):
 

 
 

 
 

 
 
Basic
$
1.12

 
$
(0.43
)
 
$
1.55

 
n/m

Diluted
$
0.98

 
$
(0.43
)
 
$
1.41

 
n/m

Weighted-average number of shares outstanding:
 

 
 

 
 

 
 
Basic
20,800,580

 
20,355,807

 
444,773

 
2
 %
Diluted
25,737,363

 
20,355,807

 
5,381,556

 
26
 %
     
Explanatory Note:
______________________________
(1)
Amounts in the prior year have been restated to reflect immaterial adjustments identified in the current year. See Item 8—"Financial Statements and Supplementary Data—Note 19" for additional details.



22


Net income (loss) attributable to CIFC Corp. was $23.4 million, or $0.98 per fully diluted share for the year ended December 31, 2013, compared to $(8.7) million, or $(0.43) per fully diluted share, in the prior year. Net income (loss) attributable to CIFC Corp. increased by $32.1 million from the prior year predominantly due to the following net results:
    
Total Net Revenues—GAAP net revenues includes investment advisory fees from unconsolidated CLOs, CDOs and other loan-based products. Total net revenues decreased $2.2 million or (20)% from the same period of the prior year as certain unconsolidated CLOs and CDOs have reached the end of their contractual reinvestment periods thereby reducing AUM and its related investment advisory fees. This decrease is slightly offset by the increase in other-loan based product advisory agreements recognized during the current year as AUM from these products has increased during 2013.

Total Expenses—Total expenses increased $1.1 million or 2% year over year primarily due to increases in Compensation and benefits, General and administrative expenses and Impairments of intangible assets. These decreases were partially offset by lower Restructuring costs, Depreciation and amortization expenses and Professional services.

Compensation and benefits increased by $7.4 million or 32% from the prior year. The increase of compensation related to (i) the accelerated vesting of stock option awards for our CEO which resulted in an additional $1.8 million of compensation and benefits expense recognized during the current year, (ii) additional amortization of stock options granted during 2012, (iii) the amortization and re-measurement of the profits interests granted in 2011 by CIFC Parent to our employees and (iv) the payment of a percentage of incentive fees earned on CLOs in accordance to employment agreements with certain former employees. In addition, compensation and benefits increased as a result of an overall increased headcount to support the continued growth and diversification of the business.

In addition, General and administrative expenses increased year over year due to increase in (i) investment related subscription services, (ii) marketing costs from additional marketing efforts and (iii) other general and administrative costs to support our overall growth.

During the current year, we fully impaired intangible assets related to CLO management contracts where the holders exercised their rights to call the CLO and when the carrying value attributable to non-core CDOs were no longer deemed recoverable. Non-core CDOs are expected to continue to decline as the funds run-off per their contractual terms. In the prior year, we fully impaired intangible assets associated with the Primus CLO I, Ltd. management contract where the holders exercised their rights to call the CLO for redemption. In addition, the prior year full impairment of intangibles resulted in a reduction of Depreciation and amortization expense by $2.4 million.

During 2012, restructuring charges included the termination of our Rosemont, Illinois lease related to the consolidation of operations at our 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 April 13, 2011 merger with Legacy CIFC.

Professional services decreased year over year due to an overall reduction in the use of external consultants as we hired personnel to perform these services.

Net other income (expense) and gain (loss)—Total Net other expense and loss decreased by $9.3 million or 90% year over year, primarily due to significant decrease in losses on contingent liabilities at fair value. During 2012, we recognized $11.5 million of losses from contingent liabilities as market conditions indicated a better performance on legacy CIFC CLOs subject to fee sharing arrangements. These increases were slightly offset by decrease in gains we recognized from the sale of management contracts as we sold our rights to manage Gillespie during 2012 (see “Item 8-Notes to Consolidated Financial Statements-Note 9”).

    

23


Net results of Consolidated Entities attributable to CIFC Corp.—The table below represents our share in the net results of the Consolidated Entities and a reconciliation to the characteristics of these results:
 
For the Years Ended December 31,
2013 vs. 2012
 
2013
 
2012
Variance
 
% Variance
 
(In thousands)
 
 
 
Net results of Consolidated Entities
169,869

 
(168,380
)
338,249

 
n/m

Net (income) loss attributable to noncontrolling interest in Consolidated Entities
(73,464
)
 
230,712

(304,176
)
 
(132
)%
   Net results of Consolidated Entities attributable to CIFC Corp.
$
96,405

 
$
62,332

$
34,073

 
55
 %
 
 
 
 
 
 
 
Characteristics of net results of Consolidated Entities attributable to CIFC Corp:
 
 
 
 
 
 
Consolidated Entities investment advisory fees
$
82,317

 
$
51,657

$
30,660

 
59
 %
Consolidated Entities net investment income
14,088

 
10,675

3,413

 
32
 %
 Net results of Consolidated Entities attributable to CIFC Corp.
$
96,405

 
$
62,332

$
34,073

 
55
 %

Net results of Consolidated Entities attributable to CIFC Corp. includes our portion of the Consolidated Entities' (including our Consolidated VIEs, or CLOs and warehouses) operating results. During the years ended December 31, 2013 and 2012, we recognized $96.4 million and $62.3 million, respectively, of Consolidated Entities' investment advisory fees and net investment interest income related to our investments in the equity of CLOs we manage (see  below - Consolidated VIEs for further details).

The $34.1 million increase in Net results of Consolidated Entities attributable to CIFC Corp. was primarily due to an increase in Consolidated Entities' incentive fees as (i) more CLOs reached their incentive fee hurdles as compared to the same period of the prior year and (ii) during the second quarter of 2013, we began realizing 50% of incentive fees earned on our legacy CIFC CLOs acquired through the Merger in April 2011. In the prior year, all incentive fees were paid to the seller. In addition, net investment income increased as we realized more gains from our warehouse investments in the current year.

Income tax expense/benefit—The following table summarizes our tax position:
 
For the Year Ended December 31,
 
2013
 
2012
 
(In thousands)
Income (loss) before income taxes
$
115,617

 
$
(228,661
)
Income tax expense (1)
$
18,782

 
$
10,750

Effective income tax rate (1)
16.25
%
 
4.70
%

Explanatory Note:
______________________________
(1)
Amounts in the prior year have been restated to reflect immaterial adjustments identified in the current year. See Item 8—"Financial Statements and Supplementary Data—Note 19" for additional details.

The income tax expense increased by $8.0 million from the prior year. During the years ended December 31, 2013 and 2012, the effective tax rate was 16.25% and 4.70%, respectively. For both years, the effective tax rate differed from the statutory rate of 35% primarily due to the impact of the Consolidated VIEs noncontrolling interest income (loss), which has been included in our pre-tax income (loss) but is not taxable to CIFC, state income taxes, certain discrete and permanent items, including fair value changes of certain contingent liabilities related to the Merger.


24


Economic Net Income "ENI" (Non-GAAP Measures)
 
ENI is a non-GAAP financial measure of profitability which we use in addition to GAAP Net income attributable to CIFC Corp. to measure the performance of our core business (excluding non-core products). We believe ENI reflects the nature and substance of the business, the economic results driven by investment advisory fee revenues from the management of client funds and earnings on our investments. ENI presents investment advisory fee revenues net of (i) any fee-sharing arrangements primarily resulting from mergers or acquisitions and (ii) revenues attributable to non-core investment products. In addition, ENI represents net income (loss) attributable to CIFC Corp. before taxes, gains (losses) on disposition(s) attributable to non-core assets, a portion of non-cash compensation related to profits interests granted by CIFC Parent in June 2011 (a significant stockholder prior to December 18, 2013 - See Item 8 - "Consolidated Financial Statements - Note 15"), amortization and impairments of intangible assets, gains/(losses) on derivatives and contingent liabilities and certain non-recurring operating expenses and strategic transaction expenses (such as those associated with mergers and acquisitions).

     ENI may not be comparable to similar measures presented by other companies, as they are non-GAAP financial measures that are 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 an 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 Years Ended December 31,
 
 
2013
 
2012
 
(in thousands)
GAAP Net income (loss) attributable to CIFC Corp. (1)
 
$
23,371

 
$
(8,699
)
Reconciling and non-recurring items:
 
 
 
 
Advisory fee sharing arrangements (2)
 
(15,744
)
 
(10,193
)
Advisory fees attributable to non-core funds (3)
 
(3,139
)
 
(3,168
)
Compensation costs (4)
 
3,767

 
2,135

Insurance settlement received
 

 
(657
)
Amortization and impairment of intangibles
 
17,913

 
19,213

Restructuring charges
 

 
5,877

Net (gain)/loss on contingent liabilities, derivatives and other (5)
 
(1,644
)
 
12,041

Strategic transactions expenses (6)
 

 
657

Gain on sales of contracts (7)
 
(1,386
)
 
(5,772
)
Income tax expense (benefit) (1)
 
18,782

 
10,750

Total reconciling and non-recurring items (1)
 
18,549

 
30,883

ENI
 
$
41,920

 
$
22,184


Explanatory Notes:
______________________________
(1)
Amounts in the prior year have been restated to reflect immaterial adjustments identified in the current year. See Item 8—"Financial Statements and Supplementary Data—Note 19" for additional details.
(2)
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 funds to us). Investment advisory fees are presented on a gross basis for GAAP and on a net basis for Non-GAAP ENI.
(3)
Current year ENI calculation includes the reduction attributable to non-core advisory fees. Prior year ENI calculation has been adjusted to conform with the current year's calculation.
(4)
Compensation has been adjusted for non-cash compensation related to profits interests granted to CIFC employees by CIFC Parent Holdings LLC (a significant stockholder in us prior to December 18, 2013) in 2011 and in 2013 sharing of incentive fees with certain former employees established in connection with our acquisition of certain CLOs from Columbus Nova Credit Investments Management LLC (“CNCIM Acquisition”).
(5)
Adjustment primarily includes the elimination of gains (losses) on contingent liabilities during the respective periods.
(6)
These expenses relate to a transaction enter into a strategic relationship with an affiliate of General Electric Capital Corporation (“GE Capital”).
(7)
In January 2012, we completed the sale of our right to manage Gillespie CLO PLC. We recognized additional gains from contingent payments collected during 2013.

    
    

25


The following table presents our components of ENI for the years ended December 31, 2013 and 2012:
 
 
For the Years Ended December 31,
 
 
 
 
 
 
 
2013 vs. 2012
 
2013
 
2012
 
Variance
 
% Variance
 
(in thousands)
 
 
Adjusted revenues
 
 
 
 
 
 
 
Investment advisory fees (1)
$
71,834

 
$
48,992

 
$
22,842

 
47
 %
Net investment income
16,243

 
13,377

 
2,866

 
21
 %
Total adjusted net revenues (2)
88,077

 
62,369

 
25,708

 
41
 %
 
 
 
 
 
 
 
 
Adjusted expenses
 
 
 
 
 

 
 
Compensation and benefits
26,572

 
20,810

 
5,762

 
28
 %
Professional services
5,277

 
6,878

 
(1,601
)
 
(23
)%
General and administrative expenses
7,707

 
6,096

 
1,611

 
26
 %
Depreciation and amortization
734

 
489

 
245

 
50
 %
Corporate interest expense
5,865

 
5,912

 
(47
)
 
(1
)%
Other, net
2

 

 
2

 
100
 %
Total adjusted expenses (3)
46,157

 
40,185

 
5,972

 
15
 %
 
 
 
 
 
 
 
 
ENI
$
41,920

 
$
22,184

 
$
19,736

 
89
 %

Explanatory Note:
______________________________
(1)
See Adjusted investment advisory fees table below for details of revenue components.
(2)
For the years ended December 31, 2013 and 2012, total adjusted net revenues includes GAAP Net revenues of $8.7 million and $10.9 million, respectively, GAAP Net gains (losses) on investments at fair value of $1.8 million and $2.3 million, respectively, GAAP Net results from Consolidated Entities of $169.9 million and $(168.4) million, respectively, GAAP Net (income) loss attributable to noncontrolling interest in Consolidated Entities of $(73.5) million and $230.7 million, respectively, and adjusted for advisory fees attributable to fee sharing of $15.7 million and $10.2 million, respectively, and non-core products of $3.1 million and $3.2 million, respectively. In addition, for the year ended December 31, 2012, total adjusted net revenues includes other of $0.2 million.
(3)
For the years ended December 31, 2013 and 2012, total adjusted expenses includes GAAP total expenses of $62.0 million and $60.8 million, respectively, corporate interest expense of $5.9 million and $5.9 million, respectively, other gains of $2.0 thousand and $0, respectively, and excludes certain compensation costs of $3.8 million and $2.1 million, respectively, and amortization and impairment of intangible assets of $17.9 million and $19.2 million, respectively. In addition, for the year ended December 31, 2012, total adjusted expenses includes professional fees of $0.7 million and excludes restructuring charges of $5.8 million.

The following table presents our components of investment advisory fees as adjusted for ENI for the years ended December 31, 2013 and 2012
 
 
For the Years Ended December 31,
 
2013 vs. 2012
 
 
2013
 
2012
 
Variance
 
% Variance
 
(In thousands)
 
 
Senior management fees
 
$
19,998

 
$
16,783

 
$
3,215

 
19
%
Subordinated management fees
 
33,861

 
29,533

 
4,328

 
15
%
Incentive management fees
 
16,272

 
2,490

 
13,782

 
553
%
   Subtotal
 
$
70,131

 
$
48,806

 
21,325

 
44
%
Other loan-based products
 
1,703

 
186

 
1,517

 
816
%
   Total adjusted investment advisory fee revenues
 
$
71,834

 
$
48,992

 
$
22,842

 
47
%

Adjusted Investment Advisory Fees—Total adjusted advisory fee revenue increased year over year by $22.8 million or 47% primarily as a result of an increase in incentive fees. Incentive fees increased as (i) more CLOs reached their incentive fee hurdles as compared to the prior year and (ii) during the second quarter of 2013, we began earning 50% of incentive fees realized from the legacy CIFC CLOs acquired through the Merger. All prior year incentive fees earned were shared with the seller (see also Contingent Liabilities and Other Commitments below for further details). Senior and subordinated management fees also increased as the current year included a full year of results from CLOs sponsored and acquired since the fourth quarter of 2012. These increases were offset by principal paydowns, calls and redemptions of certain legacy CLOs.


26


Adjusted net investment income—The following table presents our components of net investment income as adjusted for ENI for the years ended December 31, 2013 and 2012

 
For the Years Ended December 31,
 
 
 
 
 
2013
 
2012
 
Variance
 
% Variance
 
(In thousands)
 
 
Adjusted Net Investment Income
 
 
 
 
 
 
 
   CLO Funds
$
5,531

 
$
9,576

 
$
(4,045
)
 
(42
)%
   Warehouse
8,398

 
1,533

 
6,865

 
448
 %
   Loans
990

 
2,207

 
(1,217
)
 
(55
)%
   Other-loan based products
1,324

 
61

 
1,263

 
2,070
 %
   Total adjusted net investment income
$
16,243

 
$
13,377

 
$
2,866

 
21
 %

Total adjusted net investment income increased year over year by $2.9 million or 21%. We recognized adjusted net investment income from six warehouse investments during 2013 compared to two warehouse investments during 2012. These increases were slightly offset by total net unrealized losses on our CLO investments due to the changes in CLO residual interest prices during the years.

Adjusted expenses—Total adjusted expenses increased year over year by $6.0 million or 15% primarily due to an increase in adjusted compensation and benefits and adjusted general and administrative costs. These increases were slightly offset by a decrease in professional services. In connection with the DFR Holdings purchase transaction, on December 18, 2013, we entered into a multi-year employment contract with Peter Gleysteen, pursuant to which Mr. Gleysteen agreed to serve as Vice Chairman of our Board of Directors and will be actively involved in managing certain of our legacy CLOs. The agreement provided for the acceleration of the vesting of Mr. Gleysteen's stock option awards, which resulted in an additional $1.8 million of non-cash compensation and benefits expense recognized during the current year. In addition, adjusted compensation and benefits increased as a result of additional amortization of stock options granted during 2012 and an overall increased headcount to support the continued growth and diversification of the business.

General and administrative expenses increased year over year due to increase in (i) investment related subscription services, (ii) marketing costs from additional marketing efforts and (iii) other general and administrative costs to support our overall growth.

Professional services decreased year over year due to an overall reduction in the use of external consultants as we hired personnel to perform these services.

Liquidity and Capital Resources
 
The table below is a reconciliation of selected cash flows data for the year ended December 31, 2013 from GAAP to Non-GAAP:
 
For the Year Ended December 31, 2013
(In thousands)
GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
Cash and Cash Equivalents, Beginning
$
47,692

 
$

 
$
47,692

 
 
 
 
 
 
Net cash provided by/(used in) Operating Activities
(1,053,787
)
 
1,085,481

 
31,694

Net cash provided by/(used in) Investing Activities
355,178

 
(389,523
)
 
(34,345
)
Net cash provided by/(used in) Financing Activities
676,411

 
(700,090
)
 
(23,679
)
Net cash provided by/(used in) Other
3

 

 
3

    Net change in Cash and Cash Equivalents
(22,195
)
 
(4,132
)
 
(26,327
)
 
 
 
 
 
 
Cash and Cash Equivalents, End
$
25,497

 
$
(4,132
)
 
$
21,365


    

27


As of December 31, 2013, total cash and cash equivalents decreased by $22.2 million to $25.5 million from $47.7 million as of December 31, 2012. For the year ended December 31, 2013, cash flows from operations provided net cash proceeds of $31.7 million. We invested $25.0 million to seed two credit funds and $9.6 million was the increase in net investment activity in CIFC managed CLO equity, warehouses and funds during the year. In addition, $19.2 million was used to pay down contingent liabilities (related to fee sharing arrangements) and deferred purchase payments, and $4.2 million was used to pay dividends.
Our investments as of December 31, 2013 and 2012 are as follows:
Non-GAAP (1)
 
December 31, 2013

 
December 31, 2012

CIFC Managed CLO Equity (Residual Interests)
 
$
44,292

 
$
47,454

Warehouses (2)
 
32,529

 
26,723

Other loan-based products (3)
 
36,310

 
5,058

Total
 
$
113,131

 
$
79,235


Explanatory Notes:
________________________________
(1)
Pursuant to GAAP, investments in consolidated CLOs, warehouses and certain other loan-based products are eliminated from "Investments at fair value" on our Consolidated Balance Sheets.
(2)
From time to time, the Company establishes “warehouses”, entities designed to accumulate investments in advance of sponsoring new CLOs or other funds managed by the Company.  To establish a warehouse, the Company contributes equity capital to a newly formed entity which is typically levered (three to five times) and begins accumulating investments.  When the related CLO or fund is sponsored, typically three to nine months later, the warehouse is “terminated”, with it concurrently repaying the related financing and returning to the Company its equity contribution, net of gains and losses, if any.
(3)
Investments in other loan-based products includes $30.0 million to seed three credit funds, of which $25.0 million seeded two funds in 2013. As of December 31, 2013 and 2012, $16.9 million and $5.1 million, respectively, of our investments in funds was not consolidated and included on our Consolidated Balance Sheets.

Other Sources and Uses of Funds

Deferred Purchase Payments—In April 2011, we entered into a merger (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 of $7.5 million of cash payable in three equal installments of $2.5 million (subject to certain adjustments). As of December 31, 2013, no remaining amounts outstanding under this agreement.

In March 2010, we entered into an acquisition and investment agreement with 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. The remaining installment of $1.5 million is payable on December 9, 2014.

During the years ended December 31, 2013 and 2012, we made deferred purchase payments of $4.0 million for both years, respectively. As of December 31, 2013 and 2012, the fair value of the remaining deferred purchase payments of $1.2 million and $4.8 million, respectively, was included in the Consolidated Balance Sheets.

Contingent Liabilities at Fair Value—In addition to the consideration paid at Merger date, we were required to pay CIFC Parent a portion of incentives earned on six CLOs managed by CIFCAM (the "Legacy CIFC CLOs"). The terms of these payments were as follows: (i) the first $15.0 million of incentive fees received, (ii) 50% of any incentive fees in excess of $15.0 million in aggregate received from the Legacy CIFC CLOs by the combined company over ten years from April 13, 2011 (the "Merger Closing Date") 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, 2013 and 2012, we made total payments of $12.5 million and $6.1 million related to these contingent liabilities. In addition, during the year ended December 31, 2013, we made our last payment to fulfill its obligation under (i) above. Accordingly, as of December 31, 2013, there are no remaining payments under item (i) and we made cumulative payments of $6.5 million under item (ii) to date.
 

28


In addition, we also assumed contingent liabilities during the Merger that primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree in December 2010. The assumed contingent liabilities are based on a fixed percentage of certain advisory fees from the CypressTree CLOs. These fixed percentages vary by CLO. From Merger date to June 2013 the minimum fixed percentage was 55%, and effective July 2013, the minimum fixed percentage was 39%. During the years ended December 31, 2013 and 2012, we made payments of $2.6 million and $10.8 million related to these contingent liabilities.  In addition, during the years ended ended December 31, 2013 and 2012, we made earn-out payments which reduced the required future payments of $0.3 million and $6.2 million, respectively.
 
Income Taxes—In general, an ownership change (as defined in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended) would occur if shareholders owning 5% or more of our stock increased their percentage ownership (by value) in us by 50% or more, as measured generally over a rolling three year period beginning with the last Ownership Change. These provisions can be triggered by new issuances of stock, merger and acquisition activity or normal market trading.

We experienced an ownership change on June 9, 2010 as a result of the acquisition of CNCIM and on the April 13, 2011 Merger with Legacy CIFC causing a limitation on the annual use of our NOLs, NCLs, and certain recognized built-in losses. The annual limitation amount is approximately $1.3 million resulting from the June 9, 2010 ownership change. The Merger resulted in an annual limitation of approximately $9.5 million. However, as of December 31, 2012, the combined federal NOL carryforwards related to Legacy CIFC were fully utilized. We also experienced a potential change of ownership for tax purposes on December 20, 2013 as a result of DFR Holdings acquisition of all of our common stock that was previously held by CIFC Parent. We do not anticipate further restrictions to the Section 382 limitation resulting from this transaction. As a result, these benefits limited our ability to reduce cash taxes in 2013. During the years ended December 31, 2013 and 2012, we paid incomes taxes of $24.3 million and $1.6 million, respectively.

Long-Term Debt—The following table summarizes our long-term debt:

 
December 31, 2013
 
December 31, 2012
 
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
%
 
21.8
 
$
95,000

 
1.00
%
 
22.8
October Junior Subordinated Notes (2)
25,000

 
3.73
%
 
21.8
 
25,000

 
3.81
%
 
22.8
Total Subordinated Notes Debt
$
120,000

 
1.57
%
 
21.8
 
$
120,000

 
1.59
%
 
22.8
 
 
 
 
 
 
 
 
 
 
 
 
Convertible Notes (3)
$
19,164

 
10.00
%
 
3.9
 
$
18,233

 
9.00
%
 
4.9
Total recourse debt
$
139,164

 
 
 
 
 
$
138,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse Consolidated Entities' debt:
 

 
 

 
 
 
 
 
 
 
 
Consolidated CLOs (4)
$
10,336,453

 
1.43
%
 
8.3
 
$
9,325,982

 
1.16
%
 
8.1
Warehouses (5)
148,522

 
1.30
%
 
n/m
 
270,452

 
2.12
%
 
n/m
Total non-recourse Consolidated Entities' debt
$
10,484,975

 
1.43
%
 
8.2
 
$
9,596,434

 
1.19
%
 
7.9
Total long-term debt
$
10,624,139

 
 
 
 
 
$
9,734,667

 
 
 
 


29


Explanatory Notes:
________________________________
(1)
March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015 and 3 month LIBOR plus 2.58% thereafter until maturity, October 30, 2035.
(2)
October Junior Subordinated Notes bear interest at an annual rate of 3 month LIBOR plus 3.50% and mature on October 30, 2035.
(3)
As of December 31, 2013 and 2012, Convertible Notes were recorded net of a discount of $5.8 million and $6.8 million, respectively and paid interest at the stated rates of 10.00% and 9.00%, respectively. Including the discount, the effective rate of interest is 18.14% for both periods.
(4)
Long-term debt of the Consolidated CLOs is recorded at fair value. The subordinated notes of Consolidated CLOs do not have a stated interest rate, and are therefore excluded from the calculation of the weighted average borrowing rate. As of December 31, 2013 and 2012, the par value of the Consolidated CLOs long-term debt (including subordinated notes) was $10.9 billion and $9.8 billion, respectively.
(5)
Long-term debt of warehouses not held by us is recorded at fair value. The fair value excludes the preferred shares of Warehouse(s) outstanding as of each respective period not held by us, which have a par value of $67.5 million and $25.6 million as of December 31, 2013 and 2012, respectively. They do not have a stated interest rate and are excluded from the calculation of the weighted average borrowing rate.

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 us 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 us 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 our 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.
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 10% and will increase 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 our option at a price equal to 100% of their principal amount, plus, if the redemption occurs 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 our 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 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.

30


Lease Commitments—In July 2012, we entered into a lease agreement for our corporate headquarters (the "Lease"), which had a term of 10.5 years. The future minimum commitments under our lease agreement are as follows:
 
(In thousands)
2014
$
1,607

2015
1,607

2016
1,607

2017
1,607

2018
1,680

Thereafter
7,010

 
$
15,118

 
Share Repurchase Program—During the year ended December 31, 2013, we repurchased 34,995 common shares in open-market transactions for an aggregate cost of $0.3 million with an average price per share of $7.16. As of December 31, 2013, we were authorized to repurchase up to $5.4 million of our common stock under the share repurchase program approved by the Board of Directors (the "Board").

On March 29, 2012, the 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 common shares in open-market transactions for an aggregate cost of $4.4 million with an average price per share of $6.60. During the same year, the Board authorized the constructive retirement of 565,627 treasury shares with an aggregate cost of $3.7 million. As a result, the cost of the shares constructively retired was reclassified from "Treasury stock" to "Additional paid-in capital" on the Consolidated Balance Sheet.
 
Consolidated VIEs—Although we consolidate all the assets and liabilities of the Consolidated VIEs (includes the Consolidated CLOs, CDOs and warehouses), our maximum exposure to loss is limited to our investments and beneficial interests in the Consolidated VIEs and the receivables of management fees from the Consolidated VIEs. All of these items are eliminated upon consolidation. The assets of each of the Consolidated VIEs are administered by the trustee of each fund 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 debt and residual interests of the Consolidated VIEs have no recourse to our general assets. Therefore, this debt is not our obligation.

Related Party Transactions

DFR Holdings—In December 2013, DFR Holdings purchased approximately 9.1 million shares of our outstanding common stock from CIFC Parent as well as 1.0 million of our outstanding common stock and 2.0 million warrants from GE Capital (see "Item 1—Consolidated Financial Statements—Note 1"). As of December 31, 2013, DFR Holdings owns approximately 14.7 million shares of our common stock, $25.0 million aggregate principal amount of our Convertible Notes which is convertible into approximately 4.1 million shares of our common stock (see "Item 1—Consolidated Financial Statements—Note 12") and warrants that entitle DFR Holdings the right to purchase 2.0 million shares of our voting common stock (see "Item 1—Consolidated Financial Statements—Note 12"). As of December 31, 2012 , DFR Holdings owned approximately 4.6 million shares of our common stock, predominately issued as part of the consideration for the acquisition of CNCIM and our Convertible Notes.

In connection with the transaction,  we entered into a Third Amended and Restated Stockholders Agreement  with DFR Holdings, dated December 2, 2013 (the “Stockholders Agreement”). Pursuant to the Stockholders Agreement, at each annual or special meeting of stockholders at which an election of directors is held, we agreed to nominate to our Board of Directors six directors designated by DFR Holdings. As detailed in our Form 8-K filed with the SEC on December 3, 2013, the number of directors that can be designated by DFR Holdings reduces as they decrease their ownership (on a diluted basis) in the Company. If DFR Holdings' ownership falls below 5%,  it loses the right to designate any director. Following the transaction, three directors designated by CIFC Parent resigned and were subsequently replaced by three designees of DFR Holdings.
Related party transactions also included (i) the interest expense on Convertible notes of $3.5 million and $3.4 million during the years ended December 31, 2013 and 2012, respectively, (ii) deferred purchase payments (see above—Deferred Purchase Payments and Contingent Liabilities and Other Commitments), (iii) fees to us for providing certain administrative services to DFR Holdings, and (iv) quarterly dividends (see "Item 1—Consolidated Financial Statements—Note 12").


31


CIFC Parent—Following the sale of CIFC Parent's common shares to DFR Holdings, CIFC Parent no longer owns shares of our common stock. In addition, during the fourth quarter of 2013, we purchased CIFC Parent's CLO residual interests in 5 CLOs managed by us for $13.2 million. As of December 31, 2012, CIFC Parent owned approximately 9.1 million shares of our common stock, issued as part of the consideration for the Merger with Legacy CIFC.

Related party transactions also included (i) the deferred purchase payments including those classified as contingent liabilities (see above—Deferred Purchase Payments and Contingent Liabilities and Other Commitments), (ii) CIFC Parent's investments in CLOs managed by us; including nine CLOs (of which seven were Consolidated CLOs) as of December 31, 2012, (iii) fees to us for providing certain administrative services to CIFC Parent, (iv) profits interests granted during 2011 to certain of our employees (see "Item 1—Consolidated Financial Statements—Note 12") and (v) quarterly dividends (see "Item 1—Consolidated Financial Statements—Note 12").
Other—During the year ended December 31, 2013, a board member purchased $1.0 million of income notes in one of our sponsored CLO, CIFC 2013-II, through an entity in which he is a 50% equity holder.
Total related party receivables and investment advisory fee revenues related to management agreements noted above are as follows:
 
 
Receivables
 
Investment Advisory Fees
 
 
December 31, 2013
 
December 31, 2012
 
For the Years Ended December 31,
 
 
 
 
2013
 
2012
 
 
(in thousands)
CIFC Parent
 
$
167

 
$
19

 
$
148

 
$
199

DFR Holdings
 

 
17

 
(17
)
 
68

Total
 
$
167

 
$
36

 
$
131

 
$
267

Off-Balance Sheet Arrangements
As of December 31, 2013, 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, 2013, we did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
Other—As of December 31, 2013 and 2012, we fully funded our aggregate minimum commitment to invest $30.0 million and $5.0 million, respectively, in our CIFC sponsored funds.
Subsequent Events
Subsequent to year end, we sponsored the issuance of one new CLO that represents approximately $600 million of new loan-based AUM.
    
In addition, on March 27, 2014 we provided notice to GE Capital Equity Investments, Inc., a wholly-owned subsidiary of GE Capital (“GECEII”) that we intend to terminate the Investment Agreement that we entered into with GECEII on September 24, 2012. See also Part II—Item 8—"Financial Statements and Supplementary Data - Note 4"

In addition, subsequent to year end, we declared a cash dividend of $0.10 per share. The dividend will be paid on April 25, 2014 to shareholders of record as of the close of business on April 4, 2014.
    

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 arrive at what we believe to be reasonable estimates. Under varying conditions, we could report materially different amounts arising under these critical accounting policies.

32


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 primary 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 intangible assets with finite lives. 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 review goodwill periodically, at least on an annual basis in the fourth quarter of each year, considering factors such as our projected cash flows and revenues and earnings multiples of comparable companies, to determine whether the carrying value of goodwill is impaired. If 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 determine 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. A portion or all of goodwill may become impaired in future periods if we are not successful in achieving our expected cash flow levels, 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.
During the fourth quarter of 2013 and 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 test. Based on the reviews performed as of December 31, 2013 and 2012, we concluded that our sole reporting unit had an estimated fair value in excess of carrying value. If our reporting unit's 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.

33


Intangible Assets—Intangible assets are comprised of assets with finite lives 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 or based on a ratio of expected discounted cash flows from the contracts. 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.
Intangible assets with finite lives 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, 2013, we received notices from holders of certain CLOs exercising their rights to call the CLOs for redemption. As a result of these calls, we recorded a $1.0 million expense to fully impair the intangible asset associated with these management contracts. In addition, we also recorded a $2.1 million impairment charge to fully impair CDO related management contracts. We determined that the carrying value of intangible assets attributable to our non-core CDO assets were no longer recoverable. Non-core assets are expected to continue to decline as the funds run-off per their contractual terms. During the year ended December 31, 2012, we received notice from a holder of Primus CLO I, Ltd. (“Primus I”) exercising its right to call the CLO for redemption. As a result of the call, we recorded a $1.8 million expense to fully impair the intangible asset associated with the management contract.
Income Taxes—Current federal income taxes are recognized based on amounts estimated to be payable or recoverable as a result of taxable operations for the current year. 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.
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.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2013 and 2012, we believe there are no tax positions that would require disclosure under GAAP.
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.

34


Item 8.    Financial Statements and Supplementary Data

CIFC CORP.
Index to Financial Statements





35


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, 2013 and 2012, 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, 2013. We also have audited the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) 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, 2013 and 2012, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, 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, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ DELOITTE & TOUCHE LLP

New York, New York
March 28, 2014


36


CIFC CORP. AND ITS SUBSIDIARIES
Consolidated Balance Sheets

 
December 31,
2013
 
December 31,
2012
 
(In thousands, except share
and per share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
25,497

 
$
47,692

Restricted cash and cash equivalents
1,700

 
1,612

Due from brokers
18,813

 
1,150

Investments at fair value
16,883

 
5,058

Receivables
2,120

 
2,432

Prepaid and other assets
5,104

 
5,392

Deferred tax asset, net (1)
57,675

 
53,914

Equipment and improvements, net
4,261

 
3,979

Intangible assets, net
25,223

 
43,136

Goodwill
76,000

 
76,000

Subtotal (1)
233,276

 
240,365

Assets of Consolidated Entities (2):
 

 
 
Restricted cash and cash equivalents
699,387

 
1,059,283

Due from brokers
209,882

 
103,008

Investments at fair value
10,420,993

 
9,066,779

Receivables
36,350

 
38,845

Prepaid and other assets
300

 

Total assets of Consolidated Entities
11,366,912

 
10,267,915

TOTAL ASSETS (1)
$
11,600,188

 
$
10,508,280

LIABILITIES
 
 
 
Due to brokers
$
5,499

 
$

Accrued and other liabilities
15,197

 
15,734

Deferred purchase payments
1,179

 
4,778

Contingent liabilities at fair value
16,961

 
33,783

Long-term debt
139,164

 
138,233

   Subtotal
178,000

 
192,528

Non-Recourse Liabilities of Consolidated Entities (2):
 
 
 
Due to brokers
606,808

 
494,641

Accrued and other liabilities
100

 
5,207

Interest payable
22,552

 
16,753

Long-term debt at fair value
10,484,975

 
9,596,434

Total Non-Recourse Liabilities of Consolidated Entities
11,114,435

 
10,113,035

TOTAL LIABILITIES
11,292,435

 
10,305,563

EQUITY
 
 
 
Common stock, par value $0.001: 500,000,000 shares authorized, 20,921,333 issued and 20,790,889 outstanding as of December 31, 2013 and 20,778,053 issued and 20,682,604 outstanding as of December 31, 2012
21

 
21

Treasury stock, at cost: 130,444 shares as of December 31, 2013, and 95,449 shares as of December 31, 2012
(914
)
 
(664
)
Additional paid-in capital
963,011

 
955,407

Accumulated other comprehensive income (loss)

 
(3
)
Retained earnings (deficit) (1)
(810,858
)
 
(830,073
)
TOTAL CIFC CORP. STOCKHOLDERS’ EQUITY (1)
151,260

 
124,688

Noncontrolling interest in Consolidated Funds (Note 2)
5,107

 

Appropriated retained earnings (deficit) of Consolidated VIEs (Note 3)
151,386

 
78,029

TOTAL EQUITY (1)
307,753

 
202,717

TOTAL LIABILITIES AND EQUITY (1)
$
11,600,188

 
$
10,508,280

Explanatory Notes:
________________________________
(1)
Amounts in the prior year have been restated to reflect immaterial adjustments identified in the current year. See Note 19.
(2)
Consolidated Entities represents the assets and liabilities of the Consolidated VIEs for both periods presented.



  See notes to Consolidated Financial Statements.

37


CIFC CORP. AND ITS SUBSIDIARIES
Consolidated Statements of Operations

 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
(In thousands, except share
and per share amounts)
Revenues
 
 
 
 
Investment advisory fees
 
$
8,400

 
$
10,696

Net interest income from investments
 
333

 
226

Total net revenues
 
8,733

 
10,922

Expenses
 
 
 
 
Compensation and benefits
 
30,339

 
22,945

Professional services
 
5,277

 
6,221

General and administrative expenses
 
7,707

 
6,096

Depreciation and amortization
 
15,541

 
17,931

Impairment of intangible assets
 
3,106

 
1,771

Restructuring charges
 

 
5,877

Total expenses
 
61,970

 
60,841

Other Income (Expense) and Gain (Loss)
 
 
 
 
Net gain (loss) on investments at fair value
 
1,822

 
2,308

Net gain (loss) on contingent liabilities at fair value (Note 10)
 
1,644

 
(11,452
)
Corporate interest expense
 
(5,865
)
 
(5,912
)
Net gain on sale of management contract
 
1,386

 
5,772

Strategic transactions expenses
 

 
(657
)
Other, net
 
(2
)
 
(421
)
Net other income (expense) and gain (loss)
 
(1,015
)
 
(10,362
)
Operating income (loss)
 
(54,252
)
 
(60,281
)
 
 
 
 
 
Net results of Consolidated Entities (Note 7)
 
169,869

 
(168,380
)
 
 
 
 
 
Income (loss) before income taxes
 
115,617

 
(228,661
)
   Income tax (expense) benefit (1)
 
(18,782
)
 
(10,750
)
Net income (loss) (1)
 
96,835

 
(239,411
)
Net (income) loss attributable to noncontrolling interest in Consolidated Entities (Note 3)
 
(73,464
)
 
230,712

Net income (loss) attributable to CIFC Corp. (1)
 
23,371

 
$
(8,699
)
 
 
 
 
 
Earnings (loss) per share (Note 13) (1)—