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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33805

 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

26-0354783

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

 

9 West 57th Street, New York, New York 10019

(Address of Principal Executive Offices)

Registrant’s telephone number: (212) 790-0041

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

þ

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  þ

As of July 31, 2014, there were 171,744,202 Class A Shares and 301,884,116 Class B Shares outstanding.

 

 

 

 

 

 


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

TABLE OF CONTENTS

 

 

 

 

  

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

3

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2014, and December 31, 2013

  

3

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

  

4

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2014

  

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

  

6

 

 

 

 

 

Notes to Consolidated Financial Statements

  

8

 

 

 

Item 2.

 

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

  

33

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

62

 

 

 

Item 4.

 

Controls and Procedures

  

63

 

 

PART II — OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

65

 

 

 

Item 1A.

 

Risk Factors

  

65

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

65

 

 

 

Item 3.

 

Defaults upon Senior Securities

  

65

 

 

 

Item 4.

 

Mine Safety Disclosures

  

65

 

 

 

Item 5.

 

Other Information

  

65

 

 

 

Item 6.

 

Exhibits

  

66

 

 

Signatures

  

67

 

 

 

i


 

In this quarterly report, references to “Och-Ziff,” “our Company,” “the Company,” “the firm,” “we,” “us,” or “our” refer, unless the context requires otherwise, to Och-Ziff Capital Management Group LLC, a Delaware limited liability company, and its consolidated subsidiaries, including the Och-Ziff Operating Group. References to the “Och-Ziff Operating Group” refer, collectively, to OZ Management LP, a Delaware limited partnership, which we refer to as “OZ Management,” OZ Advisors LP, a Delaware limited partnership, which we refer to as “OZ Advisors I,” OZ Advisors II LP, a Delaware limited partnership, which we refer to as “OZ Advisors II,” and their consolidated subsidiaries. References to our “intermediate holding companies” refer, collectively, to Och-Ziff Holding Corporation, a Delaware corporation, which we refer to as “Och-Ziff Corp,” and Och-Ziff Holding LLC, a Delaware limited liability company, which we refer to as “Och-Ziff Holding,” both of which are wholly owned subsidiaries of Och-Ziff Capital Management Group LLC.

References to our “executive managing directors” refer to the current limited partners of the Och-Ziff Operating Group entities other than our intermediate holding companies, including our founder, Mr. Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company. References to our “active executive managing directors” refer to executive managing directors who remain active in our business. References to the “Ziffs” refer collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons.

References to “Class A Shares” refer to our Class A Shares, representing Class A limited liability company interests of Och-Ziff Capital Management Group LLC, which are publicly traded and listed on the New York Stock Exchange, which we refer to as the “NYSE.” References to “Class B Shares” refer to Class B Shares of Och-Ziff Capital Management Group LLC, which are not publicly traded, are currently held solely by our executive managing directors and have no economic rights but entitle the holders thereof to one vote per share together with the holders of our Class A Shares.

References to our “IPO” refer to our initial public offering of 36.0 million Class A Shares that occurred in November 2007. References to the “2007 Offerings” refer collectively to our IPO and the concurrent private offering of approximately 38.1 million Class A Shares to DIC Sahir Limited, a wholly owned subsidiary of Dubai International Capital LLC, which we refer to as “DIC.” References to the “Reorganization” refer to the reorganization of our business prior to the 2007 Offerings. References to the “2011 Offering” refer to our public offering of 33.3 million Class A Shares in November 2011.

References to “our funds” or the “Och-Ziff funds” refer to the multi-strategy funds, credit funds, collateralized loan obligations (“CLOs”), real estate funds, equity funds and other alternative investment vehicles for which we provide asset management services. References to “Special Investments” refer to investments that we, as investment manager, believe lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance.

No statements herein, available on our website or in any of the materials we file with the U.S. Securities and Exchange Commission, which we refer to as the “SEC,” constitute, or should be viewed as constituting, an offer of any Och-Ziff fund.

 

 

 

1


 

Forward-Looking Statements

Some of the statements under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which we refer to as the “MD&A,” “Part I — Item 3. Quantitative and Qualitative Disclosures About Market Risk,” and “Part II — Item 1A. Risk Factors” and elsewhere in this quarterly report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act,” 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,” “could,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate,” “opportunity,” “comfortable,” “assume,” “remain,” “maintain,” “sustain,” “achieve,” “see,” “think,” “position” or the negative version of those words or other comparable words.

Any forward-looking statements contained herein are based upon historical information and on our current plans, estimates and expectations. The inclusion of this or other forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.

We caution that forward-looking statements are subject to numerous assumptions, estimates, risks and uncertainties, including but not limited to the following: global economic, business, market and geopolitical conditions, including Euro-zone sovereign debt issues; U.S. and foreign regulatory developments relating to, among other things, financial institutions and markets, government oversight, fiscal and tax policy; conditions impacting the alternative asset management industry; our ability to successfully compete for fund investors, assets, professional talent and investment opportunities; our ability to retain our active executive managing directors, managing directors and other investment professionals; our successful formulation and execution of our business and growth strategies; our ability to appropriately manage conflicts of interest and tax and other regulatory factors relevant to our business; and assumptions relating to our operations, investment performance, 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 assumptions or estimates prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors are not and should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to our annual report on Form 10-K for the year ended December 31, 2013, filed on March 18, 2014, which we refer to as our “Annual Report.”

There may be additional risks, uncertainties and factors that we do not currently view as material or that are not known. The forward-looking statements contained in this report are made only as of the date of this report. We do not undertake to update any forward-looking statement because of new information, future developments or otherwise.

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS – UNAUDITED

 

 

June 30, 2014

 

 

December 31, 2013

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

336,925

 

 

$

189,974

 

Income and fees receivable

 

32,208

 

 

 

942,589

 

Due from related parties

 

6,987

 

 

 

5,314

 

Deferred income tax assets

 

906,446

 

 

 

934,658

 

Other assets, net

 

141,364

 

 

 

85,550

 

Assets of consolidated Och-Ziff funds:

 

 

 

 

 

 

 

Investments, at fair value

 

6,349,486

 

 

 

4,608,418

 

Other assets of Och-Ziff funds

 

155,619

 

 

 

102,771

 

Total Assets

$

7,929,035

 

 

$

6,869,274

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Due to related parties

$

785,696

 

 

$

782,667

 

Debt obligations

 

416,918

 

 

 

384,177

 

Compensation payable

 

18,826

 

 

 

307,495

 

Other liabilities

 

93,750

 

 

 

60,933

 

Liabilities of consolidated Och-Ziff funds:

 

 

 

 

 

 

 

Notes payable of consolidated CLOs, at fair value

 

4,193,106

 

 

 

2,763,977

 

Securities sold under agreements to repurchase

 

227,260

 

 

 

257,691

 

Other liabilities of Och-Ziff funds

 

27,435

 

 

 

20,727

 

Total Liabilities

 

5,762,991

 

 

 

4,577,667

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests (Note 3)

 

425,859

 

 

 

76,583

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

Class A Shares, no par value, 1,000,000,000 shares authorized,

   171,725,986 and 169,641,610 shares issued and outstanding

   as of June 30, 2014 and December 31, 2013, respectively

 

-

 

 

 

-

 

Class B Shares, no par value, 750,000,000 shares authorized,

   301,884,116 and 301,884,116 shares issued and outstanding

   as of June 30, 2014 and December 31, 2013, respectively

 

-

 

 

 

-

 

Paid-in capital

 

2,987,114

 

 

 

2,958,324

 

Appropriated retained earnings

 

4,264

 

 

 

12,872

 

Accumulated deficit

 

(3,306,956

)

 

 

(3,104,917

)

Shareholders' deficit attributable to Class A Shareholders

 

(315,578

)

 

 

(133,721

)

Shareholders' equity attributable to noncontrolling interests

 

2,055,763

 

 

 

2,348,745

 

Total Shareholders' Equity

 

1,740,185

 

 

 

2,215,024

 

Total Liabilities, Redeemable Noncontrolling Interests

   and Shareholders' Equity

$

7,929,035

 

 

$

6,869,274

 

See notes to consolidated financial statements.

 

 

 

3


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

 

(dollars in thousands)

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

$

164,031

 

 

$

137,365

 

 

$

322,801

 

 

$

266,163

 

 

Incentive income

 

10,918

 

 

 

22,905

 

 

 

63,011

 

 

 

123,065

 

 

Other revenues

 

201

 

 

 

222

 

 

 

647

 

 

 

1,183

 

 

Income of consolidated Och-Ziff funds

 

87,319

 

 

 

68,672

 

 

 

161,490

 

 

 

124,964

 

 

Total Revenues

 

262,469

 

 

 

229,164

 

 

 

547,949

 

 

 

515,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

66,694

 

 

 

69,283

 

 

 

132,549

 

 

 

120,698

 

 

Reorganization expenses

 

4,021

 

 

 

4,021

 

 

 

8,042

 

 

 

8,042

 

 

Interest expense

 

1,693

 

 

 

1,735

 

 

 

3,359

 

 

 

3,465

 

 

General, administrative and other

 

43,231

 

 

 

41,722

 

 

 

79,143

 

 

 

79,595

 

 

Expenses of consolidated Och-Ziff funds

 

38,456

 

 

 

23,511

 

 

 

77,133

 

 

 

38,837

 

 

Total Expenses

 

154,095

 

 

 

140,272

 

 

 

300,226

 

 

 

250,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on investments in Och-Ziff funds and joint ventures

 

390

 

 

 

417

 

 

 

5,873

 

 

 

722

 

 

Net gains of consolidated Och-Ziff funds

 

65,768

 

 

 

35,763

 

 

 

120,267

 

 

 

143,013

 

 

Total Other Income

 

66,158

 

 

 

36,180

 

 

 

126,140

 

 

 

143,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

174,532

 

 

 

125,072

 

 

 

373,863

 

 

 

408,473

 

 

Income taxes

 

21,328

 

 

 

13,103

 

 

 

54,919

 

 

 

38,398

 

 

Consolidated and Total Comprehensive Net Income

$

153,204

 

 

$

111,969

 

 

$

318,944

 

 

$

370,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of Consolidated and Total Comprehensive Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shareholders

$

10,716

 

 

$

3,818

 

 

$

34,568

 

 

$

33,853

 

 

Noncontrolling interests

 

128,596

 

 

 

107,721

 

 

 

260,661

 

 

 

333,513

 

 

Redeemable noncontrolling interests

 

13,892

 

 

 

430

 

 

 

23,715

 

 

 

2,709

 

 

 

$

153,204

 

 

$

111,969

 

 

$

318,944

 

 

$

370,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Class A Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.06

 

 

$

0.03

 

 

$

0.20

 

 

$

0.22

 

 

Diluted

$

0.05

 

 

$

0.02

 

 

$

0.20

 

 

$

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Class A Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

172,733,171

 

 

 

152,016,631

 

 

 

172,329,212

 

 

 

151,335,477

 

 

Diluted

 

479,894,909

 

 

 

155,900,015

 

 

 

176,821,370

 

 

 

153,756,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Paid per Class A Share

$

0.23

 

 

$

0.28

 

 

$

1.35

 

 

$

1.03

 

 

See notes to consolidated financial statements.

 

 

4


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY – UNAUDITED

 

 

Och-Ziff Capital Management Group LLC Shareholders

 

 

 

 

 

 

 

 

 

 

Number of

Class A

Shares

 

 

Number of

Class B

Shares

 

 

Paid-in

Capital

 

 

Appropriated

Retained Earnings

 

 

Accumulated

Deficit

 

 

Shareholders' Deficit Attributable to Class A Shareholders

 

 

Shareholders' Equity Attributable to Noncontrolling Interests

 

 

Total

Shareholders'

Equity

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

As of December 31, 2013

 

169,641,610

 

 

 

301,884,116

 

 

$

2,958,324

 

 

$

12,872

 

 

$

(3,104,917

)

 

$

(133,721

)

 

$

2,348,745

 

 

$

2,215,024

 

Capital contributions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

134,133

 

 

 

134,133

 

Capital distributions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(711,394

)

 

 

(711,394

)

Cash dividends declared on Class A Shares

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(229,472

)

 

 

(229,472

)

 

 

-

 

 

 

(229,472

)

Dividend equivalents on Class A restricted share units

 

-

 

 

 

-

 

 

 

7,135

 

 

 

-

 

 

 

(7,135

)

 

 

-

 

 

 

-

 

 

 

-

 

Equity-based compensation

 

738,904

 

 

 

-

 

 

 

17,925

 

 

 

-

 

 

 

-

 

 

 

17,925

 

 

 

30,240

 

 

 

48,165

 

Och-Ziff Operating Group A Unit exchanges (See Note 3)

 

1,345,472

 

 

 

-

 

 

 

1,205

 

 

 

-

 

 

 

-

 

 

 

1,205

 

 

 

-

 

 

 

1,205

 

Impact of changes in Och-Ziff Operating Group ownership (See Note 3)

 

-

 

 

 

-

 

 

 

(242

)

 

 

-

 

 

 

-

 

 

 

(242

)

 

 

242

 

 

 

-

 

Acquisition of noncontrolling interests

 

-

 

 

 

-

 

 

 

(141

)

 

 

-

 

 

 

-

 

 

 

(141

)

 

 

(251

)

 

 

(392

)

Initial consolidation of CLOs

 

-

 

 

 

-

 

 

 

-

 

 

 

(20,355

)

 

 

-

 

 

 

(20,355

)

 

 

-

 

 

 

(20,355

)

Allocation of gains of consolidated CLOs

 

-

 

 

 

-

 

 

 

-

 

 

 

11,747

 

 

 

-

 

 

 

11,747

 

 

 

(11,747

)

 

 

-

 

Impact of amortization of Reorganization charges on capital

 

-

 

 

 

-

 

 

 

2,908

 

 

 

-

 

 

 

-

 

 

 

2,908

 

 

 

5,134

 

 

 

8,042

 

Total comprehensive net income (excludes $23,715 allocated to redeemable noncontrolling interests)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

34,568

 

 

 

34,568

 

 

 

260,661

 

 

 

295,229

 

As of June 30, 2014

 

171,725,986

 

 

 

301,884,116

 

 

$

2,987,114

 

 

$

4,264

 

 

$

(3,306,956

)

 

$

(315,578

)

 

$

2,055,763

 

 

$

1,740,185

 

See notes to consolidated financial statements.

 

 

 

5


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

(dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Consolidated net income

$

318,944

 

 

$

370,075

 

Adjustments to reconcile consolidated net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

Reorganization expenses

 

8,042

 

 

 

8,042

 

Amortization of equity-based compensation

 

55,869

 

 

 

63,037

 

Depreciation and amortization

 

3,631

 

 

 

4,322

 

Deferred income taxes

 

37,166

 

 

 

30,596

 

Operating cash flows due to changes in:

 

 

 

 

 

 

 

Income and fees receivable

 

910,381

 

 

 

553,863

 

Due from related parties

 

(1,673

)

 

 

(2,183

)

Other assets, net

 

(18,727

)

 

 

(4,263

)

Due to related parties

 

(3,797

)

 

 

17

 

Compensation payable

 

(288,669

)

 

 

(202,480

)

Other liabilities

 

31,334

 

 

 

3,388

 

Consolidated Och-Ziff funds related items:

 

 

 

 

 

 

 

Realized gains of consolidated Och-Ziff funds

 

(74,494

)

 

 

(142,969

)

Change in unrealized gains of consolidated Och-Ziff funds

 

(48,708

)

 

 

12,569

 

Change in unrealized losses of notes payables of consolidated CLOs

 

2,935

 

 

 

(12,614

)

Purchases of investments

 

(2,775,985

)

 

 

(1,504,706

)

Proceeds from sale of investments

 

2,407,246

 

 

 

1,118,468

 

Other assets of consolidated Och-Ziff funds

 

103,864

 

 

 

239,721

 

Securities sold under agreements to repurchase

 

(30,431

)

 

 

118,771

 

Other liabilities of consolidated Och-Ziff funds

 

6,708

 

 

 

3,352

 

Net Cash Provided by Operating Activities

 

643,636

 

 

 

657,006

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Deposit on corporate aircraft

 

(32,662

)

 

 

-

 

Investment in Och-Ziff funds

 

(15,316

)

 

 

3,733

 

Return on investment in Och-Ziff funds

 

15,836

 

 

 

-

 

Other, net

 

(8,573

)

 

 

(3,870

)

Net Cash Used in Investing Activities

 

(40,715

)

 

 

(137

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Contributions from noncontrolling and redeemable noncontrolling interests

 

459,694

 

 

 

328,196

 

Distributions to noncontrolling and redeemable noncontrolling interests

 

(711,394

)

 

 

(746,579

)

Dividends on Class A Shares

 

(229,472

)

 

 

(152,909

)

Borrowings under Aircraft Loan

 

32,662

 

 

 

-

 

Other, net

 

(7,460

)

 

 

(5,881

)

Net Cash Used in Financing Activities

 

(455,970

)

 

 

(577,173

)

Net Change in Cash and Cash Equivalents

 

146,951

 

 

 

79,696

 

Cash and Cash Equivalents, Beginning of Period

 

189,974

 

 

 

162,485

 

Cash and Cash Equivalents, End of Period

$

336,925

 

 

$

242,181

 

6


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED – (Continued)

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

(dollars in thousands)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

Interest

$

3,302

 

 

$

3,296

 

Income taxes

$

12,780

 

 

$

8,093

 

Non-cash transactions:

 

 

 

 

 

 

 

Assets related to the initial consolidation of CLOs

$

1,405,840

 

 

$

1,219,181

 

Liabilities related to the initial consolidation of CLOs

$

1,426,194

 

 

$

1,237,635

 

See notes to consolidated financial statements.

 

 

 

7


 

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

1.OVERVIEW

Och-Ziff Capital Management Group LLC (the “Registrant”), a Delaware limited liability company, together with its consolidated subsidiaries (collectively, the “Company”), is a global alternative asset management firm with offices in New York, London, Hong Kong, Mumbai, Beijing and Dubai. The Company provides asset management services to its investment funds (the “Och-Ziff funds” or the “funds”), which pursue a broad range of global investment opportunities. The Company currently manages multi-strategy funds, credit funds, collateralized loan obligations (“CLOs”), real estate funds, equity funds and other alternative investment vehicles.

The Company’s primary sources of revenues are management fees, which are based on the amount of the Company’s assets under management, and incentive income, which is based on the investment performance of its funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the Och-Ziff funds.

The Company conducts substantially all of its operations through its one reportable segment, the Och-Ziff Funds segment, which provides asset management services to its multi-strategy funds, credit funds, CLOs, equity funds and other alternative investment vehicles. The Company’s Other Operations are primarily comprised of its real estate business, which provides asset management services to its real estate funds. The businesses included in the Company’s Other Operations do not meet the thresholds of reportable business segments under U.S. generally accepted accounting principles (“GAAP”).

The Company generates substantially all of its revenues in the United States. The liability of the Company’s Class A Shareholders is limited to the extent of their capital contributions.

The Company conducts substantially all of its operations through OZ Management LP, OZ Advisors LP and OZ Advisors II LP and their consolidated subsidiaries (collectively, the “Och-Ziff Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of OZ Management LP, OZ Advisors LP and OZ Advisors II LP other than the Company’s intermediate holding companies, including the Company’s founder, Mr. Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company. References to the Company’s “active executive managing directors” refer to executive managing directors who remain active in the Company’s business. References to the “Ziffs” refer collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons. References to the Company’s “intermediate holding companies” refer, collectively, to Och-Ziff Holding Corporation (“Och-Ziff Corp”) and Och-Ziff Holding LLC, both of which are wholly owned subsidiaries of the Registrant.

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited, interim, consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s unaudited, interim, consolidated financial statements have been included and are of a normal and recurring nature. The results of operations presented for the interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year, primarily because of the majority of incentive income and discretionary cash bonuses being recorded in the fourth quarter each year. All significant intercompany transactions and balances have been eliminated in consolidation.

As discussed in Note 17, the Company restated the quarterly amounts previously reported in its Form 10-Qs for the first through third quarters of 2013. See Note 17 for additional information.

Recently Adopted Accounting Pronouncements

None of the changes to GAAP that went into effect in the six months ended June 30, 2014 has had a material effect on the Company’s consolidated financial statements.

8


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

 

Future Adoption of Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities are permitted to apply the guidance in ASU 2014-09 using one of the following methods: (1) full retrospective application to each prior period presented, or (2) modified retrospective application with a cumulative effect adjustment to opening retained earnings in the annual reporting period that includes that date of initial application. The requirements of ASU 2014-09 are effective for the Company beginning in the first quarter of 2017. The Company is currently evaluating the impact, if any, that these updates will have on its financial condition and results of operations.

None of the other changes to GAAP that are not yet effective is expected to have a material effect on the Company’s consolidated financial statements.

3.NONCONTROLLING INTERESTS

Noncontrolling interests represent ownership interests in the Company’s subsidiaries held by parties other than the Company, and primarily relate to the Och-Ziff Operating Group A Units held by the Company’s executive managing directors and the Ziffs (until they exchanged their remaining interests during the 2014 second quarter) and fund investors’ interests in the consolidated Och-Ziff funds. Net income allocated to the Och-Ziff Operating Group A Units is driven by the earnings of the Och-Ziff Operating Group. Net income allocated to fund investors’ interests in consolidated Och-Ziff funds is driven by the earnings of those funds, including the net difference in the fair value of CLO assets and liabilities that are subsequently reclassified to appropriated retained earnings on the consolidated balance sheets.

The following table presents the components of the net income allocated to noncontrolling interests:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

2014

 

 

2013

(Restated -

See Note 17)

 

 

(dollars in thousands)

 

Och-Ziff Operating Group A Units

$

48,981

 

 

$

29,693

 

 

$

122,562

 

 

$

135,572

 

Consolidated Och-Ziff funds

 

79,715

 

 

 

77,139

 

 

 

137,956

 

 

 

193,657

 

Other

 

(100

)

 

 

889

 

 

 

143

 

 

 

4,284

 

 

$

128,596

 

 

$

107,721

 

 

$

260,661

 

 

$

333,513

 

 

The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:

 

 

June 30, 2014

 

 

December 31, 2013

 

 

 

(dollars in thousands)

 

 

Och-Ziff Operating Group A Units

$

452,555

 

 

$

788,689

 

 

Consolidated Och-Ziff funds

 

1,601,189

 

 

 

1,558,435

 

 

Other

 

2,019

 

 

 

1,621

 

 

 

$

2,055,763

 

 

$

2,348,745

 

 

9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

 

 

The following table presents the activity in redeemable noncontrolling interests as presented in the consolidated balance sheets:

 

 

Six Months Ended

June 30, 2014

 

 

 

(dollars in thousands)

 

 

Beginning balance

$

76,583

 

 

Capital contributions

 

325,561

 

 

Total comprehensive income

 

23,715

 

 

Ending Balance

$

425,859

 

 

 

Och-Ziff Operating Group Ownership

The Company’s interest in the Och-Ziff Operating Group increased to 36.3% as of June 30, 2014, from 35.9% as of December 31, 2013. Increases in the Company’s interest in the Och-Ziff Operating Group were driven by the exchange of Och-Ziff Operating Group A Units for an equal number of Class A Shares and the issuance of Class A Shares under the Company’s Amended and Restated 2007 Equity Incentive Plan, primarily related to the vesting of Class A restricted share units (“RSUs”). The Company also makes awards under its 2013 Incentive Plan, which may result in the issuance of Class A Shares in the future, primarily related to the vesting of RSUs or the exchange of Och-Ziff Operating Group A Units. The Company’s interest in the Och-Ziff Operating Group is expected to continue to increase over time as additional Class A Shares are issued upon the exchange of Och-Ziff Operating Group A Units and vesting of RSUs. These increases will be offset upon any conversion of Och-Ziff Operating Group D Units, which are not considered equity for GAAP purposes, into Och-Ziff Operating Group A Units.

Och-Ziff Operating Group A Unit Exchanges

During the six months ended June 30, 2014, the Company issued 1,345,472 Class A Shares in connection with the Ziffs’ exchange of an equal number of Och-Ziff Operating Group A Units. As a result, the Company recorded an increase to shareholders’ equity related to deferred income tax assets resulting from the exchange, net of an increase in the tax receivable agreement liability. Following such exchange, the Ziffs ceased to own any Och-Ziff Operating Group A Units.

4.FAIR VALUE DISCLOSURES

Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date (i.e., an exit price). Due to the inherent uncertainty of valuations of investments that are determined to be illiquid or do not have readily ascertainable fair values, the estimates of fair value may differ from the values ultimately realized, and those differences can be material.

GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively-quoted prices generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value.

Assets and liabilities measured at fair value are classified into one of the following categories:

·

Level I – Fair value is determined using quoted prices that are available in active markets for identical assets or liabilities. The types of assets and liabilities that would generally be included in this category are certain listed equities, sovereign debt of developed nations and certain listed derivatives.

·

Level II – Fair value is determined using quotations received from dealers making a market for these assets or liabilities (“broker quotes”), valuations obtained from independent third-party pricing services, the use of models or other valuation methodologies based on pricing inputs that are either directly or indirectly market observable as of the measurement date. Consideration is given to the nature of the broker quotes (e.g., indicative or executable). Assets and liabilities for which executable broker quotes are significant inputs in determining the fair value of an asset or liability are included within Level II. The types of assets and liabilities that would generally be included in this category are certain corporate bonds, certain credit

10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

 

default swap contracts, certain bank debt securities, certain commercial real estate debt, less liquid and restricted equity securities, forward contracts and certain over the-counter (“OTC”) derivatives.

·

Level III – Fair value is determined using pricing inputs that are unobservable in the market and includes situations where there is little, if any, market activity for the asset or liability. The fair value of assets and liabilities in this category may require significant judgment or estimation in determining fair value of the assets or liabilities. The fair value of these assets and liabilities may be estimated using a combination of observed transaction prices, independent pricing services, relevant broker quotes, models or other valuation methodologies based on pricing inputs that are neither directly or indirectly market observable. Assets and liabilities for which indicative broker quotes are significant inputs in determining the fair value of an asset or liability are included within Level III. The types of assets and liabilities that would generally be included in this category include real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, certain OTC derivatives, residential and commercial mortgage-backed securities, asset-backed securities, collateralized debt obligations, as well as the notes payable of consolidated CLOs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The assets and liabilities presented in the tables below belong to the investors in the consolidated funds. The Company has a minimal, if any, investment in these funds.

Fair Value Measurements Categorized within the Fair Value Hierarchy

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of June 30, 2014:

 

 

As of June 30, 2014

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Counterparty Netting

of Derivative Contracts

 

 

Total

 

 

(dollars in thousands)

 

Bank debt

$

-

 

 

$

2,503,487

 

 

$

1,641,800

 

 

$

-

 

 

$

4,145,287

 

Real estate investments

 

-

 

 

 

-

 

 

 

609,323

 

 

 

-

 

 

 

609,323

 

Investments in affiliated credit funds

 

-

 

 

 

-

 

 

 

537,207

 

 

 

-

 

 

 

537,207

 

Residential mortgage-backed securities

 

-

 

 

 

-

 

 

 

421,408

 

 

 

-

 

 

 

421,408

 

Collateralized debt obligations

 

-

 

 

 

-

 

 

 

190,816

 

 

 

-

 

 

 

190,816

 

Energy and natural resources limited partnerships

 

-

 

 

 

-

 

 

 

171,515

 

 

 

-

 

 

 

171,515

 

Commercial real estate debt

 

-

 

 

 

-

 

 

 

162,931

 

 

 

-

 

 

 

162,931

 

Corporate bonds

 

-

 

 

 

37,444

 

 

 

826

 

 

 

-

 

 

 

38,270

 

United States government obligations

 

35,144

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,144

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

23,392

 

 

 

-

 

 

 

23,392

 

Commercial mortgage-backed securities

 

-

 

 

 

-

 

 

 

9,883

 

 

 

-

 

 

 

9,883

 

Other investments

 

135

 

 

 

303

 

 

 

4,539

 

 

 

(667

)

 

 

4,310

 

Financial Assets, at Fair Value, Included

   Within Investments, at Fair Value

$

35,279

 

 

$

2,541,234

 

 

$

3,773,640

 

 

$

(667

)

 

$

6,349,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes payable of consolidated CLOs

$

-

 

 

$

-

 

 

$

3,818,203

 

 

$

-

 

 

$

3,818,203

 

Subordinated notes payable of consolidated CLOs

 

-

 

 

 

-

 

 

 

374,903

 

 

 

-

 

 

 

374,903

 

Notes payable of consolidated CLOs, at fair value

 

-

 

 

 

-

 

 

 

4,193,106

 

 

 

-

 

 

 

4,193,106

 

Other liabilities, included within other

   liabilities of Och-Ziff funds

 

4,856

 

 

 

121

 

 

 

667

 

 

 

(667

)

 

 

4,977

 

Financial Liabilities, at Fair Value

$

4,856

 

 

$

121

 

 

$

4,193,773

 

 

$

(667

)

 

$

4,198,083

 

11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

 

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2013:

 

 

As of December 31, 2013

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Counterparty Netting

of Derivative Contracts

 

 

Total

 

 

(dollars in thousands)

 

Bank debt

$

-

 

 

$

1,551,892

 

 

$

1,180,831

 

 

$

-

 

 

$

2,732,723

 

Real estate investments

 

-

 

 

 

-

 

 

 

633,311

 

 

 

-

 

 

 

633,311

 

Investments in affiliated credit funds

 

-

 

 

 

-

 

 

 

188,454

 

 

 

-

 

 

 

188,454

 

Residential mortgage-backed securities

 

-

 

 

 

-

 

 

 

400,510

 

 

 

-

 

 

 

400,510

 

Collateralized debt obligations

 

-

 

 

 

-

 

 

 

205,026

 

 

 

-

 

 

 

205,026

 

Energy and natural resources limited partnerships

 

-

 

 

 

-

 

 

 

158,759

 

 

 

-

 

 

 

158,759

 

Commercial real estate debt

 

-

 

 

 

-

 

 

 

93,445

 

 

 

-

 

 

 

93,445

 

Corporate bonds

 

-

 

 

 

38,228

 

 

 

817

 

 

 

-

 

 

 

39,045

 

United States government obligations

 

97,741

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

97,741

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

34,627

 

 

 

-

 

 

 

34,627

 

Commercial mortgage-backed securities

 

-

 

 

 

-

 

 

 

20,530

 

 

 

-

 

 

 

20,530

 

Other investments

 

964

 

 

 

87

 

 

 

3,292

 

 

 

(96

)

 

 

4,247

 

Financial Assets, at Fair Value, Included

   Within Investments, at Fair Value

$

98,705

 

 

$

1,590,207

 

 

$

2,919,602

 

 

$

(96

)

 

$

4,608,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes payable of consolidated CLOs

$

-

 

 

$

-

 

 

$

2,508,338

 

 

$

-

 

 

$

2,508,338

 

Subordinated notes payable of consolidated CLOs

 

-

 

 

 

-

 

 

 

255,639

 

 

 

-

 

 

 

255,639

 

Notes payable of consolidated CLOs, at fair value

 

-

 

 

 

-

 

 

 

2,763,977

 

 

 

-

 

 

 

2,763,977

 

Other liabilities, included within other

   liabilities of Och-Ziff funds

 

3,066

 

 

 

19

 

 

 

800

 

 

 

(96

)

 

 

3,789

 

Financial Liabilities, at Fair Value

$

3,066

 

 

$

19

 

 

$

2,764,777

 

 

$

(96

)

 

$

2,767,766

 

 

Reconciliation of Fair Value Measurements Categorized within Level III

The Company assumes that any transfers between Level I, Level II or Level III occur at the beginning of the reporting period presented. Amounts related to the initial consolidation of the Company’s CLOs are included within investment purchases in the tables below.

12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

JUNE 30, 2014

 

The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes payable of consolidated CLOs) for the three months ended June 30, 2014:

 

 

Balance as of

March 31,

2014

 

 

Transfers

In

 

 

Transfers

Out

 

 

Investment

Purchases

 

 

Investment

Sales

 

 

Derivative Settlements

 

 

Net Gains

(Losses)

of

Consolidated

Och-Ziff

Funds

 

 

Balance as of

June 30,

2014

 

 

(dollars in thousands)

 

Bank debt

$

1,323,441

 

 

$

78,502

 

 

$

(272,750

)

 

$

867,757

 

 

$

(356,611

)

 

$

-

 

 

$

1,461

 

 

$

1,641,800

 

Real estate investments

 

620,036

 

 

 

-

 

 

 

-

 

 

 

3,177

 

 

 

(23,139

)

 

 

-

 

 

 

9,249

 

 

 

609,323

 

Investments in affiliated

   credit funds

 

431,108

 

 

 

-

 

 

 

-

 

 

 

107,492

 

 

 

(22,303

)

 

 

-

 

 

 

20,910

 

 

 

537,207

 

Residential mortgage-backed

   securities

 

399,791

 

 

 

-

 

 

 

-

 

 

 

46,706

 

 

 

(41,666

)

 

 

-

 

 

 

16,577

 

 

 

421,408

 

Collateralized debt

   obligations

 

210,823

 

 

 

-

 

 

 

-

 

 

 

24,144

 

 

 

(50,755

)

 

 

-

 

 

 

6,604

 

 

 

190,816

 

Energy and natural resources

   limited partnerships

 

146,509

 

 

 

-

 

 

 

-

 

 

 

17,606

 

 

 

(1,811

)

 

 

-

 

 

 

9,211

 

 

 

171,515

 

Commercial real estate debt

 

132,537