S-1/A 1 ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 11, 2007

Registration No. 333-144256

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


Amendment No. 3

to

FORM S-1

 


REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   6282   26-0354783
(State of Incorporation)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

9 West 57th Street

New York, New York 10019

(212) 790-0041

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 


Jeffrey C. Blockinger

Chief Legal Officer

Och-Ziff Capital Management Group LLC

9 West 57th Street

New York, New York 10019

(212) 790-0041

(Name, Address, Including Zip Code, and Telephone Number,

Including Area Code, of Agent For Service)

 


Copies to:

 

Matthew J. Mallow

Jennifer A. Bensch

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

  

Jay Clayton

Glen T. Schleyer

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

(212) 558-4000

 


Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

 



Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated October 11, 2007

PROSPECTUS

LOGO

36,000,000 Class A Shares

Representing Class A Limited Liability Company Interests

This is the initial public offering of our Class A shares representing Class A limited liability company interests. We intend to use all of the proceeds to us from this offering to acquire interests in our business from our existing owners, including members of our senior management. Our existing partners will reinvest all of their after-tax proceeds into certain of our funds.

Prior to this offering, there has been no public market for our Class A shares. It is currently estimated that the initial public offering price per Class A share will be between $30.00 and $33.00. We intend to apply to list our Class A shares on the New York Stock Exchange under the symbol “OZM”.

 

     Per Class A Share    Total

Initial public offering price

   $      $  

Underwriting discount

   $      $  

Proceeds to us (before expenses)

   $      $  

To the extent that the underwriters sell more than 36,000,000 Class A shares, the underwriters have the option to purchase up to an additional 5,400,000 Class A shares from us at the initial public offering price less the underwriting discount.

Investing in our Class A shares involves risks. See “ Risk Factors” beginning on page 32 to read about factors you should consider before buying our Class A shares. These risks include:

 

   

Our founder, Daniel Och, will initially control all matters requiring shareholder approval and has certain approval rights with respect to certain actions of our Board of Directors. Mr. Och also will initially designate five of the seven nominees for election to our Board of Directors. These approval and designation rights as well as this control of voting power by Mr. Och could cause or prevent us from engaging in certain transactions, which could adversely affect the market price of the Class A shares or deprive our Class A shareholders of an opportunity to receive a premium as part of a sale of our company.

   

We are dependent on the investment performance of our funds, which may be adversely affected by difficult market conditions and other events and circumstances beyond our control.

   

The success of our business depends on the efforts, judgment and personal reputations of our key partners, particularly Mr. Och, and our future success and growth depends on our ability to retain our professionals and attract additional partners and managing directors.

   

Our operating agreement contains provisions that reduce fiduciary duties of our directors and officers with respect to potential conflicts of interest and limit remedies available to our Class A shareholders against such individuals for actions that might otherwise constitute a breach of duty. Our operating agreement also contains provisions limiting the liabilities of our officers and directors to us, which also reduces remedies available to our Class A shareholders for certain acts by such persons.

   

As discussed in “Material U.S. Federal Tax Considerations,” Och-Ziff Capital Management Group LLC will be treated as a partnership for U.S. federal income tax purposes and you may therefore be subject to taxation on your allocable share of items of income, gain, loss, deduction and credit of Och-Ziff Capital Management Group LLC. You may not receive cash distributions equal to your allocable share of our net taxable income or even in an amount sufficient to pay the tax liability that results from that income.

   

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation or regulation were to be enacted and to apply to us, we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the Class A shares against payment in New York, New York on                     , 2007.

 

Goldman, Sachs & Co.   Lehman Brothers

Merrill Lynch & Co.       Morgan Stanley       Citi       Deutsche Bank Securities       JPMorgan

 

Credit Suisse

 

Keefe, Bruyette & Woods

Bear, Stearns & Co. Inc.

 

Bank of China International

Macquarie Bank  

Ramirez & Co., Inc.

Nomura

 

Prospectus dated                      , 2007.


Table of Contents

Table of Contents

     Page

Prospectus Summary

   1

Overview

   1

Investment Performance

   3

Why We Are Going Public

   4

Industry Overview

   4

Our Competitive Strengths

   6

Our Growth Strategy

   7

Our Structure

   8

Voting, Nomination, Consent and Approval Rights of Class B Shareholder Committee

   17

Tax Consequences and Post-Offering Distributions

   20

Distributions and Other Payments to Our Existing Owners

   21

Additional Information

   23

The Offering

   24

Summary Historical Combined and Unaudited Pro Forma Financial Information

   27

Risk Factors

   32

Risks Related to Our Business

   32

Risks Related to Our Funds

   44

Risks Related to Our Organization and Structure

   51

Risks Related to this Offering

   56

Risks Related to Taxation

   60

Cautionary Note Regarding Forward-Looking Statements

   68

Market and Industry Data

   68

Our Structure

   69

Overview

   69

The Transactions

   69

Operating Group Limited Partnership Agreements and Shareholders’ Agreement

   77

Certain Committees

   79

Voting, Nomination, Consent and Approval Rights of Class B Shareholder Committee

   80

Effects of Transactions

   81

Tax Consequences and Post-Offering Distributions

   84

Distributions and Other Payments to our Existing Owners

   86

Use of Proceeds

   88

Cash Distribution Policy

   89
     Page

Capitalization

   91

Dilution

   92

Unaudited Pro Forma Financial Information

   94

Selected Combined Financial and Operating Data

   108

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   110

Overview

   110

Business Considerations

   111

Market Factors and Trends

   112

Financial Information Overview

   114

Results of Operations

   122

Segment Analysis

   130

Historical Liquidity and Capital Resources

   137

Post-Offering Liquidity

   139

Contractual Obligations

   141

Off-Balance Sheet Arrangements

   142

Critical Accounting Policies and Estimates

   142

Qualitative and Quantitative Disclosures about Market Risk

   148

Industry

   152

Asset Management

   152

Hedge Funds

   152

Industry Trends

   153

Business

   156

Overview

   156

Our Fund Investors

   158

Our Growth Strategy

   158

Our Competitive Strengths

   160

Investment Performance

   163

Our Funds and Fund Strategies

   166

Fund Investment Strategies

   167

Risk Management Principles and Practices

   168

Investor Relations

   168

Employees

   169

Competition

   169

Regulatory Matters

   169

Global Compliance Program

   169

Legal Proceedings

   170

Properties

   170

 

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    Page

Management

  171

Executive Officers and Directors

  171

Board of Directors

  172

Committees of the Board of Directors

  173

Compensation Committee Interlocks and Insider Participation

  174

Compensation Discussion and Analysis

  174

Executive Compensation

  177

Summary Compensation Table

  177

Non-Qualified Deferred Compensation

  177

Non-Competition, Non-Solicitation and Confidentiality Restrictions

  177

Compensation of Directors

  180

Equity Incentive Plan

  180

IPO Date Awards

  183

Limitation of Liability and Indemnification

  183

Certain Relationships and Related Party Transactions

  185

The Transactions

  185

Distributions

  185

Shareholders’ Agreement

  186

Exchange Agreement

  188

Registration Rights Agreement

  188

Tax Receivable Agreement

  189

Limited Partnership Agreements of Och-Ziff Operating Group Entities

  191

Expense Allocation Agreement

  201

Advances and Reimbursements

  201

Investment Activities

  202

Indemnification Agreements

  202

Related Person Transaction Policy

  202
    Page

Principal Shareholders

  203

Description of New Term Loan

  204

Description of Shares

  206

Shares

  206

Preferred Shares

  207

Listing

  208

Transfer Agent and Registrar

  208

Och-Ziff Capital Management Group LLC Limited Liability Company Agreement

  208

Shareholders’ Agreement

  217

Shares Eligible for Future Sale

  218

Lock-Up of our Class A Shares

  219

Rule 144

  221

Rule 144(k)

  221

Material U.S. Federal Tax Considerations

  222

Taxation of Our Company

  222

Taxation of Holders of Class A Shares

  226

Taxation of Non-U.S. Persons

  232

Administrative Matters

  234

Taxes in Other State, Local, and Non-U.S. Jurisdictions

  238

New Legislation or Administrative or Judicial Action

  238

Underwriting

  241

Legal Matters

  250

Experts

  250

Where You Can Find More
Information

 

250

Index to Consolidated Financial Statements

 

F-1


This prospectus includes certain information regarding the historical performance of our funds. An investment in our Class A shares is not an investment in our funds. In considering the performance information relating to our funds contained herein, prospective Class A shareholders should bear in mind that the performance of our funds is not indicative of the possible performance of our Class A shares and is also not necessarily indicative of the future results of our funds, even if fund investments were in fact liquidated on the dates indicated, and there can be no assurance that our funds will continue to achieve, or that future funds will achieve, comparable results.

 

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This is the initial public offering of Class A shares representing limited liability company interests of Och-Ziff Capital Management Group LLC, a Delaware limited liability company that will be the holding company for the public’s ownership in the Och-Ziff Operating Group (defined below). Except where the context requires otherwise, in this prospectus:

 

  Ÿ  

“Assets under management” or “AUM” refers to the assets we manage. Our assets under management equal the sum of the NAV (defined below) of our private investment funds and our managed accounts. Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management that is set forth in the agreements governing the investment funds that we manage. Assets under management presented in this prospectus include AUM relating to deferred balances payable by our funds to OZ Management (“Deferred Balances”) and investments in our funds by us, our partners and certain other affiliated parties on which we have not charged management fees or received incentive income.

 

  Ÿ  

“Class B Shareholder Committee” refers to a committee of holders of our Class B shares, which initially shall consist solely of our founder, Daniel Och, which shall have the rights and authority with respect to voting, approval, board nomination and other rights as delegated to it by the Class B shareholders as set forth under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights,” “—Board Representation” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

 

  Ÿ  

“existing owners” refer, collectively, to our founder, Daniel Och, our 17 other existing partners and the Ziffs, who together own 100% of the interests in our business prior to the completion of this offering. The Ziffs’ equity interest in our business upon consummation of this offering will be economically identical to our existing partners’ equity interests. The Ziffs will not hold any of our Class B shares. References in this prospectus to the ownership of our existing owners include the ownership of current and future personal planning entities of those owners who are individuals and immediate family members of such persons.

 

  Ÿ  

“existing partners,” “partners” or “executive managing directors” refer to our existing owners other than the Ziffs. Our partners, in their capacity as limited partners of the Och-Ziff Operating Group, are not officers or directors of Och-Ziff Capital Management Group LLC.

 

  Ÿ  

“fund investors” or “investors in our funds” refer to the shareholders and limited partners of the Och-Ziff funds.

 

  Ÿ  

“NAV” or “net asset value” refers to, with respect to any of our funds or portfolios as of any given date, the assets minus the liabilities of such fund or portfolio.

 

  Ÿ  

“Och-Ziff,” “our company,” “we,” “us” or “our” refer (1) prior to the consummation of this offering and related Reorganization described under “Our Structure,” to the Och-Ziff Operating Group entities and their respective subsidiaries and the interests of our existing owners in our affiliated real estate business and (2) after the consummation of this offering and the related formation transactions, to Och-Ziff Capital Management Group LLC and its consolidated subsidiaries, including the Och-Ziff Operating Group (which will acquire our existing owners’ interests in the real estate business). Completion of the Reorganization will occur prior to the completion of this offering.

 

  Ÿ  

“Och-Ziff Corp” refers to Och-Ziff Holding Corporation, a Delaware corporation, a wholly owned subsidiary of Och-Ziff and the sole general partner of OZ Management and OZ Advisors I.

 

  Ÿ  

“Och-Ziff funds” or “our funds” refer to the private investment funds and managed accounts that are managed by the Och-Ziff Operating Group.

 

  Ÿ  

“Och-Ziff Holding” refers to Och-Ziff Holding LLC, a Delaware limited liability company, a wholly owned subsidiary of Och-Ziff and the sole general partner of OZ Advisors II.

 

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  Ÿ  

“Och-Ziff Operating Group” refers to OZ Management, OZ Advisors I and OZ Advisors II, which are owned and operated by our existing owners prior to the completion of this offering and any future entity that is controlled by Och-Ziff Corp, Och-Ziff Holding or any future intermediate holding company. Upon consummation of this offering, Och-Ziff Holding will be the sole general partner of OZ Advisors II and Och-Ziff Corp will be the sole general partner of OZ Management and OZ Advisors I.

 

  Ÿ  

“operating agreement” refers to the Second Amended and Restated Limited Liability Company Agreement of Och-Ziff Capital Management Group LLC that will be in effect upon consummation of this offering.

 

  Ÿ  

“operating group limited partnership agreements” refer, collectively, to the limited partnership agreements of each of OZ Management, OZ Advisors I and OZ Advisors II that will be in effect upon consummation of this offering, each of which will be substantially similar in form.

 

  Ÿ  

“OZ Advisors I” refers to OZ Advisors LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“OZ Advisors II” refers to OZ Advisors II LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“OZ Management” refers to OZ Management LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“Partner Management Committee” refers to a committee of seven partners of each Och-Ziff Operating Group entity, which initially shall consist of Messrs. Och, Windreich, Frank, Cohen, Varga, Kelly and Brown. For a description of the Partner Management Committee and its authority, see “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Partner Management Committee”.

 

  Ÿ  

“Partner Performance Committee” refers to a committee of six partners of each Och-Ziff Operating Group entity, which initially shall consist of Messrs. Och, Windreich, Frank, Cohen, Varga and Kelly. For a description of the Partner Performance Committee and its authority see “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Partner Performance Committee”.

 

  Ÿ  

“Reorganization” refers to the formation of Och-Ziff Capital Management Group LLC and the intermediate holding companies, the related reorganization of the Och-Ziff Operating Group, the contribution of the interests in our real estate business and the deconsolidation of the Och-Ziff funds, in each case as described under “Our Structure—The Transactions—The Reorganization”.

 

  Ÿ  

“Transactions” refers to the Reorganization, this offering and the related transactions, as discussed in “Our Structure—The Transactions”, and the Special Distributions.

 

  Ÿ  

“Ziffs” refer to Ziff Brothers Investments, L.L.C. and certain of its affiliates and control persons, which, together with Mr. Och, founded our business in 1994.

 


Unless indicated otherwise, the information included in this prospectus assumes:

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional 5,400,000 Class A shares from us;

 

  Ÿ  

that the Class A shares to be sold in this offering are sold at $31.50 per Class A share, which is the midpoint of the price range indicated on the front cover of this prospectus; and

 

  Ÿ  

that the 14,761,905 Class A restricted share units that may be settled, at our option, in Class A shares or cash that we intend to grant at the time of this offering to our managing directors and other employees will be settled in Class A shares.

In addition, except where the context requires otherwise, references in this prospectus to the percentage ownership of interests in the Och-Ziff Operating Group entities or similar references refer to the ownership of the common equity interests in each such entity and not the Class C Non-Equity Interests (as defined under “Prospectus Summary—Our Structure”).

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A shares. You should read this entire prospectus carefully, especially the risks of investing in our Class A shares discussed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. The information in this prospectus gives effect to the Reorganization and the other transactions described under “Our Structure.” We are a holding company and, upon completion of this offering, we will hold substantially all of our assets and conduct substantially all of our business through the Och-Ziff Operating Group.

Overview

We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $29.7 billion of assets under management for over 700 fund investors as of August 31, 2007. We have a strong track record spanning over 13 years, which we believe places us among the longest standing alternative asset managers globally.

We were founded in 1994 by Daniel Och, together with the Ziffs, with the goal of building an enduring, world class investment management business. Prior to founding our company, Mr. Och spent over 11 years at Goldman, Sachs & Co. Mr. Och instilled the team-based culture he experienced at Goldman Sachs into our firm, and this approach has helped us become a leader in the alternative asset management industry. Today, we have over 350 personnel, with over 130 investment professionals, including 18 partners. We have been a leader in international expansion in our industry with headquarters in New York and offices in London, Hong Kong, Tokyo, Bangalore and Beijing.

Our funds seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. “Risk-adjusted returns” are based on the income generated from primary investment positions, net of expenses associated with hedges intended to limit the risks associated with market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based analysis and thorough due diligence. Our investment philosophy focuses on opportunities for long-term value. Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with our analysts daily to review the risks related to their positions and the inherent risks associated with these positions, and we have a risk management committee that conducts regular oversight of portfolio risk. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process today.

We believe our deeply embedded, team-based culture differentiates us from our competitors. Our partners, whom we also refer to as our executive managing directors, and our managing directors derive virtually all of their income payments from participation in the profits of our entire business. Our compensation system helps minimize the potential for asymmetric risk profiles between fund investors and our partners and employees and fosters a strong culture of internal cooperation and sharing of ideas. Additionally, all of our professional employees have the opportunity to eventually become managing directors and executive managing directors, providing a compelling incentive and retention mechanism. At the time of this offering, we intend to grant to all of our managing directors and other employees 14,761,905 Class A restricted share units in the aggregate under our 2007 equity incentive plan which will vest over a four-year period.

 

 

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Our operations, including our growth and expansion, have been financed primarily from cash flows generated by our operations. Our primary sources of revenues are management fees and incentive income. Management fees are based on assets under management. Incentive income, which is primarily earned on an annual basis, is based on realized and unrealized gains generated by the funds that we manage. Accordingly, for any given fiscal period our revenues will be heavily influenced by the combination of assets under management and the investment performance of our funds. The investment performance of our funds is pivotal to the long-term success of our business. To increase assets under management our funds must attract new investment capital, realize gains that they can reinvest and maintain low redemption rates, all of which are dependent upon the performance of our funds.

The long-term interests of our fund investors have always been, and will always be, of paramount importance and have driven, and will continue to drive, our growth strategy. This growth has been based on building and expanding investment platforms and geographic capabilities to enable us to provide the best possible investment services to our fund investors.

Our assets under management have grown from approximately $5.8 billion as of December 31, 2002 to approximately $29.7 billion as of August 31, 2007, representing a 42% compound annual growth rate. We have continued to expand internationally, and today invest more than 50% of our AUM in foreign markets. We take a measured approach to growth, accepting new investor capital commensurate with investment opportunities and our goal of delivering positive, risk-adjusted returns.

Our Total Historical AUM(1)

(dollars in billions)

LOGO


(1) Includes Deferred Balances and investments in our funds by us, our partners and certain other affiliated parties on which we have not charged management fees or received incentive income. As of August 31, 2007, our AUM relating to these amounts was approximately $1.8 billion, or 6.1%, of our AUM. We will charge management fees and receive incentive income on investments made by our partners (but not by us or the other affiliated parties) in our funds on and after the closing date of this offering, other than in respect of investments made with Deferred Income Distributions and Investment Distributions (as defined under “—Distributions and Other Payments to Our Existing Owners”).

 

 

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Investment Performance

We believe one of the principal drivers of our growth has been the investment performance of our flagship global multi-strategy fund, OZ Master Fund, Ltd. Performance for OZ Master Fund, Ltd. is provided for illustrative purposes only. OZ Master Fund, Ltd. includes every strategy and geography in which our funds invest and constituted approximately 63% of our AUM as of August 31, 2007. Our other funds implement geographical or strategy focused investment programs. The performance metrics for our other funds vary from those of OZ Master Fund, Ltd., and such variance may be material. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information Overview—Assets Under Management and Fund Performance” and “Business—Investment Performance” for information regarding the performance of our other funds.

In considering the performance information contained in this prospectus, prospective Class A shareholders should bear in mind that such performance information (including that reflected in the following table) is not indicative of the possible performance of our Class A shares. An investment in our Class A shares is not an investment in any of the Och-Ziff funds, including OZ Master Fund, Ltd. Moreover, OZ Master Fund, Ltd. and most of our other funds will not be consolidated in our financial statements for periods following June 30, 2007 as a result of the deconsolidation of most of our funds as of June 30, 2007. The performance reflected in the following table is also not necessarily indicative of the future results of OZ Master Fund, Ltd. There can be no assurance that OZ Master Fund, Ltd. will continue to achieve, or that our other existing and future funds will achieve, comparable results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information Overview—Assets Under Management and Fund Performance” and “Business—Investment Performance” for additional information regarding the limitations of this information.

The following table sets forth, as of August 31, 2007, comparative performance measures for OZ Master Fund, Ltd. and the S&P 500 Index:

 

     1 Year     3 Years     5 Years     Strategy
Inception
 

Net Annualized Return(1)

        

OZ Master Fund, Ltd.(2)

   13.4 %   12.4 %   13.7 %   16.7 %

S&P 500 Index(3)

   15.1     12.2     12.0     11.3  

Correlation of OZ Master Fund, Ltd. to S&P 500 Index(4)

   0.56     0.61     0.44     0.45  

Volatility

        

Master Fund Standard Deviation (Annualized)(5)

   3.4     3.0     3.5     5.0  

S&P 500 Index Standard Deviation (Annualized)(5)

   8.0     7.4     11.0     14.1  

Sharpe Ratio(6)

        

Master Fund

   2.33     2.69     3.06     2.45  

S&P 500 Index

   1.21     1.07     0.81     0.49  

(1) Net Annualized Return represents a composite of the average annual return of the feeder funds that comprise OZ Master Fund, Ltd. Net Annualized Return is presented on a total return basis, net of all fees and expenses, and includes the reinvestment of all dividends and income.
(2) Performance from inception includes actual total return for the partial year beginning in April 1994. For the period from April 1994 through December 1997, performance represents the performance of Och-Ziff Capital Management, L.P., a Delaware limited partnership that was managed by Daniel Och following an investment strategy that is substantially similar to that of OZ Master Fund, Ltd. In addition, during this period performance was calculated by deducting management fees on a quarterly basis and incentive income on a monthly basis. Starting from January 1998, performance has been calculated by deducting both management fees and incentive income on a monthly basis from the composite returns of OZ Master Fund, Ltd.

 

 

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(3) The returns of the S&P 500 Index are presented for the limited purpose of providing a comparison to the broader equity market. You should not assume that there is any material overlap between those securities in the portfolio of OZ Master Fund, Ltd. and those that comprise the S&P 500 Index. It is not possible to invest directly in the S&P 500 Index. Returns of the S&P 500 Index have not been reduced by fees and expenses associated with investing in securities and include the reinvestment of dividends. The S&P 500 Index is an equity index owned and maintained by Standard & Poor’s, a division of McGraw-Hill, and its value is calculated as the free float-weighted average of the share prices of 500 large-cap corporations listed on the NYSE and Nasdaq.
(4) Correlation to the returns of the S&P 500 Index represents a statistical measure of the degree to which the return of one portfolio is correlated to the return of another. It is expressed as a factor that ranges from -1.0 (perfectly inversely correlated) to +1.0 (perfectly positively correlated).
(5) Standard deviation is a statistical measure of the degree to which an individual value in a distribution tends to vary from the mean of the distribution.
(6) Sharpe Ratio represents a measure of the investment returns as adjusted for risk. The Sharpe Ratio is calculated by subtracting a “risk-free” rate from the composite returns, and dividing that amount by the standard deviation of returns. A higher Sharpe Ratio indicates a portfolio that generates a return that is higher than would be expected for the level of risk in the portfolio as compared to the risk-free rate. The risk-free rate used is three-month LIBOR.

Why We Are Going Public

 

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To enable us to implement our growth strategy and continue to attract and retain the finest talent in the world.

 

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To continue to develop new investment strategies as we identify strategic opportunities around the world.

 

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To offer existing and prospective partners and employees direct participation in our success, which will align the interests of our partners and employees with those of our investors.

 

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Each of our existing partners will invest 100% of the after-tax proceeds received by him in connection with this offering in certain of our funds, including funds we may offer in the future. Not only will this more closely align the interests of our partners with our fund investors, but we believe this will also assist us in building a track record and ultimately raising additional capital for our funds.

Industry Overview

The asset management business involves managing investments on behalf of third parties in exchange for contracted fees and other income. The industry manages trillions of dollars of assets, and can be broadly divided into two categories: traditional asset management and alternative asset management.

Traditional Asset Management

Traditional asset managers, such as large mutual funds and separate account managers, typically manage portfolios of actively traded equity, fixed income and/or derivative securities. The investment objectives of such portfolios may include total return, capital appreciation, current income and/or replicating the performance of a specific index. The investment strategies of traditional asset managers typically involve long-only portfolios. Such portfolios may include investment companies registered under the Investment Company Act of 1940, or the “1940 Act,” (such as mutual funds, closed-end funds or exchange-traded funds) or separate accounts managed on behalf of individuals or institutions. Managers

 

 

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of such portfolios are compensated, in general, on a monthly or quarterly basis, at a contracted fee based on the assets under management, generally without regard to performance of the investments held in the portfolio. Managers of such portfolios in the United States are typically registered with the U.S. Securities and Exchange Commission, or the “SEC,” under the Investment Advisers Act of 1940, or the “Advisers Act”.

Alternative Asset Management

Alternative asset management, in general, involves a variety of investment strategies where the common element is the manager’s goal of delivering, within certain risk parameters, investment performance that is typically measured on an absolute return basis, meaning that performance is measured not by how well a fund performs relative to a benchmark index, but by how well the fund performs in absolute terms. Examples of alternative asset managers are managers of hedge and private equity funds. These managers typically manage pooled investment vehicles which are not subject to the investment limitations of traditional mutual funds and separate account managers. The investment vehicles managed by alternative asset managers may employ a wide variety of investment strategies. Alternative asset managers strive to produce investment returns that have a lower correlation to the broader market than do traditional asset management strategies. Alternative asset managers typically earn management fees based on the value of the investments they manage and earn incentive income based on the performance of such investments. Alternative investment funds are typically exempt from registration with regulatory authorities. Advisers of such funds in the United States may or may not be registered with the SEC under the Advisers Act. Investment vehicles employing alternative investment strategies are commonly referred to as hedge funds, among other things.

Hedge Funds

The term “hedge funds” generally refers to privately held and unregistered collective investment vehicles. Because they are not subject to the investment limitations imposed by the 1940 Act, hedge funds differ from traditional investment vehicles, such as mutual funds, by the strategies they employ and the asset classes in which they invest. Asset classes in which hedge funds may invest are very broad and include liquid and illiquid securities, derivative instruments, asset-backed securities and a variety of other non-traditional assets, such as distressed securities and infrastructure investments, among others.

The increasing demand for hedge fund products by institutional investors is one of the main drivers of the hedge fund industry’s growth. According to McKinsey & Company, institutional investors accounted for approximately 40% to 50% of all new flows into hedge funds in 2006. Higher institutional demand is driven by several factors, including the pursuit of higher returns compared to those generated by traditional equity and fixed income strategies, the desire to diversify investment portfolios by investing in assets with low correlation to traditional asset classes, and an increased level of comfort with hedge fund investments as the industry continues to mature.

 

 

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Historical Hedge Fund AUM and Net Asset Flows

(dollars in billions)

LOGO

Source: HFR Industry Reports © HFR Inc. 2007

Despite the rapid expansion in institutional inflows, alternative investment strategies still account for a relatively small portion of all institutional assets, signifying potential opportunity for continued growth. The increased role of institutional investors has resulted in a greater focus on risk management and investment operations throughout the industry.

Our Competitive Strengths

Leading Institutional Alternative Asset Management Firm.    We are one of the leading alternative asset managers in the world and have become a widely respected brand name in the industry. We believe that the strength and breadth of our franchise, supported by our people, investment approach and track record of success, provide a distinct advantage for raising capital, attracting and retaining talent, generating investment opportunities and maximizing long-term value for our shareholders.

Diversified, Global Alternative Investment Platform.    During our 13-year history, we have grown by launching new funds that complement our existing strategies and capitalizing on opportunities to deploy our financial and intellectual capital internationally. We believe that there is significant potential for us to continue to develop our investment strategies in additional markets and that our ability to identify and quickly respond to opportunities to enter new growth areas is a key competitive advantage.

Our Culture.    Our team-based culture is deeply embedded and emphasizes the success of our company as a whole, enforced by our company-wide compensation structure. We believe this unique culture is a key differentiator of our company and has helped us attract and retain highly talented, results-driven people.

Experienced Global Investment Team.    We have a team of over 130 investment professionals, led by Daniel Och, David Windreich, Michael Cohen, Zoltan Varga and Harold Kelly, each of whom has been with our company for at least nine years. Building on their many years of industry experience, the team provides a deep knowledge of the global capital markets and has developed long-term relationships with financial leaders and businesses in the asset management industry which are critical to the success of our company.

 

 

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Research-Driven Investment Process.    Over our 13-year history, we have developed and refined a rigorous, research-driven investment process based on extensive qualitative and quantitative analysis. We generally make investments where our analytical processes lead us to believe we have expertise and a competitive advantage, and then only in positions for which we believe the related risks are reasonable and manageable.

Record of Positive, Risk-Adjusted Returns.    We believe that our investment professionals have an exceptional record of generating positive, risk-adjusted returns, consistent with our funds’ investment objectives. We believe that our investment track record across a broad and expanding range of alternative asset classes and through varying economic conditions and market cycles is a key driver of our success.

Risk Management Expertise.    Risk management is a core element of our investment philosophy and process, and plays a crucial role in the strategy and operation of our business. Our risk management process is implemented at both the individual position and total portfolio levels and our Chief Executive Officer is responsible for managing overall portfolio risk.

Our Record of Growth.    We were established in 1994 with one professional located in an office in New York. Over time, we have grown our company with the goal of creating an enduring business. This growth has been systematic and methodical. We have been among the pioneers in international expansion, and we believe that our international platform is among the strongest in our industry.

Alignment of Interests.    One of our fundamental philosophies is to align our interests with those of our fund investors. Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering, without the approval of the general partner or board of directors of such funds, as applicable. In addition, we intend to grant              Class A restricted share units to all of our managing directors and other employees at the time of this offering, which will vest over a four-year period.

Diverse Investor Base.    Our funds have a diverse and sophisticated investor base consisting of more than 700 investors, including many of the largest pension funds, university endowments and financial institutions. No single investor in our funds accounted for more than 4% of our assets under management as of August 31, 2007.

Sources of Liquidity.    We believe the use of leverage in our funds’ investments has been conservative. For this reason, we have been able to secure access to pools of capital at fixed terms over several years. We may increase our use of leverage in the future in a manner that is consistent with our growth strategy and investment and risk management processes.

Our Growth Strategy

Continue to Deliver Positive, Risk-Adjusted Returns.    We believe that our fundamental research-driven analysis, diversified and dynamic investment process, and highly disciplined risk management processes will provide opportunities for us to continue to deliver positive, risk-adjusted returns to our growing investor base.

Continue to Broaden Our Leading Global Alternative Investment Platform.    We believe we have been a leader in establishing global investment capabilities in local markets outside of the United

 

 

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States, as evidenced by our activities in Europe and Asia. As capital markets develop and opportunities arise around the world, we expect to continue to open new offices and develop local teams to take advantage of those opportunities.

Pursue New Investment Strategies.    To maximize our flexibility, we manage our investment capital such that we are poised to pursue investment opportunities as they arise, whether due to specific corporate events or general market or economic changes or trends. We seek to diversify our investment platform and capabilities to better identify investment opportunities in existing and new geographies, strategies and asset classes.

Develop New Products.    We seek to develop and broaden our investment strategies and capabilities in areas around the world. We launch new products only after a thorough vetting process based upon our internal capabilities and risk assessments, providing our funds with opportunities to deploy capital and enabling us to diversify our product offerings and sources of revenue.

Continue to Broaden Our Investor Base.    Many institutional investors have allocated significant amounts of capital to our multi-strategy and other product offerings, motivated, we believe, by our positive, risk-adjusted returns and our diversified, international risk-managed investment discipline and well-developed infrastructure. We intend to continue to attract new capital, while striving to continue to deliver positive, risk-adjusted returns.

Develop New Distribution Channels.    As we expand our investment platform, we believe our reputation and market position will attract new investors in developing global markets. Furthermore, new distribution channels for alternative asset management products are opening, and we believe we are well positioned to take advantage of these opportunities.

Our Structure

We conduct our business through the Och-Ziff Operating Group, which consists of separate entities owned and operated by our existing owners, and through our real estate business, which is a joint venture between entities owned and operated by our existing owners and third parties. We have historically operated our business through these separate entities with no single holding company owned by the existing owners. Our existing owners include Mr. Och, our 17 other existing partners and the Ziffs. For accounting purposes in our historical financial statements, Mr. Och is treated as the sole equity owner of our business prior to this offering, our 17 other existing partners are treated as non-equity partners and the Ziffs are treated as having a right to receive certain payments based on management fees and incentive income earned by us. Distributions to the existing owners have been treated in our historical financial statements as follows: distributions on equity for Mr. Och, compensation expense for our 17 other existing partners and profit sharing expense for the Ziffs.

Prior to the completion of this offering, we will reorganize our company through the transactions described below and in “Our Structure”, and we will acquire the interests in the real estate business held by our existing owners. The real estate business will become a subsidiary of the Och-Ziff Operating Group, and third parties who currently own the remaining interests in the real estate business will continue to directly own a 50% interest therein. As more fully described below and under “Our Structure,” each of our existing owner’s interest in our business will be reclassified, for financial accounting purposes, into an equity interest in our business. Thus, despite the different financial accounting treatment of such interests prior to the Transactions as described above, upon completion of the Reorganization, each of the existing owners will hold the same type of equity interests in the Och-Ziff Operating Group, as well as the other interests described below. In addition, upon completion

 

 

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of the Transactions, Och-Ziff Capital Management Group LLC will be a holding company and its primary assets will be its ownership interest in the Och-Ziff Operating Group entities, which will be held indirectly through two intermediate holding companies: Och-Ziff Corp and Och-Ziff Holding. We will hold substantially all of our assets and conduct substantially all of our business through the Och-Ziff Operating Group. Having a holding company structure rather than a group of separate entities will facilitate our ability to offer interests in our business to the public.

The Reorganization

Och-Ziff Operating Group Entities.    The Och-Ziff Operating Group currently consists of OZ Management, OZ Advisors I and OZ Advisors II. Upon the completion of the Reorganization, all of our interests in OZ Management and OZ Advisors I will be held through Och-Ziff Corp, which will be taxed as a corporation. As a result, we anticipate that we will have significantly higher income tax expense after the Reorganization and that our effective income tax rate will increase substantially. All of our interests in OZ Advisors II will be held through Och-Ziff Holding, which will be a disregarded entity for U.S. federal income tax purposes. Each intermediate holding company will be the sole general partner of the applicable Och-Ziff Operating Group entity and will, therefore, generally control the business and affairs of such entity.

We intend to continue to conduct all of our material business activities through the Och-Ziff Operating Group. Historically, we have used more than one Och-Ziff Operating Group entity to segregate operations for business, financial, tax and other reasons. Going forward, we may increase or decrease the number of our Och-Ziff Operating Group entities and intermediate holding companies based on our views as to the appropriate balance between administrative convenience and continued business, financial, tax and other considerations. We expect that we will continue to conduct our fee-generating businesses, our domestic fund business and our domestic real estate fund business through OZ Management and OZ Advisors I. We expect that we will hold our interests in our offshore funds through OZ Advisors II.

Following the Reorganization, the operating entities of the Och-Ziff Operating Group will continue to be entitled to all of the management fees and incentive income earned with respect to our funds.

Och-Ziff Operating Group Units

Class A operating group units.    As described above, our existing owners currently hold interests in our business that are treated differently for financial accounting purposes. However, for all other purposes of our business, we treat all of our partners as the current owners of our business. Each of our partners holds the same proportionate interest in each Och-Ziff Operating Group entity, whether treated as equity or non-equity for financial accounting purposes. Prior to completion of this offering, each existing partner’s interest in each Och-Ziff Operating Group entity will be reclassified as Class A operating group units, which will represent common equity interests in the respective Och-Ziff Operating Group entity. Each of Mr. Och and our 17 other partners will receive an amount of Class A operating group units in each Och-Ziff Operating Group entity equal to such partner’s then-existing income allocation percentage under the applicable limited partnership agreement in effect immediately prior to such reclassification. In addition, as part of the reclassification, each partner will also receive a Class C non-equity interest (the “Class C Non-Equity Interests”), which will not represent a common equity interest in our business. The Class C Non-Equity Interests will represent non-equity interests on which discretionary income allocations may be made to our existing and future partners, as described below, although we currently do not intend to make any such distributions. The Ziffs’ existing interest in our business will also be reclassified as Class A operating group units, representing an approximately

 

 

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10% interest in the common equity of each Och-Ziff Operating Group entity immediately prior to this offering, which will proportionately reduce each partner’s common equity interest in the respective Och-Ziff Operating Group entity. The Ziffs will not hold any Class C Non-Equity Interests. As a result, upon completion of the Reorganization and prior to this offering, Mr. Och, the 17 other partners and the Ziffs will own in the aggregate 100% of the common equity in each Och-Ziff Operating Group entity.

One Class A operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group A Unit”. Och-Ziff Operating Group A Units will be exchangeable for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions, as described below. Upon completion of this offering, including the use of proceeds therefrom, Mr. Och, our 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 43.5%, 37.2% and 9.0%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full).

Class B operating group units.    As described below under “—Offering Transactions—Public Offering of Class A Shares,” after completion of the Reorganization and in connection with the consummation of this offering, we will contribute the proceeds to us from this offering to the intermediate holding companies, which will in turn contribute such proceeds to the Och-Ziff Operating Group entities in exchange for Class B operating group units in each such entity. Each intermediate holding company will hold Class B operating group units in each Och-Ziff Operating Group entity that it controls. Och-Ziff Corp will hold 100% of the Class B operating group units in each of OZ Management and OZ Advisors I, and Och-Ziff Holding will hold 100% of the Class B operating group units in OZ Advisors II. The Class B operating group units will be economically identical to the Class A operating group units held by our existing owners, representing common equity interests in our business, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements.

One Class B operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group B Unit”. In this prospectus, we refer to the Och-Ziff Operating Group A Units and the Och-Ziff Operating Group B Units, which together represent all of the common equity interests in the Och-Ziff Operating Group entities, collectively as the “Operating Group Equity Units”. The Operating Group Equity Units will have no preference or priority over other securities of the Och-Ziff Operating Group and, upon liquidation, dissolution or winding up, will be entitled to any assets remaining after payment of all debts and liabilities of the Och-Ziff Operating Group.

Class C Non-Equity Interests.    As described above, our existing partners will also receive Class C Non-Equity Interests in the Reorganization. The Class C Non-Equity Interests will represent non-equity interests in our business which the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote), in conjunction with our compensation committee, may from time to time use to make discretionary income allocations to our partners, including new partners, and will not represent common equity interests in the Och-Ziff Operating Group entities. We currently do not intend to make any such distributions on the Class C Non-Equity Interests. However, in the future, the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee may determine that for competitive or other reasons, distributions on the Class C Non-Equity Interests are advisable and in keeping with our compensation philosophy of rewarding performance that increases long-term shareholder value and attracting and retaining the highest quality professionals. In such case, distributions may be made to one or more holders of the Class C Non-Equity Interests as and to

 

 

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the extent determined appropriate by the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee and need not be made to all such holders on a pro rata basis or otherwise. No holder of Class C Non-Equity Interests will have any right to receive distributions on such interests. Any discretionary income allocations made pursuant to the Class C Non-Equity Interests would be treated as an expense for financial reporting purposes and would therefore reduce amounts available for distribution to us (and, in turn, our Class A shareholders), our partners and the Ziffs as owners of the equity interests in the Och-Ziff Operating Group after this offering.

Deconsolidation of Och-Ziff Funds.    In accordance with GAAP, most of our funds have historically been consolidated into our combined financial statements notwithstanding the fact that we have had only a minority interest in these funds. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis rather than reflecting only the value of our investments in such funds. As of December 31, 2006, the assets of the Och-Ziff funds consolidated on our balance sheet were $36.0 billion, while the net asset value of our investments in these consolidated funds was approximately $414.5 million. In addition, all management fees and incentive income earned by us from these funds were eliminated as a result of the consolidation of these funds and are reflected on our historical financial statements as an increase in our allocated share of the net income from these funds.

In December 2006, we granted substantive “kick-out” rights to the unaffiliated limited partners of most of our domestic funds enabling them to remove the respective general partner with a simple majority vote. These rights became effective on January 1, 2007. In June 2007, we granted similar rights to the unaffiliated shareholders of each of our offshore funds, enabling them to replace the respective investment manager by replacing one or more members of the respective boards of directors. These rights became effective on June 30, 2007. As a result, most of our domestic funds and all of our offshore funds have been deconsolidated as of the relevant effective dates of such rights. Funds with only affiliated investors will continue to be consolidated for financial reporting periods as of and after June 30, 2007. These funds comprised approximately $87.7 million or 0.3% of our assets under management as of June 30, 2007.

We granted these rights to our fund investors for no consideration in order to enable us to deconsolidate these funds. We believe the deconsolidation allows us to present financial information in a manner that more clearly reflects our business, financial condition and results of operations because, among other things:

 

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We will include the management fees and incentive income earned from our deconsolidated funds on our statements of income rather than eliminating the revenue in consolidation.

 

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We will not record on our balance sheets or statements of income the gross assets, liabilities, revenues, expenses and other income or the related non-controlling interests of our fund investors in our deconsolidated funds.

 

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We will not reflect cash flows of our deconsolidated funds on our statements of cash flows.

Despite the above changes to certain aspects of our combined financial statements, the deconsolidation of our funds will not have any effect on our net income or equity.

Furthermore, because management makes operating decisions and allocates resources based on financial information that, among other things, shows our results of operations after giving effect to the deconsolidation of our funds, our financial reporting is now presented in a manner that is consistent

 

 

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with how our management evaluates our business and the related risks thus providing shareholders with a better method of understanding our business.

Offering Transactions

Public Offering of Class A Shares.    Och-Ziff Capital Management Group LLC will issue 36,000,000 Class A shares in this offering (or 41,400,000 Class A shares if the underwriters exercise their option to purchase additional Class A shares in full). The Class A shares will entitle the holders to one vote per share. Och-Ziff will then contribute the proceeds from this offering less underwriting discounts and commissions to its intermediate holding companies, based on the relative value of those entities. The intermediate holding companies may enter into credit arrangements with one another with respect to a portion of such proceeds, depending upon the relative need and other business considerations. Any such credit arrangements will have no effect on our overall organizational structure, including the number of Operating Group Equity Units issued to our existing owners and our intermediate holding companies. The intermediate holding companies will then contribute all of the proceeds received from us to the Och-Ziff Operating Group in exchange for newly issued Och-Ziff Operating Group B Units such that the intermediate holding companies will hold a number of Och-Ziff Operating Group B Units that will be equal in number to the number of Class A shares issued in this offering. As a result, our existing owners’ percentage ownership of the common equity interests in the Och-Ziff Operating Group will be correspondingly reduced. Och-Ziff Operating Group B Units held by the intermediate holding companies will be economically identical in all respects to Och-Ziff Operating Group A Units that our existing owners will hold, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements. The Och-Ziff Operating Group will then immediately use all of such offering proceeds to purchase an aggregate of 36,000,000 Och-Ziff Operating Group A Units from our existing owners for an aggregate purchase price equal to $1.1 billion, and such units will be cancelled. Upon such purchase, an equal number of Class B shares held by our existing partners will correspondingly be cancelled, as described below. We will pay all of the expenses related to this offering from cash on hand, and we will not retain any of the proceeds from this offering. The number of Och-Ziff Operating Group A Units purchased from each of Mr. Och, our 17 other existing partners and the Ziffs (and, therefore, the corresponding number of Class B shares to be cancelled) will equal such existing owner’s pro rata portion of the aggregate amount of such units outstanding immediately prior to such purchase.

In the event the underwriters exercise their option to purchase additional Class A shares, the proceeds will be used as described above. First, Och-Ziff will contribute the proceeds to it to the intermediate holding companies based on the relative value of those entities, and the intermediate holding companies will then contribute all of such proceeds to the Och-Ziff Operating Group in exchange for a number of newly issued Och-Ziff Operating Group B Units equal to the number of Class A shares issued pursuant to the underwriters’ option. The Och-Ziff Operating Group will then use all of the offering proceeds from the exercise of such option, assuming such option is exercised in full, to purchase 5,400,000 Och-Ziff Operating Group A Units from our existing owners on a pro rata basis for an aggregate purchase price equal to $160.7 million, and such units, as well as 4,860,000 Class B shares held by our existing partners, will be cancelled.

Reclassification of Och-Ziff Interests to Class B Shares.    All of the currently outstanding limited liability company interests of Och-Ziff Capital Management Group LLC are held by our existing partners. These interests will be reclassified as our Class B shares prior to the completion of this offering and will be adjusted so that our partners will hold a number of Class B shares upon completion of the Reorganization equal to the number of Och-Ziff Operating Group A Units then held by each such partner. Upon the purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from

 

 

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our existing partners with the proceeds from this offering as described above, a corresponding number of Class B shares will be cancelled so that, upon completion of this offering, our existing partners will hold 327,600,000 Class B shares (or 322,740,000 Class B shares if the underwriters exercise their option to purchase additional Class A shares in full), which will equal the number of Och-Ziff Operating Group A Units then held by them. The Ziffs will not hold any of our Class B shares. The Class B shares will have no economic rights but will entitle the holders to one vote per share. The Class B shares are not expected to be registered for public sale or listed on any securities exchange and will only be transferable by a holder in connection with a transfer of such holder’s Och-Ziff Operating Group A Units. The Class B shares are intended solely to provide our existing partners with a voting interest in Och-Ziff Capital Management Group LLC equal to their economic interest in our business. As a result, the number of Class B shares held by an existing partner at any time will equal the number of Och-Ziff Operating Group A Units then held by such partner. Holders of Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Upon completion of this offering, our partners will hold Class B shares representing 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full). Each of our partners will grant initially to Mr. Och, as the sole member of the Class B Shareholder Committee, an irrevocable proxy to vote all of his Class B shares until the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company.

IPO Date Awards.    At the time of this offering, we intend to grant to all of our managing directors and other employees (which do not include our partners) 14,761,905 Class A restricted share units in the aggregate under our 2007 equity incentive plan. These units, which may be settled in Class A shares or cash, at the election of a majority of our Board of Directors, will vest in equal installments over a four-year period beginning on the first anniversary of this offering and will accrue distributions (to be paid when the underlying Class A restricted share units vest). We will recognize compensation expense over the vesting period. An employee will forfeit all unvested units if an employee leaves or is terminated for any reason (other than in the event of a termination of employment resulting from death or disability, or without cause within the one-year period following a change in control of us, in which case all such restricted share units will vest). To the extent that Class A restricted share units are settled in Class A shares, we expect to issue registered Class A shares in respect of such units upon vesting. As a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144 under the Securities Act, or “Rule 144,” without regard to holding period limitations.

Exchange and Registration Rights.    We will enter into an exchange agreement with our existing owners. Pursuant to the exchange agreement, our existing owners will be entitled to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions. Such exchanges generally may be made as and when approved by the Chairman of the exchange committee (or the full committee acting by majority vote if there is no Chairman) for the five-year period following this offering and quarterly thereafter. The exchange committee will consist of the members of the Partner Management Committee, with Mr. Och initially acting as Chairman. Our Board of Directors may cause the Och-Ziff Operating Group entities to elect to pay a cash equivalent in lieu of Class A shares upon any such exchange. Upon any such exchange, the corresponding Class B shares of Och-Ziff Capital Management Group LLC held by an exchanging owner will be cancelled, and such exchanging owner may be entitled to certain payments under the tax receivable agreement described below. Upon any such exchange for Class A shares, the number of Och-Ziff Operating Group B Units

 

 

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that we hold will correspondingly increase. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Issuance of Equity Securities by Och-Ziff.” If and when an existing owner exchanges an Och-Ziff Operating Group A Unit for a Class A share and the corresponding Class B share is cancelled, then-existing Class A shareholders will be diluted with respect to their ownership of the Class A shares. However, the relative equity ownership positions of the exchanging existing owner and of the other equity owners of our business (whether held at Och-Ziff Capital Management Group LLC or at Och-Ziff Operating Group) will not be altered. In addition, other than with respect to an exchange by the Ziffs, there will be no effect on the number of voting shares outstanding, as a corresponding Class B share is cancelled for each Class A share issued upon such exchange. We intend to grant to our existing owners certain registration rights with respect to the Class A shares received by them as a result of any such exchange or otherwise. In addition to certain demand rights and piggyback registration rights, we will be required to file a shelf registration statement on or prior to the fifth anniversary of this offering covering the resale of all Class A shares held by our existing owners or issuable upon exchange of their Och-Ziff Operating Group A Units. The Och-Ziff Operating Group B Units held by our intermediate holding companies will not be exchangeable for Class A shares.

Tax Receivable Agreement.    The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. As a result, we expect that the amount of tax that we would otherwise have been required to pay in the future will be reduced. Accordingly, Och-Ziff Corp and our other corporate taxpayer intermediate holding companies, if any, will enter into a tax receivable agreement with our existing owners whereby such intermediate holding companies will agree to pay to our existing owners 85% of the amount of tax savings actually realized by such entities.

In connection with the purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, we have assumed, for financial accounting purposes, no material change in the relevant tax law and that we will earn sufficient taxable income to realize the full tax benefit of increased amortization of our assets attributable to tax basis increases resulting from such purchase. On that basis, the cash savings to our intermediate holding companies from the initial purchase would aggregate approximately $             million over the next 15 years (or $             million over the next 15 years if the underwriters exercise their option to purchase additional Class A shares in full). These amounts reflect the fact that payments under the tax receivable agreement may result in further tax savings, and thus may give rise to additional payment obligations thereunder. The obligation to pay 85% of the amount of such cash savings to our existing owners is an obligation of the corporate taxpayer intermediate holding companies and not of the Och-Ziff Operating Group entities. Future cash savings and related payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary based upon a number of factors (including the timing of future exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income), depending upon the outcome of these factors, payments that we may be obligated to make to our existing owners as a result of the purchase of Och-Ziff Operating Group A Units in connection with this offering, as well as the payments in respect of subsequent exchanges, could be substantial. In light of the numerous factors affecting our obligation to make such payments, however, the timing and amounts of any such actual payments are not reasonably ascertainable at this time.

 

 

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Vesting; Forfeiture; Transfer and Other Restrictions Applicable to Our Partners.    Upon completion of the Reorganization, Mr. Och and the 17 other partners will hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to different vesting, forfeiture, transfer, and other restrictions and minimum retained ownership requirements as described below. Pursuant to the operating group limited partnership agreements, the Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and thereafter will be cancelled. All other Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by Mr. Och and our 17 other partners upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest, subject to our partners’ continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary date of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners only if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is terminated by the partnership for cause or if the Partner Performance Committee terminates such partner for any reason. We will recognize compensation expense to the extent of the amount of Och-Ziff Operating Group A Units that vest in each year over the vesting period. In addition, the operating group limited partnership agreements will provide for restrictions on transfers by any of our partners of their interests in our business, permitting transfers of their vested Och-Ziff Operating Group A Units, including in exchange for Class A shares pursuant to the exchange agreement, generally only as permitted by the Chairman of the Partner Management Committee (or, with respect to the Chairman or in the event there is no Chairman, by the Partner Management Committee acting by majority vote); provided that after the fifth anniversary of this offering, there will be no restrictions on exchanges by any of our partners of their Och-Ziff Operating Group A Units for our Class A shares or the transfer of any such Class A shares received in any such exchange. In addition, on or prior to such fifth anniversary, we will be required to file a shelf registration statement covering the resale of all Class A shares held by our existing owners or issuable upon any such exchange. Any transfers will be further subject to a requirement that each partner (including Mr. Och), while he is associated with us and during the two-year period immediately following the date of termination of his association with us for any reason, maintains a minimum ownership of 25% of the vested Och-Ziff Operating Group A Units received by him and without reduction for dispositions. The foregoing vesting and minimum retained ownership requirements may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee with respect to the Chairman or in the event there is no Chairman) at any time. Any waiver of the vesting provisions would result in an accelerated recognition of compensation expense associated with such interests. Each of Mr. Och and our 17 other partners will also be subject to certain restrictions with respect to competing with us, soliciting our employees or fund investors and disclosing confidential information about our business. Our managing directors will be subject to similar restrictions. Each of Mr. Och and our 17 other partners will re-invest 100% of the after-tax proceeds received by him in connection with this offering into our funds.

Restrictions on Transfer of the Ziffs’ Interest in Our Business.    Upon completion of the Reorganization, the Ziffs will also hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to vesting (without regard to service or performance conditions) and transfer restrictions as described below but will not be subject to forfeiture or minimum retained ownership requirements. The operating group limited partnership agreements will

 

 

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provide that the Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and will thereafter be cancelled. All other Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by the Ziffs upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The Ziffs will be restricted from transferring any Och-Ziff Operating Group A Units prior to vesting. The Ziffs will not have any demand registration rights with respect to any Class A shares acquired by them upon exchange of their Och-Ziff Operating Group A Units but will have “piggyback” registration rights that are the same as those granted to our existing partners and will be entitled to include their Class A shares in the shelf registration statement that we will be required to file on or prior to the fifth anniversary of this offering. In addition, following the first anniversary of this offering, the Ziffs will generally be entitled, in any given fiscal quarter, to exchange their vested Och-Ziff Operating Group A Units for Class A shares in an amount equal to up to the lesser of (i) 3.3% of the total issued and outstanding Class A shares at the time of such exchange and (ii) 5% of the Class A shares that would have been held by them had they exchanged all of their Och-Ziff Operating Group A Units into Class A shares immediately prior to the completion of this offering. The Ziffs will generally be entitled to freely sell any such Class A shares received upon any such exchange, subject to applicable law. The Ziffs will also be permitted to contribute their vested Och-Ziff Operating Group A Units to charities, subject to the approval of the Chairman of the Partner Management Committee. The foregoing vesting requirements and transfer restrictions may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee in the event there is no Chairman) at any time. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

Certain Committees

Partner Management Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Management Committee”. The Partner Management Committee will be a committee comprised of seven partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga, Kelly and Brown, with Mr. Och serving as Chairman. The Partner Management Committee shall act by majority approval. Each member of the Partner Management Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Management Committee shall act by majority vote to either (1) replace Mr. Och with a partner to serve as Chairman, until such partner’s withdrawal, death, disability or removal by the other members of the Partner Management Committee or (2) reduce the size of the Partner Management Committee to the remaining members (in which event, there shall be no Chairman, and the remaining members will act by majority vote). Upon the withdrawal, death, disability or removal of any of the members of the Partner Management Committee other than the Chairman, the remaining members of the Partner Management Committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided in clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new member’s withdrawal, death, disability or removal. The Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to make determinations with respect to distributions on the Class C Non-Equity Interests, subject to the authority of our compensation committee, although we do not currently intend to make any such distributions. In addition, the Chairman (or, with respect to the Chairman or in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to

 

 

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approve transfers of Och-Ziff Operating Group A Units in accordance with the operating group limited partnership agreements. The full Partner Management Committee acting by majority vote will also have authority to reconstitute the Class B Shareholder Committee.

Partner Performance Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Performance Committee”. The Partner Performance Committee will be a committee comprised of six partners acting by majority vote, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga and Kelly, with Mr. Och serving as Chairman. The vote of Mr. Och will break any deadlock. Each member of the Partner Performance Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the other members of the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Performance Committee shall act by majority vote to replace Mr. Och with a partner (who may or may not serve as Chairman) until such partner’s withdrawal, death, disability or removal by the other members of the Partner Performance Committee. Upon the withdrawal, death, disability or removal of any of the members of the Partner Performance Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided above, the Partner Performance Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Performance Committee will have authority to terminate any partner, other than Mr. Och, for any reason. At all times in which there is a Chairman of the Partner Performance Committee, any such termination shall be made only upon the recommendation of the Chairman.

Class B Shareholder Committee.    The shareholders’ agreement will provide for the establishment of the “Class B Shareholder Committee”. The Class B Shareholder Committee initially will be a committee of one, consisting solely of Mr. Och until his withdrawal, death or disability. Upon Mr. Och’s withdrawal, death or disability, the Partner Management Committee shall act by majority vote to reconstitute the Class B Shareholder Committee either by (1) appointing a new partner to serve as the sole member of the Class B Shareholder Committee until such partner’s withdrawal, death, disability or removal by the Partner Management Committee, or (2) appointing the members of the Partner Management Committee as the members of the Class B Shareholder Committee (in which event such members would act by majority vote in their capacity as the Class B Shareholder Committee). Upon a reconstitution as provided by clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. Upon a reconstitution as provided by clause (2) above, the Class B Shareholder Committee shall thereafter be comprised of the members who from time to time constitute the Partner Management Committee. The Class B Shareholder Committee will have certain voting, nomination, consent and approval rights, as described below.

Voting, Nomination, Consent and Approval Rights of Class B Shareholder Committee

Our Class B Shareholder Committee will have certain voting, nomination, consent and approval rights pursuant to the shareholders’ agreement. These rights include:

 

  Ÿ  

The right to vote all of the outstanding Class B shares, pursuant to irrevocable voting proxies granted by our existing partners, until the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company. Upon completion of this offering, the Class B shares will represent 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

The right initially to designate five of the seven nominees for election to our Board of Directors, with such number of nominees decreasing as the voting interest held by our partners decreases;

 

 

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  Ÿ  

The right to consent to or approve certain actions (so long as our existing partners continue to own more than 40% of the total combined voting power of our company), including:

 

  ¡  

incurrence of indebtedness, issuance of securities or making of investments, in each case subject to monetary thresholds;

 

  ¡  

entry into a new line of business;

 

  ¡  

adoption of a shareholder rights plan;

 

  ¡  

appointment or termination of a chief executive officer; or

 

  ¡  

termination of any executive officer or partner of any of our subsidiaries without cause.

In addition, our operating agreement requires that we obtain the consent of the Class B Shareholder Committee for specified actions primarily relating to our structure so long as any Class B shares remain outstanding. Our structure is intended to ensure that we maintain exchangeability of Class A shares and Och-Ziff Operating Group A Units on a one-for-one basis. Accordingly, the Class B Shareholder Committee will have the right to approve or consent to actions that could result in an economic disparity, such as the issuance of certain securities, making certain capital contributions, owning or disposing of certain assets, incurring certain indebtedness and conducting business outside of the Och-Ziff Operating Group. Please refer to “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities” for additional information.

 

 

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The diagram below depicts our organizational structure immediately following the above-described transactions:(1)

LOGO

 


(1)

This diagram does not give effect to 14,761,905 Class A restricted share units to be granted under our 2007 equity incentive plan to all of our managing directors and our other employees in

 

 

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connection with this offering or the issuance of any Class A shares upon exercise of the underwriters’ option to purchase additional Class A shares. Assuming the underwriters exercise in full their option to purchase additional Class A shares, and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering (assuming such units are settled in Class A shares), (i) our existing owners will hold 86.5% of the equity in our business and 85.2% of the total combined voting power of our company and (ii) investors in this offering will hold, indirectly, 10.0% of the equity in our business and 10.9% of the total combined voting power of our company. Our real estate funds, OZ 2004 Investment Partners, L.L.C. and OZ 2004 GP, L.L.C., which are reflected as part of the Och-Ziff Operating Group in our historical financial statements, are not reflected in this diagram as these entities will become subsidiaries of the Och-Ziff Operating Group in connection with the Transactions.

(2) Our existing owners include Mr. Och, the 17 other existing partners and the Ziffs. Upon consummation of this offering, Mr. Och, the 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 42.0%, 35.9% and 8.6%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will hold all of the Class C Non-Equity Interests, which may be used for discretionary income allocations in the future, although we currently do not intend to make any distributions on such interests. The Ziffs will not hold any Class C Non-Equity Interests.
(3) Upon consummation of this offering, Mr. Och will hold Class B shares representing 48.6% of the voting power of our company and the 17 other partners will hold Class B shares representing 41.5% of the voting power of our company (or 45.9% and 39.3%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will grant initially to Mr. Och, as the sole member of the Class B Shareholder Committee, an irrevocable proxy to vote all of their Class B shares. The Ziffs will not hold any of our Class B shares.
(4) Och-Ziff Operating Group A Units and Och-Ziff Operating Group B Units together represent all of the equity interests in the Och-Ziff Operating Group.
(5) Held solely by existing partners for potential future discretionary income allocations.

Tax Consequences and Post-Offering Distributions

Skadden, Arps, Slate, Meagher & Flom LLP has acted as our counsel in connection with this offering. Subject to the assumptions and other qualifications described in “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status,” Skadden, Arps, Slate, Meagher & Flom LLP is of the opinion that at the closing of this offering we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or publicly traded partnership (within the meaning of Section 7704 of the Code) subject to tax as a corporation. As a result of our being treated as a partnership for U.S. federal income tax purposes, holders of Class A shares will be required to report their allocable share of our income for U.S. federal income tax purposes, regardless of whether any cash or other distributions are paid to them. Income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

The Och-Ziff Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the direct holders of Operating Group Equity Units that are not taxed on a flow-through basis, including Och-Ziff Corp and our existing owners, will incur

 

 

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U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Och-Ziff Operating Group. As a result of Och-Ziff Corp being taxed as a corporation we anticipate that we will have significantly higher tax expenses after the Reorganization and that our effective tax rate will increase substantially.

After this offering, we intend to cause the Och-Ziff Operating Group to make distributions on a pro rata basis to holders of Operating Group Equity Units (including our existing owners and our intermediate holding companies) in order to fund any distributions we may declare on the Class A shares. However any such distributions will be at the sole discretion of our Board of Directors. If the Och-Ziff Operating Group makes such distributions, the holders of Operating Group Equity Units will be entitled to receive distributions pro rata, based on their partnership interests. In the event that a distribution is made on the Operating Group Equity Units solely to fund a distribution on the Class A shares, we would expect that the distribution per Class A share would equal the distribution per Operating Group Equity Unit. As a result, our existing owners would receive a distribution per Och-Ziff Operating Group A Unit equal to the per Class A share distribution. No similar distributions will be made on the corresponding Class B shares of Och-Ziff held by our partners. In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Operating Group Equity Units in an amount at least equal to the presumed maximum tax liabilities arising from the ownership of such units, if any. Because the purpose of such tax distributions is to enable Och-Ziff Corp and the existing owners to satisfy their respective tax liabilities, no such distribution will necessarily be required to be distributed by our intermediate holding companies to us, and we may determine not to pay cash distributions on the Class A shares. The declaration and payment of distributions on the Class A shares will be at the sole discretion of our Board of Directors. As a result, there may be instances in which our existing owners receive a distribution on their Och-Ziff Operating Group A Units but holders of Class A shares receive no distribution. A holder of Class A shares will be required to report its share of our taxable income even if the Board of Directors does not pay distributions. Distributions on Operating Group Equity Units will be made on all such units, whether or not vested.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation were to be enacted and to apply to us, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares. In addition, proposed changes to the U.S. federal tax laws and interpretations thereof could change the character or treatment of portions of our income, including, for instance, treating carried interest income as entirely ordinary income. “Carried interest” is a term often used in the marketplace as a general reference to describe a general partner’s right to receive its incentive income in the form of a profit allocation eligible for capital gains tax treatment (to the extent that the carried interest consists of capital gains).

Distributions and Other Payments to our Existing Owners

In 2006 and from January 1, 2007 to the date of this prospectus, excluding the special distributions described in the bullet points below, our named executive officers, certain of whom are also directors, received aggregate cash distributions of $        billion and $        billion, respectively, while our other existing owners received an aggregate of $        billion and $        billion, respectively.

 

 

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The following is a summary of special distributions that have been or will be made to our existing owners in connection with this offering and the other transactions described in this prospectus. We refer to these distributions collectively as the “Special Distributions”:

 

  Ÿ  

Special Pre-Offering Distributions

 

  Ÿ  

Term Loan Distributions. On July 2, 2007, we entered into a new $750 million term loan, which we will amend prior to the closing of this offering. We intend to use the full amount of the proceeds from the term loan to make pro rata distributions to our existing owners prior to completion of this offering, which we refer to throughout this prospectus as the “Term Loan Distributions”. Our named executive officers, certain of whom are also directors, will receive Term Loan Distributions of $        million in the aggregate, while our other existing owners will receive Term Loan Distributions of $        million in the aggregate.

 

  Ÿ  

Distribution of Investments in Och-Ziff Funds. We have made investments in our funds on behalf of our existing partners that we expect to distribute to them prior to the completion of this offering. These investments, which were approximately $300 million at June 30, 2007, will be distributed in the form of limited partnership interests in the respective funds. We refer to these distributions as the “Investment Distributions”.

 

  Ÿ  

2007 Management Fee Distribution. Prior to completion of this offering, we intend to declare a distribution to our existing owners equal to management fees earned from January 1, 2007 through the date of this offering reduced by expenses and prior management fee distributions for such period. Such distributions are not expected to exceed $        million in the aggregate and will not include any amounts in respect of incentive income that has been or may be earned for 2007. We refer to this distribution as the “2007 Management Fee Distribution” and, together with the Term Loan Distributions and the Investment Distributions, the “Pre-Offering Distributions”.

 

  Ÿ  

Offering Distributions

 

  Ÿ  

In connection with our purchase of Och-Ziff Operating Group A Units with proceeds of this offering, our named executive officers are expected to receive approximately $779 million in the aggregate (or $896 million if the underwriters exercise their option to purchase additional Class A shares in full), while our other existing owners are expected to receive approximately $293 million in the aggregate (or $337 million, if the underwriters exercise their option to purchase additional Class A shares in full). All of the net after-tax proceeds to be received by our partners in connection with this offering (and 50% of the net after-tax proceeds received by the Ziffs) will be reinvested in our funds.

 

  Ÿ  

Special Post-Offering Distributions and Payments

 

  Ÿ  

Deferred Income Distributions. We intend that the Deferred Balances, which were approximately $1.5 billion as of June 30, 2007, will be paid in the form of cash or other property to OZ Management and, in turn, distributed to our existing owners over a three-year period commencing in January 2008. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Offering Liquidity” for additional information regarding our deferral arrangements and the termination thereof. We refer to these distributions as the “Deferred Income Distributions”.

 

 

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  Ÿ  

Tax Receivable Payments. Commencing in 2008, our existing owners will be eligible to receive payments under the tax receivable agreement in connection with our purchase of their Och-Ziff Operating Group A Units in connection with this offering and pursuant to subsequent exchanges. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Post-Offering Liquidity” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for additional information regarding the timing and amount of such distributions. We refer to these payments as “Tax Receivable Payments”.

Additional Information

Our principal executive offices are located at 9 West 57th Street, New York, New York 10019. The telephone number of our principal executive offices is (212) 790-0041.

 

 

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The Offering

 

Shares offered by us in this offering

Class A shares: 36,000,000

 

Shares to be outstanding immediately after this offering

Class A shares: 36,000,000

 

 

Class B shares: 327,600,000

 

Shares to be held by our existing owners immediately after this offering

Class A shares: None

 

 

Class B shares: 327,600,000 (100% held by our partners)

 

Operating Group Equity Units to be held by us and our existing owners immediately after this offering

36,000,000 by us, or 9.0%

364,000,000 by our existing owners, or 91.0%

 

Voting

One vote per Class A share.

 

 

One vote per Class B share.

 

 

Holders of our Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Our Class B Shareholder Committee has the right to vote all of the Class B Shares pursuant to irrevocable voting proxies.

 

Approval and board designation rights

Our Class B Shareholder Committee will initially have approval and consent rights with respect to certain actions of our Board of Directors and will also initially have the right to designate five of the seven nominees for election to our Board of Directors.

 

Use of proceeds

We estimate that the proceeds from the sale of our Class A shares in this offering, after deducting the underwriting discounts and commissions, will be approximately $1.1 billion. All of such proceeds to us from this offering will be contributed to the Och-Ziff Operating Group, which in turn will apply those proceeds to purchase Och-Ziff Operating Group A Units from our existing owners at a purchase price per unit equal to the initial public offering price less underwriting discounts and commissions. Accordingly, we will not retain any of the proceeds from this offering. In addition, we will pay all of the expenses related to this offering, estimated to be approximately $20.4 million, from cash on hand.

 

 

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Cash distribution policy

Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth of our business and to provide for future distributions to our Class A shareholders. We expect that our first quarterly distribution will be paid in the first quarter of 2008 in respect of the prior quarter. Incentive income has a significant impact on our economic income but these amounts are not determinable until completion of our fiscal year. We currently anticipate that quarterly distributions in respect of the first three fiscal quarters of any given calendar year will be based on our actual performance, but will not reflect any assumption as to incentive income that may or may not be recorded at year end. Accordingly, if our performance for a given year enables us to earn incentive income, the distributions made in respect of our first three fiscal quarters will be smaller than the distribution we make in respect of our fourth fiscal quarter.

 

 

The declaration and payment of any future distributions will be at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Our ability to make distributions may be limited by legal and contractual restrictions. For example, as a Delaware limited liability company we are not permitted to make a distribution if and to the extent that after giving effect to such distribution, our liabilities would exceed the fair value of our assets. In addition, we will not be permitted to make distributions if we are in default under our new term loan, and the term loan will limit the aggregate amount of distributions we can pay during a 12-month period to our “free cash flow”, as such term is defined in the term loan. See “Description of New Term Loan.” In addition, our Board of Directors will take into account such other factors as it may deem relevant, including general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; our financial condition and operating results; working capital requirements and anticipated cash needs; and contractual obligations, including payment obligations pursuant to the tax receivable agreement.

 

 

In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units, including us and our existing owners, in an amount at least equal to the maximum presumed tax liabilities arising from the direct ownership of such units, if any. We will also cause the

 

 

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applicable Och-Ziff Operating Group Entities to distribute cash to us sufficient to fund any payments due under the tax receivable agreement and the expense allocation agreement.

 

 

The distributions to holders of Och-Ziff Operating Group Units in respect of their tax liabilities and payments under the tax receivable agreement will reduce amounts that would otherwise be available for distribution on Class A shares.

 

Proposed New York Stock Exchange symbol

“OZM”

 

Risk factors

Please read the section entitled “Risk Factors” beginning on page 31 for a discussion of some of the factors you should carefully consider before deciding to invest in our Class A shares.

References in this section to the number of our Class A shares and Class B shares to be outstanding after this offering, and the percent of our total combined voting power held, do not reflect:

 

  Ÿ  

364,000,000 Class A shares issuable upon exchange of 364,000,000 Och-Ziff Operating Group A Units (or 358,600,000 Class A shares if the underwriters exercise in full their option to purchase additional Class A shares) held by our existing owners;

 

  Ÿ  

5,400,000 Class A shares issuable on exercise of the underwriters’ option to purchase additional Class A shares in full if they sell more than 36,000,000 Class A shares in this offering; or

 

  Ÿ  

interests that may be granted under our 2007 equity incentive plan, consisting of:

 

  Ÿ  

14,761,905 Class A restricted share units that we expect to grant to all of our managing directors and other employees (which do not include our partners) at the time of this offering, which will vest, subject to their continued employment (other than in the event of a termination of employment resulting from death or disability or without cause within the one year period following a change in control of us, in which case all such restricted share units will vest), in equal installments on each anniversary date of this offering for four years, beginning on the first anniversary date of this offering, and which may be settled, at the election of a majority of our Board of Directors, in Class A shares or cash;

 

  Ÿ  

60,000,000 Class A shares reserved for issuance under our 2007 equity incentive plan.

 

 

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SUMMARY HISTORICAL COMBINED AND

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Summary Historical Combined Financial Information

The following tables set forth certain summary financial information on a historical basis. The Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. The summary historical combined financial information set forth below as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, has been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined financial information set forth below as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002, has been derived from our unaudited accounting records prepared on a consistent basis with the financial statements described above.

The summary historical combined financial information set forth below as of June 30, 2007 and 2006, and for the six months ended June 30, 2007 and 2006, has been derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The unaudited interim combined financial statements include all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the periods presented.

Effective January 1, 2004, the Och-Ziff Operating Group adopted FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which requires us to consolidate variable interest entities in which we were determined to be the primary beneficiary. As a result, amounts presented for 2002 and 2003 are not comparable to amounts presented in subsequent periods.

In addition, as of January 1, 2007, the Och-Ziff Operating Group no longer consolidates most of its domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds. Similar changes to the rights of unaffiliated shareholders in the offshore funds were made in June 2007 and resulted in the deconsolidation of all of the offshore funds as of June 30, 2007. As a result, the financial information presented for the six months ended June 30, 2007 is not comparable to the financial information presented for the six months ended June 30, 2006.

In addition, incentive income, which has a significant impact on our results of operations, is determined on an annual basis at the end of our fiscal year and is not reflected in our interim financial results, other than incentive income actually earned during a given interim period as a result of investor redemptions during the period, which may or may not be significant. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year.

Compensation and benefits for all periods presented does not include any income allocations to Daniel Och, which were accounted for as increases to partner’s equity, but includes income allocations to all other existing partners. For periods following the completion of the Reorganization, income allocations to all of our existing owners in respect of their Och-Ziff Operating Group A Units will be treated as increases to partners’ equity of the Och-Ziff Operating Group. Such interests will be reclassified in consolidation to Partners’ and others’ interests in consolidated subsidiaries in periods following the Transactions. After completion of this offering, compensation expense will reflect the amortization of significant non-cash equity-based compensation expense relating to the vesting of the Och-Ziff Operating Group A Units to be issued to all existing partners, including Daniel Och, over the

 

 

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five-year period following this offering, as well as the vesting of Class A restricted share units granted to managing directors and other employees in connection with this offering over the four-year period following this offering. In addition, we expect to recognize a significant charge associated with the purchase of Och-Ziff Operating Group A Units from our existing owners in connection with this offering and an additional charge associated with the Term Loan Distributions in the period or periods in which such distributions are made. Accordingly, compensation and benefits expense reflected in our historical results is not indicative of future compensation and benefits expense.

A portion of historical income was deferred by us and generally remains indexed to our funds. We intend to amend these deferral arrangements (with the result that no income will be deferred in future periods) and the full amount of the deferred balance, which was approximately $1.5 billion as of June 30, 2007, will be paid to OZ Management which amount will, in turn, be distributed to our existing owners over a three-year period commencing in 2008. In addition, Investments in Och-Ziff Funds as of June 30, 2007 includes approximately $300 million invested in our funds by us on behalf of our partners, the interest in which we expect to distribute to our partners prior to the completion of this offering. As a result, these amounts, which approximated $1.8 billion in the aggregate as of June 30, 2007, will not benefit our Class A shareholders, and the expected Deferred Income Distributions and Investment Distributions will reduce, as applicable, total partner’s equity of the Och-Ziff Operating Group with respect to distributions to Mr. Och, compensation payable with respect to distributions to our 17 other partners and profit sharing payable with respect to distributions to the Ziffs.

The information below should be read in conjunction with “Our Structure,” “Selected Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and notes thereto included elsewhere in this prospectus.

 

    Summary Historical Financial Information  
   

Six Months

Ended June 30,

    Year Ended December 31,  
    2007     2006     2006     2005     2004     2003     2002  
    (dollars in thousands)  

Summary Operating Information

             

Revenues

             

Management fees, incentive income and other revenues

  $ 53,231     $ 8,325     $ 33,391     $ 22,456     $ 18,280     $ 233,053     $ 70,089  

Och-Ziff funds income

    531,587       449,534       972,442       489,352       267,646       133,911       148,362  
                                                       

Total Revenues

    584,818       457,859       1,005,833       511,808       285,926       366,964       218,451  
                                                       

Expenses

             

Compensation and benefits

    183,310       119,428       446,672       239,466       153,503       125,949       46,303  

Non-compensation expenses

    60,411       39,461       147,675       88,962       60,825       52,145       22,848  

Och-Ziff funds expenses

    340,979       249,427       495,621       418,705       199,782       138,824       115,279  
                                                       

Total Expenses

    584,700       408,316       1,089,968       747,133       414,110       316,918       184,430  
                                                       

Total Other Income

    2,379,915       1,276,839       3,290,175       1,640,983       1,167,756       423,822       (29,046 )
                                                       

Income Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    2,380,033       1,326,382       3,206,040       1,405,658       1,039,572       473,868       4,975  

Non-controlling interests in income of consolidated subsidiaries

    (2,173,310 )     (1,240,219 )     (2,594,706 )     (1,134,869 )     (836,007 )     (268,274 )     19,449  
                                                       

Income Before Income Taxes

    206,723       86,163       611,334       270,789       203,565       205,594       24,424  
                                                       

Income taxes

    7,283       4,804       23,327       9,898       9,785       7,655       3,175  
                                                       

Net Income

  $ 199,440     $ 81,359     $ 588,007     $ 260,891     $ 193,780     $ 197,939     $ 21,249  
                                                       

 

 

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As of

June 30,

2007

  As of December 31,
      2006   2005   2004   2003   2002
    (dollars in thousands)

Summary Balance Sheet Information

           

Cash and cash equivalents

  $ 40,805   $ 23,590   $ 69,550   $ 27,800   $ 12,680   $ 20,824

Deferred income receivable, at fair value

  $ 1,520,205   $ —     $ —     $ —     $ —     $ —  

Investments in Och-Ziff funds

  $ 343,990   $ —     $ —     $ —     $ —     $ —  

Och-Ziff funds assets

  $ 87,759   $ 35,967,024   $ 24,184,369   $ 16,002,932   $ 1,592,526   $ 1,670,934

Total assets

  $ 2,139,446   $ 36,075,049   $ 24,305,342   $ 16,076,195   $ 2,139,652   $ 1,971,648

Och-Ziff funds liabilities

  $ 57   $ 14,260,142   $ 9,543,812   $ 5,264,619   $ 130,183   $ 402,769

Total liabilities

  $ 729,588   $ 15,050,088   $ 10,021,681   $ 5,608,569   $ 404,621   $ 546,078

Non-controlling interests in consolidated subsidiaries

  $ 86,032   $ 19,777,297   $ 13,544,966   $ 9,972,112   $ 1,372,853   $ 1,230,224

Total partner’s equity

  $ 1,323,826   $ 1,247,664   $ 738,695   $ 495,514   $ 362,178   $ 195,346

 

 

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Summary Unaudited Pro Forma Financial Information

The summary unaudited pro forma financial information presented below was derived from the application of pro forma adjustments to the combined financial statements of Och-Ziff Operating Group, the predecessor for accounting purposes of Och-Ziff Capital Management Group LLC, to give effect to the Pro Forma Adjustments as defined in “Unaudited Pro Forma Financial Information”. The unaudited pro forma statements of operations information has been prepared as if the Pro Forma Adjustments occurred on January 1, 2006. The unaudited pro forma balance sheet information has been prepared as if the Pro Forma Adjustments had occurred as of June 30, 2007. The summary unaudited pro forma financial information should be read in conjunction with “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and the related notes included elsewhere in this prospectus.

The Pro Forma Adjustments are based upon available information and methodologies that we believe are reasonable. The unaudited pro forma statements of operations information and unaudited pro forma balance sheet information are presented solely for illustrative and informational purposes and are not necessarily indicative of what our actual operations or financial position would have been had the Pro Forma Adjustments taken place on the dates indicated, or during the periods presented, nor does it purport to represent our results for any future period.

 

     Six Months
Ended June 30,
    Year Ended
December 31,
 
     2007     2006     2006  
     (in thousands, except share data)  
Summary Unaudited Pro Forma Operating Information       

Revenues

      

Management fees, incentive income and other revenues

   $ 222,180     $ 141,478     $ 963,379  

Och-Ziff funds income

     3,590       3,390       8,951  
                        

Total Revenues

     225,770       144,868       972,330  
                        

Expenses

      

Compensation and benefits

     1,073,947       1,061,236       2,215,600  

Non-Compensation expenses

     59,245       46,446       96,114  

Och-Ziff funds expenses

     767       804       1,893  
                        

Total Expenses

     1,133,959       1,108,486       2,313,607  
                        

Total Other Income

     228,925       104,169       280,047  
                        

Income Before Partners’ and Others’ Interests in Income of Consolidated Subsidiaries and Income Taxes

     (679,264 )     (859,449 )     (1,061,230 )
                        

Partners’ and others’ interests in income of consolidated subsidiaries

     618,950       786,184       982,914  
                        

Income (Loss) Before Income Taxes

     (60,314 )     (73,265 )     (78,316 )
                        

Income taxes

      
                        

Net Income (Loss)

   $       $       $    
                        

Net Income (Loss) Per Share (Basic and Diluted)

   $       $       $    
                        

Weighted Average Class A Shares (Basic and Diluted)

      
                        

Summary Unaudited Pro Forma Balance Sheet Information

   As of June 30,
2007
             
     (in thousands)              

Cash and cash equivalents

   $ 18,013      

Investments in Och-Ziff funds

   $ 40,207      

Och-Ziff funds assets

   $ 87,759      

Total assets

   $        

Och-Ziff funds liabilities

   $ 57      

Total liabilities(1)

   $        

Partners’ and others’ interests in consolidated subsidiaries

   $ 86,032      

Total equity (deficit)

   $        

 

 

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(1) Total liabilities is expected to be reduced in future periods by the amount of the Deferred Income Distributions and Investment Distributions to our partners and by Deferred Income Distributions to the Ziffs, which amounts aggregated approximately $1.8 billion as of June 30, 2007.

 

 

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RISK FACTORS

Investing in our Class A shares involves a high degree of risk. You should carefully consider the following risks as well as other information contained in this prospectus, including our combined financial statements and the notes to those statements, before investing in our Class A shares. The occurrence of any of the following risks could materially adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our Class A shares could decline and you could lose all or part of your investment.

Risks Related to Our Business

Difficult market conditions can materially adversely affect our business in many ways, including by reducing the value or performance of the investments made by our funds and by reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue and cash flow and materially adversely affect our financial condition.

The success of our business is highly dependent upon conditions in the global financial markets and economic conditions throughout the world that are outside our control and difficult to predict. Factors such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls, and national and international political circumstances (including wars, terrorist acts or security operations) can have a material negative impact on the value of our funds’ portfolio investments, which in turn would reduce our revenues and profitability.

Unpredictable or unstable market conditions may result in reduced opportunities to find suitable risk-adjusted investments to deploy capital and make it more difficult to exit and realize value from our existing investments, which could materially adversely affect our ability to raise new funds and sustain our growth. In addition, during such periods, financing and merger and acquisition activity may be greatly reduced, making it harder and more competitive for asset managers to find suitable event-driven opportunities. Also, during periods of adverse economic conditions or during a tightening of global credit markets, we may have difficulty obtaining funding for additional investments at attractive rates, which would further reduce our profitability.

If we fail to react appropriately to difficult market conditions, our funds could incur material losses. Recently, there have been several well publicized failures of hedge funds to effectively mitigate their exposure to adverse conditions in the mortgage finance markets, particularly the sub-prime mortgage sector. We could suffer material adverse effects from these conditions, the overall tightening of global credit markets or other changes in market conditions.

Our revenue, net income and cash flow are all highly variable, and since we do not earn or record meaningful incentive income or incentive compensation expense on a quarterly basis, our quarterly results are not expected to be indicative of results for a completed fiscal year, which may increase the volatility of the price of our Class A shares.

Our revenue, net income and cash flow are all highly variable, primarily due to the fact that a substantial portion of our revenues historically has been and we expect will continue to be derived from incentive income from our funds, which is contingent on the funds’ annual performance. In addition, the investment return profiles of most of our funds are volatile. We may also experience fluctuations in our results from quarter to quarter due to a number of other factors, including changes in the values of our funds’ investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and

 

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general economic and market conditions. Such variability and unpredictability may lead to volatility in the trading price of our Class A shares and cause our results for a particular period not to be indicative of our performance in a future period or particularly meaningful as a basis of comparison against results for a prior period. It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our Class A shares or increased volatility in our Class A share price generally.

The timing and receipt of incentive income generated by our funds is uncertain and will contribute to the volatility of our results. Given this uncertainty, we do not record incentive income on our interim financial statements other than incentive income actually earned during a given interim period as a result of investor redemptions during the period. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year. In addition, incentive income depends on our funds’ performance and opportunities for realizing gains, which may be limited. We cannot predict when, or if, any realization of investments will occur. If we were to have a realization event in a particular quarter, it may have a significant impact on our results for that particular quarter which may not be replicated in subsequent quarters. We recognize revenue on investments in our funds based on our allocable share of realized and unrealized gains (or losses) reported by such funds, and a decline in realized or unrealized gains, or an increase in realized or unrealized losses, would materially adversely affect our revenue, which could further increase the volatility of our quarterly results.

Our funds have “high water marks” whereby we do not earn incentive income during a particular year even though the fund had a positive return in such year as a result of losses in the immediately preceding year. If a fund investor experiences losses, we will not be able to earn incentive income with respect to such investor’s investment in a fund until it surpasses the previous year’s high water mark. The incentive income we earn is therefore dependent on the net asset value of each fund investor’s investment in the fund, which could lead to significant volatility in our quarterly results.

Because our revenue, net income and cash flow can be highly variable from quarter to quarter and year to year, we plan not to provide any guidance regarding our expected quarterly and annual operating results. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in our Class A share price.

The asset management business is intensely competitive.

The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to fund investors, brand recognition and business reputation. We compete for fund investors, talent and for investment opportunities with a number of hedge funds, private equity funds, specialized funds, traditional asset managers, commercial banks, investment banks and other financial institutions. A number of factors serve to increase our competitive risks:

 

  Ÿ  

a number of our competitors have greater financial, technical, marketing and other resources and more personnel than we do;

 

  Ÿ  

several of our competitors have recently raised, or are expected to raise, significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

 

  Ÿ  

some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities;

 

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  Ÿ  

some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

 

  Ÿ  

some of our competitors may have higher risk tolerances or different risk assessments which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make;

 

  Ÿ  

there are relatively few barriers to entry impeding new funds, including a relatively low cost of entering this business, and the successful efforts of new entrants into our business, including former “star” portfolio managers at large diversified financial institutions, major commercial and investment banks and other financial institutions, have resulted in increased competition;

 

  Ÿ  

some investors may prefer to invest with an investment manager that is not publicly traded;

 

  Ÿ  

investors may develop concerns that we will allow our business to grow to the detriment of fund performance; and

 

  Ÿ  

other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

We may lose investment opportunities in the future if we do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased rates of return and increased risks of loss if we match investment prices, structures and terms offered by competitors. In addition, changes in the global capital markets could diminish the attractiveness of our funds relative to investments in other investment products. This competitive pressure could materially adversely affect our ability to make successful investments and limit our ability to raise future funds, either of which would materially adversely impact our business, revenue, results of operations and cash flow.

Over the past several years, the size and number of hedge funds and private equity funds has continued to increase. We expect this trend to continue and, thus, if our performance is not consistently above the performance of our competitors, it will become increasingly difficult for our funds to raise capital and continue to achieve growth. More significantly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors may lead to a reduction in profitable investment opportunities, including by driving prices for investments higher and increasing the difficulty of achieving consistent, positive returns. Competition for investors is based on a variety of factors, including:

 

  Ÿ  

investment performance;

 

  Ÿ  

investor perception of investment managers’ ability, drive, focus and alignment of interest with them;

 

  Ÿ  

quality of service provided to and duration of relationship with investors;

 

  Ÿ  

business reputation; and

 

  Ÿ  

level of fees, incentive income and expenses charged for services.

These and other factors could reduce our earnings and revenues and materially adversely affect our business. In addition, if we are forced to compete with other alternative asset managers on the basis of price, we may not be able to maintain our current management fee and incentive income structures. We have historically competed for investors primarily on the performance of our funds, and not on the level of our fees or incentive income relative to those of our competitors. However, as the alternative asset management sector matures, there is a risk that fees and incentive income will decline, without regard to the historical performance of a manager. Fee or incentive income reductions on existing or future funds, without corresponding decreases in our cost structure, could materially adversely affect our revenues and profitability.

 

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The loss of services of any of our key partners, particularly our founder Daniel Och, would materially adversely affect our business.

The success of our business depends on the efforts, judgment and personal reputations of our key partners, particularly our founder, Daniel Och, and other members of our senior management team, including Joel Frank, David Windreich, Michael Cohen, Zoltan Varga and Harold Kelly. Our key partners’ reputations, expertise in investing, relationships with investors in our funds and relationships with third parties on whom our funds depend for investment opportunities and financing are each critical elements in operating and expanding our business. The loss of any of these individuals could harm our business and jeopardize our relationships with our fund investors and members of the business community. We believe our performance is highly correlated to the performance of these individuals. Accordingly, the retention of our key partners is crucial to our success, but none of them is obligated to remain associated with us. In addition, if any of our key partners were to join or form a competitor, some of our fund investors could choose to invest with that competitor rather than in our funds. The loss of the services of any of our key partners would have a material adverse effect on us, including our ability to retain and attract investors and raise new funds, and the performance of our funds. We do not carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our key partners.

Our ability to retain our professionals is critical to our success and our ability to grow depends on our ability to attract additional partners and managing directors.

Our most important asset is our people, and our continued success is highly dependent upon the efforts of all of our partners and managing directors. Our future success and growth depend to a substantial degree on our ability to retain and motivate our partners and other key personnel and to strategically recruit, retain and motivate new talent, including new partners and managing directors. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive. Historically, we have compensated our partners through distributions on their interests in our business and our managing directors through profit participation payments. As we grow our business as a public company, we may not be able to provide future partners with equity interests in our business to the same extent or with the same tax consequences as our existing partners. Therefore, in order to recruit and retain existing and future partners, we will need to maintain a flexible compensation program, including the ability to make cash income allocations to them and issue equity or other interests in our business including, without limitation, Class C Non-Equity Interests, with respect to which the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee by majority vote) in conjunction with our compensation committee will have the authority to declare distributions. As a result, our total compensation and benefits expense would increase and would adversely affect our profitability, and our cash available for distribution to the holders of the equity interests in our business would be reduced. In addition, any issuances of equity interests in our business to current or future personnel would dilute Class A shareholders.

Our investment professionals possess substantial experience and expertise in investing, are responsible for locating and executing our funds’ investments, have significant relationships with the institutions which are the source of many of our funds’ investment opportunities, and in certain cases have strong relationships with our fund investors. Therefore, if our investment professionals join competitors or form competing companies it could result in the loss of significant investment opportunities and certain existing investors. As a result, the loss of even a small number of our investment professionals could jeopardize the performance of our funds, which would have a material adverse effect on our results of operations.

The operating group limited partnership agreements provide that the Och-Ziff Operating Group A Units held by our partners upon completion of this offering (after giving effect to the purchase of vested

 

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units with proceeds from this offering, including any proceeds from the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested and will vest, subject to their continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners only if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is terminated by the partnership for cause or if the Partner Performance Committee terminates such partner for any reason. However, these provisions of the operating group limited partnership agreements may be amended or waived at any time. We, our shareholders and the Och-Ziff Operating Group have no ability to enforce the forfeiture provisions of the operating group limited partnership agreements or to prevent the partners from amending those provisions or waiving any such obligations.

In addition, all of our partners will be subject to transfer restrictions and minimum retained ownership requirements with respect to their equity interests in us. The Class A restricted share units that we expect to award to our managing directors in connection with this offering will be subject to certain vesting requirements, and all of our partners and managing directors will be subject to certain restrictions with respect to competing with us, soliciting our employees and fund investors and disclosing confidential information about our business. However, these requirements and restrictions lapse over time, may not be enforceable in all cases and can be waived by us at any time. After the fifth anniversary of this offering, there will be no restrictions on our partners’ ability to exchange their Och-Ziff Operating Group A Units for Class A shares or to sell the Class A shares received in any such exchange, and we will be required to file a shelf registration statement covering the resale of all Class A shares held by our existing owners or issuable upon any such exchange. Accordingly, all of our partners will be able to freely sell their Class A shares at such time. There is no guarantee that these requirements and agreements or the forfeiture provisions of the operating group limited partnership agreements will prevent any of these professionals from leaving us, joining our competitors or otherwise competing with us. Any of these events could have a material adverse affect on our business.

Each of our funds has special withdrawal provisions pursuant to which the failure of Daniel Och to be actively involved in the business provides investors with the right to redeem from the funds. The loss of the services of Daniel Och would have a material adverse effect on each of our funds and on us.

Investors in each of our funds are generally given a one-time special redemption right (not subject to redemption fees) if Daniel Och dies or ceases to perform his duties with respect to the fund for 90 consecutive days or otherwise ceases to be involved in the activities of the Och-Ziff Operating Group. The death or inability of Mr. Och to perform his duties with respect to any of our funds for 90 consecutive days, or termination of Mr. Och’s involvement in the activities of the Och-Ziff Operating Group for any reason, could result in substantial redemption requests from investors in each of our funds. Any such event would have a direct material adverse effect on our revenues and earnings, and would likely harm our ability to maintain or grow assets under management in existing funds or raise additional funds in the future. Such withdrawals could lead possibly to a liquidation of our funds and a corresponding elimination of our management fees and potential to earn incentive income. The loss of Mr. Och could, therefore, ultimately result in a loss of substantially all of our earnings.

 

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We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources.

Our assets under management have grown from approximately $5.8 billion as of December 31, 2002 to $29.7 billion as of August 31, 2007. Our rapid growth has caused, and if it continues will continue to cause, significant demands on our legal, accounting and operational infrastructure, and increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our assets under management have grown, but of significant differences in the investing strategies employed within our funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting and regulatory developments.

Our future growth will depend on, among other things, our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources. As a result, we face significant challenges:

 

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in maintaining adequate financial and business controls;

 

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in implementing new or updated information and financial systems and procedures; and

 

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in training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis.

There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to continue to grow, and any failure to do so could materially adversely affect our ability to generate revenue and control our expenses.

Operational risks may disrupt our business, result in losses or limit our growth.

We rely heavily on our financial, accounting, trading and other data processing systems to, among other things, execute, confirm, settle and record transactions across markets and geographies in a time-sensitive, efficient and accurate manner. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to our funds, regulatory intervention or reputational damage.

In addition, we operate a business that is 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 rely on our headquarters in New York City, where most of our personnel are located, for the continued operation of our business. We have taken precautions to limit the impact that a disruption to our New York headquarters could cause (for example, by ensuring our London office can operate independently of our other offices and establishing a SunGard “hot site” located in New Jersey, from which we could run our operations). Although these precautions have been taken, a disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

 

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Finally, although we perform and back-up all key functions of our business, including portfolio valuation, internally, we rely on third-party service providers for certain aspects of our business, including for certain information systems and technology and administration of our funds. Severe interruptions or deteriorations in the performance of these third parties or failures of their information systems and technology could impair the quality of the funds’ operations and could impact our reputation and hence materially adversely affect our business.

The historical and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future performance or of cash available for distribution.

The historical combined financial information included in this prospectus is not indicative of our future financial results, and distributions to our existing owners in prior periods are not necessarily indicative of amounts that will be available for future distributions. Our historical combined financial information consolidates a large number of our funds which will not be consolidated after this offering, as described further under “Unaudited Pro Forma Financial Information”. In addition, the historical combined financial information included in this prospectus does not reflect the added costs, including taxes, that we will incur as a public company or the impact of our change in structure. In addition, we will incur significant compensation expense associated with the vesting of the Och-Ziff Operating Group A Units being issued to our existing partners and Class A restricted share units being issued to all of our employees in connection with this offering. We will also incur significant charges in respect of the purchase of Och-Ziff Operating Group A Units from our existing owners in connection with this offering and the Term Loan Distributions. As a result of these expenses, we expect to report losses on our GAAP financial statements during future periods. In preparing our unaudited pro forma financial information for certain periods prior to this offering, we adjusted our historical combined financial information for the transactions described in “Our Structure—The Transactions” and, as such, this financial information does not purport to represent the results of any future periods.

Our future financial statements are also likely to be materially different as a result of:

 

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the deconsolidation of most of our funds;

 

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interest expense associated with borrowings of $750 million under our new term loan;

 

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the reclassification of the Ziff profit sharing interest and the interests of our partners other than Mr. Och to common equity interests in our business;

 

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the impact of the transactions occurring in connection with this offering on a pro forma basis, including the impact of the tax receivable agreement and an increase in our tax expense and our effective tax rate as a result of Och-Ziff Corp being taxable as a corporation, and the incremental expenses we will incur as a result of being a publicly traded company;

 

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fund performance in the future which differs from the historical performance reflected in our unaudited pro forma financial information; and

 

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the pace of growth of our business in the future, including the formation of new funds, which differs from the historical growth reflected in our unaudited pro forma financial information.

As a result of the foregoing, the historical financial information presented in this prospectus, including with respect to distributions to holders, is not necessarily indicative of future performance. The estimates used in our unaudited pro forma financial information are not necessarily an accurate estimate of our actual experience as a public company or indicative in any way of our future performance.

 

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The requirements of being a public entity and sustaining our growth may strain our resources.

As a public entity, we will be subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and requirements of the U.S. Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act”. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition and operations. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which is discussed below. In order to maintain and improve the effectiveness of our disclosure controls and procedures, significant resources and management oversight will be required. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements of the SEC and other regulators, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

Our internal control over financial reporting does not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our financial condition, results of operations, business and Class A share price.

Once we become a public company, the Sarbanes-Oxley Act of 2002 and the related rules will require our management to conduct annual assessments of the effectiveness of our internal control over financial reporting and will require a report by our independent registered public accounting firm addressing these assessments, as well as an independent audit of our internal control over financial reporting, beginning with our fiscal year ending December 31, 2008. Our internal control over financial reporting does not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act. In particular, we have not yet established and adopted all of the formal policies, processes and practices related to financial reporting that will be necessary to comply with Section 404. Such policies, processes and practices are important to ensure the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.

Additionally, we have begun the process of documenting our internal control procedures to satisfy the requirements of Section 404. However, we do not currently have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404. As a public company, we will be required to complete our initial assessment in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to our assessment concerning the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition, results of operations and business, and lead to a decline in the price of our Class A shares.

 

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Our independent registered public accounting firm identified a material weakness in our internal controls, which, if not properly remediated, could result in material misstatements of our financial statements in future periods.

Our independent registered public accounting firm reported to our management a material weakness in our internal control over financial reporting as of December 31, 2006. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The identified material weakness, which was unrelated to the Och-Ziff funds, relates to errors in accounting for certain historical profits interests in the company and for certain revenues and expenses for associated entities. The errors noted in the previous sentence were due to certain complex legal contracts containing ambiguous or conflicting terms and the financial statement close process as it relates to the application of the relevant accounting.

Management has developed a plan to remediate the material weakness. We have significantly expanded our legal and professional accounting staff and continue to seek additional resources to further enhance our accounting and reporting functions and document retention practices. However, if these measures fail to remediate the material weakness or if additional material weaknesses in our internal controls are discovered in the future, we may be unable to provide required financial information in a timely and reliable manner, or otherwise comply with the standards applicable to us as a public company, and our management may not be able to report that our internal control over financial reporting is effective for the year ending December 31, 2008 or thereafter, when we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. There could also be a negative reaction in the markets due to a loss of investor confidence in us and the reliability of our financial statements and, as a result, our business may be harmed and the price of our Class A shares may decline.

We are subject to third-party litigation risk which could result in significant liabilities and reputational harm which could materially adversely affect our results of operations, financial condition and liquidity.

In general, we will be exposed to risk of litigation by our fund investors if our management of any fund is alleged to constitute negligence or dishonesty. Investors could sue us to recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss. Furthermore, we may be subject to litigation arising from investor dissatisfaction with the performance of our funds or from allegations that we improperly exercised control or influence over companies in which our funds have large investments. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are indemnified by our funds, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from our funds, our results of operations, financial condition and liquidity would be materially adversely affected.

In our funds, we are exposed to the risk of litigation if the funds suffer catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules and regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances which are materially damaging to our

 

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reputation and our business. In addition, we face the risk of litigation from investors in our funds if we violate restrictions in such funds’ organizational documents (for example, by failing to adhere to the limits we have to set on maximum exposure by a fund to a single investment).

Certain of our funds are incorporated or formed under the laws of the Cayman Islands. Cayman Islands laws, particularly with respect to shareholders rights, partner rights and bankruptcy, differ from the laws of the United States and could change, possibly to the detriment of our funds and investment management subsidiaries.

In addition, with a workforce consisting of many very highly paid investment professionals, we face the risk of lawsuits relating to claims for compensation, which may individually or in the aggregate be significant in amount. The cost of settling such claims could materially adversely affect our results of operations.

Extensive regulation of our business affects our activities and creates the potential for significant liabilities and penalties. Increased regulatory focus could result in additional burdens on our business. Our reputation, business and operations could be materially affected by regulatory issues.

Our business is subject to extensive regulation. We are subject to regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which we operate around the world. The SEC oversees our activities as a registered investment adviser under the Advisers Act. We are also subject to regulation under the Exchange Act and the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and various other statutes. In addition, we are subject to regulation by the Department of Labor under the U.S. Employee Retirement Income Security Act of 1974, or “ERISA”. In the United Kingdom, we are subject to regulation by the U.K. Financial Services Authority. Our Asian operations, and our investment activities around the globe, are subject to a variety of regulatory regimes that vary country by country, including the Financial Services Agency in Japan and the Securities and Futures Commission in Hong Kong.

Each of the regulatory bodies with jurisdiction over us has the authority to grant, and in specific circumstances to cancel, permissions to carry on our business and to conduct investigations and administrative proceedings. Such investigations 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. For example, a failure to comply with the obligations imposed by the Advisers Act, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or a failure to maintain our funds’ exemption from compliance with the 1940 Act, could result in investigations, sanctions and reputational damage. Our funds are involved regularly in trading activities which implicate a broad number of U.S. and foreign securities law regimes, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation policies. 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 investors or fail to gain new investors.

In addition, we regularly rely on exemptions from various requirements of the Securities Act, the Exchange Act and ERISA 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. See “—Risks Related to Our Organization and Structure— If we are deemed

 

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an investment company under the Investment Company Act of 1940, our business would be subject to applicable restrictions under that Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our Class A shares”. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our funds and are not designed to protect holders of our Class A shares.

Various factors, including recent financial scandals, have caused investors and governmental authorities to express concerns over the integrity of the U.S. financial markets and the adequacy of the current regulation of financial institutions, including alternative asset managers. For these and other reasons, the regulatory environment relevant to our business and to investors in our funds is subject to change in a manner that may be adverse to us and fund investors. For example, we may be materially adversely affected as a result of new or revised legislation or regulations imposed by the SEC, or other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets, including developments that are not directed at alternative asset managers but nevertheless affect our business and operations. We also may be materially adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Such changes could place limitations on the types of investors that can invest in alternative investment funds or on the conditions under which such investors may invest. Furthermore, such changes may limit the scope of investing activities that may be undertaken by alternative investment managers. It is not practicable to determine with meaningful specificity the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Any such regulations could increase our costs of doing business or materially adversely affect our profitability and materially adversely affect our ability to recruit, retain and motivate our current and future professionals.

Regulatory developments specifically designed to increase oversight or taxation of alternative investment funds may materially adversely affect our business. In recent years, there has been debate in U.S. and foreign governments about new rules and regulations for investment funds. Any new rules or regulations could negatively impact our ability to conduct our investment activities and thereby reduce the value of our Class A shares. See “—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules”.

Our failure to deal appropriately with conflicts of interest could damage our reputation and materially adversely affect our business.

As we have expanded the scope of our business, we increasingly confront potential conflicts of interest relating to our funds’ investment activities. Certain of our funds have overlapping investment objectives and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of other funds to buy or sell securities in the public markets. In addition, investors (or holders of Class A shares) may perceive conflicts of interest regarding investment decisions for funds in which our partners, who have and may continue to make significant personal investments, are personally invested.

It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection

 

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with, conflicts of interest would have a material adverse effect on our reputation which would materially adversely affect our business in a number of ways, including an inability to raise additional funds and a reluctance of counterparties to do business with us.

Employee misconduct could harm us by impairing our ability to attract and retain investors and subjecting us to significant legal liability and reputational harm.

There is a risk that our employees could engage in misconduct that materially adversely affects our business. We are subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. The violation of these obligations and standards by any of our employees would materially adversely affect our investors and us. In addition, our business requires that we properly deal with confidential matters of great significance to companies in which we may invest. If our employees were improperly to use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If one of our employees were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be materially adversely affected.

Our organizational documents do not limit our ability to enter into new lines of business, and we may enter into new businesses, make future strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties in our business.

We intend, to the extent that market conditions warrant, to grow our business by increasing assets under management and creating new investment products and businesses. Accordingly, we may pursue growth through strategic investments, acquisitions or joint ventures, which may include entering into new lines of business, such as the broker-dealer or financial advisory industries. In addition, we expect opportunities will arise to acquire, or enter into joint ventures with, other alternative or traditional asset managers. To the extent we make strategic investments or acquisitions, enter into joint ventures, or enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with (i) the required investment of capital and other resources, (ii) the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, (iii) combining or integrating operational and management systems and controls and (iv) loss of investors in our fund due to the perception that we are no longer focusing on our core fund management duties. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be materially adversely affected. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control.

We may use substantial amounts of leverage to finance our business, which will expose us to substantial risks.

We may eventually use a significant amount of borrowings to finance our business operations as a public company. This will expose us to the typical risks associated with the use of substantial leverage, including those discussed below under “—Risks Related to Our Funds—Dependence on significant leverage in investments by our funds could materially adversely affect our ability to achieve positive rates of return on those investments”. These risks could be exacerbated by the use of leverage by our funds to finance investments and could cause us to suffer a decline in any credit ratings

 

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assigned to us or our debt by rating agencies. Any such decline in ratings might result in an increase in borrowing costs and could otherwise adversely affect our business in a material way. In addition, as our long-term unsecured debt and committed secured credit facilities expire, or if our lenders fail, we will need to replace them by entering into new facilities or finding other sources of liquidity, and there is no guarantee that we will be able to do so on attractive terms or at all, particularly in a liquidity or other market crisis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical Liquidity and Capital Resources” for a further discussion of our liquidity.

An increase in our borrowing costs may adversely affect our earnings and liquidity.

Under our new term loan, we have borrowings in the amount of $750 million. This term loan will mature in July 2012, at which time we will be required to either refinance it by entering into new facilities, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay the term loan by using cash on hand or cash from the sale of our assets. No assurance can be given that we will be able to enter into new facilities or issue equity in the future on attractive terms, or at all. Our term loan is a LIBOR-based floating-rate obligation and the interest expense we incur varies with changes in the applicable LIBOR reference rate. As indicated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk,” a 10% change in LIBOR would result in a change of approximately $4 million in our annual interest expense associated with this term loan, assuming LIBOR in effect at June 30, 2007. We may incur additional indebtedness in the future to finance our operations. An increase in interest rates would adversely affect the market value of any fixed-rate debt investments and/or subject them to prepayment or extension risk, which may adversely affect our earnings and liquidity.

Risks Related to Our Funds

Our results of operations are dependent on the performance of our funds. Poor fund performance will result in reduced revenues and earnings. Poor performance of our funds will make it difficult for us to retain or attract investors to our funds and to grow our business. The performance of each fund we manage is subject to some or all of the following risks.

The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A shares.

We have presented in this prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Financial Information Overview”, “Business—Investment Performance” and elsewhere the net composite returns relating to the historical performance of our funds, and also refer to other metrics associated with historical returns, such as risk and correlation measures. The returns are relevant to us primarily insofar as they are indicative of incentive income we have been allocated in prior years. The historical and potential future returns of our funds, however, are not expected to be indicative of returns on our Class A shares. Therefore, you should not conclude that positive performance of our funds will result in positive returns on an investment in Class A shares. However, poor performance of our funds may cause a decline in our revenue, and would therefore have a negative effect on our performance and the returns on an investment in our Class A shares. An investment in our Class A shares is not an investment in any of the Och-Ziff funds. Moreover, most of our funds will not be consolidated in our financial statements for periods after June 30, 2007.

 

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Moreover, with respect to the historical returns of our funds:

 

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the historical returns of our funds should not be considered indicative of the future results that should be expected from such funds or from any future funds we may raise;

 

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our funds’ returns have benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; and

 

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the rates of return reflect our historical cost structure, which may vary in the future due to factors beyond our control, including changes in law.

In addition, future returns will be affected by the applicable risks described elsewhere in this prospectus, including risks of the industries and businesses in which a particular fund invests.

Poor performance of our funds would cause a decline in our revenue, income and cash flow and could materially adversely affect our ability to raise additional capital.

In the event that any of our funds were to perform poorly, our revenue, income and cash flow would decline because the value of our assets under management would decrease, which would result in a reduction in management fees. A decrease in our investment returns would result in a reduction in incentive income and, if such decrease was substantial, could result in the elimination of incentive income for a given year. Poor performance of our funds could make it more difficult for us to raise new capital. Investors in our funds might decline to invest in future funds we raise and investors in our funds might redeem their investments as a result of poor performance of the funds in which they are invested in favor of investments which are perceived to have lower risk or greater opportunity for returns. Investors and potential investors in our funds continually assess our funds’ performance, and our ability to raise capital for existing and future funds and avoid excessive redemption levels will depend on our funds’ continued satisfactory performance.

Dependence on significant leverage in investments by our funds could materially adversely affect our ability to achieve positive rates of return on those investments.

Our funds may choose to use leverage as part of their respective investment programs and regularly borrow a substantial amount of their capital either directly or through the use of derivative instruments. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss in the value of the investments in our funds. Our funds may borrow money from time to time to purchase or carry securities. The interest expense and other costs incurred in connection with such borrowing may not be recovered by appreciation in the securities purchased or carried, and will be lost—and the timing and magnitude of such losses may be accelerated or exacerbated—in the event of a decline in the market value of such securities. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund’s net asset value could also decrease faster than if there had been no borrowings. Increases in interest rates could also decrease the value of fixed-rate debt investments that our funds make. Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

Third-party investors in our funds will have the right to remove us as investment manager or general partner of the funds and investors in our funds may redeem their investments. These events would lead to a decrease in our revenues, which could be substantial.

The governing agreements of most of our funds provide that, subject to certain conditions, third-party investors in those funds will have the right, without cause, to vote to remove us as investment

 

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manager or general partner of the fund by a simple majority vote, resulting in the elimination of management fees and incentive income derived from those funds. In addition to having a significant negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our funds would likely result in significant reputational damage to us.

Investors in our funds may also generally redeem their investments on an annual or quarterly basis following the expiration of a specified period of time when capital may not be redeemed (typically between five and nine fiscal quarters), subject to the applicable fund’s specific redemption provisions. In a declining market, the pace of redemptions and consequent reduction in our assets under management could accelerate. The decrease in revenues that would result from significant redemptions in our funds could have a material adverse effect on our business, net income and cash flows.

The due diligence process that we undertake in connection with investments by our funds may not reveal all facts that may be relevant in connection with an investment.

Before making investments, particularly investments in securities that are not publicly traded, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence investigation that we will carry out with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.

Our funds invest in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of our principal investments.

Our funds invest in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration is available. The ability of many of our funds to dispose of such investments is heavily dependent on the public equity markets. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the required holding period. Accordingly, under certain conditions, our funds may be forced to either sell securities at lower prices than they had expected to realize or defer—potentially for a considerable period of time—sales that they had planned to make. Contributing capital to these investments is risky, and we may lose some or all of the principal amount of such investments.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds.

There are no readily ascertainable market prices for a large number of the illiquid investments in our funds. The value of the investments of our funds is determined periodically by us based on the fair value of such investments. The fair value of investments is determined using a number of

 

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methodologies described in the funds’ valuation policies. These policies are based on a number of factors, including the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third parties for the investment, the length of time the investment has been held, the trading price of securities (in the case of publicly traded securities), restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individual investments are based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investment may vary materially as a result of the inaccuracy of such assumptions or estimates. In addition, because the illiquid investments held by our funds may be in industries or sectors which are unstable, in distress, or undergoing some uncertainty, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments.

Because there is significant uncertainty in the valuation of or in the stability of the value of illiquid investments, the fair values of such investments as reflected in a fund’s net asset value do not necessarily reflect the prices that would actually be obtained when such investments are sold. Realizations at values significantly lower than the values at which investments have been reflected in fund net asset values would result in losses for the applicable fund, a decline in asset management fees and the loss of potential incentive income. Also, a situation where asset values turn out to be materially different from values reflected in fund net asset values will cause investors to lose confidence in us which may, in turn, result in redemptions from our funds or difficulties in our ability to raise additional capital.

Our funds make investments in companies that we do not control.

Investments by all of our funds will include investments in debt or equity of companies that we do not control. Such investments may be acquired by our funds through trading activities or through purchases of securities from the issuer. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. In addition, we may make investments in which we share control over the investment with co-investors, which may make it more difficult for us to implement our investment approach or exit the investment when we otherwise would. If any of the foregoing were to occur, the values of investments by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

We expect our funds to make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States.

All of our funds generally invest a significant portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States. Investments in non-U.S. securities involve certain factors not typically associated with investing in U.S. securities, including risks relating to:

 

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currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

 

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less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity;

 

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the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation;

 

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differences in the legal and regulatory environment;

 

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difficulties in enforcing contracts and filing claims under foreign legal systems;

 

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  Ÿ  

less publicly available information in respect of companies in non-U.S. markets;

 

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certain economic and political risks, including potential exchange control regulations and restrictions on our non-U.S. investments and repatriation of profits on investments or of capital invested, the risks of political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

 

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the possible imposition of non-U.S. taxes or withholding on income and gains recognized with respect to such securities.

There can be no assurance that adverse developments with respect to such risks will not materially adversely affect our funds’ investments that are held in certain countries or the returns from these investments.

Risk management activities may materially adversely affect the return on our funds’ investments.

When managing our funds’ exposure to market risks, the relevant fund (or one of our affiliates on behalf of the funds) may from time to time use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments to limit its exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument, the position being hedged, and the creditworthiness of the counterparty and other factors. As a result, while we may enter into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

Certain of our investments may be concentrated in certain asset types or in a geographic region, which could exacerbate any negative performance of those funds to the extent those concentrated investments perform poorly.

The governing agreements of our funds generally contain only limited investment restrictions and only limited requirements as to diversification of fund investments, either by geographic region or asset type. During periods of difficult market conditions or slowdowns in these regions, any decrease in revenues and difficulty in obtaining access to financing may be exacerbated by any concentration of investments, which would result in lower investment returns for our funds.

Our funds’ investments are subject to numerous additional risks.

Our funds’ investments are subject to numerous additional risks, including the following:

 

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Generally, there are few limitations on the execution of our funds’ investment strategies, which are subject to the sole discretion of the investment manager or the general partner of such funds.

 

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The funds may engage in short-selling, which is subject to the theoretically unlimited risk of loss because there is no limit on how much the price of a security may appreciate before the short position is closed out. A fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions.

 

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The funds are exposed to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or

 

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not bona fide) or because of a credit or liquidity problem, thus causing the fund to suffer a loss. Counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the fund has concentrated its transactions with a single or small group of counterparties. Generally, the funds are not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. Moreover, the funds’ monitoring of the creditworthiness of their counterparties may prove insufficient. The absence of a regulated market to facilitate settlement may increase the potential for losses.

 

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Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This “systemic risk” may materially adversely affect the financial intermediaries (such as prime brokers, clearing agencies, clearing houses, banks, securities firms and exchanges) with which the funds interact on a daily basis.

 

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The efficacy of investment and trading strategies depends largely on the ability to establish and maintain an overall market position in a combination of financial instruments. A fund’s trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the funds might only be able to acquire some but not all of the components of the position, or if the overall position were to need adjustment, the funds might not be able to make such adjustment. As a result, the funds would not be able to achieve the market position selected by the management company or general partner of such funds, and might incur a loss in liquidating their position.

 

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The funds are subject to risks due to potential illiquidity of assets. The funds may make investments or hold trading positions in markets or entities that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes in industry and government regulations. It may be impossible or costly for the funds to liquidate positions rapidly in order to meet margin calls, withdrawal requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time or the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise.

 

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Fund investments are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances, including if the fund writes a call option. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the securities underlying them. In addition, the funds’ assets are subject to the risk of the failure of any of the exchanges on which their positions trade or of their clearinghouses or counterparties.

Most of our funds utilize distressed debt and equity investment strategies which involve significant risks and potential additional liabilities.

Most of our funds invest a portion of their assets in issuers with weak financial conditions, poor operating results, substantial financial needs, negative net worth and/or special competitive problems. These funds may also invest in issuers that are involved in bankruptcy or reorganization proceedings. In such situations, it may be difficult to obtain full information as to the exact financial and operating conditions of these issuers. Furthermore, some of our funds’ distressed investments may not be widely

 

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traded or may have no recognized market. Depending on the specific fund’s investment profile, a fund’s exposure to such investments may be substantial in relation to the market for those investments and the acquired assets are likely to be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such investments to ultimately reflect their intrinsic value as perceived by us.

A central strategy of our distressed securities investing is to predict the occurrence of certain corporate events, such as debt and/or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions. If we do not accurately predict these events, the market price and value of our funds’ investment could decline sharply.

In addition, these investments could subject our funds to certain potential additional liabilities that may exceed the value of their original investments. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed, or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in substantial litigation.

Our funds are subject to risks due to potential illiquidity of assets.

Our funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which we may be a party, and changes in industry and government regulations. When a fund holds a security or position, it is vulnerable to price and value fluctuations and may experience losses to the extent the value of the position decreases and it is unable to timely sell, hedge or transfer the position. Therefore, it may be impossible or costly for our funds to liquidate positions rapidly, particularly if the relevant market is moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise. Alternatively, it may not be possible in certain circumstances for a position to be purchased or sold promptly, particularly if there is insufficient trading activity in the relevant market or otherwise.

If our risk management systems are ineffective, we may be exposed to material unanticipated losses.

We continue to refine our risk management techniques, strategies and assessment methods. However, our risk management techniques and strategies may not fully mitigate the risk exposure of our funds in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Some of our strategies for managing risk in our funds are based upon our use of historical market behavior statistics. We apply statistical and other tools to these observations to measure and analyze the risks to which our funds are exposed. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in the funds or to seek positive, risk-adjusted returns. In addition, any risk management failures could cause fund losses to be significantly greater than the historical measures predict. Furthermore, our mathematical modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. See “Business—Risk Management Principles and Practices”.

 

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We are subject to risks in using prime brokers, custodians, administrators and other agents.

All of our funds depend on the services of prime brokers, custodians, administrators or other agents to carry out certain securities transactions. In the event of the insolvency of a prime broker and/or custodian, the funds might not be able to recover equivalent assets in full as they will rank among the prime broker’s and custodian’s unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the funds’ cash held with a prime broker or custodian may not be segregated from the prime broker’s or custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

Risks Related to Our Organization and Structure

Control by Mr. Och of the total combined voting power of our shares could cause or prevent us from engaging in certain transactions, which could adversely affect the market price of the Class A shares or deprive our Class A shareholders of an opportunity to receive a premium as part of a sale of our company.

Upon consummation of this offering, our partners will control approximately 90.1% of the combined voting power of our Class A shares and Class B shares through their ownership of 100% of our Class B shares. In addition, each of our partners has granted to the members of the Class B Shareholder Committee, which initially consists solely of our founder, Daniel Och, an irrevocable proxy to vote all of such shares as such members may determine in their sole discretion, which proxy will terminate upon the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company. Accordingly, Mr. Och initially will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs. In addition, he will be able to determine the outcome of all matters requiring shareholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our Board of Directors, and could preclude any unsolicited acquisition of our company. The control of voting power by Mr. Och could deprive Class A shareholders of an opportunity to receive a premium for their Class A shares as part of a sale of our company, and might ultimately affect the market price of the Class A shares. Upon Mr. Och’s withdrawal, death or disability, the Class B Shareholder Committee will consist of either (i) the members of the Partner Management Committee, who shall act by majority vote in such capacity, or (ii) a partner elected by majority vote of the remaining members of the Partner Management Committee to serve as the sole member of the Class B Shareholder Committee.

Because our partners control more than 50% of our voting power, we are eligible for the “controlled company” exception from NYSE requirements that our Board of Directors be comprised of a majority of independent directors and that our compensation committee and nominating, corporate governance and conflicts committee consist solely of independent directors. Although we do not currently intend to utilize this exception, we may in the future determine to do so.

In addition, the shareholders’ agreement among us and our partners, in their capacity as the Class B shareholders, will provide the Class B Shareholder Committee, so long as our partners and their permitted transferees continue to hold more than 40% of the total combined voting power of our outstanding Class A shares and Class B shares, with approval rights over a variety of significant board actions, including:

 

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any incurrence of indebtedness, other than inter-company indebtedness, in one transaction or a series of related transactions, by us or any of our subsidiaries or controlled affiliates in an amount in excess of approximately 10% of the then existing long-term indebtedness of us and our subsidiaries;

 

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any issuance by us or any of our subsidiaries or controlled affiliates, in any transaction or series of related transactions, of equity or equity-related shares which would represent, after such

 

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issuance, or upon conversion, exchange or exercise, as the case may be, at least 10% of the total combined voting power of our outstanding Class A shares and Class B shares other than (1) pursuant to transactions solely among us and our wholly owned subsidiaries, (2) upon issuances of securities pursuant to our 2007 equity incentive plan, (3) upon the exchange of Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares pursuant to the Exchange Agreement or (4) upon conversion of convertible securities or upon exercise of warrants or options, which convertible securities, warrants or options are either outstanding on the date of, or issued in compliance with, the shareholders’ agreement;

 

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any equity or debt commitment or investment or series of related equity or debt commitments or investments by us or any of our subsidiaries or controlled affiliates in an unaffiliated entity or related group of entities in an amount greater than $250 million;

 

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any entry by us, any subsidiary or controlled affiliate into a new line of business that does not involve investment management and that requires a principal investment in excess of $100 million;

 

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the adoption of a shareholder rights plan;

 

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any appointment or removal of a chief executive officer or co-chief executive officer; or

 

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the termination of the employment of an executive officer or the association of a partner with us or any of our subsidiaries or controlled affiliates without cause.

In addition, our operating agreement requires that we obtain the consent of the Class B Shareholder Committee for specified actions primarily relating to our structure so long as any Class B shares are outstanding. Our structure is intended to ensure that we maintain exchangeability of Class A shares and Och-Ziff Operating Group A Units on a one-for-one basis. Accordingly, the Class B Shareholder Committee will have the right to approve or consent to actions that could result in an economic disparity, such as the issuance of certain securities, making certain capital contributions, owning or disposing of certain assets, incurring certain indebtedness and conducting business outside of the Och-Ziff Operating Group. See “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Amendment of Our Operating Agreement” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

Our operating agreement contains provisions that reduce fiduciary duties of our directors and officers with respect to potential conflicts of interest against such individuals and limit remedies available to our Class A shareholders against such individuals for actions that might otherwise constitute a breach of duty. Our operating agreement contains provisions limiting the liability of our officers and directors to us, which also reduces remedies available to our Class A shareholders for certain acts by such person.

Our operating agreement provides that in the event a potential conflict of interest exists or arises between any of our partners, our officers, our directors or their respective affiliates, on the one hand, and us, any of our subsidiaries or any of our shareholders, on the other hand, a resolution or course of action by our Board of Directors shall be deemed approved by all of our shareholders, and shall not constitute a breach of the fiduciary duties of members of the board to us or our shareholders, if such resolution or course of action is (i) approved by our nominating, corporate governance and conflicts committee, which is composed of independent directors, (ii) approved by shareholders holding a majority of our shares that are disinterested parties, (iii) on terms no less favorable than those generally provided to or available from unrelated third parties, or (iv) fair and reasonable to us. Accordingly, if such a resolution or course of action is approved by our nominating, corporate governance and conflicts committee or otherwise meets one or more of the above criteria, you will not be able to successfully assert a claim that such resolution or course of action constituted a breach of fiduciary duties owed to you by our officers, directors and their respective affiliates. Under the

 

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Delaware General Corporation Law, or the “DGCL,” in contrast, a corporation is not permitted to automatically exempt board members from claims of breach of fiduciary duty under such circumstances. In addition, our operating agreement provides that all conflicts of interest described in this prospectus are deemed to have been specifically approved by all of our shareholders.

Our operating agreement also provides that to the fullest extent permitted by applicable law our directors or officers will not be liable to us other than in instances of fraud, gross negligence and willful misconduct. Accordingly, unless our officers and directors commit acts of fraud, gross negligence or willful misconduct, our shareholders may not have remedies available against such individuals under applicable law. Under the DGCL, in contrast, a director or officer would be liable to us for (i) breach of duty of loyalty to us or our shareholders; (ii) intentional misconduct or knowing violations of the law that are not done in good faith; (iii) improper redemption of stock or declaration of a dividend, or (iv) a transaction from which the director derived an improper personal benefit.

Our operating agreement also provides that we will indemnify our directors and officers for acts or omissions to the fullest extent permitted by law other than in instances of fraud, gross negligence and willful misconduct, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of the company and counsel fees and disbursements) arising from the performance of any of their obligations or duties in connection with their service to us or the operating agreement, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be made party by reason of being or having been one of our directors or officers. Under the DGCL, in contrast, a corporation can only indemnify directors and officers for acts or omissions if the director or officer acted in good faith, in a manner he reasonably believed to be in the best interests of the corporation, and, in a criminal action, if the officer or director had no reasonable cause to believe his conduct was unlawful.

Because our existing partners hold their economic interest through Och-Ziff Operating Group, conflicts of interest may arise between them and holders of our Class A shares or us.

Our partners will hold 81.9% of the Operating Group Equity Units upon completion of this offering. Because they hold their economic interest in our business directly through Och-Ziff Operating Group, rather than through ownership of our Class A shares, our partners may have conflicting interests with holders of Class A shares or with us. For example, our partners will have different tax positions from shareholders which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. Decisions with respect to these and other operational matters could affect the timing and amounts of payments due to our existing owners under the tax receivable agreement. In addition, the structuring of future transactions and investments may take into consideration the partners’ tax considerations even where no similar benefit would accrue to us.

We intend to pay regular distributions but our ability to do so may be limited by our holding company structure, as we are dependent on distributions from the Och-Ziff Operating Group to make distributions and to pay taxes and other expenses.

As a holding company, our ability to make distributions or to pay taxes and other expenses will be subject to the ability of our subsidiaries to provide cash to us. We intend to make quarterly distributions to our Class A shareholders. Accordingly, we expect to cause the Och-Ziff Operating Group to make distributions to its direct unitholders holding Operating Group Equity Units, initially our wholly owned subsidiaries and our existing owners, pro rata in an amount sufficient to enable us to pay such distributions to our Class A shareholders; however, no assurance can be given that such distributions will or can be made. Our Board of Directors can reduce or eliminate our distributions at any time, in its discretion. In addition, the Och-Ziff Operating Group is required to make minimum tax distributions to

 

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its direct unitholders, which our Class A shareholders will not be entitled to. As a result, Class A shareholders may not receive any distributions at a time when our existing owners are receiving distributions on their Och-Ziff Operating Group A Units. If the Och-Ziff Operating Group has insufficient funds to make such distributions, we may have to borrow additional funds or sell assets, which could materially adversely affect our liquidity and financial condition. Furthermore, by paying cash distributions rather than investing that cash in our business, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

The declaration and payment of any future distributions will be at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Because we only earn and recognize incentive income on an annual basis, we anticipate that quarterly distributions in respect of the first three fiscal quarters will be disproportionate to distributions in respect of the last fiscal quarter, which will typically be paid in the first fiscal quarter of the following year. Our Board of Directors will take into account such factors as it may deem relevant, including general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; our financial condition and operating results; working capital requirements and anticipated cash needs; contractual restrictions and obligations, including payment obligations pursuant to the tax receivable agreement and restrictions pursuant to our new term loan; legal, tax and regulatory restrictions; and other restrictions and implications on the payment of distributions by us to our Class A shareholders or by our subsidiaries to us and such other factors as our Board of Directors may deem relevant. Any income payments made to our partners and compensatory payments made to our employees, as well as payments that Och-Ziff Corp makes under the tax receivable agreement and distributions to holders of Och-Ziff Operating Group Units in respect of their tax liabilities arising from their direct ownership of Och-Ziff Operating Group Units, will reduce amounts that would otherwise be available for distribution by us on the Class A shares. In addition, any discretionary income allocations on the Class C Non-Equity Interests as determined by the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote) in conjunction with our compensation committee, will also reduce amounts available for distribution to our Class A shareholders.

The declaration and payment of any distribution may be subject to legal, contractual or other restrictions. For example, as a Delaware limited liability company, we are not permitted to make distributions if and to the extent that after giving effect to such distributions, our liabilities would exceed the fair value of our assets. In addition, we will not be permitted to make distributions if we are in default under our new term loan, and the term loan limits the amount of distributions we can pay to our “free cash flow”, as such term is defined in the term loan. See “Description of New Term Loan”.

The vast majority of cash and investment assets reflected on our historical audited combined balance sheets belongs to our funds which are presented on a consolidated basis under GAAP. We depend on the cash we receive from the Och-Ziff Operating Group.

Our historical audited combined financial information includes significant investment asset balances, cash and restricted cash that is owned by our consolidated funds. Although the investments, cash and other assets of certain of our funds were historically included in our consolidated statements for financial reporting purposes, such assets were not available to us to pay distributions or for other liquidity needs but rather were property of the relevant fund. Following changes made to our fund documents, most of our domestic funds are no longer included in our combined financial statements as of January 1, 2007 and none of our offshore funds is included as of June 30, 2007. As a result, such funds’ assets no longer appear on the face of our balance sheets. We depend on distributions from the Och-Ziff Operating Group for cash and the Och-Ziff Operating Group depends primarily on the management fees and incentive income it receives from our funds and its portion of the distributions

 

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made by the funds, if any, for cash. We do not receive management fees or earn incentive income on investments made by us, our managing directors or other employees or on certain investments made by our partners.

We will be required to pay our existing owners for most of the tax benefits we realize as a result of the tax basis step-up we receive in connection with taxable exchanges by our existing owners of Och-Ziff Operating Group A Units or our acquisitions of those units from our existing owners.

At any time and from time to time, subject to vesting, minimum retained ownership requirements and transfer restrictions, each of our existing owners will, and each of our future owners may, have the right to exchange its Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent) in a taxable transaction. These taxable exchanges, as well as our acquisitions of Och-Ziff Operating Group A Units from our owners (including in connection with this offering), may result in increases in the tax depreciation and amortization deductions, as well as an increase in the tax basis of other assets, of Och-Ziff Operating Group that otherwise would not have been available. These increases in tax depreciation and amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax that our corporate taxpayer intermediate holding companies that hold an interest in an Och-Ziff Operating Group entity would otherwise have been required to pay in the future, although the Internal Revenue Service (“IRS”) may challenge all or part of increased deductions and tax basis increase, and a court could sustain such a challenge.

Prior to the completion of this offering, we will enter into a tax receivable agreement with our existing owners that will provide for the payment by the corporate taxpayers to those owners of 85% of the amount of tax savings, if any, that the corporate taxpayers actually realize (or are deemed to realize in the case of an early termination payment by the corporate taxpayers or a change of control, as discussed below) as a result of these increases in tax deductions and tax basis of the Och-Ziff Operating Group. These amounts reflect the fact that payments under the tax receivable agreement may result in further tax savings, and thus may give rise to additional payment obligations thereunder. The obligation to pay 85% of the amount of such cash savings to our existing owners is an obligation of the corporate taxpayer intermediate holding companies and not of the Och-Ziff Operating Group entities. Future cash savings and related payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary based upon a number of factors (including the timing of future exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income), depending upon the outcome of these factors, payments that we may be obligated to make to our existing owners as a result of the purchase of Och-Ziff Operating Group A Units in connection with this offering, as well as the payments in respect of subsequent exchanges, could be substantial. In light of the numerous factors affecting our obligation to make such payments, however, the timing and amounts of any such actual payments are not reasonably ascertainable at this time. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Offering Liquidity” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

Were the IRS to challenge a tax basis increase, our owners who have received payments under the tax receivable agreement will not reimburse the corporate taxpayers for any such payments that have been previously made. As a result, in certain circumstances, payments could be made to our owners under the tax receivable agreement in excess of the corporate taxpayers’ cash tax savings.

 

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The corporate taxpayers’ ability to achieve benefits from any tax basis increase, and the payments to be made under this agreement, will depend upon a number of factors, including the timing and amount of our future income.

Decisions made by the partners in the course of running our business, in particular decisions made with respect to the sale or disposition of assets or change of control, may influence the timing and amount of payments that are payable to an exchanging or selling owner under the tax receivable agreement. In general, earlier disposition of assets following an exchange or acquisition transaction will tend to accelerate such payments and increase the present value of the tax receivable agreement, and disposition of assets before an exchange or acquisition transaction will tend to increase an owner’s tax liability without giving rise to any rights to receive payments under the tax receivable agreement.

In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, the corporate taxpayers’ (or their successors’) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control) would be based on certain prescribed assumptions, including that the corporate taxpayers would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. Accordingly, obligations under the tax receivable agreement may make it more expensive for third parties to acquire control of us and make it more difficult for the holders of Class A shares to recognize a premium in connection with any such transaction. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

If we are deemed an investment company under the Investment Company Act of 1940, our business would be subject to applicable restrictions under that Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our Class A shares.

We do not believe that we are an “investment company” under the 1940 Act because the nature of our assets and the sources of our income exclude us from the definition of an investment company under the 1940 Act. In addition, we believe our company is not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily engaged in a non-investment company business. We intend to conduct our operations so that we will not be deemed an investment company. However, 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. In addition, we would no longer be treated, for U.S. federal income tax purposes, as a partnership and our earnings would become taxable as a corporation, which could have a material adverse effect on our business and the price of our Class A shares.

Risks Related to this Offering

All of the proceeds from this offering will be used to acquire interests in our business from our existing owners. Accordingly, we will not retain any proceeds from this offering.

We estimate that our proceeds from this offering, at an assumed initial public offering price of $31.50 per Class A share and after deducting estimated underwriting discounts and commissions will be approximately $1.1 billion, or $1.2 billion if the underwriters exercise their option to purchase additional Class A shares in full. We intend to use all of these proceeds to acquire interests in our business from our existing owners as described under “Our Structure—The Transactions—Offering Transactions”. Accordingly, we will not retain any of the proceeds from the offering. In addition, we will pay all of the expenses related to this offering from cash on hand. See “Use of Proceeds”.

 

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An active market for our Class A shares may not develop.

Prior to this offering there has been no trading market for our Class A shares. We intend to submit an application to have our Class A shares listed on the New York Stock Exchange, or the “NYSE,” under the symbol “OZM”. However, we cannot assure you that our Class A shares will be approved for listing on the NYSE or, if approved, that a regular trading market of our Class A shares will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A shares will develop or be maintained, the liquidity of any trading market, your ability to sell your Class A shares when desired, or at all, or the prices that you may obtain for your Class A shares. The initial public offering price per Class A share will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which our Class A shares will trade in the public market after this offering.

The market price and trading volume of our Class A shares may be volatile, which could result in rapid and substantial losses for our shareholders.

Even if an active trading market develops, the market price of our Class A shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A shares may fluctuate and cause significant price variations to occur. If the market price of our Class A shares declines significantly, you may be unable to resell your Class A shares at or above your purchase price, if at all. We cannot assure you that the market price of our Class A shares will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A shares or result in fluctuations in the price or trading volume of our Class A shares include:

 

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variations in our quarterly operating results;

 

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failure to meet our earnings estimates;

 

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publication of research reports about us or the asset management industry or the failure of securities analysts to cover our Class A shares after this offering;

 

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additions to or departures of our partners and other key management personnel;

 

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adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

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actions by shareholders;

 

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changes in market valuations of similar companies;

 

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speculation in the press or investment community about our business;

 

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changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations, or announcements relating to these matters;

 

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adverse publicity about the asset management industry generally or individual scandals, specifically; and

 

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general market and economic conditions.

Our Class A share price may decline due to the large number of shares eligible for future sale and for exchange into Class A shares.

The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time

 

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and price that we deem appropriate. After the consummation of this offering, we will have 36,000,000 outstanding Class A shares and 14,761,905 Class A restricted share units granted to employees pursuant to our 2007 equity incentive plan, and 45,238,095 Class A shares will remain available for future grant under our 2007 equity incentive plan. See “Shares Eligible for Future Sale”. Beginning in 2008, the Class A shares reserved under our 2007 equity incentive plan will be increased on the first day of each fiscal year during the plan’s term by the positive difference, if any, of (i) 15% of the number of outstanding Class A shares of the company (assuming the exchange of all outstanding Och-Ziff Operating Group A Units for Class A shares) on the last day of the immediately preceding fiscal year over (ii) the number of shares reserved for issuance under our 2007 equity incentive plan as of such date.

We have agreed with the underwriters not to sell, otherwise dispose of or hedge, directly or indirectly, any of our Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including interests in the Och-Ziff Operating Group), subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Lehman Brothers Inc. Subject to these agreements, we may issue and sell in the future additional Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including interests in the Och-Ziff Operating Group).

Our existing owners will own an aggregate of 364,000,000 Och-Ziff Operating Group A Units upon consummation of this offering. Each existing owner will have the right to exchange each of its Och-Ziff Operating Group A Units for one of our Class A shares (or, at our option, a cash equivalent), subject to vesting, minimum retained ownership requirements and transfer restrictions. Our existing owners, directors, executive officers, managing directors and participants in our directed share program have agreed with the underwriters not to dispose of or hedge, directly or indirectly, any of our Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including interests in the Och-Ziff Operating Group), subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Lehman Brothers Inc. After the expiration of this 180-day lock-up period, these Class A shares and Och-Ziff Operating Group A Units will be eligible for resale from time to time, subject to certain contractual restrictions and Securities Act limitations. Under certain circumstances the 180-day lock-up period may be extended.

In connection with this offering, our existing owners will enter into a registration rights agreement with us. Under that agreement, after the expiration of their 180-day lock-up period, our partners will have the ability to cause us to register the Class A shares they acquire upon exchange of their Och-Ziff Operating Group A Units or otherwise and our partners and the Ziffs will have certain “piggyback” registration rights in connection with registered offerings of our securities. In addition, we will be required to file a shelf registration statement on or prior to the fifth anniversary of this offering covering the resale of all Class A shares held by our partners and the Ziffs or issuable upon exchange of their Och-Ziff Operating Group A Units.

At the time of this offering, we intend to grant to all of our managing directors and other employees (which do not include our partners) 14,761,905 Class A restricted share units in the aggregate under our 2007 equity incentive plan, which units may be settled at the election of a majority of our Board of Directors in Class A shares or cash. These units will vest, subject to continued employment, and the underlying Class A shares will be issued, or cash in lieu thereof will be paid, in equal installments over a four-year period beginning on the first anniversary of this offering. If an employee leaves or is terminated for any reason other than as a result of death or disability or in the event of a termination without cause within the one year period following a change in control of us, such employee will forfeit all unvested units. Upon an employee’s termination of employment as a result of death or disability, all restricted share units will vest. Upon an employee’s termination without

 

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cause within the one year period following a change in control of us, all restricted share units will vest and be settled in Class A shares or cash on the first business day following the date such restricted share units would have otherwise become vested. We intend to file a registration statement on Form S-8 to register an aggregate of 60,000,000 Class A shares reserved for issuance under our 2007 equity incentive plan (not including automatic annual increases thereto). As a result, any Class A shares issued in respect of the Class A restricted share units will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144, without regard to holding period limitations.

In addition, the operating group limited partnership agreements authorize the Och-Ziff Operating Group entities to issue an unlimited number of additional partnership interests and authorize the general partner to specify (a) the allocations of items of partnership income, gain, loss, deduction and credit to holders of each such class or series of interests; (b) the right of holders of each such class or series of interests to share (on a pari passu, junior or preferred basis) in partnership distributions; (c) the rights of holders of each such class or series of interests upon dissolution and liquidation of the limited partnership; (d) the voting rights, if any, of holders of each such class or series of interests; and (e) the conversion, redemption or exchange rights applicable to each such class or series of units, including exchanges for Class A shares. The total number of interests that may be created pursuant to the foregoing and the issuance thereof that may be authorized by the general partner is not limited.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per Class A share will be substantially higher than our pro forma as adjusted net tangible book value per share immediately after this offering. As a result, you will pay a price per Class A share that substantially exceeds the book value of our assets after subtracting our liabilities. At an assumed initial offering price of $31.50 per Class A share you will incur immediate dilution in an amount of $             per Class A share.

Our partners’ beneficial ownership of Class B shares, our shareholders’ agreement, the tax receivable agreement and anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control.

Upon consummation of this offering, our partners will beneficially own all of our Class B shares, representing approximately 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full). In addition, our partners will grant to the members of the Class B Shareholder Committee (which initially consists solely of Mr. Och) an irrevocable proxy to vote all of such shares as they may determine in their sole discretion, which proxy will terminate upon the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company. As a result, Mr. Och will be able to control all matters requiring the approval of shareholders and will be able to prevent a change in control of our company. In addition, under our shareholders’ agreement, the Class B Shareholder Committee has approval rights with respect to certain actions of our Board of Directors, including actions relating to a potential change in control, so long as our partners continue to hold at least 40% of the total combined voting power of our company and has the ability to initially designate five of the seven nominees to our Board of Directors, and, under our operating agreement, the Class B Shareholder Committee will have certain consent rights with respect to structural and other changes involving our company. See “—Risks Related to Our Organization and Structure—Control by Mr. Och of the combined voting power of our shares and our existing partners holding their economic interest through Och-Ziff Operating Group may give rise to conflicts of interest”.

In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, the corporate taxpayers’ (or any successors’) obligations with respect to exchanged or acquired units (whether exchanged or acquired

 

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before or after such change of control) would be based on certain prescribed assumptions, including that the corporate taxpayers would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. The provisions may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders.

In addition, provisions in our operating agreement may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders. For example, our operating agreement provides for a staggered board, requires advance notice for proposals by shareholders and nominations, places limitations on convening shareholder meetings, and authorizes the issuance of preferred shares that could be issued by our Board of Directors to thwart a takeover attempt. The market price of our Class A shares could be adversely affected to the extent that Mr. Och’s control over us, as well as provisions of our operating agreement, discourage potential takeover attempts that our shareholders may favor.

Risks Related to Taxation

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

The U.S. federal income tax treatment of holders of the Class A shares depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in the Class A shares may be modified by administrative, legislative or judicial interpretation at any time, possibly on a retroactive basis, and any such action may affect investments and commitments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and commitments, change the character or treatment of portions of our income (including, for instance, treating carried interest income as entirely ordinary income), affect the tax considerations of an investment in us and adversely affect an investment in our Class A shares. “Carried interest” is a term often used in the marketplace as a general reference to describe a general partner’s right to receive its incentive income in the form of a profit allocation eligible for capital gains tax treatment (to the extent that the carried interest consists of capital gains). See “Risk Factors—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch action occurs which would materially affect our ability to move ahead with this offering”.

Our organizational documents and agreements permit the Board of Directors to modify our operating agreement from time to time, without the consent of the holders of Class A shares, in order to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of the holders of

 

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our Class A shares. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to holders in a manner that reflects such holders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Internal Revenue Code of 1986, as amended (the “Code”) and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects holders of the Class A shares.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch action occurs which would materially affect our ability to move ahead with this offering.

On June 14, 2007, the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance introduced legislation that would tax as corporations publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. In addition, the Chairman and the Ranking Republican Member concurrently issued a press release stating that they do not believe that proposed public offerings of private equity and hedge fund management firms are consistent with the intent of the existing rules regarding publicly traded partnerships because the majority of their income is from the active provision of services to investment funds and limited partner investors in such funds. Further, they have sent letters to the Secretary of the Treasury and the Chairman of the U.S. Securities and Exchange Commission regarding these tax issues in which they express a view that recent initial public offerings of firms that manage private equity and hedge funds “raise serious tax questions that if left unaddressed have the potential to jeopardize the integrity of the tax code and the corporate tax base over the long-term”. As explained in the technical explanation accompanying the proposed legislation:

Under the bill, the exception from corporate treatment for a publicly traded partnership does not apply to any partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from services provided by any person as an investment adviser, as defined in the Investment Advisers Act of 1940, or as a person associated with an investment adviser, as defined in that Act. Further, the exception from corporate treatment does not apply to a partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from asset management services provided by an investment adviser, a person associated with an investment adviser, or any person related to either, in connection with the management of assets with respect to which investment adviser services were provided. For purposes of the bill, these determinations are made without regard to whether the person is required to register as an investment adviser under the Investment Advisers Act of 1940.

If enacted in its proposed form, the proposed legislation introduced by the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance would be applicable to taxable years of a partnership beginning on or after June 14, 2007. On June 20, 2007, a Congressman from Vermont introduced legislation in the House of Representatives that is substantially similar to the proposed legislation introduced by the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance. In addition, on June 22, 2007, a Congressman from Michigan, joined by the Chairmen and other members of the United States House of Representatives Committee

 

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on Ways and Means, introduced legislation in the House of Representatives that would have the effect of treating publicly traded partnerships that derive income directly or indirectly from investment management services as corporations for U.S. federal income tax purposes (although the effective date of such legislation, if enacted, has not been determined).

If any version of these legislative proposals survives the legislative and executive process in its proposed form and were enacted into law, or if other similar legislation were enacted or any other change in the tax laws, rules, regulations or interpretations were to preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability as a public company from the date any such changes became applicable to us (which could include periods from and after the date of this offering and prior to the date of enactment of such legislation), which could result in a reduction in the value of our Class A shares. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch actions occur which would materially affect our ability to move ahead with the offering.

You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash distributions from us.

So long as we are not required to register as an investment company under the 1940 Act and 90% of our gross income for each taxable year constitutes “qualifying income” within the meaning of the Code on a continuing basis, we will be treated, under current law, as a partnership for U.S. federal income tax purposes and not as an association or a publicly traded partnership taxable as a corporation. You may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on your allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable years ending with or within your taxable year, regardless of whether or not you receive cash distributions from us. See “Material U.S. Federal Tax Considerations”.

You may not receive cash distributions equal to your allocable share of our net taxable income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings, if any, in a Controlled Foreign Corporation (“CFC”) and a Passive Foreign Investment Company (“PFIC”), may produce taxable income prior to the receipt of cash relating to such income, and holders of our Class A shares that are United States persons will be required to take such income into account in determining their taxable income. Under our operating agreement, in the event of an inadvertent partnership termination in which the IRS has granted us limited relief, each holder of our Class A shares also is obligated to make such adjustments as are required by the IRS to maintain our status as a partnership. Such adjustments may require persons who hold our Class A shares to recognize additional amounts in income during the years in which they hold such shares. We may also be required to make payments to the IRS.

There can be no assurance that amounts paid as distributions on Class A shares will be sufficient to cover the tax liability arising from ownership of Class A shares.

Any distributions paid on Class A shares will not take into account your particular tax situation (including the possible application of the alternative minimum tax) and, therefore, because of the foregoing as well as other possible reasons, may not be sufficient to pay your full amount of tax based upon your share of our net taxable income. In addition, the actual amount and timing of distributions will always be subject to the discretion of our Board of Directors and we cannot assure you that we will

 

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in fact pay cash distributions as currently intended. In particular, the amount and timing of distributions will depend upon a number of factors, including, among others:

 

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general business and economic conditions and our strategic plans and prospects;

 

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amounts necessary or appropriate to provide for the conduct of our business, including to pay operating and other expenses;

 

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amounts necessary to make appropriate investments in our business and our funds and the timing of such investments;

 

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our actual results of operations and financial condition;

 

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restrictions imposed by our operating agreement and Delaware law;

 

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contractual restrictions, including restrictions imposed by our new term loan and payment obligations under our tax receivable agreement;

 

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cash income allocations to our partners, if any, and compensatory payments made to our employees;

 

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the amount of cash that is generated by our investments or to fund liquidity needs;

 

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contingent liabilities; and

 

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other factors that our Board of Directors deems relevant.

Even if we do not distribute cash in an amount that is sufficient to fund your tax liabilities, you will still be required to pay income taxes on your share of our taxable income.

If we were to be treated as a corporation for U.S. federal income tax purposes, the value of the Class A shares would be adversely affected.

We have not requested, and do not plan to request, a ruling from the IRS on our treatment as a partnership for U.S. federal income tax purposes, or on any other matter affecting us. Under current law and assuming full compliance with the terms of our operating agreement (and other relevant documents) and based upon factual statements and representations made by us, Skadden, Arps, Slate, Meagher & Flom LLP has opined that at the closing of this offering we will be treated as a partnership, and not as an association or a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. However, opinions of counsel are not binding upon the IRS or any court, and the IRS may challenge this conclusion and a court may sustain such a challenge. The factual representations made by us upon which Skadden, Arps, Slate, Meagher & Flom LLP will rely relate to our organization, operation, assets, activities, income, and present and future conduct of our operations. See “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status”.

In general, if an entity that would otherwise be classified as a partnership for U.S. federal income tax purposes is a “publicly traded partnership” (as defined in the Code) it will be nonetheless treated as a corporation for U.S. federal income tax purposes, unless the exception described below, and upon which we intend to rely, applies. A publicly traded partnership will, however, be treated as a partnership, and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income” within the meaning of the Code and it is not required to register as an investment company under the 1940 Act. We refer to this exception as the “qualifying income exception”.

Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We expect that our

 

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income generally will consist of interest and dividends (including dividends from Och-Ziff Corp and interest on indebtedness from Och-Ziff Corp), capital gains and other types of qualifying income, such as income from notional principal contracts, securities loans, options, forward contracts and future contracts. No assurance can be given as to the types of income that will be earned in any given year. If we fail to satisfy the qualifying income exception described above, items of income and deduction would not pass through to holders of the Class A shares and holders of the Class A shares would be treated for U.S. federal (and certain state and local) income tax purposes as shareholders in a corporation. In such a case, we would be required to pay income tax at regular corporate rates on all of our income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of such income. Moreover, dividends to holders of the Class A shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and the payment of these dividends would not be deductible by us. Taxation of us as a publicly traded partnership taxable as a corporation could result in a material adverse effect on our cash flow and the after-tax returns for holders of Class A shares and thus could result in a substantial reduction in the value of the Class A shares.

Tax gain or loss on disposition of our Class A shares could be more or less than expected.

If you sell your Class A shares, you will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those Class A shares. Prior distributions to you in excess of the total net taxable income allocated to you, which decreased the tax basis in your Class A shares, will in effect become taxable income to you if the Class A shares are sold at a price greater than your tax basis in those Class A shares, even if the price is less than the original cost.

We treat each purchaser of our Class A shares as having the same tax benefits without regard to the Class A shares purchased. The IRS may challenge this treatment, which could adversely affect the value of our Class A shares.

Because we cannot match transferors and transferees of Class A shares, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our holders. It also could affect the timing of these tax benefits or the amount of gain on the sale of Class A shares and could have a negative impact on the value of our Class A shares or result in audits of and adjustments to our holders’ tax returns.

If we were not to make, or cause to be made, an otherwise available election under Section 754 of the Internal Revenue Code to adjust our asset basis or the asset basis of OZ Advisors II, a holder of Class A shares could be allocated more taxable income in respect of those shares prior to disposition than if such an election were made.

We currently do not intend to make, or cause to be made, an election to adjust asset basis under Section 754 of the Internal Revenue Code with respect to us or OZ Advisors II. If no such election is made, there will generally be no adjustment to the basis of the assets of OZ Advisors II upon our acquisition of interests in OZ Advisors II in connection with this offering or upon a subsequent exchange of OZ Operating Group A Units for Class A shares, or to our assets or to the assets of OZ Advisors II upon a subsequent transferee’s acquisition of Class A shares from a prior holder of such shares, even if the purchase price for those interests or shares, as applicable, is greater than the share of the aggregate tax basis of our assets or the assets of OZ Advisors II attributable to those interests or units immediately prior to the acquisition. Consequently, upon a sale of an asset by us or OZ Advisors II, gain allocable to a holder of Class A shares could include built-in gain in the asset existing at the time we acquired those interests, or such holder acquired such shares, which built-in gain would

 

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otherwise generally be eliminated if a Section 754 election had been made. See ‘‘Material U.S. Federal Tax Considerations—Administrative Matters—Tax Elections.’’

The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for federal income tax purposes.

We will be considered to have been terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all holders and could result in a deferral of depreciation deductions allowable in computing our taxable income. See “Material U.S. Federal Tax Considerations” for a description of the consequences of our termination for federal income tax purposes.

Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

In order for us to be treated as a partnership for U.S. federal income tax purposes, and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the 1940 Act. In order to effect such treatment we (or our subsidiaries) may be required to invest through foreign or domestic corporations, forego attractive business or investment opportunities or enter into borrowings or financings we may not have otherwise entered into. This may adversely affect our ability to operate solely to maximize our cash flow. Our structure also may impede our ability to engage in certain corporate acquisitive transactions because we generally intend to hold all of our assets through the Och-Ziff Operating Group. In addition, we may be unable to participate in certain corporate reorganization transactions that would be tax free to our holders if we were a corporation. To the extent we hold assets other than through the Och-Ziff Operating Group, we will make appropriate adjustments to the Och-Ziff Operating Group agreements so that distributions to partners and us would be the same as if such assets were held at that level.

We may not be able to invest in certain assets, other than through a taxable corporation.

In certain circumstances, we or one of our subsidiaries may have an opportunity to invest in certain assets through an entity that is characterized as a partnership for U.S. federal income tax purposes, where the income of such entity may not be “qualifying income” for purposes of the publicly traded partnership rules. See “Material U.S. Federal Tax Considerations—Taxation of Our Company”. In order to manage our affairs so that we will meet the qualifying income exception, we may either refrain from investing in such entities or, alternatively, we may structure our investment through an entity classified as a corporation for U.S. federal income tax purposes. If the entity were a U.S. corporation, it would be subject to U.S. federal income tax on its operating income, including any gain recognized on its disposal of its interest in the entity in which the opportunistic investment has been made, as the case may be, and such income taxes would reduce the return on that investment.

Our intermediate holding company, Och-Ziff Corp, will be subject to corporate income taxation in the United States.

In light of the publicly traded partnership rules, a significant portion of our activities will be conducted through Och-Ziff Corp, which will be treated as a corporation for U.S. federal income tax purposes. Och-Ziff Corp could be liable for significant U.S. federal income taxes and applicable state, local and other taxes that would not otherwise be incurred if it were subject to tax on a flow-through basis, which could adversely affect the value of your investment. Dividends paid by Och-Ziff Corp from

 

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time to time will then be included in our income. Prior to the Reorganization, we are not subject to taxation as a corporation. We expect our effective tax rate and tax expense to be significantly higher after the Reorganization.

The IRS could assert that we are engaged in a U.S. trade or business, with the result that some portion of our income is properly treated as effectively connected income, or ECI, with respect to non-U.S. holders of Class A shares. Moreover, certain REIT dividends and other stock gains may be treated as effectively connected income with respect to non-U.S. holders of Class A shares.

While we expect that our method of operation will not result in a determination that we are engaged in a U.S. trade or business, there can be no assurance that the IRS will not assert successfully that we are engaged in a U.S. trade or business with the result that some portion of our income is properly treated as ECI with respect to non-U.S. holders. Moreover, dividends paid by an investment that we make in a REIT that is attributable to gains from the sale of U.S. real property interests will, and sales of certain investments in the stock of U.S. corporations owning significant U.S. real property may, be treated as effectively connected income with respect to non-U.S. holders. In addition, certain income of non-U.S. holders from U.S. sources not connected to any such U.S. trade or business conducted by us could be treated as ECI. To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on their allocable shares of such income, would be required to file a U.S. federal income tax return for such year reporting their allocable shares of income effectively connected with such trade or business and any other income treated as ECI, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders may also be subject to a 30% branch profits tax on such income in the hands of non-U.S. holders that are corporations.

Class A shareholders may be subject to foreign, state and local taxes and return filing requirements as a result of investing in our Class A shares.

While it is expected that our method of operation will not result in a determination that the holders of our Class A shares, solely on account of their ownership of Class A shares, are engaged in trade or business so as to be taxed on any part of their allocable shares of our income or subjected to tax return filing requirements in any jurisdiction in which we conduct activities or own property, there can be no assurance that the Class A shareholders, on account of owning Class A shares, will not be subject to certain taxes, including foreign, state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes, imposed by the various jurisdictions in which we conduct activities or own property now or in the future, even if the Class A shareholders do not reside, or are not otherwise subject to such taxes, in any of those jurisdictions. Consequently, Class A shareholders also may be required to file foreign, state and local income tax returns in some or all of these jurisdictions. Furthermore, Class A shareholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Class A shareholder to file all United States federal, foreign, state and local tax returns that may be required of such Class A shareholder. See “Material U.S. Federal Tax Considerations—Administrative Matters” and “Material U.S. Federal Tax Considerations—Taxes in Other State, Local, and Non-U.S. Jurisdictions”.

Our delivery of required tax information for a taxable year may be subject to delay, which may require a Class A shareholder to request an extension of the due date for their income tax return.

We have agreed to use reasonable efforts to furnish to you tax information (including Schedule K-1) which describes your allocable share of our income, gains, losses and deductions for our preceding taxable year. Delivery of this information by us will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from lower-tier entities. It is

 

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therefore possible that, in any taxable year, our shareholders will need to apply for extensions of time to file their tax returns. See “Material U.S. Federal Tax Considerations—Administrative Matters—Information Returns”.

An investment in Class A shares will give rise to UBTI to certain tax-exempt holders of Class A shares.

Due to ownership interests we will hold in entities that are treated as partnerships, or are otherwise subject to tax on a flow-through basis, which will incur indebtedness or may engage in a trade or business, we will derive unrelated business taxable income, or UBTI, from “debt-financed” property or from such trade or business, as applicable, and, thus, an investment in Class A shares will give rise to UBTI to certain tax-exempt holders of Class A shares. Och-Ziff Holding may borrow funds from Och-Ziff Corp or third parties from time to time to make investments. These investments will give rise to UBTI from “debt-financed” property.

We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. federal income tax purposes.

Certain of our investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. U.S. holders of Class A shares indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences. See “Material U.S. Federal Tax Considerations—Taxation of Holders of Class A Shares—Passive Foreign Investment Companies” and “—Controlled Foreign Corporations”.

WE STRONGLY URGE YOU TO REVIEW CAREFULLY THE DISCUSSION UNDER “MATERIAL U.S. FEDERAL TAX CONSIDERATIONS” AND TO SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. We generally identify forward-looking statements by terminology such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data derived from independent consultant reports, publicly available information, various industry publications and other published industry sources. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

 

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OUR STRUCTURE

Overview

Our business was founded in 1994 by Daniel Och together with the Ziffs. We conduct our business through the Och-Ziff Operating Group, which consists of separate entities owned and operated by our existing owners, and through our real estate business, which is a joint venture between entities owned and operated by all of our existing owners and third parties. We have historically operated our business through these separate entities with no single holding company owned by the existing owners. Our existing owners include Mr. Och, our 17 other existing partners and the Ziffs. For accounting purposes in our historical financial statements, Mr. Och is treated as the sole equity partner of our business prior to this offering, our 17 other existing partners are treated as non-equity partners and the Ziffs are treated as having a right to receive certain payments based on management fees and incentive income earned by us. Distributions to the existing owners have been treated in our historical financial statements as follows: distributions on equity for Mr. Och, compensation expense for our 17 other existing partners and profit sharing expense for the Ziffs.

Prior to the completion of this offering, we will reorganize our company through the transactions described below, and we will acquire the interests in the real estate business held by our existing owners. The real estate business will become a subsidiary of the Och-Ziff Operating Group and third parties who currently own the remaining interests in the real estate business will continue to directly own a 50% interest therein. As more fully described below, each of our existing owner’s interest in our business will be reclassified, for financial accounting purposes, into an equity interest in our business. Thus, despite the different financial accounting treatment of such interests prior to the Transactions as described above, upon completion of the Reorganization, each of the existing owners will hold the same type of equity interests in the Och-Ziff Operating Group, as well as the other interests described below. In addition, upon completion of the Transactions, Och-Ziff Capital Management Group LLC will be a holding company, and its primary assets will be its ownership interest in the Och-Ziff Operating Group entities, which will be held indirectly through two intermediate holding companies: Och-Ziff Corp and Och-Ziff Holding. We will hold substantially all of our assets and conduct substantially all of our business through the Och-Ziff Operating Group. Having a holding company structure rather than a group of separate entities will facilitate our ability to offer interests in our business to the public.

The Transactions

The Reorganization

Och-Ziff Capital Management Group LLC

Och-Ziff Capital Management Group LLC was formed as a Delaware limited liability company on June 6, 2007 for the purposes of effecting this offering and the related transactions and has engaged in no other business activities since its formation. Prior to the completion of this offering, we will amend and restate our operating agreement to, among other things, provide for the reclassification of our outstanding limited liability company interests, all of which are held by our existing partners, into our Class B shares and for the issuance of Class A shares, including those being offered in this offering. The Class A shares and Class B shares will have the respective rights and privileges described under “Description of Shares”.

Intermediate Holding Companies

Upon consummation of this offering, Och-Ziff Capital Management Group LLC will own 100% of:

 

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Och-Ziff Corp, a Delaware corporation, which will be the sole general partner of and will own approximately 9.0% of the limited partner equity interests of OZ Management and OZ

 

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Advisors I through its 100% ownership of the Class B operating group units of OZ Management and OZ Advisors I; and

 

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Och-Ziff Holding, a Delaware limited liability company that is a disregarded entity for U.S. federal income tax purposes, which will be the sole general partner of and will own 9.0% of the limited partner equity interests of OZ Advisors II through its 100% ownership of the Class B operating group units of OZ Advisors II.

Under the operating group limited partnership agreements, management and control rights will generally be vested in our intermediate holding companies as the general partners. These general partner interests with respect to the Och-Ziff Operating Group are not entitled to any allocation of gains or losses of, or any distributions from, the Och-Ziff Operating Group. Och-Ziff Capital Management Group LLC, through these general partner entities, will control the Och-Ziff Operating Group. In addition, as described in more detail below, our existing partners, by virtue of their ownership of the Och-Ziff Class B shares, will control all matters submitted to a vote of our shareholders and, therefore, will indirectly control the Och-Ziff Operating Group.

Och-Ziff Operating Group Entities

We intend to continue to conduct all of our material business activities through the Och-Ziff Operating Group. Historically, we have used more than one Och-Ziff Operating Group entity to segregate operations for business, financial, tax and other reasons. Going forward, we may increase or decrease the number of our Och-Ziff Operating Group entities and intermediate holding companies based on our views as to the appropriate balance between administrative convenience and continued business, financial, tax and other considerations. We expect that we will continue to conduct our fee-generating businesses, our domestic fund business and our domestic real estate fund business through OZ Management and OZ Advisors I. We expect that we will hold our interests in our offshore funds through OZ Advisors II.

As a result of the foregoing, the operating entities of the Och-Ziff Operating Group will continue to be entitled to all of the management fees and incentive income earned with respect to our funds. We have historically paid, and intend to continue to pay, a portion of our profits to our non-partner professionals as compensation in order to better align their interests with our own and with those of the investors in our funds. In the future, we may also determine to pay our partners additional annual cash amounts or make discretionary income allocations on their Class C Non-Equity Interests, as described below, or issue equity incentive awards to some or all of our partners and employees. Any such actions would be treated as expenses for financial reporting purposes and would therefore reduce the income of the Och-Ziff Operating Group allocable to Och-Ziff Capital Management Group LLC, which is derived only from its equity interest in the Och-Ziff Operating Group.

The Och-Ziff Operating Group is considered our predecessor for accounting purposes. We will carry forward unchanged the value of the assets and liabilities of the Och-Ziff Operating Group reflected in its historical combined financial statements into our future consolidated financial statements.

Och-Ziff Operating Group Units

Class A operating group units.    As described above, our existing owners currently hold interests in our business that are treated differently for financial accounting purposes. However, for all other purposes of our business, we treat all of our partners as the current owners of our business. Each of our partners holds the same proportionate interest in each Och-Ziff Operating Group entity, whether treated as equity or non-equity for financial accounting purposes. Prior to completion of this offering,

 

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each existing partner’s interest in each Och-Ziff Operating Group entity will be reclassified as Class A operating group units, which will represent common equity interests in the respective Och-Ziff Operating Group entity. Each of Mr. Och and our 17 other partners will receive an amount of Class A operating group units in each Och-Ziff Operating Group entity equal to such partner’s then-existing income allocation percentage under the applicable limited partnership agreement immediately prior to such reclassification. In addition, as part of the reclassification, each partner will also receive a Class C Non-Equity Interest, which will not represent a common equity interest in our business. The Class C Non-Equity Interests will represent non-equity interests on which discretionary income allocations may be made to our existing and future partners, as described below, although we currently do not intend to make any such distributions. The Ziffs’ existing interest in our business will also be reclassified as Class A operating group units, representing a 10% interest in the common equity of each Och-Ziff Operating Group entity immediately prior to this offering, which will proportionately reduce each partner’s common equity interest in the respective Och-Ziff Operating Group entity. The Ziffs will not hold any Class C Non-Equity Interests. As a result, upon completion of the Reorganization and prior to this offering, Mr. Och, the 17 other partners and the Ziffs will own in the aggregate 100% of the common equity in each Och-Ziff Operating Group entity.

One Class A operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group A Unit”. Och-Ziff Operating Group A Units will be exchangeable for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions, as described below. Upon completion of this offering, including the use of proceeds therefrom, Mr. Och, our 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 43.5%, 37.2% and 9.0%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full).

The Och-Ziff Operating Group A Units received by our existing owners in the Reorganization will be charged to compensation expense as they vest based on the issue-date fair value. Future distributions to all existing owners in respect of their Och-Ziff Operating Group A Units will be treated as equity distributions of the Och-Ziff Operating Group (other than Deferred Income Distributions and Investment Distributions).

Class B operating group units.    As described below under “—Offering Transactions—Public Offering of Class A Shares”, after completion of the Reorganization and in connection with the consummation of this offering, we will contribute the proceeds to us from this offering to the intermediate holding companies, which will in turn contribute such proceeds to the Och-Ziff Operating Group entities in exchange for Class B operating group units in each such entity. Each intermediate holding company will hold Class B operating group units in each Och-Ziff Operating Group entity that it controls. Och-Ziff Corp will hold 100% of the Class B operating group units in each of OZ Management and OZ Advisors I, and Och-Ziff Holding will hold 100% of the Class B operating group units in OZ Advisors II. The Class B operating group units will be economically identical to the Class A operating group units held by our existing owners, representing common equity interests in our business, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements.

One Class B operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group B Unit”. In this prospectus, we refer to the Och-Ziff Operating Group A Units and the Och-Ziff Operating Group B Units, which together represent all of the common equity interests in the Och-Ziff Operating Group entities, collectively as the “Operating Group Equity Units”. The Operating Group Equity Units will have no preference or priority over other securities of the

 

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Och-Ziff Operating Group and, upon liquidation, dissolution or winding up, will be entitled to any assets remaining after payment of all debts and liabilities of the Och-Ziff Operating Group.

Class C Non-Equity Interests.    As described above, our existing partners will also receive Class C Non-Equity Interests in the Reorganization. The Class C Non-Equity Interests will represent non-equity interests in our business which the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote), in conjunction with our compensation committee, may from time to time use to make discretionary income allocations to our partners, including new partners, and will not represent common equity interests in the Och-Ziff Operating Group entities. We currently do not intend to make any such distributions on the Class C Non-Equity Interests. However, in the future, the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee may determine that for competitive or other reasons, distributions on the Class C Non-Equity Interests are advisable and in keeping with our compensation philosophy of rewarding performance that increases long-term shareholder value and attracting and retaining the highest quality professionals. In such case, distributions may be made to one or more holders of the Class C Non-Equity Interests as and to the extent determined appropriate by the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee and need not be made to all such holders on a pro rata basis or otherwise. No holder of Class C Non-Equity Interests will have any right to receive distributions on such interests. Any discretionary income allocations made pursuant to the Class C Non-Equity Interests would be treated as an expense for financial reporting purposes and would therefore reduce amounts available for distribution to us (and, in turn, our Class A shareholders), our partners and the Ziffs as owners of the Operating Group Equity Units after this offering.

Deconsolidation of the Och-Ziff Funds

In accordance with GAAP, most of our funds have historically been consolidated into our combined financial statements notwithstanding the fact that we have had only a minority interest in these funds. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis rather than reflecting only the value of our investments in such funds. As of December 31, 2006, the assets of the Och-Ziff funds consolidated on our balance sheet were $36.0 billion, while the net asset value of our investments in these consolidated funds was approximately $414.5 million. In addition, all management fees and incentive income earned by us from these funds were eliminated as a result of the consolidation of these funds and are reflected on our historical financial statements as an increase in our allocated share of the net income from these funds.

In December 2006, we granted substantive “kick-out” rights to the unaffiliated limited partners in most of our domestic funds enabling them to remove the respective general partner with a simple majority vote. These rights became effective on January 1, 2007. In June 2007, we granted similar rights to the unaffiliated shareholders of each of our offshore funds, enabling them to replace the respective investment manager by replacing one or more members of the respective boards of directors. These rights became effective on June 30, 2007. As a result, most of our domestic funds and all of our offshore funds have been deconsolidated as of the relevant effective dates of such rights. Funds with only affiliated investors will continue to be consolidated for financial reporting periods as of and after June 30, 2007. These funds comprised approximately $87.7 million or 0.3% of our assets under management as of June 30, 2007.

As a result of the deconsolidation, the fund investors’ interest in these funds, reflected as “non-controlling interests in consolidated subsidiaries” on our historical balance sheets and as “non-controlling interests in income of consolidated subsidiaries” on our historical income statements, will be

 

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eliminated and all management fees and incentive income earned by us from those funds will be reflected in our combined statement of income.

We granted these rights to our fund investors for no consideration in order to enable us to deconsolidate these funds. We believe the deconsolidation allows us to present financial information in a manner that more clearly reflects our business, financial condition and results of operations.

Furthermore, because management makes operating decisions and allocates resources based on financial information that, among other things, shows our results of operations after giving effect to the deconsolidation of our funds, our financial reporting is now presented in a manner that is consistent with how our management evaluates our business and the related risks thus providing shareholders with a better method of understanding our business.

The deconsolidation of these funds has a material effect on certain components of our combined financial statements, but does not have any effect on our net income or equity. The following describes the major effects on our combined financial statements:

 

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We will not record on our balance sheets or statements of income the gross assets, liabilities, revenues, expenses and other income and the related non-controlling interests of our fund investors in our deconsolidated funds. For example, if we had deconsolidated the offshore funds for the six months ended June 30, 2007, the following line items would have decreased by the following percentages as compared to our reported results for such period: total revenues (61)%; total expenses (58)%; other income (90)%; and non-controlling interests in income of consolidated subsidiaries (100)%.

 

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We will reflect our equity in the income of our deconsolidated funds on our statements of income using the equity method of accounting, rather than eliminating the investments in consolidation.

 

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We will include the management fees and incentive income earned from our deconsolidated funds on our statements of income rather than eliminating the revenue in consolidation.

 

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We will not reflect cash flows of our deconsolidated funds on our statements of cash flows.

 

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We will remove disclosures related to amounts no longer reflected on our combined financial statements, including, but not limited to:

 

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the accounting policies of our deconsolidated funds, and

 

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detailed disclosure of the investments activities of the Och-Ziff funds.

 

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We will continue to provide information regarding our management agreements with, and fees and income earned from, our deconsolidated funds.

 

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We will evaluate on an ongoing basis whether we will need to provide separate financial statements for investments in majority-owned unconsolidated subsidiaries and investments accounted for using the equity method of accounting pursuant to Regulation S-X Rule 3-09.

Please refer to “Unaudited Pro Forma Financial Information” for a more detailed description of the deconsolidation of our funds and the effects on our financial statements as a result thereof.

Offering Transactions

 

Public Offering of Class A Shares

Och-Ziff Capital Management Group LLC will issue 36,000,000 Class A shares in this offering (or 41,400,000 Class A shares if the underwriters exercise their option to purchase additional Class A

 

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shares in full). The Class A shares will entitle the holders to one vote per share. Och-Ziff will then contribute the proceeds from this offering less underwriting discounts and commissions to its intermediate holding companies, based on the relative value of those entities. The intermediate holding companies may enter into credit arrangements with one another with respect to a portion of such proceeds, depending upon the relative need and other business considerations. Any such credit arrangements will have no effect on our overall organizational structure, including the number of Operating Group Equity Units issued to our existing owners and our intermediate holding companies. The intermediate holding companies will then contribute all of the proceeds received from us to the Och-Ziff Operating Group in exchange for newly issued Och-Ziff Operating Group B Units such that the intermediate holding companies will hold that number of Och-Ziff Operating Group B Units which will be equal in number to the number of Class A shares issued in this offering. As a result, our existing owners’ percentage ownership of the common equity interests in the Och-Ziff Operating Group will be correspondingly reduced. Och-Ziff Operating Group B Units held by the intermediate holding companies will be economically identical in all respects to Och-Ziff Operating Group A Units that our existing owners will hold, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements. The Och-Ziff Operating Group will then use all of such offering proceeds to purchase an aggregate of 36,000,000 Och-Ziff Operating Group A Units from our existing owners for an aggregate purchase price of $1.1 billion, and such units will then be cancelled. Upon such purchase, an equal number of Class B shares held by our existing partners will correspondingly be cancelled, as described below. We will pay all of the expenses related to this offering from cash on hand, and we will not retain any of the proceeds from this offering. The number of Och-Ziff Operating Group A Units purchased from each of Mr. Och, our 17 other partners and the Ziffs (and, therefore, the corresponding number of Class B shares to be cancelled) will equal such existing owner’s pro rata portion of the aggregate amount outstanding immediately prior to such purchase.

In the event the underwriters exercise their option to purchase additional Class A shares, the proceeds will be used as described above. First, Och-Ziff will contribute the proceeds to it to the intermediate holding companies based on the relative value of those entities, and the intermediate holding companies will then contribute all of such proceeds to the Och-Ziff Operating Group in exchange for a number of newly issued Och-Ziff Operating Group B Units equal to the number of Class A shares issued pursuant to the underwriters’ option. The Och-Ziff Operating Group will then use all of the offering proceeds from the exercise of such option, assuming such option is exercised in full, to purchase 5,400,000 Och-Ziff Operating Group A Units from our existing owners on a pro rata basis, for an aggregate purchase price equal to $160.7 million, and such units, as well as 4,860,000 Class B shares held by our existing partners, will be cancelled.

Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or board of directors of such funds, as applicable.

Reclassification of Och-Ziff Interests to Class B Shares

All of the currently outstanding limited liability company interests of Och-Ziff Capital Management Group LLC are held by our existing partners. These interests will be reclassified as our Class B shares prior to the completion of this offering and will be adjusted so that our partners will hold a number of Class B shares upon completion of the Reorganization equal to the number of Och-Ziff Operating Group A Units then held by each such partner. Upon the purchase of Och-Ziff Operating Group A Units from our existing partners with the proceeds from this offering as described above, a corresponding number of Class B shares will be cancelled so that, upon completion of this offering, our existing partners will hold 327,600,000 Class B shares (or 322,740,000 Class B shares if the underwriters

 

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exercise their option to purchase additional Class A shares in full), which will equal the number of Och-Ziff Operating Group A Units then held by them. The Ziffs will not hold any of our Class B shares. The Class B shares will have no economic rights but will entitle the holders to one vote per share. The Class B shares are not expected to be registered for public sale or listed on any securities exchange and will only be transferable by a holder in connection with a transfer of such holder’s Och-Ziff Operating Group A Units. The Class B shares are intended solely to provide our existing partners with a voting interest in Och-Ziff Capital Management Group LLC equal to their economic interest in our business. As a result, the number of Class B shares held by an existing partner at any time will equal the number of Och-Ziff Operating Group A Units then held by such partner. Holders of Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Upon completion of this offering, our partners will hold Class B shares representing 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full). Pursuant to our shareholders’ agreement, our existing partners will grant an irrevocable proxy to the members of the Class B Shareholder Committee (which initially consists solely of Mr. Och) to vote all of their Class B shares as such members may determine in their sole discretion, which proxy will terminate upon the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company. As a result, Mr. Och initially will control the outcome of any matter submitted to a vote of our shareholders.

IPO Date Awards

At the time of this offering, we intend to grant to all of our managing directors and other employees (which do not include our partners) an aggregate of 14,761,905 Class A restricted share units under our 2007 equity incentive plan. These units, which may be settled in Class A shares or cash, at the election of a majority of our Board of Directors, will vest, subject to continued employment, in equal installments on each anniversary date of this offering for four years, beginning on the first anniversary date of this offering, and will accrue distributions (to be paid when the underlying Class A restricted share units vest). We will recognize compensation expense over the vesting period. An employee will forfeit all unvested units if an employee leaves or is terminated for any reason other than as a result of death or disability, or in the event of a termination without cause within the one year period following a change in control of us. Upon an employee’s termination of employment as a result of death or disability, all restricted share units will vest. Upon an employee’s termination without cause within the one-year period following a change in control of us, all restricted share units will vest and be settled in Class A shares or cash on the first business day following the date such restricted share units would have otherwise become vested. To the extent that Class A restricted share units are settled in Class A shares, we expect to issue registered Class A shares in respect of such units upon vesting. As a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144, without regard to holding period limitations.

Exchange and Registration Rights

We will enter into an exchange agreement with our existing owners. Pursuant to the exchange agreement, our existing owners will be entitled to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions. Such exchanges generally may be made as and when approved by the Chairman of the exchange committee (or the full committee acting by majority vote if there is no Chairman) for the five-year period following this offering and quarterly thereafter. The exchange committee will consist of the members of the Partner Management

 

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Committee, with Mr. Och initially acting as Chairman. Our Board of Directors may cause the Och-Ziff Operating Group entities to determine to pay a cash equivalent in lieu of Class A shares upon any such exchange. Upon any such exchange, the corresponding Class B shares of Och-Ziff Capital Management Group LLC held by the exchanging owner will be cancelled, and such exchanging owner may be entitled to certain payments under the tax receivable agreement described below. Upon any such exchange for Class A shares, the number of Och-Ziff Operating Group B Units that we hold will correspondingly increase. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Issuance of Equity Securities by Och-Ziff.” If and when an existing owner exchanges an Och-Ziff Operating Group A Unit for a Class A share and the corresponding Class B share is cancelled, then-existing Class A shareholders will be diluted with respect to their ownership of the Class A shares. However, the relative equity ownership positions of the exchanging existing owner and of the other equity owners of our business (whether held at Och-Ziff Capital Management Group LLC or at Och-Ziff Operating Group) will not be altered. In addition, other than with respect to an exchange by the Ziffs, there will be no effect on the number of voting shares outstanding, as a corresponding Class B share is cancelled for each Class A share issued upon such exchange. The Och-Ziff Operating Group B Units held by our intermediate holding companies will not be exchangeable for our Class A shares. We will also be required to file a shelf registration statement on or prior to the fifth anniversary of this offering covering the resale of all Class A shares held by our existing owners or issuable upon exchange of their Och-Ziff Operating Group A Units. See “Certain Relationships and Related Party Transactions—Exchange Agreement” for additional information regarding our existing owners’ exchange rights.

In addition, we intend to grant to our existing partners certain rights to cause us to register for resale the Class A shares received by them as a result of any such exchange (or otherwise) and we intend to grant our existing partners and the Ziffs rights to include such Class A shares in future offerings by us. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Tax Receivable Agreement

The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. This increase in tax basis will increase, for tax purposes, our depreciation and amortization expense and will therefore reduce the amount of tax that Och-Ziff Corp and any other corporate taxpayer intermediate holding companies that acquire Och-Ziff Operating Group A Units in connection with an exchange, if any, would otherwise have been required to pay in the future. As a result, such intermediate holding companies will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of this increase in tax basis. No payments will be made if a partner elects to exchange his Och-Ziff Operating Group A Units in a tax-free transaction.

In connection with the purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, we have assumed, for financial accounting purposes, no material change in the relevant tax law and that we will earn sufficient taxable income to realize the full tax benefit of increased amortization of our assets attributable to tax basis increases resulting from such purchase. On that basis, the cash savings to our intermediate holding companies from the initial purchase would aggregate approximately $             million over the next 15 years (or $             million over the next 15 years if the underwriters exercise their option to purchase

 

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additional Class A shares in full). These amounts reflect the fact that payments under the tax receivable agreement may result in further tax savings, and thus may give rise to additional payment obligations thereunder. The obligation to pay 85% of the amount of such cash savings to our existing owners is an obligation of the corporate taxpayer intermediate holding companies and not of the Och-Ziff Operating Group entities. Future cash savings and related payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary based upon a number of factors (including the timing of future exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income), depending upon the outcome of these factors, payments that we may be obligated to make to our existing owners as a result of the purchase of Och-Ziff Operating Group A Units in connection with this offering, as well as the payments in respect of subsequent exchanges, could be substantial. In light of the numerous factors affecting our obligation to make such payments, however, the timing and amounts of any such actual payments are not reasonably ascertainable at this time.

See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a more detailed description of our tax receivable agreement.

Operating Group Limited Partnership Agreements and Shareholders’ Agreement

Vesting; Forfeiture; Transfer and Other Restrictions Applicable to Our Partners.    Upon completion of the Reorganization, Mr. Och and the 17 other partners will hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to different vesting, forfeiture, transfer, exchange and other restrictions and minimum retained ownership requirements as described below. Pursuant to the operating group limited partnership agreements, the Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and thereafter will be cancelled. All other Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization and will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by Mr. Och and our 17 other partners upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest, subject to our partners’ continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary date of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners only if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is terminated by the partnership for cause or if the Partner Performance Committee terminates such partner for any reason as described further under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture.” We will recognize compensation expense to the extent of the amount of Och-Ziff Operating Group A Units that vest in each year over the vesting period. In addition, the operating group limited partnership agreements will also restrict transfers by any of our partners of their interests in our business, permitting transfers of their vested Och-Ziff Operating Group A Units, including in exchange for Class A shares pursuant to the exchange agreement, generally only as permitted by the Chairman of the Partner Management Committee (or, with respect to the Chairman or in the event there is no Chairman by the full Partner Management Committee acting by majority vote); provided that after the fifth anniversary of this offering, there will be no restrictions on exchanges by any of our partners of their Och-Ziff Operating Group A Units for our Class A shares or the transfer of any such Class A

 

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shares received in any such exchange. In addition, on or prior to such fifth anniversary, we will be required to file a shelf registration statement covering the resale of all Class A shares held by our existing owners or issuable upon exchange. Any transfers will be further subject to a requirement that each partner (including Mr. Och) while he is associated with us and during the two-year period immediately following the date of termination of his association with us for any reason, maintains a minimum ownership of 25% of the vested Och-Ziff Operating Group A Units received by him, without reduction for dispositions. The foregoing vesting and minimum retained ownership requirements may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee with respect to the Chairman or in the event there is no Chairman) at any time. Any waiver of the vesting provisions would result in an accelerated recognition of compensation expense associated with such interests. Each of Mr. Och and our 17 other partners will also be subject to certain restrictions with respect to competing with us, soliciting our employees or fund investors and disclosing confidential information about our business. In the event that a partner breaches the restrictions with respect to competing with us, all of such partner’s vested and unvested Och-Ziff Operating Group Units will be reallocated to the other partners, effective as of the date of any such breach. Our managing directors will be subject to similar restrictions.

Restrictions on Transfer of the Ziffs’ Interest in Our Business.    Upon completion of the Reorganization, the Ziffs will also hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to vesting (without regard to service or performance conditions) and transfer restrictions as described below but will not be subject to forfeiture or minimum retained ownership requirements. The operating group limited partnership agreements will provide that the Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and thereafter will be cancelled. All other Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by the Ziffs upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The Ziffs will be restricted from transferring any Och-Ziff Operating Group A Units prior to vesting. The Ziffs will not have any demand registration rights with respect to any Class A shares acquired by them upon exchange of their Och-Ziff Operating Group A Units but will have “piggyback” registration rights that are the same as those granted to our existing partners and will be entitled to include their Class A shares in the shelf registration statement that we will be required to file on or prior to the fifth anniversary of this offering. In addition, following the first anniversary of this offering, the Ziffs will generally be entitled, in any given fiscal quarter, to exchange their vested Och-Ziff Operating Group A Units for Class A shares in an amount equal to up to the lesser of (i) 3.3% of the total issued and outstanding Class A shares at the time of such exchange and (ii) 5% of the Class A shares that would have been held by them had they exchanged all of their Och-Ziff Operating Group A Units into Class A shares immediately prior to the completion of this offering. The Ziffs will generally be entitled to freely sell any such Class A shares received upon any such exchange, subject to applicable law. The Ziffs will also be permitted to contribute their vested Och-Ziff Operating Group A Units to charities, subject to the approval of the Chairman of the Partner Management Committee. The foregoing vesting requirements and transfer restrictions may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee in the event there is no Chairman) at any time. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

 

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Certain Committees

Partner Management Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Management Committee”. The Partner Management Committee will be a committee comprised of seven partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga, Kelly and Brown, with Mr. Och serving as Chairman. The Partner Management Committee shall act by majority approval. Each member of the Partner Management Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Management Committee shall act by majority vote to either (1) replace Mr. Och with a partner to serve as Chairman, until such partner’s withdrawal, death, disability or removal by the other members of the Partner Management Committee or (2) reduce the size of the Partner Management Committee to the remaining members (in which event, there shall be no Chairman, and the remaining members will act by majority vote). Upon the withdrawal, death, disability or removal of any of the members of the Partner Management Committee other than the Chairman, the remaining members of the Partner Management Committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided in clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new member’s withdrawal, death, disability or removal. The Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to make determinations with respect to distributions on our Class C Non-Equity Interests, subject to the authority of our compensation committee as described under “Management—Committees of the Board of Directors—Compensation Committee”. We do not currently intend to make any such distributions. In addition, the Chairman (or with respect to the Chairman or in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to approve transfers of Och-Ziff Operating Group A Units in accordance with the operating group limited partnership agreement. The full Partner Management Committee acting by majority vote will also have authority to reconstitute the Class B Shareholder Committee as provided under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights”.

Partner Performance Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Performance Committee”. The Partner Performance Committee will be a committee comprised of six partners acting by majority vote, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga and Kelly, with Mr. Och serving as Chairman. The vote of Mr. Och will break any deadlock. Each member of the Partner Performance Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the other members of the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Performance Committee shall act by majority vote to replace Mr. Och with a partner (who may or may not serve as Chairman) until such partner’s withdrawal, death, disability or removal by the other members of the Partner Performance Committee. Upon the withdrawal, death, disability or removal of any of the members of the Partner Performance Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided above, the Partner Performance Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Performance Committee will have authority to terminate any partner, other than Mr. Och, for any reason as provided under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture.” At all times in which there is a Chairman of the Partner Performance Committee, any such termination shall be made only upon the recommendation of the Chairman.

Class B Shareholder Committee.    The shareholders’ agreement will provide for the establishment of the “Class B Shareholder Committee”. The Class B Shareholder Committee initially

 

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will be a committee of one, consisting solely of Daniel Och until his withdrawal, death or disability. Upon Mr. Och’s withdrawal, death or disability, the Partner Management Committee shall act by majority vote to reconstitute the Class B Shareholder Committee either by (1) appointing a new partner to serve as the sole member of the Class B shareholder committee until such partner’s withdrawal, death, disability or removal by the Partner Management Committee, or (2) appointing the members of the Partner Management Committee as the members of the Class B Shareholder Committee (in which event such members would act by majority vote in their capacity as the Class B shareholder committee). Upon a reconstitution as provided by clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. Upon a reconstitution as provided by clause (2) above, the Class B Shareholder Committee shall thereafter be comprised of the members who from time to time constitute the Partner Management Committee. The Class B Shareholder Committee will have certain voting, nomination, consent and approval rights as described below and under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

Voting, Nomination, Consent and Approval Rights of Class B Shareholder Committee

Our Class B Shareholder Committee will have certain voting, nomination, consent and approval rights pursuant to the shareholders’ agreement. These rights include:

 

  Ÿ  

The right to vote all of the outstanding Class B shares, pursuant to irrevocable voting proxies granted by our existing partners, until the later of (i) Mr. Och’s withdrawal, death or disability (ii) or such time as our partners hold less than 40% of the total combined voting power of our company. Upon completion of this offering, the Class B shares will represent 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

The right initially to designate five of the seven nominees for election to our Board of Directors, with such number of nominees decreasing as the voting interest held by our partners decreases;

 

  Ÿ  

The right to consent to or approve certain actions (so long as our existing partners continue to own more than 40% of the total combined voting power of our company), including:

 

  ¡  

incurrence of indebtedness, issuance of securities or making of investments, in each case subject to monetary thresholds;

 

  ¡  

entry into a new line of business;

 

  ¡  

adoption of a shareholder rights plan;

 

  ¡  

appointment or termination of a chief executive officer; or

 

  ¡  

termination of any executive officer or partner of any of our subsidiaries without cause.

Please refer to “Certain Relationships and Related Party Transactions—Shareholders’ Agreement” for additional information.

In addition, our operating agreement requires that we obtain the consent of the Class B Shareholder Committee for specified actions primarily relating to our structure so long as any Class B shares remain outstanding. Our structure is intended to ensure that we maintain exchangeability of Class A shares and Och-Ziff Operating Group A Units on a one-for-one basis. Accordingly, the Class B Shareholder Committee will have the right to approve or consent to actions that could result in an economic disparity, such as the issuance of certain securities, making certain capital contributions,

 

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owning or disposing of certain assets, incurring certain indebtedness and conducting business outside of the Och-Ziff Operating Group. Please refer to “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities” for additional information.

Effects of Transactions

As a result of our post-offering structure, we will be a holding company with publicly traded Class A shares, but our existing owners will retain their economic interests in us in the form of direct interests in the Och-Ziff Operating Group. All of the businesses operated by the Och-Ziff Operating Group prior to the completion of this offering and our real estate business, and all of the interests therein held by us or our existing owners prior to the completion of this offering, will be operated or held, as the case may be, by the Och-Ziff Operating Group following this offering.

Assuming the issuance of 36,000,000 Class A shares in this offering (or 41,400,000 Class A shares if the underwriters exercise their option to purchase additional Class A shares in full), immediately following the Transactions:

 

  Ÿ  

Och-Ziff Capital Management Group LLC, through its wholly owned subsidiaries, will hold 36,000,000 Och-Ziff Operating Group B Units (or 41,400,000 Och-Ziff Operating Group B Units if the underwriters exercise their option to purchase additional Class A shares in full), representing 9.0% of the equity interest in our business (or 10.4% if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Och-Ziff Capital Management Group LLC’s wholly owned subsidiaries will be the sole general partner of each Och-Ziff Operating Group entity and will operate and generally control all of the business and affairs of the Och-Ziff Operating Group;

 

  Ÿ  

Investors in this offering will own 36,000,000 Class A shares, representing indirectly 9.0% of the equity and 9.9% of the total combined voting power of our company (or 41,400,000 Class A shares, representing indirectly 10.4% of the equity and 11.4% of the total combined voting power in our company if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Mr. Och will own 176,612,800 of both Och-Ziff Operating Group A Units and Class B shares, representing 44.2% and 48.6% of the equity and voting power, respectively, in our business (or 173,992,720 of both Och-Ziff Operating Group A Units and Class B shares of Och-Ziff, representing 43.5% and 47.8% of the equity and voting power, respectively, in our business if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Our 17 other existing partners will own 150,987,200 of both Och-Ziff Operating Group A Units and Class B shares, representing 37.7% and 41.5% of the equity and voting power, respectively, in our business (or 148,747,280 of both Och-Ziff Operating Group A Units and Class B shares of Och-Ziff, representing 37.2% and 40.8% of the equity and voting power, respectively, in our business if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Mr. Och and our 17 other existing partners will own all of the outstanding Class C Non-Equity Interests pursuant to which the Partner Management Committee in conjunction with our compensation committee may from time to time determine to make discretionary income allocations to our existing or future partners in accordance with our compensation philosophy as described under “Management—Compensation Discussion and Analysis”, although we currently do not intend to make any such distributions;

 

  Ÿ  

The Ziffs will own 36,400,000 Och-Ziff Operating Group A Units, representing 9.1% of the equity in our business (or 35,860,000 Och-Ziff Operating Group A Units representing 9.0% of

 

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the equity in our business if the underwriters exercise their option to purchase additional Class A shares in full), and no Class B shares of Och-Ziff;

 

  Ÿ  

Through the irrevocable proxy granted by our existing partners to the members of the Class B Shareholder Committee, which shall initially be comprised solely of Daniel Och, such committee will control the vote of the Class B shares and, therefore, the outcome of any matter submitted to a vote of our shareholders;

 

  Ÿ  

Through the operating group limited partnership agreements, Mr. Och and our 17 other partners’ interests in our business will be subject to the respective forfeiture, vesting and minimum retained ownership requirements and transfer and exchange restrictions over the respective time periods set forth therein;

 

  Ÿ  

Through the operating group limited partnership agreements, the Ziffs’ interest in our business will be subject to vesting (without regard to service or performance conditions) and transfer restrictions over the respective time periods set forth therein but will not be subject to forfeiture or minimum retained ownership requirements; and

 

  Ÿ  

Our existing owners will be entitled, subject to vesting, minimum retained ownership requirements and transfer restrictions, to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), which will correspondingly decrease an exchanging owner’s ownership of our Class B shares and may entitle them to rights to receive payments under the tax receivable agreement.

 

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The diagram below depicts our organizational structure immediately following the Transactions:(1)

LOGO

 


(1)

This diagram does not give effect to 14,761,905 Class A restricted share units to be granted under our 2007 equity incentive plan to all of our managing directors and our other employees in connection with this offering or the issuance of any Class A shares upon exercise of the underwriters’ option to purchase additional Class A shares. Assuming the underwriters exercise in

 

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full their option to purchase additional Class A shares, and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering (assuming such units are settled in Class A shares), (i) our existing owners will hold 86.5% of the equity in our business and 85.2% of the total combined voting power of Och-Ziff Capital Management Group LLC and (ii) investors in this offering will hold 10.0% of the equity interests in our business and 10.9% of the total combined voting power of our company. Our real estate funds, OZ 2004 Investment Partners, L.L.C. and OZ 2004 GP, L.L.C., which are reflected as part of the Och-Ziff Operating Group in our historical financial statements, are not reflected in this diagram as these entities will become subsidiaries of the Och-Ziff Operating Group in connection with the Transactions.

(2) Our existing owners include Mr. Och, the 17 other existing partners and the Ziffs. Upon consummation of this offering, Mr. Och, the 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 42.0%, 35.9% and 8.6%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will hold all of the Class C Non-Equity Interests, which may be used for discretionary income allocations in the future, although we currently do not intend to make any distributions on such interests. The Ziffs will not hold any Class C Non-Equity Interests.
(3) Upon consummation of this offering, Mr. Och will hold Class B shares representing 48.6% of the voting power of our company and the 17 other partners will hold Class B shares representing 41.5% of the voting power of our company (or 45.9% and 39.3%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will grant initially to Mr. Och, as the sole member of the Class B Shareholder Committee, an irrevocable proxy to vote all of their Class B shares. The Ziffs will not hold any of our Class B shares.
(4) Och-Ziff Operating Group A Units and Och-Ziff Operating Group B Units together represent all of the equity interests in the Och-Ziff Operating Group.
(5) Held solely by existing partners for potential future discretionary income payments.

Tax Consequences and Post-Offering Distributions

Skadden, Arps, Slate, Meagher & Flom LLP has acted as our counsel in connection with this offering. Skadden, Arps, Slate, Meagher & Flom LLP is of the opinion that at the closing of this offering we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or publicly traded partnership (within the meaning of Section 7704 of the Code) subject to tax as a corporation. As a result of our being treated as a partnership for U.S. federal income tax purposes, holders of Class A shares will be required to report their allocable share of our income for U.S. federal income tax purposes, regardless of whether any cash or other distributions are paid to them. See “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status” for a more complete description. Income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

Och-Ziff Corp, our wholly owned subsidiary and the general partner of OZ Management and OZ Advisors I, will incur U.S. federal, state, local and foreign income taxes on its proportionate share of any net taxable income of such entities. Och-Ziff Holding, our wholly owned subsidiary and the general partner of OZ Advisors II, will be, for U.S. federal income tax purposes, an entity disregarded as an entity separate from its owner, and not as an association taxable as a corporation. Accordingly, income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

 

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The Och-Ziff Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the direct holders of Operating Group Equity Units that are not taxed on a flow-through basis, including Och-Ziff Corp and our existing owners, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Och-Ziff Operating Group. As a result of Och-Ziff Corp being taxed as a corporation, we anticipate that we will have significantly higher tax expenses after the Reorganization and that our effective tax rate will increase substantially. Net profits and net losses of the Och-Ziff Operating Group will generally be allocated to holders of Operating Group Equity Units pro rata in accordance with the percentages of their respective interests in the equity of such entities. Because we will indirectly own 9.0% of the Operating Group Equity Units (or 10.4% if the underwriters exercise in full their option to purchase additional Class A shares), we will indirectly be allocated 9.0% of such net profits and net losses of the Och-Ziff Operating Group (or 10.4% if the underwriters exercise in full their option to purchase additional Class A shares). The remaining such net profits and net losses will be allocated to the other limited partners of the Och-Ziff Operating Group, which initially will consist of our existing owners.

After this offering, we intend to cause the Och-Ziff Operating Group to make distributions on a pro rata basis to holders of Operating Group Equity Units (including our existing owners and our intermediate holding companies) in order to fund any distributions we may declare on the Class A shares. However, any such distributions will be at the sole discretion of our Board of Directors. If the Och-Ziff Operating Group makes such distributions, the holders of Operating Group Equity Units will be entitled to receive distributions pro rata, based on their partnership interests. In the event that a distribution is made on the Operating Group Equity Units solely to fund a distribution on the Class A shares, we would expect that the distribution per Class A share would equal the distribution per Och-Ziff Operating Group Unit. As a result, our existing owners would receive a distribution per Och-Ziff Operating Group A Unit equal to the per Class A share distribution. No similar distributions will be made on the corresponding Class B shares of Och-Ziff held by our partners. In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Operating Group Equity Units in an amount at least equal to the presumed maximum tax liabilities arising from the ownership of such units, if any. Because the purpose of such tax distributions is to enable Och-Ziff Corp and the existing owners to satisfy their respective tax liabilities, no such distribution will necessarily be required to be distributed by our intermediate holding companies to us, and we may determine not to pay cash distributions on the Class A shares. The declaration and payment of distributions on the Class A shares will be at the sole discretion of our Board of Directors. As a result, there may be instances in which our existing owners receive a distribution on their Och-Ziff Operating Group A Units but holders of Class A shares receive no distribution. A holder of Class A shares will be required to report its share of our taxable income even if the Board of Directors does not pay distributions. See “Risk Factors—Risk Related to Taxation—You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash distributions from us”. Distributions on Operating Group Equity Units will be made on all such units, whether or not vested.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation were to be enacted and to apply to us, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares. See “Risk Factors—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules”. It is unclear whether any

 

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such legislation will be enacted and, if enacted, how the legislation would apply to us. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch actions occur which would materially affect our ability to move ahead with the offering. In addition, proposed changes to the U.S. federal tax laws and interpretations thereof could change the character or treatment of portions of our income, including, for instance, treating carried interest income as entirely ordinary income. “Carried interest” is a term often used in the marketplace as a general reference to describe a general partner’s right to receive its incentive income in the form of a profit allocation eligible for capital gains tax treatment (to the extent that the carried interest consists of capital gains).

Distributions and Other Payments to our Existing Owners

In 2006 and from January 1, 2007 to the date of this prospectus, excluding the special distributions described in the bullet points below, our named executive officers, certain of whom are also directors, received aggregate cash distributions of $             billion and $             billion, respectively, while our other existing owners received an aggregate of $             billion and $             billion, respectively.

The following is a summary of the Special Distributions that have been or will be made to our existing owners in connection with this offering and the other transactions described in this prospectus.

 

  Ÿ  

Special Pre-Offering Distributions

 

  Ÿ  

Term Loan Distributions. On July 2, 2007, we entered into a new $750 million term loan, which we will amend prior to the closing of this offering. We intend to use the full amount of the proceeds from the term loan to make pro rata distributions to our existing owners prior to completion of this offering. Our named executive officers, certain of whom are also directors, will receive Term Loan Distributions of $             million in the aggregate, while our other existing owners will receive Term Loan Distributions of $             million in the aggregate.

 

  Ÿ  

Distribution of Investments in Och-Ziff Funds. We have made investments in our funds on behalf of our existing partners that we expect to distribute to them prior to the completion of this offering. These investments, which were approximately $300 million at June 30, 2007, will be distributed in the form of limited partnership interests in the respective funds.

 

  Ÿ  

2007 Management Fee Distribution. Prior to completion of this offering, we intend to declare a distribution to our existing owners equal to management fees earned from January 1, 2007 through the date of this offering reduced by expenses and prior management fee distributions for such period. Such distributions are not expected to exceed $             million in the aggregate and will not include any amounts in respect of incentive income that has been or may be earned for 2007.

 

  Ÿ  

Offering Distributions

 

  Ÿ  

In connection with our purchase of Och-Ziff Operating Group A Units with the proceeds of this offering, our named executive officers are expected to receive approximately $779 million in the aggregate (or $896 million if the underwriters exercise their option to purchase additional Class A shares in full), while our other existing owners are expected to receive approximately $293 million in the aggregate (or $337 million, if the underwriters exercise their option to purchase additional Class A shares in full). All of the net after-tax proceeds to be received by our partners in connection with this offering (and 50% of the net after-tax proceeds received by the Ziffs) will be reinvested in our funds.

 

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  Ÿ  

Special Post-Offering Distributions and Payments

 

  Ÿ  

Deferred Income Distributions. We intend that the Deferred Balances, which were approximately $1.5 billion as of June 30, 2007, will be paid in the form of cash or other property to OZ Management and, in turn, distributed to our existing owners over a three-year period commencing in January 2008. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Offering Liquidity” for additional information regarding our deferral arrangements and the termination thereof.

 

  Ÿ  

Tax Receivable Payments. Commencing in 2008, our existing owners will be eligible to receive payments under the tax receivable agreement in connection with our purchase of their Och-Ziff Operating Group A Units in connection with this offering and pursuant to subsequent exchanges. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Offering Liquidity” for additional information regarding the timing and amount of such distributions and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

 

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USE OF PROCEEDS

We estimate that we will receive proceeds of approximately $1.1 billion from the sale of our Class A shares in this offering at an assumed initial public offering price of $31.50 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions payable by us in this offering. If the underwriters exercise their option to purchase additional Class A shares in full, then we estimate that the proceeds to us will be approximately $1.2 billion.

We intend to contribute all of such proceeds to us from this offering, including any proceeds from the exercise of the underwriters’ option to purchase additional Class A shares, to the Och-Ziff Operating Group, which in turn will immediately apply all of those proceeds to purchase 36,000,000 Och-Ziff Operating Group A Units (or 41,400,000 Och-Ziff Operating Group A Units if the underwriters exercise their option to purchase additional Class A shares in full) from our existing owners, including members of our senior management, at a price per unit equal to the public offering price of a Class A share sold in this offering, net of underwriting discounts and commissions. Accordingly, we will not retain any of the proceeds from this offering. In addition, we will pay all of the expenses related to the offering, estimated to be approximately $20.4 million, from cash on hand.

Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or Board of Directors of such funds, as applicable. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

 

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CASH DISTRIBUTION POLICY

Historically, we have had a policy of distributing substantially all of our economic income to our existing partners. Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of our annual Economic Income (as described in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Segment Analysis”) in excess of amounts determined by us to be necessary or appropriate to provide for the conduct of our business, to make discretionary cash income payments to our partners (if any), to make appropriate investments in our business and our funds, to comply with applicable law, to make principal payments on any of our debt instruments or agreements, including our new term loan, and to provide for future distributions to our Class A shareholders for any one or more of the ensuing quarters. We expect that our first quarterly distribution will be paid in the first quarter of 2008 in respect of the prior quarter. Incentive income has a significant impact on our Economic Income but is not determinable until completion of our fiscal year and is therefore not reflected in our interim financial results, except for incentive income actually earned as a result of investor redemptions during the period. Though our Board of Directors will have broad discretion in determining our future distribution policy, we currently anticipate that quarterly distributions in respect of the first three fiscal quarters of any given calendar year will be based on our actual performance, but will not reflect any assumption as to incentive income that may or may not be recorded at year end. Accordingly, if our performance for a given year enables us to earn incentive income, the distributions made in respect of our first three fiscal quarters will be smaller than the distribution we make in respect of our fourth fiscal quarter, which will be paid in the first fiscal quarter of the following year. We would expect that these differences could be substantial in years in which our funds achieve favorable investment performance.

The declaration and payment of any future distributions will be at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Our ability to make such distributions may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions applicable to us and our subsidiaries. For example, as a Delaware limited liability company we are not permitted to make a distribution if and to the extent that after giving effect to such distribution, our liabilities would exceed the fair value of our assets. In addition, we will not be permitted to make distributions if we are in default under our new term loan. The term loan will also limit the amount of distributions we can pay in a 12-month period to our “free cash flow”, as such term is defined in the term loan. For more information regarding what constitutes a default and how we calculate “free cash flow” under the new term loan, see “Description of New Term Loan”. In addition, our Board of Directors will take into account such other factors as it may deem relevant, including general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; our financial condition and operating results; working capital requirements and anticipated cash needs; and contractual obligations, including payment obligations pursuant to the tax receivable agreement. Payments that Och-Ziff Corp makes under the tax receivable agreement and, as described below, distributions to holders of Och-Ziff Operating Group Units in respect of their tax liabilities arising from their direct ownership of Och-Ziff Operating Group Units will reduce amounts that would otherwise be available for distribution by us on Class A shares.

We will be a holding company and, as such, our ability to pay distributions on our Class A shares will be subject to the ability of our subsidiaries to provide cash to us, which may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions as described above. We will fund any such distribution by causing our subsidiaries to make corresponding distributions. More specifically, first, we will cause the Och-Ziff Operating Group to make a distribution to all of its unitholders (consisting of our existing owners and our intermediate holding companies) holding Operating Group Equity Units, whether or not vested, on a pro rata basis and, second, we will cause our intermediate holding companies to distribute the proceeds of such distributions to us in an amount sufficient to pay aggregate distributions declared by our Board of Directors on our Class A shares. In

 

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the event that a distribution is made on the Operating Group Equity Units solely to fund a distribution on the Class A shares, we would expect that the distribution per Class A share would equal the distribution per Operating Group Equity Unit. As a result, our existing owners would receive a distribution per Och-Ziff Operating Group A Unit equal to the per Class A share distribution. No such distributions will be paid in respect of our Class B shares. There may be instances, however, in which our existing owners receive a distribution on their Och-Ziff Operating Group A Units but holders of Class A shares receive no distribution.

In accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Operating Group Equity Units in an amount at least equal to the presumed maximum tax liabilities arising from the direct ownership of such units. The Och-Ziff Operating Group will distribute to such unitholders, on a pro rata basis, tax distributions based upon the presumed maximum income allocable to any such unitholder at the maximum combined U.S. federal, New York State and New York City tax rates. Holders of our Class A shares will not be entitled to these distributions and thus may not receive any distributions at a time when our existing owners are receiving distributions on their Och-Ziff Operating Group A Units. Such tax distributions will take into account the disproportionate income allocation (but not a disproportionate cash allocation) to the unitholders with respect to “built-in gain assets” at the time of the offering. Consequently, Och-Ziff Operating Group tax distributions will be greater than if such assets had a tax basis equal to their value at the time of this offering.

Our distribution policy has certain risks and limitations, particularly with respect to our liquidity. Although we expect to pay distributions according to our policy, we may not make distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended distribution. Moreover, if the Och-Ziff Operating Group’s cash flows from operations are insufficient to enable it to make required minimum tax distributions to its unitholders, the Och-Ziff Operating Group may have to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise. In such event, we may not be able to effect our business and growth strategy to the extent intended. In addition, we may have to borrow additional amounts to fund our operations or make such capital expenditures, in which case our borrowing costs would increase and negatively impact our liquidity.

Historically, only distributions made to Mr. Och have been treated as equity distributions on our financial statements. Distributions to Mr. Och in respect of the fiscal and tax years ended December 31, 2006 and 2005 were approximately $             and $            , respectively. Distributions to Mr. Och in respect of the current fiscal and tax year have aggregated approximately $             to date, or $             assuming the full amount of the Pre-Offering Distributions had been made. In addition, we expect to make other Special Distributions following the completion of this offering. See “Our Structure—Distributions and Other Payments to Our Existing Owners.” Distributions made to our existing partners, other than Mr. Och, have been treated as compensation expenses and distributions made to the Ziffs have been treated as profit sharing expense. We expect that all future distributions to be made to our partners will be treated as equity distributions of the Och-Ziff Operating Group for financial reporting purposes (other than Deferred Income Distributions and Investment Distributions).

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2007:

 

  Ÿ  

on a historical basis based on the combined Och-Ziff Operating Group as our accounting predecessor;

 

  Ÿ  

on a pro forma basis, after giving effect to the Pro Forma Adjustments (other than adjustments related to this offering); and

 

  Ÿ  

on a pro forma as adjusted basis, after giving effect to the foregoing pro forma adjustments, and adjustments related to this offering at an assumed initial public offering price of $31.50 per Class A share.

This table should be read in conjunction with “Our Structure—The Transactions,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information,” and the financial statements and notes thereto included in this prospectus.

 

     As of June 30, 2007
     Och-Ziff
Operating
Group
Combined
Historical
   Pro Forma
before this
Offering
    Och-Ziff Capital
Management
Group LLC
Consolidated
Pro Forma as
Adjusted
     (Unaudited)
     (dollars in thousands)

Cash and cash equivalents

   $ 40,805    $ 38,411     $             
                     

New term loan

   $ —      $ 750,000     $  

Non-controlling interests in consolidated subsidiaries

     86,032      86,032    

Equity

       

Paid-in-capital

     —        —      

Retained earnings(1)

     1,323,826      (721,522 )  

Distributions in excess of earnings and capital

     —        —      
                     

Total equity (deficit)(1)

     1,323,826      (721,522 )  
                     

Total capitalization(1)

   $ 1,450,663    $ 152,921     $  
                     

(1) In periods following this offering, we intend to make distributions to our existing owners with respect to Deferred Balances and investments by us in the Och-Ziff funds on behalf of our partners, as applicable, which totaled approximately $1.8 billion as of June 30, 2007. Deferred Income Distributions and Investment Distributions to Mr. Och, which would have been approximately $1.3 billion as of June 30, 2007, would have reduced our retained earnings, total equity, and total capitalization by such amount.

 

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DILUTION

If you invest in our Class A shares, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A shares and the pro forma net tangible book value per share of our Class A shares after this offering. Dilution results from the fact that the per share offering price of the Class A shares is substantially in excess of the net tangible book value per share attributable to our existing owners. Net tangible book value represents net book equity excluding intangible assets, if any.

Our pro forma net tangible book value before this offering would have been $             million or $             per Class A share assuming that our existing equity holders exchanged all of their                  Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (but excluding any effect of the resulting increased tax basis acquired by Och-Ziff Corp upon such exchange). Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the Pro Forma Adjustments, other than adjustments related to this offering.

On a pro forma as adjusted basis, after giving effect to the sale of 36,000,000 Class A shares in this offering at an assumed initial public offering price of $31.50 per Class A share and deducting estimated underwriting discounts and commissions, estimated offering expenses and other related transaction costs payable by us, the tax receivable payments and the related tax effects of the Transactions, our pro forma as adjusted net tangible book value as of June 30, 2007 would have been $             million or $             per Class A share, assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (but excluding any effect of the resulting increased tax basis acquired by Och-Ziff Corp upon such exchange), as of the date of this offering.

The following table illustrates the immediate dilution of $             per share to new shareholders purchasing Class A shares in this offering, assuming the underwriters do not exercise their option to purchase additional Class A shares.

 

Assumed initial public offering price per share

      $                 

Pro forma net tangible book value per Class A share before this offering

   $                    

Increase in net tangible book value per Class A share attributable to investors in this offering

     
         

Pro forma as adjusted net tangible book value per Class A share as of June 30, 2007

     
         

Dilution to new Class A shareholders per share

      $  
         

The following table summarizes, on the same pro forma as adjusted basis as of June 30, 2007, the differences between the existing owners and the new Class A shareholders purchasing in this offering with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid before deducting the estimated underwriting discount and commissions and estimated offering expenses. The table below was prepared assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis, as of the date of this offering.

 

    

Shares Purchased

   

Total Consideration

    Average
Price
Per Share
      Number    Percentage     Amount    Percentage    

Existing owners

   364,000,000    91.0 %   $ —      —   %   $ —  

New investors

     36,000,000    9.0 %   $ 1,134,000,000    100.0 %   $ 31.50
                          

Total

   400,000,000    100.0 %   $ 1,134,000,000    100.0 %  
                          

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $31.50 per Class A share would increase (decrease) total consideration paid by new investors in this offering and by all investors by $36 million, and would increase (decrease) the average price per share paid by new investors by $1.00, assuming the number of Class A shares offered by us, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

If the underwriters’ option to purchase additional Class A shares is exercised in full, the pro forma as adjusted net tangible book value per share as of June 30, 2007 would be approximately $             per Class A share and the dilution in pro forma as adjusted net tangible book value per share to new Class A shareholders would be $             per Class A share. Furthermore, the percentage of our Class A shares held by our existing owners (assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis, as of the date of this offering and further assuming that all Class A restricted share units granted to our managing directors and other employees upon completion of this Offering were fully vested and settled in Class A shares) would decrease to approximately         % and the percentage of our Class A shares held by new Class A shareholders would increase to approximately         %.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma financial information presented below was derived from the application of pro forma adjustments to the combined financial statements of Och-Ziff Operating Group, the predecessor for accounting purposes of Och-Ziff Capital Management Group LLC, to give effect to the Pro Forma Adjustments, as defined below. The unaudited pro forma statements of operations information has been prepared as if the Pro Forma Adjustments had occurred on January 1, 2006. The unaudited pro forma balance sheet information has been prepared as if the Pro Forma Adjustments had occurred as of June 30, 2007. The unaudited pro forma financial information should be read in conjunction with “Our Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and the related notes included elsewhere in this prospectus.

As a result of the Transactions, investors in this offering and our existing partners will acquire 100% of our Class A and Class B shares, respectively. We will acquire, through two intermediate holding companies, a 9% limited partner interest in, and become the sole general partner of, each Och-Ziff Operating Group entity.

The pro forma adjustments are based upon available information and methodologies that we believe are reasonable. The unaudited pro forma statements of operations information and unaudited pro forma balance sheet information are presented solely for illustrative and informational purposes and are not necessarily indicative of what our actual operations or financial position would have been had the Pre-Offering Distributions and the Transactions taken place on the dates indicated, or during the periods presented, nor does it purport to represent our results for any future period.

In December 2006 and June 2007, we amended and supplemented most of our fund offering documents to enable a simple majority of the funds’ unaffiliated limited partners or shareholders to remove us, as general partner or investment manager with decision making rights, without cause, in accordance with certain procedures. The amendments resulted in the deconsolidation of most of our domestic funds as of January 1, 2007 and all of our offshore funds as of June 30, 2007.

The deconsolidation of these funds had a material effect on certain components of our combined financial statements, but did not have an effect on our net income or equity.

The following describes the significant effects of the deconsolidation of most of our domestic and all of our offshore funds on our combined financial statements. The applicable adjustments are reflected in the accompanying consolidated pro forma financial information presented below:

 

  Ÿ  

These adjustments decrease our financial statement line items for the six-month period ended June 30, 2007 and for the year ended December 31, 2006 as follows (based on comparing our combined historical financial information for these periods to our pro forma financial information for the comparable periods):

 

     Six Months Ended
June 30, 2007
    Year Ended
December 31,
2006
 

Statement of Operations

    

Total revenues

   (61 )%   (3 )%

Total expenses

   (58 )%   (45 )%

Other income

   (90 )%   (91 )%

Non-controlling interests in income of consolidated subsidiaries

   (100 )%   (98 )%

 

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Funds with only affiliated investors will continue to be consolidated in our financial statements for reporting periods as of and after June 30, 2007. These funds comprised approximately $87.7 million, or 0.3%, of our assets under management as of June 30, 2007.

 

  Ÿ  

We will reflect our equity in the income of our deconsolidated funds on our statements of income using the equity method of accounting, rather than eliminating the investments in consolidation.

 

  Ÿ  

We will include the management fees and incentive income earned from our deconsolidated funds on our statements of income rather than eliminating the revenue in consolidation.

 

  Ÿ  

We will not reflect cash flows of our deconsolidated funds on our statements of cash flows.

 

  Ÿ  

We will remove disclosures related to amounts no longer reflected on our combined financial statements, including, but not limited to:

 

  Ÿ  

the accounting policies of the Och-Ziff funds that do not pertain to us following deconsolidation, and

 

  Ÿ  

detailed disclosure of the investment activities of the Och-Ziff funds.

 

  Ÿ  

We will continue to provide information regarding our management agreements with, and fees and income earned from, our deconsolidated funds.

 

  Ÿ  

We will evaluate on an ongoing basis whether we will need to provide separate financial statements for investments in majority-owned unconsolidated subsidiaries and investments accounted for using the equity method of accounting pursuant to Regulation S-X Rule 3-09.

The pro forma adjustments, which we refer to as the “Pro Forma Adjustments” here and throughout this prospectus, are described in the notes to the unaudited pro forma financial information and principally include the matters set forth below:

 

  Ÿ  

The effects of our deconsolidation of certain Och-Ziff funds that we consolidated historically;

 

  Ÿ  

Compensation expense as a result of our issuance of Och-Ziff Operating Group A Units in connection with this offering and the reversal of previously recognized compensation expense to our partners other than Mr. Och;

 

  Ÿ  

Compensation expense as a result of our grant of Class A restricted share units to all of our managing directors and other employees in connection with this offering;

 

  Ÿ  

Compensation payable as a result of the accelerated vesting of our partners’ previously deferred income amounts;

 

  Ÿ  

Decrease in retained earnings and an offsetting increase in paid-in capital to reflect the issuance of Och-Ziff Operating Group A Units to the Ziffs and reversal of the Ziff profit sharing expense that was previously recognized;

 

  Ÿ  

Distribution payable as a result of the planned distribution of Mr. Och’s equity balance related to the Deferred Income Distributions;

 

  Ÿ  

Our borrowings under the new term loan entered into on July 2, 2007;

 

  Ÿ  

The Pre-Offering Distributions;

 

  Ÿ  

Our Reorganization, our receipt and use of the proceeds from this offering and our payment of the related expenses; and

 

  Ÿ  

The impact of federal, state and local income taxes that our wholly-owned subsidiary Och-Ziff Corp, as a taxable corporation, will incur on income allocated to it from Och-Ziff Operating Group.

 

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Tax Receivable Agreement

We may also be required to make payments under the tax receivable agreement that we will enter into in connection with this offering. The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. This increase in tax basis will increase, for tax purposes, our depreciation and amortization expense and will therefore reduce the amount of tax that Och-Ziff Corp and our other corporate taxpayer intermediate holding companies that acquire Och-Ziff Operating Group A Units in connection with an exchange, if any, would otherwise have been required to pay in the future. As a result, such intermediate holding companies will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of this increase in tax basis. These amounts reflect the fact that payments under the tax receivable agreement may result in further tax savings, and thus may give rise to additional payment obligations thereunder. The obligation to pay 85% of the amount of such cash savings to our existing owners is an obligation of the corporate taxpayer intermediate holding companies and not of the Och-Ziff Operating Group entities. Future cash savings and related payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary based upon a number of factors (including the timing of future exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income), depending upon the outcome of these factors, payments that we may be obligated to make to our existing owners as a result of the purchase of Och-Ziff Operating Group A Units in connection with this offering, as well as the payments in respect of subsequent exchanges, could be substantial. In light of the numerous factors affecting our obligation to make such payments, however, the timing and amounts of any such actual payments are not reasonably ascertainable at this time.

Any payments made under the tax receivable agreement will give rise to additional tax benefits and additional potential payments under the tax receivable agreement.

 

  Ÿ  

We anticipate that we will account for the income tax effects and corresponding tax receivable agreement effects as a result of future pay-outs to existing owners by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the transaction;

 

  Ÿ  

We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance;

 

  Ÿ  

We will include the estimated amount of the increase in deferred tax assets, net of any valuation allowance, directly in paid-in capital; and

 

  Ÿ  

We will record a liability for the expected amount we will pay to our existing owners under the tax receivable agreement (85% of tax savings realized), estimated using assumptions consistent with those we use in estimating the net deferred tax assets.

Therefore, at the date of the Transactions, on a cumulative basis, the net effect of accounting for income taxes and the tax receivable agreement on our financial statements will be a net increase in paid-in capital of 15% of the estimated realizable tax benefit. The effects of subsequent changes in any of our estimates after the date of the Transactions will be included in net income. Similarly, the effects of subsequent changes in the enacted tax rates will be included in net income.

 

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Unaudited Pro Forma Balance Sheet Information

as of June 30, 2007

 

     Och-Ziff
Operating
Group
Combined
Historical
  

Och-Ziff
Operating
Group Pro
Forma
Adjustments

   

Och-Ziff
Operating
Group
Combined
Pro Forma

   

Offering

Adjustments

    Och-Ziff
Capital
Management
Group LLC
Consolidated
Pro Forma
as Adjusted
 
     (dollars in thousands)  

Assets

           

Cash and cash equivalents

   $ 40,805    $ (2,394 )(a)   $ 38,411     $ 1,051,232  (e)   $ 18,013  
            (1,071,630 )(e)  

Income and fees receivable

     15,443      —         15,443       —         15,443  

Due from affiliates

     75,432      —         75,432       —         75,432  

Deferred tax assets

     —        —         —            (f)(n)  

Deferred income receivable, at fair value

     1,520,205      —         1,520,205       —         1,520,205  

Investments in Och-Ziff funds

     343,990      (303,783 )(b)     40,207       —         40,207  

Other assets, net

     55,812      2,394  (a)     58,206       —         58,206  

Och-Ziff funds assets:

           

Securities owned, at fair value

     54      —         54       —         54  

Due from brokers

     4,580      —         4,580       —         4,580  

Other investments, at fair value

     81,777      —         81,777       —         81,777  

Other Och-Ziff funds assets

     1,348      —         1,348       —         1,348  
                                       

Total Assets

   $ 2,139,446    $ (303,783 )   $ 1,835,663     $       $    
                                       

Liabilities and Equity (Deficit)

           

Compensation payable

   $ 561,578    $ (86,267 )(b)   $ 490,224       —       $ 490,224  
        14,913  (c)      

Payable to affiliates

     —        1,005,322  (c)     1,062,919       —         1,062,919  
        57,597  (d)      

Profit sharing payable

     83,961      —         83,961       —         83,961  

Term loan

     —        750,000  (a)     750,000       —         750,000  

Amounts payable under tax receivable agreement

     —        —         —            (f)(n)  

Other liabilities

     83,992      —         83,992       —         83,992  

Och-Ziff funds liabilities:

           

Redemptions payable

     7      —         7       —         7  

Other Och-Ziff funds liabilities

     50      —         50       —         50  
                                       

Total Liabilities

     729,588      1,741,565       2,471,153      
                                       

Partners’ and Others’ Interests in Consolidated Subsidiaries

     86,032      —         86,032       (1,071,630 )(e)     86,032  
            1,071,630  (e)  
            1,089,270  (g)  
            (1,089,270 )(h)  

Equity (Deficit)

           

Paid-in capital

     —        —         —         1,051,232  (e)  
               (f)(n)  

Retained earnings (deficit)

     1,323,826      (750,000)  (a)     (721,522 )     (1,071,630 )(e)     (1,793,152 )
        (217,516 )(b)       (1,089,270 )(g)  
        (1,005,322 )(c)       1,089,270  (h)  
        (14,913 )(c)      
        (57,597 )(d)      
                                       

Total Equity (Deficit)

     1,323,826      (2,045,348 )     (721,522 )    
                                       

Total Liabilities and Equity (Deficit)

   $ 2,139,446    $ (303,783 )   $ 1,835,663     $       $    
                                       

See notes to the unaudited pro forma financial information.

 

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Unaudited Pro Forma Statement of Operations Information

for the Six Months Ended June 30, 2007

 

   

Och-Ziff

Operating

Group
Combined

Historical

   

Deconsolidation

Adjustments(i)

    Och-Ziff
Operating
Group
Deconsolidated
   

Debt

Issuance

Adjustments(a)

   

Other

Pro Forma

Adjustments

   

Och-Ziff

Capital

Management

Group LLC

Consolidated

Pro Forma

 
    (dollars in thousands, except unit and share data)  

Revenues

           

Management fees

  $ 50,014     $ 164,396     $ 214,410     $ —       $ —       $ 214,410  

Incentive income

    1,387       4,553       5,940       —         —         5,940  

Other revenues

    1,830       —         1,830       —         —         1,830  

Och-Ziff funds income:

           

Interest income

    415,929       (415,658 )     271       —         —         271  

Dividend income

    78,436       (78,435 )     1       —         —         1  

Other Och-Ziff funds revenues

    37,222       (33,904 )     3,318       —         —         3,318  
                                               

Total Revenues

    584,818       (359,048 )     225,770       —         —         225,770  
                                               

Expenses

           

Compensation and benefits

    183,310       —         183,310       —         890,637  (j)     1,073,947  

Profit sharing

    24,374       —         24,374       —         (24,374 )(g)     —    

Professional services

    15,743       —         15,743       —         —         15,743  

Occupancy and equipment

    7,829       —         7,829       —         —         7,829  

Business development

    4,280       —         4,280       —         —         4,280  

Information processing and communications

    4,809       —         4,809       —         —         4,809  

Interest expense

    625       —         625       23,208       —         23,833  

Other expenses

    2,751       —         2,751      
—  
 
    —         2,751  

Och-Ziff funds expenses:

           

Interest expense

    152,066       (151,944 )     122       —         —         122  

Dividend expense

    102,290       (102,290 )     —         —         —         —    

Other Och-Ziff funds expenses

    86,623       (85,978 )     645       —         —         645  
                                               

Total Expenses

    584,700       (340,212 )     244,488      
23,208
 
    866,263       1,133,959  
                                               

Other Income

           

Earnings on investments in and deferred income receivable from Och-Ziff funds

    41,646       186,376       228,022       —         —         228,022  

Och-Ziff funds net gains (losses):

           

Net realized gains on investments

    1,755,347       (1,754,597 )     750       —         —         750  

Net unrealized gains on investments

    556,444       (556,352 )     92       —         —         92  

Net realized and unrealized foreign currency losses

    (24,402 )     24,385       (17 )     —         —         (17 )

Net realized and unrealized gains on derivative contracts

    50,880       (50,802 )     78       —         —         78  
                                               

Total Other Income

    2,379,915       (2,150,990 )     228,925       —         —         228,925  
                                               

Income (Loss) Before Partners’ and Others’ Interests in Income of Consolidated Subsidiaries and Income Taxes

    2,380,033       (2,169,826 )     210,207      
(23,208
)
    (866,263 )     (679,264 )

Partners’ and others’ interests in income of consolidated subsidiaries

    (2,173,310 )     2,169,826       (3,484 )     —         622,434  (h)     618,950  
                                               

Income (Loss) Before Income Taxes

    206,723       —         206,723      
(23,208
)
    (243,829 )     (60,314 )

Income taxes

    7,283       —         7,283      
—  
 
        (k)(n)  
                                               

Net Income (Loss)

  $ 199,440     $ —       $ 199,440     $
(23,208
)
  $                      $    
                                               

Net Income per Unit:

           

Historical, post-Reorganization

  $   (l)(n)          
                 

Pro forma

  $   (l)(n)          
                 

Net Income (Loss) per share (basic and diluted)

            $   (m)(n)
                 

See notes to the unaudited pro forma financial information.

 

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Table of Contents

Unaudited Pro Forma Statement of Operations Information

for the Six Months Ended June 30, 2006

 

   

Och-Ziff

Operating
Group
Combined
Historical

    Deconsolidation
Adjustments(i)
    Och-Ziff
Operating
Group
Deconsolidated
   

Debt

Issuance

Adjustments(a)

    Other
Pro Forma
Adjustments
   

Och-Ziff

Capital
Management
Group LLC
Consolidated
Pro Forma

 
    (dollars in thousands, except unit and share data)  

Revenues

           

Management fees

  $ 6,874     $ 131,213     $ 138,087     $ —       $ —       $ 138,087  

Incentive income

    —         1,940       1,940       —         —         1,940  

Other revenues

    1,451       —         1,451       —         —         1,451  

Och-Ziff funds income:

           

Interest income

    361,494       (361,238 )     256       —         —         256  

Dividend income

    69,803       (69,803 )     —         —         —         —    

Other Och-Ziff funds revenues

    18,237       (15,103 )     3,134       —         —         3,134  
                                               

Total Revenues

    457,859       (312,991 )     144,868       —         —         144,868  
                                               

Expenses

           

Compensation and benefits

    119,428       —         119,428       —         941,808  (j)     1,061,236  

Profit sharing

    16,223       —         16,223       —         (16,223 )(g)     —    

Professional services

    4,016       —         4,016       —         —         4,016  

Occupancy and equipment

    5,815       —         5,815       —         —         5,815  

Business development

    3,903       —         3,903       —         —         3,903  

Information processing and communications

    2,699       —         2,699       —         —         2,699  

Interest expense

    575       —         575       23,208       —         23,783  

Other expenses

    6,230       —         6,230       —         —         6,230  

Och-Ziff funds expenses:

           

Interest expense

    107,480       (107,338 )     142       —         —         142  

Dividend expense

    82,889       (82,886 )     3       —         —         3  

Other Och-Ziff funds expenses

    59,058       (58,399 )     659       —         —         659  
                                               

Total Expenses

    408,316       (248,623 )     159,693       23,208       925,585       1,108,486  
                                               

Other Income

           

Earnings on investments in and deferred income receivables from Och-Ziff funds

    —         104,093       104,093       —         —         104,093  

Och-Ziff funds net gains (losses):

           

Net realized gains (losses) on investments

    2,068,985       (2,068,995 )     (10 )     —         —         (10 )

Net unrealized (losses) gains on investments

    (224,378 )     224,484       106       —         —         106  

Net realized and unrealized foreign currency losses

    (36,016 )     35,932       (84 )     —         —         (84 )

Net realized and unrealized (losses) gains on derivative contracts

    (531,752 )     531,816       64       —         —         64  
                                               

Total Other Income

    1,276,839       (1,172,670 )     104,169       —         —         104,169  
                                               

Income Before Partners’ and Others’ Interests in Income of Consolidated Subsidiaries and Income Taxes

    1,326,382       (1,237,038 )     89,344       (23,208 )     (925,585 )     (859,449 )

Partners’ and others’ interests in income of consolidated subsidiaries

    (1,240,219 )     1,237,038       (3,181 )     —         789,365  (h)     786,184  
                                               

Income (Loss) Before Income Taxes

    86,163       —         86,163       (23,208 )     (136,220 )     (73,265 )

Income taxes

    4,804       —         4,804       —            (k)(n)  
                                               

Net Income (Loss)

  $ 81,359     $ —       $ 81,359     $ (23,208 )   $       $                
                                               

Net Income per Unit:

           

Historical, post-Reorganization

  $ (l )(n)          
                 

Pro forma

  $ (l )(n)          
                 

Net Income (Loss) per share (basic and diluted)

            $              (m)(n)
                 

See notes to the unaudited pro forma financial information.

 

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Table of Contents

Unaudited Pro Forma Statement of Operations Information

for the Year Ended December 31, 2006

 

    Och-Ziff
Operating
Group
Combined
Historical
    Deconsolidation
Adjustments(i)
   

Och-Ziff
Operating
Group
Deconsolidated

   

Debt

Issuance

Adjustments(a)

   

Other

Pro Forma

Adjustments

   

Och-Ziff
Capital

Management

Group LLC

Consolidated

Pro Forma

 
   

(dollars in thousands, except unit and share data)

 

Revenues

           

Management fees

  $ 13,739     $ 294,341     $ 308,080     $ —       $ —       $ 308,080  

Incentive income

    15,851       635,647       651,498       —         —         651,498  

Other revenues

    3,801       —         3,801       —         —         3,801  

Och-Ziff funds income:

           

Interest income

    768,503       (768,031 )     472       —         —         472  

Dividend income

    154,963       (154,961 )     2       —         —         2  

Other Och-Ziff funds revenues

    48,976       (40,499 )     8,477       —         —         8,477  
                                               

Total Revenues

    1,005,833       (33,503 )     972,330       —         —         972,330  
                                               

Expenses

           

Compensation and benefits

    446,672