CIFC Corp. - FORM 10-Q - August 13, 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
x
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
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
 
Commission file number: 1-32551
 
CIFC CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-2008622
 (I.R.S. Employer Identification No.)
 
 
 
250 Park Avenue, 4th Floor, New York, NY
 (Address of principal executive offices)
 
10177
 (Zip code)
 
Registrant’s telephone number, including area code: 212-624-1200
 
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 x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
                           Large accelerated filer o
 
                               Accelerated filer o
 
 
 
                           Non-accelerated filer o
 
                               Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

There were 25,146,986 shares of the registrant’s common stock outstanding as of August 1, 2014.
 


CIFC CORP.

Index to Form 10-Q

 
 
Page
 
 




CERTAIN DEFINITIONS
Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. as "CIFC," to CIFC and its subsidiaries as "we," "us," "our," "our company" or "the Company," to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as "CIFCAM," to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as "DCM," to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as "CypressTree," to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as "CNCIM."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q (the "Quarterly Report"), and the information incorporated by reference into this Quarterly Report are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include, but are not limited to, statements regarding future results or expectations. Forward-looking statements can be identified by forward-looking language, including words such as "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "projects," "will" and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made, various operating assumptions and predictions as to future facts and conditions, which may be difficult to accurately make and involve the assessment of events beyond our control. Caution must be exercised in relying on forward-looking statements. Our actual results may differ materially from the forward-looking statements contained in this Quarterly Report. We believe these factors include, but are not limited to, those described under the section entitled Item 1A—"Risk Factors" in our 2013 Annual Report on Form 10-K (the "Annual Report"), as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov.

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


3


PART I. Financial Information

Item 1.    Condensed Consolidated Financial Statements and Notes (Unaudited)

CIFC CORP. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)


 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
(In thousands, except share
and per share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
22,046

 
$
25,497

Restricted cash and cash equivalents
1,693

 
1,700

Due from brokers
—

 
18,813

Investments at fair value
24,177

 
16,883

Receivables
2,550

 
2,120

Prepaid and other assets
3,833

 
5,104

Deferred tax asset, net
50,815

 
57,675

Equipment and improvements, net
4,443

 
4,261

Intangible assets, net
19,707

 
25,223

Goodwill
76,000

 
76,000

Subtotal
205,264

 
233,276

Assets of Consolidated Entities:
 

 
 
Restricted cash and cash equivalents
850,212

 
699,387

Due from brokers
196,471

 
209,882

Investments at fair value
11,492,106

 
10,420,993

Receivables
39,760

 
36,350

Prepaid and other assets
1,562

 
300

Total assets of Consolidated Entities
12,580,111

 
11,366,912

TOTAL ASSETS
$
12,785,375

 
$
11,600,188

LIABILITIES
 
 
 
Due to brokers
$
1,036

 
$
5,499

Accrued and other liabilities
12,616

 
15,197

Deferred purchase payments
1,348

 
1,179

Contingent liabilities at fair value
14,450

 
16,961

Long-term debt
139,697

 
139,164

   Subtotal
169,147

 
178,000

Non-Recourse Liabilities of Consolidated Entities:
 
 
 
Due to brokers
587,692

 
606,808

Accrued and other liabilities
210

 
100

Interest payable
27,177

 
22,552

Long-term debt at fair value
11,480,641

 
10,484,975

Total Non-Recourse Liabilities of Consolidated Entities (1)
12,095,720

 
11,114,435

TOTAL LIABILITIES
12,264,867

 
11,292,435

EQUITY
 
 
 
Common stock, par value $0.001: 500,000,000 shares authorized, 21,145,199 issued and 21,014,755 outstanding as of June 30, 2014 and 20,921,333 issued and 20,790,889 outstanding as of December 31, 2013
21

 
21

Treasury stock, at cost: 130,444 shares as of June 30, 2014 and December 31, 2013
(914
)
 
(914
)
Additional paid-in capital
964,533

 
963,011

Retained earnings (deficit)
(808,367
)
 
(810,858
)
TOTAL CIFC CORP. STOCKHOLDERS’ EQUITY
155,273

 
151,260

Noncontrolling interest in Consolidated Funds (Note 2)
174,454

 
5,107

Appropriated retained earnings (deficit) of Consolidated VIEs
190,781

 
151,386

TOTAL EQUITY
520,508

 
307,753

TOTAL LIABILITIES AND EQUITY
$
12,785,375

 
$
11,600,188



4


CIFC CORP. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(unaudited)
    
Included in the Company's Condensed Consolidated Balance Sheets are balances from Consolidated Variable Interest Entities ("Consolidated VIEs") (1). See Note 2 and 4.
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
ASSETS
 
 
 
Assets of Consolidated VIEs:
 

 
 
Restricted cash and cash equivalents
$
835,960

 
$
699,122

Due from brokers
140,806

 
209,882

Investments at fair value
11,304,278

 
10,420,993

Receivables
39,198

 
36,350

Prepaid and other assets
919

 
—

Total assets of Consolidated VIEs
$
12,321,161

 
$
11,366,347

LIABILITIES
 
 
 
Non-Recourse Liabilities of Consolidated VIEs:
 

 
 

Due to brokers
$
519,504

 
$
606,808

Accrued and other liabilities
3

 
42

Interest payable
27,177

 
22,552

Long-term debt at fair value
11,480,641

 
10,484,975

Total Non-Recourse Liabilities of Consolidated VIEs
$
12,027,325

 
$
11,114,377

Explanatory Note: 
________________________________
(1)
If the Company were to liquidate, the assets of the Consolidated Entities would not be available to the Company's general creditors, and as a result, the Company does not consider them its assets. Additionally, the investors in the debt and residual interests of the Consolidated Entities have no recourse to the Company's general assets. Therefore, this debt is not the Company's obligation.

   See notes to Condensed Consolidated Financial Statements.


5

CIFC CORP. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except share
and per share amounts)
Revenues
 
 
 
 
 
 
 
Management fees
$
1,378

 
$
2,240

 
$
2,990

 
$
4,883

Net interest income from investments
97

 
106

 
194

 
97

Total net revenues
1,475

 
2,346

 
3,184

 
4,980

Expenses
 
 
 
 
 
 
 
Compensation and benefits
8,047

 
6,986

 
15,387

 
14,510

Professional services
706

 
715

 
1,752

 
2,638

General and administrative expenses
2,259

 
1,843

 
4,472

 
3,327

Depreciation and amortization
2,870

 
4,278

 
6,015

 
8,496

Total expenses
13,882

 
13,822

 
27,626

 
28,971

Other Income (Expense) and Gain (Loss)
 
 
 
 
 
 
 
Net gain (loss) on investments at fair value
1,121

 
251

 
2,527

 
600

Net gain (loss) on contingent liabilities at fair value (Note 9)
(1,529
)
 
613

 
(1,758
)
 
499

Corporate interest expense
(1,486
)
 
(1,452
)
 
(2,953
)
 
(2,934
)
Net gain on sale of management contract
—

 
—

 
228

 
752

Other, net
—

 
(5
)
 
—

 
(2
)
Net other income (expense) and gain (loss)
(1,894
)
 
(593
)
 
(1,956
)
 
(1,085
)
Operating income (loss)
(14,301
)
 
(12,069
)
 
(26,398
)
 
(25,076
)
 
 
 
 
 
 
 
 
Net results of Consolidated Entities (Note 6)
37,046

 
53,102

 
86,128

 
100,160

 
 
 
 
 
 
 
 
Income (loss) before income taxes
22,745

 
41,033

 
59,730

 
75,084

   Income tax (expense) benefit
(6,837
)
 
(6,488
)
 
(19,241
)
 
(9,598
)
Net income (loss)
15,908

 
34,545

 
40,489

 
65,486

Net (income) loss attributable to noncontrolling interest in Consolidated Entities (Note 2)
(9,464
)
 
(27,002
)
 
(33,810
)
 
(55,156
)
Net income (loss) attributable to CIFC Corp.
$
6,444

 
$
7,543

 
$
6,679

 
$
10,330

 
 
 
 
 
 
 
 
Earnings (loss) per share (Note 12) —
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.36

 
$
0.32

 
$
0.50

Diluted
$
0.26

 
$
0.31

 
$
0.29

 
$
0.44

Weighted-average number of shares outstanding (Note 12)—
 
 
 
 
 
 
 
Basic
20,971,928

 
20,808,750

 
20,905,949

 
20,803,151

Diluted
26,212,593

 
25,601,165

 
26,141,070

 
25,719,972

 
 
 
 
 
 
 
 
Dividends Declared
$
0.10

 
n/a

 
$
0.20

 
n/a




   
See notes to Condensed Consolidated Financial Statements.


6

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


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income (loss)
$
15,908

 
$
34,545

 
$
40,489

 
$
65,486

Other comprehensive income (loss):
 
 
 

 
 
 
 
Foreign currency translation
—

 
6

 
—

 
3

Other comprehensive income (loss)
—

 
6

 
—

 
3

Comprehensive income (loss)
15,908

 
34,551

 
40,489

 
65,489

Comprehensive (income) loss attributable to noncontrolling interest in Consolidated Entities
(9,464
)
 
(27,002
)
 
(33,810
)
 
(55,156
)
Comprehensive income (loss) attributable to CIFC Corp.
$
6,444

 
$
7,549

 
$
6,679

 
$
10,333



   See notes to Condensed Consolidated Financial Statements.


7

CIFC CORP. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
For the Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income (loss)
$
40,489

 
$
65,486

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Net premium and discount (accretion) amortization on investments, loans and debt issuance costs
169

 
230

Share-based compensation
881

 
2,899

Net (gain) loss on investments and contingent liabilities at fair value / other (gain) loss
(770
)
 
(1,099
)
Net gain on the sale of management contract
(228
)
 
(752
)
Depreciation and amortization
6,015

 
8,496

Deferred income tax expense (benefit)
6,860

 
(3,895
)
Consolidated Entities:
 

 
 

Net (gain) loss on investments at fair value
(9,946
)
 
(12,386
)
Net (gain) loss on liabilities at fair value
82,701

 
73,728

Net other (gain) loss
(2,322
)
 
48

Changes in operating assets and liabilities:
 
 
 
Due from brokers
12,832

 
(31,473
)
Receivables
(434
)
 
432

Prepaid and other assets
1,192

 
746

Due to brokers
(4,463
)
 
4,581

Accrued and other liabilities
(2,583
)
 
(3,349
)
Change in restricted cash and cash equivalents
7

 
(2
)
Consolidated Entities:
 

 
 

Due from brokers
52,596

 
(225,918
)
Purchase of investments at fair value
(4,693,839
)
 
(5,347,508
)
Sales of investments at fair value
4,010,495

 
4,819,752

Receivables
(3,773
)
 
(9,337
)
Due to brokers
(77,439
)
 
172,070

Accrued and other liabilities
(130
)
 
(5,066
)
Interest payable
4,608

 
903

Net cash provided by (used in) operating activities
(577,082
)
 
(491,414
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Proceeds from the sale of management contracts
228

 
752

Purchases of investments at fair value
(13,947
)
 
(66,784
)
Sales of investments at fair value
20,201

 
67,324

Purchases of equipment and improvements
(680
)
 
(329
)
Consolidated Entities:
 

 
 

Change in restricted cash and cash equivalents
(120,263
)
 
(16,826
)
Net cash provided by (used in) investing activities
(114,461
)
 
(15,863
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repurchases of common stock
—

 
(65
)
Payment of stock and debt issuance costs
613

 
525

Dividends paid
(4,188
)
 
—

Settlement of warrants and options
641

 
(93
)
Deferred purchase payments and payments on contingent liabilities
(4,270
)
 
(12,007
)
Consolidated Entities:
 

 
 

Net contributions from noncontrolling interests
31,191

 
—

Proceeds from issuance of long-term debt
2,487,474

 
1,937,495

Payments made on long-term debt
(1,823,369
)
 
(1,432,764
)
Net cash provided by (used in) financing activities
688,092

 
493,091

Foreign currency translation
—

 
3

Net increase (decrease) in cash and cash equivalents
(3,451
)
 
(14,183
)
Cash and cash equivalents at beginning of period
25,497

 
47,692

Cash and cash equivalents at end of period
$
22,046

 
$
33,509



8


CIFC CORP. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)

 
For the Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
SUPPLEMENTAL DISCLOSURE:
 

 
 

Cash paid for interest
$
1,577

 
$
2,102

Cash paid for income taxes
$
13,271

 
$
14,456

Consolidated Entities:
 

 
 

Cash paid for interest
$
72,250

 
$
56,894

 
 
 
 
Non-cash disclosures:
 
 
 
Exercise of stock options
$
—

 
$
197

Consolidated Entities:
 

 
 

Consolidation of net assets
$
160,074

 
$
—

Deconsolidation of net assets
$
(984
)
 
$
—

Non-cash settlement of interest receivables with increases in principal
$
1,012

 
$
1,257



See notes to Condensed Consolidated Financial Statements.


9

CIFC CORP. AND ITS SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1—Organization and Business

CIFC Corp. (“CIFC” and, together with its subsidiaries, the “Company”) is a fundamentals-based, relative value, alternative credit manager. Its primary business is to provide investment management services for investment products. The Company manages assets for various types of investors, including: pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located across the world.
The Company's assets under management ("AUM") is primarily comprised of Collateralized Loan Obligations ("CLOs"), credit funds and separately managed accounts ("SMAs", together with credit funds "other loan-based products"). These credit products are opportunistic investment strategies where the Company seeks to generate both current income and capital appreciation, primarily through senior secured corporate loan (“SSCL”) investments and, to a lesser extent, other investments. Management internally views the business as one reportable segment.
The Company has three primary sources of revenue: management fees, incentive fees and investment income. Management fees are generally earned based on the amount of assets managed (or AUM), incentive fees are earned based on the performance of the funds and investment income is earned based on the performance of the Company’s direct investment in its products.
CIFC Corp. is a Delaware corporation headquartered in New York City. As of June 30, 2014, DFR Holdings LLC ("DFR Holdings"), on a fully-diluted basis, owns approximately 70% of the Company’s diluted shares outstanding.
Note 2—Basis of Presentation and Principles of Consolidation

Basis of Presentation—The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Management believes that estimates utilized in the preparation of the Condensed Consolidated Financial Statements are prudent and reasonable. Actual results could differ from those estimates and such differences could be material. These interim unaudited Condensed Consolidated Financial Statements and related Notes should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.

In addition, certain prior year amounts on the Condensed Consolidated Financial Statements and the related notes have been re-presented to conform to current period presentation and provide additional details.

Principles of Consolidation—The Condensed Consolidated Financial Statements include the financial statements of CIFC and its wholly-owned subsidiaries, the entities in which the Company has a controlling interest ("Consolidated Funds") and variable interest entities ("VIEs" or "Consolidated VIEs") for which the Company is deemed to be the primary beneficiary (together the "Consolidated Entities"). All intercompany balances and transactions have been eliminated upon consolidation. This consolidation, particularly with respect to the Consolidated Entities, significantly impacts the Company's Condensed Consolidated Financial Statements.


10
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Consolidated Entities—Consolidated Entities includes the operating results of the Consolidated Funds and the Consolidated VIEs as defined below. As of June 30, 2014 and December 31, 2013, the Company held $114.1 million and $92.1 million, respectively of investments in its Consolidated Entities. In addition, the Company recognized management fees and net interest income from investments of the Consolidated Entities as follows:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Net results of Consolidated Entities
 
$
37,046

 
$
53,102

 
$
86,128

 
$
100,160

Net (income) loss attributable to noncontrolling interest in Consolidated Entities
 
(9,464
)
 
(27,002
)
 
(33,810
)
 
(55,156
)
   Net results from Consolidated Entities attributable to CIFC Corp.
 
$
27,582

 
$
26,100

 
$
52,318

 
$
45,004

 
 
 
 
 
 
 
 
 
Characteristics of net results of Consolidated Entities attributable to CIFC Corp:
 
 
 
 
 
 
 
 
Consolidated Entities management fees
 
$
20,560

 
$
23,559

 
$
40,803

 
$
41,714

Consolidated Entities net investment income (1)
 
7,022

 
2,541

 
11,515

 
3,290

 Net results from Consolidated Entities attributable to CIFC Corp.
 
$
27,582

 
$
26,100

 
$
52,318

 
$
45,004


Explanatory Note: 
________________________________
(1)
Includes equity distributions earned from residual interests in CLOs.

Consolidated Funds—The Company consolidates entities in which the Company has a controlling voting interest. As of June 30, 2014, the Company consolidated the following funds under the voting interest model.

Tactical Income Fund—During 2013, the Company launched an open ended credit fund that invests primarily in second-lien loans (the "Tactical Income Fund"). As of June 30, 2014 and December 31, 2013, the Company is the investment adviser for the fund and, as the general partner in the fund, held an investment of $10.9 million and $10.2 million, respectively. As of both June 30, 2014 and December 31, 2013, the Company held a controlling financial and voting interest in the Tactical Income Fund and consolidated the entity.

Senior Secured Loan Fund—During 2012, the Company launched an open ended credit fund that invests in U.S. performing senior secured corporate loans ("the "Senior Secured Loan Fund") to provide capital appreciation and risk-adjusted returns to its investors. During March 2014, several new investors entered the fund, eliminating a limited partners' substantive participating right in the fund. As of June 30, 2014, the Company consolidated the fund as it held a controlling voting interest as the investment adviser. Prior to the consolidation, the Company's investment was recorded in "Investments at fair value" on the Company's Consolidated Balance Sheet. As of June 30, 2014 and December 31, 2013, the Company held an investment of $5.1 million and $10.8 million, respectively. As of June 30, 2014, the limited partners held a $173.2 million investment which was reported in "Noncontrolling interest in Consolidated Funds" on the Condensed Consolidated Balance Sheet.

Consolidated VIEs—The Company also consolidates variable interest entities in which it is deemed the primary beneficiary. These Consolidated VIEs generally include CLOs and CDOs (collectively, the "Consolidated CLOs") and warehouses the Company manages, holds an investment in the entity or is entitled to incentive fees.

Consolidated CLOs—As of June 30, 2014, the Company consolidated 28 CLOs. As of December 31, 2013, the Company consolidated 26 CLOs. See Note 4.

Warehouses—From time to time, the Company will create special purpose vehicles ("SPV") to warehouse SSCLs in advance of sponsoring new CLOs or other funds. The Company would generally contribute equity to the new SPVs which are typically levered (three to five times) depending on the terms agreed to with the warehousing counterparties. When the related CLO or fund is sponsored, typically around three to nine months later, the warehouse is “terminated,” with it concurrently repaying the related financing and returning to the Company its equity contribution, net of gains and losses, if any.


11
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the six months ended June 30, 2014, the Company consolidated 5 warehouses and deconsolidated 2 warehouses, respectively, and during the six months ended June 30, 2013, the Company consolidated 4 warehouses and deconsolidated 3 warehouses, respectively, in conjunction with the sponsorship of newly issued CLOs. See Notes 4 and 6 for more information. As of June 30, 2014, the Company consolidated 3 warehouses.

Unconsolidated Funds—Co-Investment Fund—During 2013, the Company launched a closed end structured credit fund that invests primarily in residual tranches of CLOs and, to a lesser extent, warehouses, managed by CIFC (the "Co-Investment Fund"). As of June 30, 2014 and December 31, 2013, carrying value of the Company's investment, as the general partner of the fund was $17.1 million and $15.3 million, respectively. During the first quarter of 2014, several limited partners entered into the fund removing the general partner's presumption of control, and as such, the Company deconsolidated the fund from its Condensed Consolidated Financial Statements. As of June 30, 2014, the Company's investment was recorded in "Investments at fair value" on the Company's Condensed Consolidated Balance Sheet.

Unconsolidated VIEs
    
As of June 30, 2014, the Company had variable interests in an additional 2 CLOs, 8 CDOs, and 2 other investment products, which the Company managed, that were not consolidated (collectively the "Unconsolidated VIEs") as the Company was not deemed to be the primary beneficiary of the VIEs. As of December 31, 2013, the Company's unconsolidated VIEs included 5 CLOs, 8 CDOs and 1 other investment product.

The Company's maximum exposure to loss on Unconsolidated VIEs includes its investment, management fee receivables and future management fees collectible by the Company. As of June 30, 2014 and December 31, 2013, the Company had no maximum exposure to loss associated with the Unconsolidated VIEs related to investments made by the Company in the Unconsolidated VIEs. In addition, as of both June 30, 2014 and December 31, 2013, the Company's management fee receivables were $0.2 million.

Note 3—Summary of Significant Accounting Policies and Recent Accounting Updates

As of June 30, 2014, the Company's significant accounting policies, which are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, have not changed.

Recent Accounting Updates

In June 2013, the FASB issued Accounting Standards Update ("ASU") 2013-08, Financial Services—Investment Companies, which amends the scope, measurement, and disclosure requirements for investment companies. This ASU amends the requirements related to qualifying for the “investment-company deferral“ under ASU 2010-10, Consolidation. This guidance was effective for the Company's fiscal year beginning January 1, 2014. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.
    
In July 2013, the FASB issued ASU 2013-11, Income Taxes, which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance was effective for the Company's fiscal year beginning January 1, 2014. The adoption of this guidance did not have an impact on the Company's Condensed Consolidated Financial Statements.
    
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard clarifies the required factors that an entity must consider when recognizing revenue and also requires additional disclosures. ASU 2014-09 is effective for the Company beginning January 1, 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is evaluating the impact ASU 2014-09 will have on the Company's Condensed Consolidated Financial Statements.



12
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4—Consolidated VIEs

Although the Company consolidates all the assets and liabilities of the Consolidated VIEs (including the Consolidated CLOs and warehouses), its maximum exposure to loss is limited to its investments and beneficial interests in the Consolidated VIEs and the receivables of management fees from the Consolidated VIEs. All of these items are eliminated upon consolidation. The assets of each of the Consolidated VIEs are administered by the trustee of each fund solely as collateral to satisfy the obligations of the Consolidated VIEs. If the Company were to liquidate, the assets of the Consolidated VIEs would not be available to the Company's general creditors, and as a result, the Company does not consider them its assets. Additionally, the investors in the debt and residual interests of the Consolidated VIEs have no recourse to the Company's general assets. Therefore, this debt is not the Company's obligation.
    
Consolidated CLOs—The following table summarizes the consolidated assets and non-recourse liabilities of the Consolidated CLOs included in the Condensed Consolidated Balance Sheets and the total maximum exposure to loss on these Consolidated CLOs, as follows (1):
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Total Assets
$
11,600,237

 
$
10,963,096

Total Liabilities (non-recourse)
11,371,999

 
10,756,652

 
 
 
 
Maximum exposure to loss:
 
 
 
     Investments and beneficial interests (2)
$
33,847

 
$
49,490

     Receivables
3,593

 
3,836

Total maximum exposure to loss
$
37,440

 
$
53,326


Explanatory Notes: 
________________________________
(1)
In addition, exposure to loss excludes future management fees on the Consolidated VIEs, which are not included in the table above.
(2)
Amounts are eliminated in consolidation. As of June 30, 2014 and December 31, 2013, the Company held an investment of $32.5 million and $44.3 million, respectively, directly in the residual interests of its Consolidated CLOs and, through its ownership of credit funds (see Note 2), the Company invested an additional $1.4 million and $5.2 million, respectively, in the residual interests of its Consolidated CLOs.

Other Consolidated VIEs (Warehouses)—The following table summarizes the Company's consolidated assets and non-recourse liabilities of other Consolidated VIEs included in the Consolidated Balance Sheets:
 
 
June 30, 2014
 
December 31, 2013
 
 
Consolidated Assets
 
Consolidated Total Non-Recourse Liabilities
 
Maximum Exposure to Loss (1)
 
Consolidated Assets
 
Consolidated Total Non-Recourse Liabilities
 
Maximum Exposure to Loss (1)
 
 
(In thousands)
Warehouses (1)
 
$
720,924

 
$
655,326

 
$
65,598

 
$
403,251

 
$
357,725

 
$
42,279


Explanatory Note: 
________________________________
(1)
Maximum exposure to loss is generally limited to the Company's investment in the entity. As of June 30, 2014 and December 31, 2013, the Company consolidated three and two warehouses, respectively. Amounts are eliminated in consolidation. As of December 31, 2013, the Company invested $32.5 million directly in its warehouses, and through its ownership of the credit funds (see Note 2), the Company invested an additional $9.7 million in the warehouses. The Company did not have any investments through its ownership of the credit funds as of June 30, 2014.
    

13
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below represents total net results of the Consolidated VIEs included in the net results of the Consolidated Entities on the Condensed Consolidated Statements of Operations:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Consolidated CLOs
 
$
32,090

 
$
48,407

 
$
80,971

 
$
96,093

Warehouses (1)
 
1,316

 
4,695

 
1,310

 
4,067

   Net results of Consolidated VIEs
 
$
33,406

 
$
53,102

 
$
82,281

 
$
100,160


Explanatory Note: 
________________________________
(1)
During the three and six months ended June 30, 2014, the Company's results from warehouses included four and five warehouse investments and during the three and six months ended June 30, 2013, the Company's results from warehouses included three and four, warehouse investments, respectively.


Note 5—Fair Value
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair Value Hierarchy—The following tables summarizes the Company's assets and liabilities carried at fair value on a recurring basis, by class and by level: 
 
June 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Estimated Fair Value
 
(In thousands)
 
(In thousands)
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investments at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Investment in Funds
$
—

 
$
—

 
$
17,082

 
$
17,082

 
$
—

 
$
10,827

 
$
—

 
$
10,827

   Loans
—

 
1,022

 
1,008

 
2,030

 
—

 
5,546

 
510

 
6,056

Structured products & other
—

 
—

 
5,065

 
5,065

 
—

 
—

 
—

 
—

Subtotal
—

 
1,022

 
23,155

 
24,177

 
—

 
16,373

 
510

 
16,883

Consolidated Entities:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Loans
—

 
9,544,447

 
1,852,974

 
11,397,421

 
—

 
8,604,967

 
1,706,290

 
10,311,257

Corporate bonds
—

 
—

 
6,210

 
6,210

 
—

 
—

 
16,220

 
16,220

Structured products & other
—

 
2,322

 
86,153

 
88,475

 
—

 
—

 
93,516

 
93,516

Total Consolidated Entities
—

 
9,546,769

 
1,945,337

 
11,492,106

 
—

 
8,604,967

 
1,816,026

 
10,420,993

Total Assets
$
—

 
$
9,547,791

 
$
1,968,492

 
$
11,516,283

 
$
—


$
8,621,340

 
$
1,816,536

 
$
10,437,876

Liabilities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Contingent liabilities
$
—

 
$
—

 
$
14,450

 
$
14,450

 
$
—

 
$
—

 
$
16,961

 
$
16,961

Consolidated Entities:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Long-term debt (1)
—

 
—

 
11,480,641

 
11,480,641

 
—

 
—

 
10,484,975

 
10,484,975

Total Consolidated Entities
—

 
—

 
11,480,641

 
11,480,641

 
—

 
—

 
10,484,975

 
10,484,975

Total Liabilities
$
—

 
$
—

 
$
11,495,091

 
$
11,495,091

 
$
—

 
$
—

 
$
10,501,936

 
$
10,501,936

 
Explanatory Note:
______________________________
(1)
The Company generally invests in the residual equity of the CLOs it sponsors and invests in the warehouses it issues.


14
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Changes in Level 3 Recurring Fair Value Measurements—The following tables summarize by class the changes in financial assets and liabilities measured at fair value classified within Level 3 of the valuation hierarchy. Net realized and unrealized gains (losses) for Level 3 financial assets and liabilities measured at fair value are included in the Condensed Consolidated Statements of Operations. 

 
Level 3 Financial Assets at Fair Value
 
For the Three Months Ended June 30, 2014
 
For the Three Months Ended June 30, 2013
 
Investments at fair value
 
Investment Assets of Consolidated Entities
 
Investment Assets of Consolidated Entities
 
Loans
 
Investments in Funds
 
Structured Products & Other
 
Total
 
Loans
 
Corporate
Bonds
 
Structured Products & Other
 
Total
 
Loans
 
Corporate
Bonds
 
Structured Products & Other
 
Total
 
 
 
(In thousands)
Estimated fair value, beginning of period
$
1,512

 
$
15,964

 
$
1,880

 
$
19,356

 
$
1,826,333

 
$
5,893

 
$
95,486

 
$
1,927,712

 
$
1,342,176

 
$
37,806

 
$
96,297

 
$
1,476,279

Transfers into Level 3 (1)
—

 
—

 
—

 
—

 
446,894

 
—

 
—

 
446,894

 
170,010

 
—

 
—

 
170,010

Transfers out of Level 3 (2)
—

 
—

 
—

 
—

 
(593,806
)
 
—

 
—

 
(593,806
)
 
(474,307
)
 
—

 
—

 
(474,307
)
Transfers in due to consolidation or acquisition
1,008

 
—

 
—

 
1,008

 
12,081

 
314

 
6,256

 
18,651

 
—

 
—

 
—

 
—

Transfers between classes
(1,512
)
 
—

 
—

 
(1,512
)
 
1,512

 
—

 
—

 
1,512

 
—

 
—

 
—

 
—

Net realized/unrealized gains (losses)
—

 
1,108

 
(23
)
 
1,085

 
(26,271
)
 
3

 
4,069

 
(22,199
)
 
(1,574
)
 
77

 
6,855

 
5,358

Purchases
—

 
10

 
3,208

 
3,218

 
598,719

 
—

 
1,475

 
600,194

 
453,788

 
2,038

 
933

 
456,759

Sales
—

 
—

 
—

 
—

 
(164,961
)
 
—

 
(15,633
)
 
(180,594
)
 
(122,763
)
 
(23,091
)
 
(814
)
 
(146,668
)
Settlements
—

 
—

 
—

 
—

 
(247,527
)
 
—

 
(5,500
)
 
(253,027
)
 
(141,633
)
 
—

 
—

 
(141,633
)
Estimated fair value, end of period
$
1,008

 
$
17,082

 
$
5,065

 
$
23,155

 
$
1,852,974

 
$
6,210

 
$
86,153

 
$
1,945,337

 
$
1,225,697

 
$
16,830

 
$
103,271

 
$
1,345,798

Change in unrealized gains (losses) for the period for the assets held as of the end of the period
$
7

 
$
1,108

 
$
(23
)
 
$
1,092

 
$
(10,455
)
 
$
(51
)
 
$
(1,655
)
 
$
(12,161
)
 
$
(9,050
)
 
$
134

 
$
2,137

 
$
(6,779
)
  
 
Level 3 Financial Assets at Fair Value
 
For the Six Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2013
 
Investments at fair value
 
Investment Assets of Consolidated Entities
 
Investment Assets of Consolidated Entities
 
Loans
 
Investments in Funds
 
Structured Products & Other
 
Total
 
Loans
 
Corporate
Bonds
 
Structured Products & Other
 
Total
 
Loans
 
Corporate
Bonds
 
Structured Products & Other
 
Total
 
 
 
(In thousands)
Estimated fair value, beginning of period
$
510

 
$
—

 
$
—

 
$
510

 
$
1,706,290

 
$
16,220

 
$
93,516

 
$
1,816,026

 
$
1,177,058

 
$
67,438

 
$
81,709

 
$
1,326,205

Transfers into Level 3 (1)
—

 
—

 
—

 
—

 
952,630

 
—

 
—

 
952,630

 
396,080

 
—

 
—

 
396,080

Transfers out of Level 3 (2)
—

 
—

 
—

 
—

 
(1,150,813
)
 
—

 
—

 
(1,150,813
)
 
(754,912
)
 
—

 
—

 
(754,912
)
Transfers in due to consolidation or acquisition
1,008

 
15,964

 
—

 
16,972

 
33,284

 
314

 
6,256

 
39,854

 
—

 
—

 
—

 
—

Transfers between classes
(510
)
 
—

 
—

 
(510
)
 
2,021

 
—

 
—

 
2,021

 
—

 
—

 
—

 
—

Net realized/unrealized gains (losses)
—

 
1,108

 
(21
)
 
1,087

 
(27,936
)
 
517

 
7,597

 
(19,822
)
 
9,122

 
357

 
10,179

 
19,658

Purchases
—

 
10

 
5,086

 
5,096

 
1,050,822

 
—

 
1,475

 
1,052,297

 
866,876

 
2,788

 
19,471

 
889,135

Sales
—

 
—

 
—

 
—

 
(313,458
)
 
(10,841
)
 
(16,229
)
 
(340,528
)
 
(184,862
)
 
(53,256
)
 
(7,064
)
 
(245,182
)
Settlements
—

 
—

 
—

 
—

 
(399,866
)
 
—

 
(6,462
)
 
(406,328
)
 
(283,665
)
 
(497
)
 
(1,024
)
 
(285,186
)
Estimated fair value, end of period
$
1,008

 
$
17,082

 
$
5,065

 
$
23,155

 
$
1,852,974

 
$
6,210

 
$
86,153

 
$
1,945,337

 
$
1,225,697

 
$
16,830

 
$
103,271

 
$
1,345,798

Change in unrealized gains (losses) for the period for the assets held as of the end of the period
$
—

 
$
1,108

 
$
(21
)
 
$
1,087

 
$
(9,510
)
 
$
196

 
$
2,165

 
$
(7,149
)

$
4,877

 
$
148

 
$
10,694

 
$
15,719


Explanatory Notes:
______________________________
(1)
Transfers in represent loans currently valued by a third party pricing service using composite prices determined using less than two quotes, an internally developed pricing model or broker quotes and that were previously marked by a third party pricing service using composite prices determined from two or more quotes.
(2)
Transfers out represent loans previously valued by an internally developed pricing model, broker quotes, or a third party pricing service using composite prices determined using less than two quotes and are now being marked by a third party pricing service using composite prices determined from two or more quotes.


15
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Level 3 Financial Liabilities at Fair Value
 
For the Three Months Ended June 30, 2014
 
For the Three Months Ended June 30, 2013
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Entities
 
Total
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Entities
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
14,974

 
$
10,724,646

 
$
10,739,620

 
$
30,330

 
$
10,262,893

 
$
10,293,223

Sale of investments in Consolidated CLOs (1)
—

 
30,444

 
30,444

 
—

 
12,404

 
12,404

Transfer in due to consolidation or deconsolidation
—

 
231,673

 
231,673

 
—

 
—

 
—

Net realized/unrealized (gains) losses
1,529

 
55,072

 
56,601

 
(613
)
 
21,286

 
20,673

Purchases
—

 
15,300

 
15,300

 
—

 
789,837

 
789,837

Sales
—

 
—

 
—

 
—

 
(593,699
)
 
(593,699
)
Issuances
—

 
1,347,632

 
1,347,632

 
—

 
—

 
—

Settlements (2)
(2,053
)
 
(924,126
)
 
(926,179
)
 
(5,940
)
 
(317,542
)
 
(323,482
)
Estimated fair value, end of period
$
14,450

 
$
11,480,641

 
$
11,495,091

 
$
23,777

 
$
10,175,179

 
$
10,198,956

Change in unrealized gains (losses) for the period for the liabilities outstanding as of the end of the period
$
(1,529
)
 
$
13,112

 
$
11,583

 
$
613

 
$
137,402

 
$
138,015

 
Level 3 Financial Liabilities at Fair Value
 
For the Six Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2013
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Entities
 
Total
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Entities
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
16,961

 
$
10,484,975

 
$
10,501,936

 
$
33,783

 
$
9,596,434

 
$
9,630,217

Sale of investments in Consolidated CLOs (1)
—

 
62,445

 
62,445

 
—

 
14,085

 
14,085

Transfer in due to consolidation or deconsolidation
—

 
247,303

 
247,303

 
—

 
—

 
—

Net realized/unrealized (gains) losses
1,758

 
86,017

 
87,775

 
(499
)
 
73,728

 
73,229

Purchases
—

 
24,667

 
24,667

 
—

 
1,923,412

 
1,923,412

Sales
—

 
—

 
—

 
—

 
(593,699
)
 
(593,699
)
Issuances
—

 
2,458,455

 
2,458,455

 
—

 
—

 
—

Settlements (2)
(4,269
)
 
(1,883,221
)
 
(1,887,490
)
 
(9,507
)
 
(838,781
)
 
(848,288
)
Estimated fair value, end of period
$
14,450

 
$
11,480,641

 
$
11,495,091

 
$
23,777

 
$
10,175,179

 
$
10,198,956

Change in unrealized gains (losses) for the period for the liabilities outstanding as of the end of the period
$
(1,758
)
 
$
47,339

 
$
45,581

 
$
499

 
$
89,414

 
$
89,913


Explanatory Notes:
__________________________
(1)
Represents the Company's sales of its residual interests in the Consolidated CLOs. The sale removes the requirement to consolidate the CLOs, therefore, debt and/or subordinated notes of the CLOs are no longer eliminated in consolidation.
(2)
For Contingent Liabilities at fair value, amount represents payments made related to the contingent liabilities assumed for the Merger with Legacy CIFC.

Fair Value Methodologies of Financial Instruments

The following is a description of the Company's valuation methodologies for financial instruments measured at fair value by class as required by ASC Topic 820, including the general classification of such instruments pursuant to the valuation hierarchy.     
    
Investments in Funds—Investments in Funds represents the Company's investment in certain credit funds where the Company co-invests with third party investors. The fair value of investments in funds are generally determined based on the Company's proportionate share of the Net Asset Value ("NAV") of the fund. When the Company and third party investors have the ability to redeem their investments at their respective proportionate share of NAV at, or within three months of the reporting date, the investments at fair value are classified as Level 2 and when the Company and third party investors do not have the ability to redeem their investment at their proportionate share of NAV at, or within three months of the reporting date, the investments at fair value are classified as Level 3. The NAV calculation includes significant inputs including the valuation of assets and liabilities of the fund. A third-party pricing service provides the underlying asset prices in the fund.


16
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans—Loans are generally valued via a third-party pricing service. The value represents a composite of the mid-point in the bid-ask spread of broker quotes or is based on the composite price of a different tranche of the same or similar security if broker quotes are unavailable for the specific tranche the Company owns. The third-party pricing service provides the number of quotes used in determining the composite price, a factor that the Company uses in determining the observability level of the inputs to the composite price. When the fair value of the loan investments is based on a composite price determined using 2 or more quotes the composite price is considered to be based on significant observable inputs and classified as Level 2 within the fair value hierarchy. When the fair value of certain loan investments is based on a composite price determined using less than two quotes, the composite price is considered to be based on significant unobservable inputs. In these instances, the Company performs certain procedures on a sample basis to determine that composite prices approximate fair market value. Alternative methodologies are used to value the loans such as a comparable company pricing model (an internally developed model using composite or other observable comparable market inputs) or an internally developed model using data including unobservable market inputs. Accordingly, loans valued using alternative methodologies are classified as Level 3 within the fair value hierarchy.
 
Corporate Bonds—Corporate bonds are generally valued via a third-party pricing service.  The inputs to the valuation include recent trades, discount rates and forward yield curves. Although the inputs used in the third-party pricing services' valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model. When a value is unavailable, the Company uses an internally developed discounted cash flow model that includes unobservable market inputs or broker quotes.  Accordingly corporate bonds are classified as Level 3 within the fair value hierarchy.
 
Structured Products & Other—Structured products and other primarily represents the fair value of investments in third party CLOs or CDOs which are generally valued via a third-party pricing service. The inputs to the valuation include recent trade information, discount rates, forward yield curves, and loan level information (including loan loss, recovery and default rates, prepayment speeds and other security specific information obtained from the trustee and other service providers related to the product being valued). Although the inputs used in the third-party pricing service's valuation model are generally obtained from active markets, the third-party pricing service does not provide a detailed analysis for each security valued. The Company performs certain procedures on a sample basis to determine that prices approximate fair market value. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Inputs to the internally developed model include the structure of the product being valued, estimates related to loan default, recovery and discount rates. Accordingly these assets are classified as Level 3 within the fair value hierarchy.

In addition, included in Structured Products and Other is the Company's warehouse TRS (Note 7). The fair value of the Warehouse TRS is calculated as the sum of (i) the change in fair value of the reference obligations (SSCL's are valued at a composite of the mid-point in the bid-ask spread of broker quotes) since they became reference obligations (ii) net realized gains (losses) on reference obligations sold during the period and (iii) interest income earned on the reference obligations, less an amount equal to LIBOR plus an agreed upon margin on the outstanding notional amount of the reference obligations. The Warehouse TRS is classified as Level 2 within the fair value hierarchy.

 Contingent Liabilities—The fair value of contingent liabilities is based on a discounted cash flow model. The model is based on projections of the relevant future management fee cash flows and utilizes both observable and unobservable inputs in the determination of fair value. Significant inputs to the valuation model includes the structure of the underlying CLO and estimates related to loan default, recovery and discount rates.  Contingent liabilities are classified as Level 3 within the fair value hierarchy.
 

17
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-Term Debt of the Consolidated CLOs & Warehouses—Long-term debt of the Consolidated CLOs and Warehouses consists of debt and subordinated notes of the Consolidated CLOs or Warehouses. The fair value of debt and subordinated notes are classified as Level 3 within the fair value hierarchy. Effective June 30, 2014, the fair value of the debt and subordinated notes of the Consolidated CLOs or Warehouses are valued via a third-party pricing service. The inputs to the valuation include recent trade information, discount rates, forward yield curves, and loan level information (including loan loss, recovery and default rates, prepayment speeds and other security specific information obtained from the trustee and other service providers related to the product being valued). Although the inputs used in the third-party pricing service's valuation model are generally obtained from active markets, the third-party pricing service does not provide a detailed analysis for each security valued. The Company performs certain procedures on a sample basis to determine that prices approximate fair market value. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Inputs to the internally developed model include the structure of the product being valued, estimates related to loan default, recovery and discount rates. Accordingly these assets are classified as Level 3 within the fair value hierarchy.

Prior to June 30, 2014, the fair value of the debt and subordinated notes of the Consolidated CLOs and Warehouses were based on internally developed discounted cash flow models and utilized both observable and unobservable inputs in the determination of fair value. Significant inputs to the valuation models included the structure of the Consolidated CLOs or Warehouses and estimates related to loan default, recovery and discount rates. These liabilities were classified as Level 3 within the fair value hierarchy.


18
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Quantitative Information about Level 3 Assets & Liabilities

The disclosure provided below provides quantitative information about the significant unobservable inputs used in the valuation of the contingent liabilities and the long-term debt of the Consolidated CLOs. The table excludes the significant unobservable inputs used in valuing investments of the Consolidated CLOs and, effective June 30, 2014, long-term debt of the Consolidated CLOs and Warehouses as they were provided by a third party pricing service.

 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Impact of Increase in
Input on Fair Value
Measurement (1)
Financial Liabilities
June 30, 2014 Fair Value (in thousands)
Valuation Technique
Significant Unobservable Input
 
Range
 
Range
 
Contingent Liabilities
$
14,450

Discounted cash flows
Discount rate (2)
 
3.9%-12.5%
 
5.1%-15.0%
 
Decrease
 
 
 
Default rate (3)
 
1.5-2.0%
 
2.0%
 
Decrease
 
 
 
Recovery rate (3)
 
70%
 
70%
 
Increase
 
 
 
Pre-payment rate (3)
 
35-40%
 
30-40%
 
Decrease
 
 
 
Reinvestment spread of assets above LIBOR
 
3.0-3.8%
 
3.0-3.8%
 
Increase
 
 
 
Reinvestment price of assets
 
100.0
 
100.0
 
Increase
 
 
 
 
 
 
 
 
 
 
Long-Term Debt of the Consolidated CLOs & Warehouses
$
11,480,641

Discounted cash flows
Discount rate - Debt Tranches (4)
 
n/a (5)
 
0.6%-7.1%
 
Decrease
 
 
 
Discount rate - Subordinated Note Tranches
 
n/a (5)
 
12%
 
Decrease
 
 
 
Default rate (3)
 
n/a (5)
 
1.0-2.0%
 
Decrease
 
 
 
Recovery rate (3)
 
n/a (5)
 
70-75%
 
Increase
 
 
 
Pre-payment rate (3)
 
n/a (5)
 
25-40%
 
Decrease
 
 
 
Reinvestment spread of assets above LIBOR
 
n/a (5)
 
3.0-3.8%
 
Increase
 
 
 
Reinvestment price of assets
 
n/a (5)
 
99.5-100.0
 
Increase

Explanatory Notes:
____________________________
(1)
The impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
(2)
The discount rate varies by type of management fee (senior management fee, subordinated management fee, or incentive fee), the priority of that management fee in the waterfall of the CLO and the relative risk associated with the respective management fee cash flow projections. Amounts are presented as a spread over LIBOR.
(3)
Generally an increase in the default rate would be accompanied by a directionally opposite change in assumption for the recovery and pre-payment rates.
(4)
Prior to June 30, 2014, the valuation of long-term debt of the Consolidated CLOs discounted the cash flows of each tranche of debt and subordinated notes provided from the projected cash flow models. The discount rate varies by the original credit rating of each tranche of debt or year of issuance for the subordinated notes. Amounts are presented as a spread over LIBOR.
(5)
Although the inputs used in the third-party pricing service's valuation model are generally obtained from active markets, the third-party pricing service does not provide a detailed analysis for each security valued. The Company performs certain procedures on a sample basis to determine that prices approximate fair market value.

19
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Carrying Value and Estimated Fair Value of Financial Assets and Liabilities

The Company has not elected the fair value option for certain financial liabilities. A summary of the carrying value and estimated fair value of those liabilities are as follows:
 
 
As of June 30, 2014
 
 
As of December 31, 2013
 
Carrying
Value
 
Estimated
Fair
Value
 
 
Carrying
Value
 
Estimated
Fair
Value
 
(In thousands)
Financial liabilities:
 

 
 

 
 
 

 
 

Long-term debt:
 

 
 

 
 
 

 
 

Convertible Notes (1)
$
19,697

 
$
37,231

 
 
$
19,164

 
$
32,149

Junior Subordinated Notes (2)
$
120,000

 
$
63,257

 
 
$
120,000

 
$
63,535


Explanatory Notes:
________________________________
(1)
The estimated fair value of the Convertible Notes as of December 31, 2013 was determined using a third-party valuation firm that used a binomial tree model which utilizes significant unobservable inputs, including volatility and yield assumptions.  This methodology is classified as Level 3 within the fair value hierarchy. Subsequent to quarter end, Convertible Notes outstanding were converted (see Notes 10, 11 and 14) therefore as of June 30, 2014, the estimated fair value is classified as Level 1 within the fair value hierarchy.
(2)
The Junior Subordinated Notes include both the March and October Junior Subordinated Notes (see Note 10). The estimated fair values of the Junior Subordinated Notes were determined using a discounted cash flow model which utilizes significant unobservable inputs, including discount rates, yield and forward LIBOR curve assumptions.  This methodology is classified as Level 3 within the fair value hierarchy.

The carrying value of all of the following approximate the fair value of the financial instruments and are considered Level 1 in the fair value hierarchy: cash and cash equivalents, restricted cash and cash equivalents, due from brokers, receivables, due to brokers and deferred purchase payments. In addition, amounts in the Consolidated Entities related to due from brokers, restricted cash and cash equivalents, receivables and due to brokers also approximate the fair value of the instruments and are all considered Level 1 on the fair value hierarchy.

Loans and other investments classified as investments at fair value of the Consolidated Entities are diversified over multiple industries. In addition, applicable agreements to CLOs and warehouses outline industry concentration limits. Management does not believe the Company has any significant concentration risks.



20
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6—Net Results of Consolidated Entities

The following table is a summary of the components of "Net results of Consolidated Entities":
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Investment income
$
128,703

 
$
120,719

 
$
249,146

 
$
239,882

Interest expense
(40,799
)
 
(26,103
)
 
(76,873
)
 
(59,024
)
Net investment income
87,904

 
94,616

 
172,273

 
180,858

Net gain (loss) on investments at fair value
7,187

 
(68,707
)
 
9,946

 
12,386

Net gain (loss) on liabilities at fair value
(52,407
)
 
36,765

 
(82,701
)
 
(73,728
)
Net gain (loss) on other investments and derivatives
2,215

 
(103
)
 
2,322

 
(48
)
Net gain (loss) from activities of Consolidated Entities
$
44,899

 
$
62,571

 
$
101,840

 
$
119,468

Expenses of Consolidated Entities
(7,853
)
 
(9,469
)
 
(15,712
)
 
(19,308
)
Net Results of Consolidated Entities (1)
$
37,046

 
$
53,102

 
$
86,128

 
$
100,160


Explanatory Note:
________________________________
(1)
See Note 2 for a reconciliation of Net Results from Consolidated Entities attributable to CIFC Corp.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
Note 7—Derivative Instruments and Hedging Activities

Total Return Swap—During March 2014, the Company, through a warehouse SPV, entered into a total return swap ("TRS")agreement with a third party bank. Under the TRS, the Company received the income on the reference obligations (including gains on terminated reference obligations) and paid the counterparty an amount equal to three month LIBOR plus a margin on the outstanding notional amount of the reference obligations and losses on terminated reference obligations. The Company also consolidates this Warehouse SPV as it is a variable interest entity in which it is deemed the primary beneficiary (see Note 2).

As of June 30, 2014, the notional amount of SSCLs included as reference obligations of the Warehouse TRS was $179.6 million and the Warehouse SPV had $47.4 million (of which $26.5 million represented the Company's investment) of cash posted as collateral under the TRS, which is included within "Restricted cash and cash equivalents" of Consolidated VIEs on the Consolidated Balance Sheets. During the three and six months ended June 30, 2014, the Company recognized net income/expense related to derivative instruments of $2.2 million and $2.3 million, respectively, on the Condensed Consolidated Statement of Operations.



21
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Intangible Assets

Intangible assets are comprised of the following (1):
 
 
Weighted-Average Remaining Estimated Useful Life
 
Gross Carrying
Amount (1)
 
Accumulated
Amortization (2)
 
Net Carrying
Amount
 
(In years)
 
(In thousands)
June 30, 2014:
 
 
 

 
 

 
 

Investment management contracts
3.6
 
$
72,941

 
$
57,634

 
$
15,307

Referral arrangement
5.3
 
3,810

 
953

 
2,857

Non-compete agreements
3.7
 
1,535

 
836

 
699

Trade name
6.8
 
1,250

 
406

 
844

Total intangible assets
 
 
$
79,536

 
$
59,829

 
$
19,707

December 31, 2013:
 
 
 

 
 

 
 

Investment management contracts
4.0
 
$
72,941

 
$
52,661

 
$
20,280

Referral arrangement
5.8
 
3,810

 
572

 
3,238

Non-compete agreements
4.2
 
1,535

 
736

 
799

Trade name
7.3
 
1,250

 
344

 
906

Total intangible assets
 
 
$
79,536

 
$
54,313

 
$
25,223


Explanatory Notes:
_________________________________
(1)
Gross carrying amounts have been adjusted for impaired assets as of the date presented.
(2)
During the three and six months ended June 30, 2014, the Company recorded amortization expense on its intangible assets of $2.6 million and $5.5 million, respectively, and during the three and six months ended June 30, 2013, the Company recorded amortization expense on its intangible assets of $4.1 million and $8.1 million, respectively.

The following table presents expected amortization expense of the existing intangible assets:
 
(In thousands)
2014 (6 months remaining)
$
4,633

2015
6,796

2016
4,010

2017
2,172

2018
1,527

Thereafter
569

 
$
19,707

 
In January 2012, the Company completed the sale of its rights to manage Gillespie CLO PLC (“Gillespie”), a European CLO. The sale price was comprised of a payment on the closing date and contingent payments which were collected during 2013 and 2014. During the six months ended June 30, 2014 and 2013, the Company collected contingent payments of $0.2 million and $0.8 million, respectively, which was reported in "Net gain on the sale of management contract" on the Condensed Consolidated Statements of Operations.
 


22
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9—Deferred Purchase Payments and Contingent Liabilities at Fair Value
 
The Company's Deferred Purchase Payments and Contingent Liabilities at fair value are as follows:
 
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Deferred purchase payments
$
1,348

 
$
1,179

 
 
 
 
Contingent liabilities from the Merger (related party) - Note 14
$
13,238

 
$
15,349

Contingent liabilities value assumed through the Merger
1,212

 
1,612

   Contingent liabilities at fair value
$
14,450

 
$
16,961

 
    
Deferred Purchase Payments—In April 2011, the Company entered into a merger (the "Merger") with Commercial Industrial Finance Corp. ("Legacy CIFC"). As a result of the Merger, Legacy CIFC became CIFCAM, a wholly-owned subsidiary of CIFC. The consideration for the Merger included the payment to CIFC Parent Holdings LLC ("CIFC Parent"), the sole stockholder of Legacy CIFC, of $7.5 million of cash payable in three equal installments of $2.5 million (subject to certain adjustments). During the six months ended June 30, 2013, the Company made the final deferred purchase payment related to the Merger of $2.5 million leaving no remaining amounts outstanding under this agreement.

In March 2010, the Company entered into an acquisition and investment agreement with DFR Holdings and CNCIM pursuant to which it agreed to acquire all of the equity interests in CNCIM from DFR Holdings. The consideration for the CNCIM acquisition includes deferred purchase payments totaling $7.5 million in cash payable in five equal annual installments beginning in December 2010. The final remaining installment of $1.5 million is payable on December 9, 2014. As of June 30, 2014 and December 31, 2013, the fair value of the remaining deferred purchase payments of $1.3 million and $1.2 million, respectively, was included in the Condensed Consolidated Balance Sheets.

Contingent Liabilities at Fair Value—In addition to the consideration paid in connection with the Merger, the Company was required to pay CIFC Parent a portion of incentive fees earned on six CLOs managed by CIFCAM (the "Legacy CIFC CLOs"). The terms of these payments were as follows: (i) the first $15.0 million of incentive fees received (which was fulfilled in 2013), (ii) 50% of any incentive fees in excess of $15.0 million in aggregate received from the Legacy CIFC CLOs by the combined company over ten years from April 13, 2011 (the "Merger Closing Date") and (iii) payments relating to the present value of any such incentive fees from the Legacy CIFC CLOs that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. During the three and six months ended June 30, 2014, the Company made total payments of $1.9 million and $3.9 million, respectively, and during the three and six months ended June 30, 2013, the Company made total payments of $4.9 million and $7.8 million, respectively, related to these contingent liabilities. As of June 30, 2014, there are no remaining payments under item (i) and the Company made cumulative payments of $10.4 million under item (ii) to date.
 
In addition, the Company also assumed contingent liabilities during the merger that primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree in December 2010. The assumed contingent liabilities are based on a fixed percentage of certain management fees from the CypressTree CLOs. These fixed percentages vary by CLO. From the Merger Closing Date to June 2013 the minimum fixed percentage was 55%, and effective July 2013, the minimum fixed percentage was 39%. During the three and six months ended June 30, 2014, the Company made payments of $0.2 million and $0.4 million, respectively, and during the three and six months ended June 30, 2013, the Company made payments of $1.1 million and $1.7 million, respectively, related to these contingent liabilities.
 

23
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the changes in fair value of contingent liabilities recorded within "Net gain (loss) on liabilities at fair value" on the Condensed Consolidated Statements of Operations:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Contingent liabilities from the Merger
$
(1,544
)
 
$
421

 
$
(1,765
)
 
$
345

Contingent liabilities assumed through the Merger
15

 
192

 
7

 
154

Total net gain (loss) on contingent liabilities at fair value
$
(1,529
)
 
$
613

 
$
(1,758
)
 
$
499



Note 10—Long-Term Debt
 
The following table summarizes the Company's long-term debt:
 
 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
 
 
 
(In years)
Recourse debt:
 

 
 

 
 
 
 
 
 
 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
21.3
 
$
95,000

 
1.00
%
 
21.8
October Junior Subordinated Notes (2)
25,000

 
3.72
%
 
21.3
 
25,000

 
3.73
%
 
21.8
Total Subordinated Notes Debt
$
120,000

 
1.57
%
 
21.3
 
$
120,000

 
1.57
%
 
21.8
 
 
 
 
 
 
 
 
 
 
 
 
Convertible Notes (3)
$
19,697

 
11.00
%
 
n/a (3)
 
$
19,164

 
10.00
%
 
3.9
Total recourse debt
$
139,697

 
 
 

 
$
139,164

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse Consolidated Entities' debt:
 

 
 

 
 
 
 
 
 
 
 
Consolidated CLOs (4)
$
11,042,200

 
1.58
%
 
8.7
 
$
10,336,453

 
1.43
%
 
8.3
Warehouses (5)
438,441

 
1.41
%
 
n/m
 
148,522

 
1.30
%
 
n/m
Total non-recourse Consolidated Entities' debt
$
11,480,641

 
1.57
%
 
8.7
 
$
10,484,975

 
1.43
%
 
8.3
Total long-term debt
$
11,620,338

 


 

 
$
10,624,139

 


 


Explanatory Notes:
________________________________
(1)
March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015 and 3 month LIBOR plus 2.58% until maturity on October 30, 2035.
(2)
October Junior Subordinated Notes bear interest at an annual rate of 3 month LIBOR plus 3.50% and mature on October 30, 2035.
(3)
As of June 30, 2014 and December 31, 2013, Convertible Notes were recorded net of a discount of $5.3 million and $5.8 million, respectively and paid interest at the stated rates of 11.00% and 10.00%, respectively. Including the discount, the effective rate of interest is 18.14% for both periods. The Convertible Notes have a $25.0 million aggregate principal amount. Subsequent to quarter end, Convertible Notes outstanding were converted (see Notes 11 and 14).
(4)
Long-term debt of the Consolidated CLOs is recorded at fair value. The subordinated notes of Consolidated CLOs do not have a stated interest rate. Therefore, they are excluded from the calculation of the weighted average borrowing rate. As of June 30, 2014 and December 31, 2013, the par value of the Consolidated CLOs long-term debt (including subordinated notes) was $12.0 billion and $10.9 billion, respectively.
(5)
Long-term debt of warehouses not held by the Company is recorded at fair value. The fair value excludes the preferred shares of Warehouse(s) outstanding as of each respective period not held by the Company, which have a par value of $68.6 million and $67.5 million as of June 30, 2014 and December 31, 2013, respectively. They do not have a stated interest rate and are excluded from the calculation of the weighted average borrowing rate.


24
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recourse Debt
Convertible Notes—On June 18, 2014, the Company gave notice to its convertible note holder of its intention to redeem the notes at their full par value of $25.0 million. On July 12, 2014, the note holder, DFR Holdings LLC, exercised its right to convert the notes into shares of common stock. Pursuant to the agreement, the Convertible Notes converted into 4,132,231 shares of common stock at a conversion price of $6.05 per share. Effective June 9, 2014, cash interest increased from 10% to 11% per annum and Company could call the notes without a prepayment penalty.
Non-Recourse Consolidated Entities Debt
Consolidated CLOs—During the six months ended June 30, 2014, the Consolidated CLOs issued $1.4 billion of debt, paid down $0.9 billion of their outstanding debt, made net borrowings under revolving credit facilities of $9.4 million, and distributed $116.9 million to the holders of their subordinated notes. During the six months ended June 30, 2013, the Consolidated CLOs issued $1.6 billion of debt, paid down $747.3 million of their outstanding debt, made net borrowings under revolving credit facilities of $27.9 million, and distributed $141.1 million to the holders of their subordinated notes.
The carrying value of the assets of the Consolidated CLOs, which are the only assets to which the Consolidated CLO debt holders have recourse for repayment was $11.6 billion and $11.0 billion as of June 30, 2014 and December 31, 2013, respectively.    
Other Consolidated Entities—The debt and equity holders have recourse to the total assets of the respective Consolidated Entity's assets. See Note 4 for further details of the Company's exposure to loss on Consolidated Entities.

Note 11—Equity
 
Common Stock—On June 18, 2014, the Company gave notice to its convertible note holder of its intention to redeem the notes at their full par value of $25.0 million. On July 12, 2014, the note holder, DFR Holdings LLC, exercised its right to convert the notes into 4,132,231 shares of common stock. See also Note 10 and 14.

During the three and six months ended June 30, 2014, the Company declared cash dividends of $0.10 and $0.20, respectively, per common share. There were no cash dividends declared during the three and six months ended June 30, 2013. Subsequent to quarter end, the Company declared a cash dividend of $0.10 per share which will be paid on September 15, 2014 to shareholders of record as of the close of business on August 25, 2014 (see also Note 16).
 
Stock-based Compensation—During the three and six months ended June 30, 2014, the Company recorded total stock-based compensation expense for its Stock Options and Restricted Stock Units ("RSU") of $0.6 million and $0.7 million, respectively, and during the three and six months ended June 30, 2013, the Company recorded total stock-based compensation expense of $0.9 million and $1.7 million, respectively, on the Condensed Consolidated Statements of Operations within "Compensation and benefits" and "General and administrative expenses."

As of June 30, 2014, an aggregate of 1,108,592 shares remain available for issuance under the Company's 2011 Stock Plan ("2011 Stock Plan"). During the six months ended June 30, 2014, the Company's Board of Directors approved the second amendment to the 2011 Stock Plan increasing the aggregate number of common shares authorized for issuance under the plan by 2.0 million shares to 6,181,929. As of June 30, 2014, there was $10.9 million of estimated unrecognized compensation expense related to unvested stock option and RSU awards, net of estimated forfeitures. The remaining weighted average vesting period of stock options and RSUs are 1.4 years and 5.7 years, respectively.


25
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options—The following table summarizes certain Stock Options activity:
 
Number of Shares
Underlying Stock-Based Awards
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate Intrinsic
Value
 
 
 
 
 
(In years)
 
(In thousands)
Outstanding at December 31, 2013
3,879,813

 
$
6.05

 
5.77
 
$
5,979

Granted (1)
400,000

 
8.81

 
 
 
 
Exercised
(100,000
)
 
4.83

 

 


Forfeited (2)
(325,000
)
 
5.79

 

 


Outstanding at June 30, 2014
3,854,813

 
$
6.67

 
5.63
 
$
9,033

Exercisable at June 30, 2014
2,392,547

 
$
6.34

 
3.83
 
$
6,385

Vested and Expected to vest at June 30, 2014 (3)
3,774,035

 
$
6.65

 
5.57
 
$
8,909


Explanatory Notes:
________________________________
(1)
On June 13, 2014, the Company granted to certain executives 200,000 service-based stock options with one-quarter of the awards vesting on January 1, 2015, and 200,000 service-based stock options with one-third of the awards vesting on January 1, 2015. The remainder of these options will vest ratably over the respective remaining term of the option agreements.
(2)
The forfeited stock-based awards are returned to the grant pool for reissuance under the 2011 Stock Plan.
(3)
Includes a reduction to outstanding options at period end for expected forfeiture rate over the life of the options.

Management estimates the fair value of stock-based awards using the Black-Scholes option pricing model. The weighted average assumptions as of the grant date related to stock-based awards (by period issued) are listed in the table below:
 
For the Three Months Ended June 30,
For the Six Months Ended June 30,
 
2014
 
2013
2014
 
2013
Expected dividend yield
4.54%
 
—
4.54
%
 
—

Expected volatility
42.65%
 
n/a
42.65
%
 
48.75
%
Risk-free interest rate
1.96%
 
n/a
1.96
%
 
1.10
%
Expected life (years)
5.77
 
n/a
5.77

 
6.11


The stock-based awards granted generally have exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of 10 years and a vesting period of approximately 4 years. In addition to awards with service conditions, certain of the awards also contain performance conditions. The expected dividend yield is the expected annual dividend as a percentage of the fair market value of the stock on the date of grant. Options granted during 2014 included an expected dividend yield representing what the Company expected to distribute in the foreseeable future at the grant date. All options granted prior to 2014 did not include an expected dividend yield since the Company declared its first dividend in third quarter of 2013. The expected volatility is estimated by considering the historical volatility of the Company's stock, the historical and implied volatility of peer companies and the Company's expectations of volatility for the expected life of the stock-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for an instrument which closely approximates the expected option term. The expected option term is the number of years management estimates that the stock-based award will be outstanding prior to exercise. The expected life of the stock-based awards issued is determined using the simplified method.


26
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RSUs—On June 13, 2014, the Company granted 800,000 service-based RSUs to certain executives which vest as follows: (i) 600,000 service-based RSUs comprised of five 120,000 RSU tranches, with 20% of the first tranche initially vesting on December 31, 2014, 20% of the second tranche initially vesting on December 31, 2015, 20% of the third tranche initially vesting on December 31, 2016, 20% of the fourth tranche initially vesting on December 31, 2017 and 20% of the fifth tranche initially vesting on December 31, 2018 (each such 20% initial vesting date, the “Initial Vest Date” in respect of such tranche).  Following the Initial Vest Date in respect of each tranche, 5% of the remaining RSUs will vest quarterly over the four year period following the Initial Vest Date in respect of such tranche. (ii) 200,000 service-based RSUs vest over two years. On the same day, the Company also granted 150,000 performance-based RSUs to certain executives which cliff vest on January 1, 2017. These awards are not entitled to dividends, therefore the fair value of these awards were determined using the Company's grant date common stock price less the present value of the expected dividends forgone during the vesting period.

On June 5, 2014, the Company granted 64,396 service-based RSUs to the Company's directors that vest in approximately one year. The awards are entitled to dividend equivalent rights and, as such, the fair value of the awards were determined using the Company's grant date common stock price.

The weighted average grant date fair value of all awards granted above was $7.86.

The following table summarizes restricted stock units activity:
 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
Restricted stock units outstanding, beginning of period
 
18,486

 
103,360

Granted
 
1,014,396

 
—

Settled (1)
 
(7,236
)
 
(96,124
)
Restricted stock units outstanding, end of period (2)
 
1,025,646

 
7,236


Explanatory Notes:
_________________________________
(1)
Represents the gross number of RSUs settled during the period with the issuance of common stock to the restricted stock unit holder.  During the six months ended June 30, 2014, the Company issued 7,236 shares of common stock to settle the third 1/3 annual installment of the RSUs granted in 2011. During the six months ended June 30, 2013, the Company issued 88,888 shares of common stock to settle restricted stock grants from 2010 and 7,236 shares of common stock to settle the second 1/3 annual installment of the RSUs granted in 2011.
(2)
For 2013, outstanding amount relates to the remaining 2011 grants to certain members of the Board. The 2011 grants were fully vested and delivered as of June 30, 2014.

Profits Interests Awards—During June 2011, CIFC Parent (a related party until December 18, 2013) granted certain employees of the Company profits interests in CIFC Parent. During the three and six months ended June 30, 2014, the Company recorded a non-cash compensation expense of $0.1 million for both periods, and during the three and six months ended June 30, 2013, the Company recorded a non-cash compensation expense of $0.2 million and $1.2 million, respectively, in "Compensation and benefits" on the Condensed Consolidated Statements of Operations related to the amortization and remeasurement of the value of the awards. As of June 30, 2014, there were no estimated unrecognized compensation expense related to these awards.

Warrants—In connection with the restructuring of an investment product formerly managed by the Company, CIFC issued 250,000 warrants. These warrants provides the holders the right to purchase shares of the Company's common stock at an exercise price of $4.25 per share and expired on April 9, 2014. As of December 31, 2013, total warrants outstanding totaled 225,000. During the six months ended June 30, 2014, the holders of the warrants exercised the 225,000 warrants and the Company net share settled for 99,065 of common shares.
 


27
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 —Earnings (Loss) Per Share

The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Net income (loss) attributable to CIFC Corp. - basic
$
6,444

 
$
7,543

 
$
6,679

 
$
10,330

Dilutive effect of Convertible Notes (1)
479

 
455

 
951

 
904

Net income (loss) attributable to CIFC Corp. - diluted
$
6,923

 
$
7,998

 
$
7,630

 
$
11,234

 
 
 
 
 
 
 
 
Weighted-average shares - basic
20,972

 
20,809

 
20,906

 
20,803

   Convertible Notes (1)
4,132

 
4,132

 
4,132

 
4,132

Stock options (2)
630

 
199

 
611

 
252

Warrants
470

 
461

 
482

 
533

Unvested RSUs (2)
9

 
n/a

 
10

 
n/a

Weighted-average shares - diluted
26,213

 
25,601

 
26,141

 
25,720

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 

 
 
 
 

Basic
$
0.31

 
$
0.36

 
$
0.32

 
$
0.50

Diluted
$
0.26

 
$
0.31

 
$
0.29

 
$
0.44

 

Explanatory Notes:
________________________________
(1)
Subsequent to quarter end, the Convertible Notes were converted into 4.1 million shares of common stock to DFR Holdings (see Notes 10, 11 and 14).
(2)
For the three and six months ended June 30, 2014, 1.1 million and 0.9 million, respectively, of stock options and 0.4 million and 0.2 million, respectively, of unvested RSUs were considered anti-dilutive and excluded from diluted EPS. For both the three and six months ended June 30, 2013, 1.2 million of stock options were considered anti-dilutive and excluded from diluted EPS.

Note 13—Income Taxes

The following table summarizes the Company's tax position:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Income (loss) before income taxes
$
22,745

 
$
41,033

 
$
59,730

 
$
75,084

Income tax expense
$
(6,837
)
 
$
(6,488
)
 
$
(19,241
)
 
$
(9,598
)
Effective income tax rate
30.1
%
 
15.8
%
 
32.2
%
 
12.8
%

The effective tax rate, including noncontrolling interests in Consolidated VIEs, was 30.1% and 32.2%, respectively, during the three and six months ended June 30, 2014 and 15.8% and 12.8%, respectively, during the three and six months ended June 30, 2013. The increase in the effective tax rate compared with the prior year was primarily attributable to the write-down of deferred tax assets impacted by tax law changes enacted by New York State on March 31, 2014 that are effective for tax years beginning on or after January 1, 2015 and decrease in the Consolidated VIEs noncontrolling interest income/(loss), which is included in pre-tax income/(loss) but is not taxable to CIFC Corp. During the six months ended June 30, 2014, the Company included a tax expense of approximately $6.7 million related to the change in New York State tax laws. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or changes in tax laws or regulations.


28
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14—Related Party Transactions

DFR Holdings—As of June 30, 2014 and December 31, 2013, DFR Holdings owned approximately 14.7 million shares of the Company's common stock and $25.0 million aggregate principal amount of the Company's Convertible Notes, which is convertible into approximately 4.1 million shares of the Company's common stock. Subsequent to quarter end, on July 12, 2014, DFR Holdings exercised its right to convert the notes into shares of common stock (see Note 10, 11 and 16). In addition, DFR Holdings held warrants that entitle them the right to purchase 2.0 million shares of the Company's voting common stock. As such, related party transactions also included (i) the interest expense on Convertible notes of $0.9 million and $1.8 million, respectively, during the three and six months ended June 30, 2014 and $0.9 million and $1.7 million, respectively, during the three and six months ended June 30, 2013, (ii) deferred purchase payments (see Note 9), and (iii) quarterly dividends (see Note 11). For the three and six months ended June 30, 2013, total management fees from related parties was $13,000 and $25,000, respectively. The Company did not earn any management fees from DFR Holdings for the three and six months ended June 30, 2014.

The Company agreed to nominate to the Company's Board of Directors six directors designated by DFR Holdings. The number of directors that can be designated by DFR Holdings is reduced in the event that DFR Holdings decreases its ownership (on a diluted basis) in CIFC. If DFR Holdings' ownership falls below 5%, it will lose the right to designate any director. During the three and six months ended June 30, 2014, the directors earned an aggregate $0.2 million and $0.3 million, respectively, related to their services.

CIFC Parent—As of June 30, 2014, CIFC Parent no longer owns common shares of the Company. However, during the three and six months ended June 30, 2013, CIFC Parent held 9.1 million shares of the Company's common stock and invested in CLOs managed by the Company.

As such, related party transactions for the three and six months ended June 30, 2014, included (i) contingent liabilities payments to CIFC Parent (see Note 9), (ii) CIFC Parent's investment of $1.3 million in two Consolidated Funds managed by the Company as of June 30, 2014, (iii) fees to the Company for providing certain administrative services to CIFC Parent, and (iv) profits interests in CIFC Parent granted during 2011 to certain employees of the Company (see Note 11). As of June 30, 2014 and December 31, 2013, total management fee receivables due from related parties was $12,500 and $167,000, respectively. For the three and six months ended June 30, 2014, total management fees from related parties was $12,500 and $25,000, respectively, and for the three and six months ended June 30, 2013, total management fees from related parties was $46,000 and $93,000, respectively.
Other—As of June 30, 2014 and December 31, 2013, a board member holds $1.0 million of income notes in one of the Company's sponsored CLOs, CIFC Funding 2013-II, Ltd., through an entity in which he is a 50% equity holder.
Funds—As of June 30, 2014, employees and directors of the Company invested an aggregate $3.5 million in three different funds which the Company invests in and manages. Employees are not charged a management fee on their investment. Directors were charged a fee, similar to certain other investors. For the three and six months ended June 30, 2014, these amounts were de minimis.
Note 15—Commitments and Contingencies
Legal Proceedings—In the ordinary course of business, the Company may be subject to legal and regulatory proceedings and examinations that are generally incidental to the Company's ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings or examinations, the Company does not believe their disposition will have a material adverse effect on the Company's Condensed Consolidated Financial Statements.

In addition, in connection with activities of one of the Company's investment advisor subsidiaries that occurred prior to the Company's acquisition of such investment advisor, the Company made certain voluntary reimbursements and other payments to certain investors and CLOs currently or formerly managed by such investment advisor. As a result of a contractual arrangement the Company was fully indemnified for these payments by the seller of such investment advisor and it is not probable and estimable that any loss will be incurred.

In addition, in June 2013, a suit was filed against the Company (and certain of its affiliates and directors) by a former employee. The Company denies the allegations, intends to defend itself vigorously, believes that the pending lawsuit is without merit and has filed counterclaims against the plaintiff.    

29
CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Lease Commitments—During the three and six months ended June 30, 2014, total occupancy expense was $0.4 million and $0.8 million, respectively, and during the three and six months ended June 30, 2013, total occupancy expense was $0.4 million and $0.7 million, respectively. The future minimum commitments under the Company's lease agreement are as follows:
 
(In thousands)
2014 (6 months remaining)
$
803

2015
1,607

2016
1,607

2017
1,607

2018
1,680

Thereafter
7,010

 
$
14,314

 
Unfunded Loan Commitments—Certain of the Consolidated CLOs have debt structures which include unfunded revolvers. Unfunded debt commitments represent the estimated fair value of those unfunded revolving debt facilities. Unfunded loan commitments represent the estimated fair value of those unfunded revolvers of loan facilities.
Unfunded loan commitments represent the estimated fair value of those unfunded revolvers of loan facilities. As of June 30, 2014 and December 31, 2013, the Consolidated CLOs had unfunded investment commitments on loans of $38.6 million and $36.8 million, respectively. The timing and amount of additional funding on these loans are at the discretion of the borrower, to the extent the borrower satisfies certain requirements and provides certain documentation. The Company does not have any obligation to fund these commitments.
Other—As of both June 30, 2014 and December 31, 2013, the Company fully funded the aggregate minimum commitment to invest $30.0 million in its CIFC sponsored funds.

Note 16—Subsequent Events
    
Subsequent to quarter end, the Company sponsored the issuance of a new CLO that represented approximately $700 million of new loan-based AUM. In addition, the Company priced another CLO that represented approximately $600 million of new loan-based AUM.

Subsequent to quarter end, the Company declared a cash dividend of $0.10 per share. The dividend will be paid on September 15, 2014 to shareholders of record as of the close of business on August 25, 2014.

On June 18, 2014, the Company gave notice to the convertible note holders of its intention to redeem the notes at their full par value of $25.0 million. On July 12, 2014, the note holder, DFR Holdings, exercised its right to convert the notes into 4,132,231 shares of common stock.


30

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our Condensed Consolidated Financial Statements and notes thereto included in Part I—Item 1. Condensed Consolidated Financial Statements and Notes (Unaudited) of this Quarterly Report on Form 10-Q (the “Quarterly Report”).  The statements in this discussion regarding the industry outlook and our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Special Note Regarding Forward-Looking Statements and Part I—Item 1A. Risk Factors in our 2013 Annual Report on Form 10-K. Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. as “CIFC,” to CIFC and its subsidiaries as “we,” “us,” “our,” “our company,” or “the Company,” to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as “CIFCAM,” to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as “DCM,” to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as “CypressTree,” to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as “CNCIM.”

Overview
 
CIFC Corp. (“CIFC” and, together with its subsidiaries, "we" or "us") is a fundamentals-based, relative value, alternative credit manager. Our primary business is to provide investment management services for investment products. We manage assets for various types of investors, including: pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located across the world.
Our assets under management ("AUM") is primarily comprised of Collateralized Loan Obligations ("CLOs"), credit funds and separately managed accounts ("SMAs", together with credit funds "other loan-based products"). These credit products are opportunistic investment strategies where we seek to generate both current income and capital appreciation, primarily through senior secured corporate loan (“SSCL”) investments and, to a lesser extent, other investments. Management internally views the business as one reportable segment.
We have three primary sources of revenue: management fees, incentive fees and investment income. Management fees are generally earned based on the amount of assets managed (or AUM), incentive fees are earned based on the performance of the funds and investment income is earned based on the performance of our direct investment in our products.
CIFC Corp. is a Delaware corporation headquartered in New York City. As of June 30, 2014, DFR Holdings LLC, on a fully-diluted basis, owns approximately 70% of our diluted shares outstanding.
Executive Overview

We had a strong quarter with ENI increasing 48% year over year. Our CLOs and total return funds continue to perform well. The CLO market has been strong in 2014 and outpaced the record levels of 2013. Our loan-based AUM increased by $0.5 billion during the first half of the year. During the quarter, CIFC sponsored its largest CLO that represents approximately $0.8 billion of new AUM. Year-to-date, we have priced four CLOs with aggregate new AUM of $2.7 billion. Our ability to establish warehouses and accumulate assets before pricing the CLOs has been a key competitive advantage we continue to leverage.

During the quarter ended June 30, 2014, we recorded GAAP net income attributable to CIFC Corp. of $6.4 million, compared to $7.5 million for the same period in the prior year. The decrease in total net income period over period was predominately due to a $2.1 million increase in losses on contingent liabilities related to an improvement in the expected performance of legacy CIFC CLOs with fee sharing arrangements. This loss was partially offset by an increase in $1.5 million in net revenues which was primarily related to an increase in net investment income. See "Results of Operations" below for additional details.

Economic Net Income ("ENI") was $15.2 million, compared to $10.3 million for the same period in the prior year. ENI increased period to period by $4.9 million or 48% primarily related to higher net investment income and management fees. Net investment income increase was driven primarily by an increase in net gains from CIFC's investments in CLOs, credit funds and warehouses during the current quarter. In addition, management fees increased as we recognized more revenues from CLOs and credit funds launched since the second quarter of 2013. These increases were partially offset by (i) decreases in management fees from certain legacy CLOs that are amortizing pursuant to their contractual terms, and (ii) increases in compensation, benefits and other operating expenses to support our continued growth. See "Non-GAAP Measure - ENI" below for additional details.

31

Fee Earning AUM

Fee Earning Assets Under Management ("Fee Earning AUM" or "AUM") refers to the assets managed by us on which we are paid management fees and/or incentive fees. Generally, fees are paid on the aggregate collateral balance at par, and principal cash of CLOs and the value of the assets in credit funds (excluding non-fee earning AUM such as our investments).
The following table summarizes the Fee Earning AUM, for which we are paid a management fee, by significant investment product category (1):
 
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013
 
June 30, 2013
 
Number of Accounts
 
Fee Earning AUM
 
Number of Accounts
 
Fee Earning AUM
 
Number of Accounts
 
Fee Earning AUM
 
Number of Accounts
 
Fee Earning AUM
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
 
(In thousands)
Post 2011 CLOs
10

 
$
5,539,964

 
9

 
$
4,732,728

 
8

 
$
4,127,951

 
6

 
$
3,219,531

Legacy CLOs (2)
19

 
5,819,791

 
19

 
6,423,605

 
20

 
6,811,382

 
26

 
8,344,616

     Total CLOs
29

 
11,359,755

 
28

 
11,156,333

 
28

 
10,939,333

 
32

 
11,564,147

Other Loan-Based Products (3)
6

 
1,211,907

 
6

 
1,189,120

 
6

 
1,106,526

 
3

 
822,534

Total Loan-Based AUM
35

 
12,571,662

 
34

 
12,345,453

 
34

 
12,045,859

 
35

 
12,386,681

ABS and Corporate Bond CDOs
8

 
$
737,769

 
8

 
768,609

 
8

 
$
802,821

 
10

 
$
1,325,535

Total Fee Earning AUM
43

 
$
13,309,431

 
42

 
$
13,114,062

 
42

 
$
12,848,680

 
45

 
$
13,712,216


Explanatory Notes:
_________________________________
(1)
We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs is expected to continue to decline as these funds run-off per their contractual terms.
(2)
Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.
(3)
Other loan-based products management fee structures vary by fund and may not be similar to a CLO.

Fee Earning AUM activity is as follows:
 
 
For the Three Months Ended
 
For the Six Months Ended
 
Last Twelve Months
 
 
June 30, 2014
 
 
(In thousands)
Total loan-based AUM - Beginning Balance
 
$
12,345,453

 
$
12,045,859

 
$
12,386,681

CLO New Issuances
 
800,000

 
1,400,462

 
2,303,694

CLO Principal Paydown
 
(527,131
)
 
(908,647
)
 
(1,935,706
)
CLO Calls, Redemptions and Sales
 
(86,693
)
 
(86,693
)
 
(548,758
)
Fund Subscriptions
 
25,101

 
72,289

 
383,853

Other (1)
 
14,932

 
48,392

 
(18,102
)
Total loan-based AUM - Ending Balance
 
12,571,662

 
12,571,662

 
12,571,662

Total CDOs - Ending Balance
 
737,769

 
737,769

 
737,769

Total Fee Earning AUM - Ending Balance
 
$
13,309,431

 
$
13,309,431

 
$
13,309,431


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

32

During the three months ended June 30, 2014, total AUM increased by $0.2 billion. During the quarter, we sponsored the issuance of one CLO and increased subscriptions to other loan-based products increasing Fee Earning AUM by $825.1 million. New AUM was offset by declines in AUM for certain Legacy CLOs and CDOs aggregating $644.7 million which have reached the end of their contractual reinvestment periods (after which capital is returned to investors as the loan assets underlying the CLOs and CDOs repay principal).

During the six months ended June 30, 2014, total AUM increased by $0.5 billion. During the period, we sponsored the issuance of two CLOs and increased subscriptions to other loan-based products increasing Fee Earning AUM by approximately $1.5 billion. New AUM was offset by declines in AUM for certain Legacy CLOs and CDOs aggregating $1.1 billion which have reached the end of their contractual reinvestment periods (after which capital is returned to investors as the loan assets underlying the CLOs and CDOs repay principal).

Most of the CLOs and CDOs we manage and issued prior to 2011 have passed their first optional call date and are generally callable by their subordinated note holders, subject to satisfaction of certain conditions. As expected, CDO AUM continued to decline during the three and six months ended June 30, 2014. We do not expect to sponsor new CDOs and expect CDO AUM to continue to decline going forward as these funds run-off per their contractual terms.

    

33


The structure of the CLOs we manage affects the management fees paid to us. The following table summarizes select details of the structure of each of the CLOs we manage:
 
 
Issuance Date
 
June 30, 2014
Fee Earning AUM
 
First Optional
Call Date (1)
 
Termination of
Reinvestment
Period (2)
 
Maturity
Year (3)
 
 
Month/Year
 
(In thousands)
 
Month/Year
 
 
Post 2011 CLOs
 
 
 
 
 
 
 
 
 
 
CIFC Funding 2011-I, Ltd.
 
01/12
 
$
403,874

 
01/14
 
01/15
 
2023
CIFC Funding 2012-I, Ltd.
 
07/12
 
454,274

 
08/14
 
08/16
 
2024
CIFC Funding 2012-II, Ltd.
 
11/12
 
732,827

 
12/14
 
12/16
 
2024
CIFC Funding 2012-III, Ltd.
 
01/13
 
504,295

 
01/15
 
01/17
 
2025
CIFC Funding 2013-I, Ltd.
 
03/13
 
505,540

 
04/15
 
04/17
 
2025
CIFC Funding 2013-II, Ltd.
 
06/13
 
627,787

 
07/15
 
07/17
 
2025
   CIFC Funding 2013-III, Ltd.
 
09/13
 
403,289

 
10/15
 
10/17
 
2025
   CIFC Funding 2013-IV, Ltd.
 
11/13
 
503,492

 
11/15
 
11/17
 
2024
   CIFC Funding 2014, Ltd.
 
03/14
 
601,236

 
04/16
 
04/18
 
2025
CIFC Funding 2014-II, Ltd.
 
05/14
 
803,350

 
05/16
 
05/18
 
2026
Total Post 2011 CLOs
 
 
 
5,539,964

 
 
 
 
 
 
Legacy CLOs
 
 
 
 
 
 
 
 
 
 
Navigator 2005 CLO, Ltd.
 
07/05
 
29,580

 
10/11
 
10/11
 
2017
Bridgeport CLO Ltd. 
 
06/06
 
359,502

 
10/09
 
07/13
 
2020
CIFC Funding 2006-I, Ltd. 
 
08/06
 
218,498

 
10/10
 
10/12
 
2020
Columbus Nova 2006-I, Ltd.
 
08/06
 
266,079

 
10/09
 
10/12
 
2018
Navigator 2006 CLO, Ltd.
 
09/06
 
218,093

 
09/10
 
09/13
 
2020
CIFC Funding 2006-I B, Ltd. 
 
10/06
 
205,696

 
12/10
 
12/12
 
2020
Burr Ridge CLO Plus Ltd. 
 
12/06
 
247,188

 
06/12
 
03/13
 
2023
CIFC Funding 2006-II, Ltd. 
 
12/06
 
356,223

 
03/11
 
03/13
 
2021
Columbus Nova 2006-II, Ltd.
 
12/06
 
324,263

 
02/10
 
02/13
 
2018
Hewett's Island CLO V, Ltd. 
 
12/06
 
122,413

 
12/09
 
12/12
 
2018
CIFC Funding 2007-I, Ltd. 
 
02/07
 
345,666

 
05/11
 
11/13
 
2021
CIFC Funding 2007-II, Ltd. 
 
03/07
 
591,076

 
04/11
 
04/14
 
2021
Columbus Nova 2007-I, Ltd.
 
03/07
 
274,299

 
05/10
 
05/13
 
2019
Hewett's Island CLO VI, Ltd. 
 
05/07
 
166,239

 
06/10
 
06/13
 
2019
Schiller Park CLO Ltd. 
 
05/07
 
373,321

 
07/11
 
04/13
 
2021
Bridgeport CLO II Ltd. 
 
06/07
 
489,899

 
12/10
 
09/14
 
2021
CIFC Funding 2007-III, Ltd. 
 
07/07
 
434,483

 
07/10
 
07/14
 
2021
Primus CLO II, Ltd. 
 
07/07
 
365,097

 
10/11
 
07/14
 
2021
Columbus Nova 2007-II, Ltd.
 
11/07
 
432,176

 
10/10
 
10/14
 
2021
Total Legacy CLOs
 
 
 
5,819,791

 
 
 
 
 
 
Total CLOs
 
 
 
$
11,359,755

 
 
 
 
 
 
Explanatory Notes:
_________________________________
(1)
CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) once per quarter beginning on the "first optional call date" and subject to satisfaction of certain conditions. 
(2)
Termination of reinvestment period refers to the date after which we can no longer use certain principal collections to purchase additional collateral, and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO. 
(3)
Represents the contractual maturity of the CLO. Generally, the actual maturity of the deal is expected to occur in advance of contractual maturity. 



34

Results of Condensed Consolidated Operations
 
The Condensed Consolidated Financial Statements include the financial statements of our wholly owned subsidiaries, the entities in which we have a controlling interest ("Consolidated Funds") and variable interest entities ("VIEs" or "Consolidated VIEs") for which we are deemed to be the primary beneficiary (together the "Consolidated Entities"). Consolidated VIEs includes certain CLOs and warehouses we manage. The following table presents our comparative Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and 2013:

 
For the Three Months Ended June 30,
 
2014 vs. 2013
 
2014
 
2013
 
Variance
 
% Variance
 
(In thousands, except share and per share amounts)
 
 
Revenues
 

 
 

 
 

 
 
Management fees
$
1,378

 
$
2,240

 
$
(862
)
 
(38
)%
Net investment income
97

 
106

 
(9
)
 
(8
)%
Total net revenues
1,475

 
2,346

 
(871
)
 
(37
)%
Expenses
 

 
 

 
 

 
 
Compensation and benefits
8,047

 
6,986

 
1,061

 
15
 %
Professional services
706

 
715

 
(9
)
 
(1
)%
General and administrative expenses
2,259

 
1,843

 
416

 
23
 %
Depreciation and amortization
2,870

 
4,278

 
(1,408
)
 
(33
)%
Total expenses
13,882

 
13,822

 
60

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

 
 

 
 

 
 
Net gain (loss) on investments at fair value
1,121

 
251

 
870

 
347
 %
Net gain (loss) on contingent liabilities at fair value
(1,529
)
 
613

 
(2,142
)
 
(349
)%
Corporate interest expense
(1,486
)
 
(1,452
)
 
(34
)
 
2
 %
Other, net
—

 
(5
)
 
5

 
(100
)%
Net other income (expense) and gain (loss)
(1,894
)
 
(593
)
 
(1,301
)
 
219
 %
Operating income (loss)
(14,301
)
 
(12,069
)
 
(2,232
)
 
18
 %
 
 
 
 
 
 
 
 
Net results of Consolidated Entities
37,046

 
53,102

 
(16,056
)
 
(30
)%
Income (loss) before income taxes
22,745

 
41,033

 
(18,288
)
 
(45
)%
Income tax (expense) benefit
(6,837
)
 
(6,488
)
 
(349
)
 
5
 %
Net income (loss)
15,908

 
34,545

 
(18,637
)
 
(54
)%
Net (income) loss attributable to noncontrolling interest in Consolidated Entities
(9,464
)
 
(27,002
)
 
17,538

 
(65
)%
Net income (loss) attributable to CIFC Corp.
$
6,444

 
$
7,543

 
$
(1,099
)
 
(15
)%
Earnings (loss) per share:
 

 
 

 
 

 
 
Basic
$
0.31

 
$
0.36

 
$
(0.05
)
 
(14
)%
Diluted
$
0.26

 
$
0.31

 
$
(0.05
)
 
(16
)%
Weighted-average number of shares outstanding:
 

 
 

 
 

 
 
Basic
20,971,928

 
20,808,750

 
163,178

 
1
 %
Diluted
26,212,593

 
25,601,165

 
611,428

 
2
 %


35

Net income (loss) attributable to CIFC Corp. was $6.4 million, or $0.26 per fully diluted share for the three months ended June 30, 2014, compared to $7.5 million, or $0.31 per fully diluted share, in the prior year. Net income (loss) attributable to CIFC Corp. decreased by $1.1 million from the prior year predominantly due to the following net results:
    
Total Net Revenues—GAAP net revenues includes management fees from unconsolidated CLOs, CDOs and other loan-based products. Unconsolidated funds included 2 CLOs, 8 CDOs, and 2 other investment products as of June 30, 2014 compared to 7 CLOs, 11 CDOs and 1 other investment product as of June 30, 2013. Total net revenues decreased $0.9 million or 37% from the same period of the prior year primarily due to reductions in AUM from unconsolidated funds that liquidated since the second quarter of 2013. In addition, certain unconsolidated CLOs and CDOs have reached the end of their contractual reinvestment periods thereby reducing AUM and its related management fees. This decrease is partially offset by management fees from other loan-based products as AUM from these products increased since the second quarter of the prior year.

Total Expenses—Depreciation and Amortization decreased by $1.4 million which was mostly offset by an increase in Compensation and Benefits of $1.1 million.

Depreciation and amortization decreased by $1.4 million or 33% from the same period of the prior year primarily due to a reduction in amortization expense on intangible assets related to management contracts acquired for certain CLOs and CDOs that were impaired or written off in the prior year. Compensation and benefits increased by $1.1 million or 15% from the same period of the prior year, as a result of an increase in compensation for certain key executives and an overall increased headcount.

Net other income (expense) and gain (loss)—Total Net other income and gains decreased by $1.3 million or 219% period over period, primarily due to an increase in net losses on Contingent Liabilities at Fair Value related to an improvement in the expected performance of legacy CIFC CLOs with fee sharing arrangements.

Net results of Consolidated Entities attributable to CIFC Corp.—The table below represents our share in the net results of the Consolidated Entities and a reconciliation to the characteristics of these results:
 
 
For the Three Months Ended June 30,
 
2014 vs. 2013
 
 
2014
 
2013
 
Variance
 
% Variance
 
 
(In thousands)
 
 
 
Net results of Consolidated Entities
 
$
37,046

 
$
53,102

 
$
(16,056
)
 
(30
)%
Net (income) loss attributable to noncontrolling interest in Consolidated Entities
 
(9,464
)
 
(27,002
)
 
17,538

 
(65
)%
   Net results of Consolidated Entities attributable to CIFC Corp.
 
$
27,582

 
$
26,100

 
$
1,482

 
6
 %
 
 
 
 
 
 
 
 
 
Characteristics of net results of Consolidated Entities attributable to CIFC Corp:
 
 
 
 
 
 
 
 
Consolidated Entities management fees
 
$
20,560

 
$
23,559

 
$
(2,999
)
 
(13
)%
Consolidated Entities net investment income
 
7,022

 
2,541

 
4,481

 
176
 %
 Net results of Consolidated Entities attributable to CIFC Corp.
 
$
27,582

 
$
26,100

 
$
1,482

 
6
 %

Net results of Consolidated Entities attributable to CIFC Corp. includes our portion of the Consolidated Entities' (including our Consolidated VIEs, or CLOs and warehouses) operating results. During the three months ended June 30, 2014 and 2013, we recognized $27.6 million and $26.1 million, respectively, of Consolidated Entities' management fees and net investment interest income related to our investments in the Consolidated Entities.

The $1.5 million or 6% increase in Net results of Consolidated Entities attributable to CIFC Corp. was primarily due to an increase in Consolidated Entities' net investment income partially offset by a decrease in management fees. Net investment income increased primarily driven by an increase in net gains from our warehouses, credit funds and CLO investments during the current quarter. These increases were offset by decreases in management fees from consolidated legacy CLOs that have reached the end of their contractual reinvestment periods and are amortizing pursuant to their contractual terms.

    

36

Income tax expense/benefit—The following table summarizes our tax position:
 
For the Three Months Ended June 30,
 
2014
 
2013
 
(In thousands)
Income (loss) before income taxes
$
22,745

 
$
41,033

Income tax expense
$
(6,837
)
 
$
(6,488
)
Effective income tax rate
30.1
%
 
15.8
%

The effective tax rate, including noncontrolling interests in Consolidated VIEs, was 30.1% and 15.8%, for the three months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate compared with the same period in the prior year was primarily attributable to a decrease in the Consolidated VIEs noncontrolling interest income/(loss), which is included in pre-tax income/(loss) but is not taxable to CIFC Corp.
    
The following table presents our comparative Condensed Consolidated Statements of Operations for the six months ended June 30, 2014 and 2013:

 
For the Six Months Ended June 30,
 
2014 vs. 2013
 
2014
 
2013
 
Variance
 
% Variance
 
(In thousands, except share and per share amounts)
 
 
Revenues
 

 
 

 
 

 
 
Management fees
$
2,990

 
$
4,883

 
$
(1,893
)
 
(39
)%
Net investment income
194

 
97

 
97

 
100
 %
Total net revenues
3,184

 
4,980

 
(1,796
)
 
(36
)%
Expenses
 

 
 

 
 

 
 
Compensation and benefits
15,387

 
14,510

 
877

 
6
 %
Professional services
1,752

 
2,638

 
(886
)
 
(34
)%
General and administrative expenses
4,472

 
3,327

 
1,145

 
34
 %
Depreciation and amortization
6,015

 
8,496

 
(2,481
)
 
(29
)%
Total expenses
27,626

 
28,971

 
(1,345
)
 
(5
)%
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 
Net gain (loss) on investments at fair value
2,527

 
600

 
1,927

 
321
 %
Net gain (loss) on contingent liabilities at fair value
(1,758
)
 
499

 
(2,257
)
 
(452
)%
Corporate interest expense
(2,953
)
 
(2,934
)
 
(19
)
 
1
 %
Net gain on the sale of management contract
228

 
752

 
(524
)
 
(70
)%
Other, net
—

 
(2
)
 
2

 
(100
)%
Net other income (expense) and gain (loss)
(1,956
)
 
(1,085
)
 
(871
)
 
(80
)%
Operating income (loss)
(26,398
)
 
(25,076
)
 
(1,322
)
 
(5
)%
 
 
 
 
 
 
 


Net results of Consolidated Entities
86,128

 
100,160

 
(14,032
)
 
(14
)%
Income (loss) before income taxes
59,730

 
75,084

 
(15,354
)
 
(20
)%
Income tax (expense) benefit
(19,241
)
 
(9,598
)
 
(9,643
)
 
100
 %
Net income (loss)
40,489

 
65,486

 
(24,997
)
 
(38
)%
Net (income) loss attributable to noncontrolling interest in Consolidated Entities
(33,810
)
 
(55,156
)
 
21,346

 
(39
)%
Net income (loss) attributable to CIFC Corp.
$
6,679

 
$
10,330

 
$
(3,651
)
 
(35
)%
Earnings (loss) per share:
 

 
 

 
 

 
 
Basic
$
0.32

 
$
0.50

 
$
(0.18
)
 
n/m

Diluted
$
0.29

 
$
0.44

 
$
(0.15
)
 
n/m

Weighted-average number of shares outstanding:
 

 
 

 
 

 
 
Basic
20,905,949

 
20,803,151

 
102,798

 
—
 %
Diluted
26,141,070

 
25,719,972

 
421,098

 
2
 %
 


37

Net income (loss) attributable to CIFC Corp. was $6.7 million, or $0.29 per fully diluted share for the six months ended June 30, 2014, compared to $10.3 million, or $0.44 per fully diluted share, in the prior year. Net income (loss) attributable to CIFC Corp. decreased by $3.7 million from the prior year predominantly due to the following net results:
    
Total Net Revenues—GAAP net revenues includes management fees from unconsolidated CLOs, CDOs and other loan-based products. Unconsolidated funds included 2 CLOs, 8 CDOs, and 2 other investment products as of June 30, 2014 compared to 7 CLOs, 11 CDOs and 1 other investment product as of June 30, 2013.Total net revenues decreased $1.8 million or 36% from the prior year primarily due to reductions in AUM from unconsolidated funds that liquidated during 2013. In addition, certain unconsolidated CLOs and CDOs have reached the end of their contractual reinvestment periods thereby reducing AUM and its related management fees. This decrease is slightly offset by management fees from other loan-based products as AUM from these products has increased since the same period in the prior year.

Total Expenses—Total expenses decreased $1.3 million or 5% year over year primarily due to decreases in Depreciation and amortization expenses partially offset by higher General and administrative expenses.

Depreciation and amortization decreased by $2.5 million or 29% from the prior year primarily due to a reduction in intangible amortization expense on management contracts acquired for certain CLOs and CDOs that were impaired or written off in the prior year. General and administrative expenses increased year over year due to increase in (i) investment related subscription services and (ii) other general and administrative costs to support our overall growth.

Net other income (expense) and gain (loss)—Total Net other income and gains decreased by $0.9 million or 80% year over year, primarily due to a $2.3 million increase in net losses on Contingent Liabilities at Fair Value related to an improvement in the expected performance of legacy CIFC CLOs with fee sharing arrangements. This decrease was partially offset by increases in net gains on Investments at Fair Value due to an increase in net gains from the settlement of warehouses and realization of gains from the sales of certain CLO residual equity during the current year.
    
Net results of Consolidated Entities attributable to CIFC Corp.—The table below represents our share in the net results of the Consolidated Entities and a reconciliation to the characteristics of these results:
 
 
For the Six Months Ended June 30,
 
2014 vs. 2013
 
 
2014
 
2013
 
Variance
 
% Variance
 
 
(In thousands)
 
 
 
 
Net results of Consolidated Entities
 
$
86,128

 
$
100,160

 
$
(14,032
)
 
(14
)%
Net (income) loss attributable to noncontrolling interest in Consolidated Entities
 
(33,810
)
 
(55,156
)
 
21,346

 
(39
)%
   Net results of Consolidated Entities attributable to CIFC Corp.
 
$
52,318

 
$
45,004

 
$
7,314

 
16
 %
 
 
 
 
 
 
 
 
 
Characteristics of net results of Consolidated Entities attributable to CIFC Corp:
 
 
 
 
 
 
 
 
Consolidated Entities management fees
 
$
40,803

 
$
41,714

 
$
(911
)
 
(2
)%
Consolidated Entities net investment income
 
11,515

 
3,290

 
8,225

 
250
 %
 Net results of Consolidated Entities attributable to CIFC Corp.
 
$
52,318

 
$
45,004

 
$
7,314

 
16
 %

Net results of Consolidated Entities attributable to CIFC Corp. includes our portion of the Consolidated Entities' (including our Consolidated VIEs, or CLOs and warehouses) operating results. During the six months ended June 30, 2014 and 2013, we recognized $52.3 million and $45.0 million, respectively, of Consolidated Entities' management fees and net investment interest income related to our investments in the Consolidated Entities.

The $7.3 million or 16% increase in Net results of Consolidated Entities attributable to CIFC Corp. was primarily due to an increase in Consolidated Entities' net investment income. Net investment income increased primarily driven by an increase in net gains from our warehouses, credit funds and CLO investments during the current year. These increases were offset by decreases in management fees from consolidated legacy CLOs that have reached the end of their contractual reinvestment periods and are amortizing pursuant to their contractual terms.


38

Income tax expense/benefit—The following table summarizes our tax position:
 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
(In thousands)
Income (loss) before income taxes
 
$
59,730

 
$
75,084

Income tax expense
 
$
(19,241
)
 
$
(9,598
)
Effective income tax rate
 
32.2
%
 
12.8
%

The effective tax rate, including noncontrolling interests in Consolidated VIEs, was 32.2% and 12.8%, for the six months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate compared with the prior year was primarily attributable to the write-down of deferred tax assets impacted by tax law changes enacted by New York State on March 31, 2014 that are effective for tax years beginning on or after January 1, 2015 and a decrease in the Consolidated VIEs noncontrolling interest income/(loss), which is included in pre-tax income/(loss) but is not taxable to CIFC Corp. During the six months ended June 30, 2014, we included a tax expense of approximately $6.7 million related to the change in New York State tax laws. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or changes in tax laws or regulations.

Economic Net Income "ENI" and Deconsolidated Non-GAAP Statements (Non-GAAP Measures, unaudited)
 
Economic Net Income "ENI"
    
ENI is a non-GAAP financial measure of profitability which we use in addition to GAAP Net income attributable to CIFC Corp. to measure the performance of our core business (excluding non-core products). We believe ENI reflects the nature and substance of the business, the economic results driven by management fee revenues from the management of client funds and earnings on our investments. ENI presents management fee revenues net of (i) any fee-sharing arrangements resulting from mergers or acquisitions and (ii) revenues attributable to non-core investment products. In addition, ENI represents net income (loss) attributable to CIFC Corp. before taxes, gains (losses) on disposition(s) attributable to non-core assets, a portion of non-cash compensation related to profits interests granted by CIFC Parent in June 2011 (a significant stockholder prior to December 18, 2013 - See Item 8 - "Consolidated Financial Statements - Note 14"), amortization and impairments of intangible assets, gains/(losses) on derivatives and contingent liabilities and certain non-recurring operating expenses and strategic transaction expenses (such as those associated with mergers and acquisitions).

 

39

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

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
GAAP Net income (loss) attributable to CIFC Corp.
 
$
6,444

 
$
7,543

 
$
6,679

 
$
10,330

Reconciling and non-recurring items:
 
 
 
 
 
 
 
 
Management fee sharing arrangements (1)
 
(2,421
)
 
(5,688
)
 
(5,066
)
 
(9,898
)
Management fees attributable to non-core funds (2)
 
(201
)
 
(2,111
)
 
(442
)
 
(2,652
)
Compensation costs (3)
 
430

 
558

 
942

 
1,657

Amortization and impairment of intangibles
 
2,608

 
4,100

 
5,517

 
8,148

Net (gain)/loss on contingent liabilities and other (4)
 
1,529

 
(613
)
 
1,758

 
(499
)
Gain on sales of contracts (5)
 
—

 
—

 
(228
)
 
(752
)
Income tax expense (benefit)
 
6,837

 
6,488

 
19,241

 
9,598

Total reconciling and non-recurring items
 
8,782

 
2,734

 
21,722

 
5,602

ENI
 
$
15,226

 
$
10,277

 
$
28,401

 
$
15,932


Explanatory Notes:
______________________________
(1)
We share management fees on certain of the acquired CLOs we manage (shared with the party that sold the funds to us). Management fees are presented on a gross basis for GAAP and on a net basis for Non-GAAP ENI.
(2)
Current year ENI calculation includes the reduction attributable to non-core management fees. Prior year ENI calculation has been adjusted to conform with the current year's calculation.
(3)
Compensation has been adjusted for non-cash compensation related to profits interests granted to CIFC employees by CIFC Parent Holdings LLC (a significant stockholder in us prior to December 18, 2013) and sharing of incentive fees with certain former employees established in connection with our acquisition of certain CLOs from Columbus Nova Credit Investments Management LLC (“CNCIM Acquisition”).
(4)
Adjustment primarily includes the elimination of gains (losses) on contingent liabilities during the respective periods.
(5)
In January 2012, we completed the sale of our right to manage Gillespie CLO PLC. We recognized additional gains from contingent payments collected during 2014 and 2013.



40

The following table presents our components of ENI for the three and six months ended June 30, 2014 and 2013 (1):
 
 
For the Three Months Ended June 30,
 
 
 
For the Six Months Ended June 30,
 
 
 
 
 
 
 
2014 vs. 2013
 
 
 
 
 
2014 vs. 2013
 
2014
 
2013
 
Variance
 
% Variance
 
2014
 
2013
 
Variance
 
% Variance
 
(in thousands)
 
 
 
(in thousands)
 
 
Adjusted revenues
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Management Fees - Senior
$
5,634

 
$
4,987

 
$
647

 
13
 %
 
$
10,326

 
$
9,750

 
$
576

 
6
 %
Management Fees - Subordinated
8,343

 
8,102

 
241

 
3
 %
 
16,812

 
16,448

 
364

 
2
 %
Incentive Fees from CLOs
4,511

 
4,553

 
(42
)
 
(1
)%
 
9,411

 
7,167

 
2,244

 
31
 %
Other loan-based products
828

 
359

 
469

 
131
 %
 
1,736

 
682

 
1,054

 
155
 %
Total management Fees (2)
19,316

 
18,001

 
1,315

 
7
 %
 
38,285

 
34,047

 
4,238

 
12
 %
CLO Funds
3,509

 
679

 
2,830

 
417
 %
 
4,821

 
(1,060
)
 
5,881

 
(555
)%
Warehouses
3,085

 
2,043

 
1,042

 
51
 %
 
6,448

 
4,666

 
1,782

 
38
 %
Other loan-based products
1,646

 
176

 
1,470

 
835
 %
 
2,967

 
381

 
2,586

 
679
 %
Total net investment income
8,240

 
2,898

 
5,342

 
184
 %
 
14,236

 
3,987

 
10,249

 
257
 %
Total adjusted net revenues
27,556

 
20,899

 
6,657

 
32
 %
 
52,521

 
38,034

 
14,487

 
38
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted expenses
 
 
 
 
 

 
 
 
 
 
 
 
 

 
 
Compensation and benefits
7,617

 
6,428

 
1,189

 
18
 %
 
14,445

 
12,853

 
1,592

 
12
 %
Professional services
706

 
715

 
(9
)
 
(1
)%
 
1,752

 
2,638

 
(886
)
 
(34
)%
General and administrative expenses
2,259

 
1,843

 
416

 
23
 %
 
4,472

 
3,327

 
1,145

 
34
 %
Depreciation and amortization
262

 
179

 
83

 
46
 %
 
498

 
348

 
150

 
43
 %
Corporate interest expense
1,486

 
1,452

 
34

 
2
 %
 
2,953

 
2,934

 
19

 
1
 %
Other, net
—

 
5

 
(5
)
 
(100
)%
 
—

 
2

 
(2
)
 
100
 %
Total adjusted expenses
12,330

 
10,622

 
1,708

 
16
 %
 
24,120

 
22,102

 
2,018

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ENI
$
15,226

 
$
10,277

 
$
4,949

 
48
 %
 
$
28,401

 
$
15,932

 
$
12,469

 
78
 %

Explanatory Notes:
______________________________
(1)
Balances to this table can be derived by taking the deconsolidated non-GAAP Statement of Operations and adjusting balances using the ENI reconciliation of GAAP net income (loss) attributable to CIFC Corp. to ENI.
(2)
Current year ENI calculation does not include management fees from non-core products. Prior year ENI calculation has been adjusted to conform with the current year's calculation.

For the three months ended June 30, 2014 and 2013:

Adjusted Management Fees—Total adjusted management fee revenue increased by $1.3 million or 7% as the current year quarter included a full quarter of results from CLOs sponsored, funds launched and SMAs entered since the second quarter of 2013. These increases were partially offset by principal paydowns, calls and redemptions of certain legacy CLOs.

Adjusted net investment income—Total adjusted net investment income increased by $5.3 million or 184%, primarily driven by an increase in net gains recognized on our CLO and warehouse investments held during the current quarter compared to the same period in the prior year. In addition, new credit funds launched since the second quarter of 2013 contributed to $1.5 million of the increase year over year.

Adjusted expenses—Total adjusted expenses increased by $1.7 million or 16% primarily due to an increase in adjusted compensation and benefits and adjusted other general and administrative costs. The increase of adjusted compensation and benefits costs was due to an increase in compensation for certain key executives and an overall increased headcount. Total investment related subscription services and costs to support our overall growth increased adjusted other general and administrative costs.


41

For the six months ended June 30, 2014 and 2013:

Adjusted Management Fees—Total adjusted management fee revenue increased by $4.2 million or 12% primarily as a result of an increase in incentive fees and fees from other loan-based products. Incentive fees increased as (i) we earned 50% of incentive fees realized from the legacy CIFC CLOs acquired through the Merger. All incentive fees earned during the first four months of 2013 were entirely shared with the seller (see also Contingent Liabilities and Other Commitments below for further details) and (ii) more CLOs reached their incentive fee hurdles since the second quarter of 2013. Other loan-based product management fees increased as the current year included a full year of results from funds launched since the second quarter of 2013. These increases were partially offset by principal paydowns, calls and redemptions of certain legacy CLOs.

Adjusted net investment income—Total adjusted net investment income increased by $10.2 million. The increase was primarily driven by an increase in net gains recognized on our CLO and warehouse investments held during the current year compared to the prior year. In addition, new credit funds launched since the second quarter of 2013 contributed to $2.6 million of the increase year over year.

Adjusted expenses—Total adjusted expenses increased by $2.0 million or 9% primarily due to an increase in adjusted compensation and benefits costs and adjusted general and administrative costs. The increase of adjusted compensation and benefits costs was due to an increase in compensation for certain key executives and an overall increased headcount. Total investment related subscription services and costs to support our overall growth increased adjusted other general and administrative costs. The overall increase was slightly offset by decreases in professional fees due to an overall reduction of the use of external consultants as we hired personnel to perform these services. In addition, during 2013, we incurred more professional fees to launch new products.





















42


Deconsolidated Non-GAAP Statements
The Deconsolidated Non-GAAP Statements represents the Consolidated GAAP statements adjusted to eliminate the impact of the Consolidated Entities. On the Statement of Operations, we have reclassed the sum of Net results of Consolidated Entities, Net (income) loss attributable to noncontrolling interest in Consolidated Entities and Net gain (loss) on investments at fair value to the Deconsolidated Non-GAAP line items that represent its characteristics; management fees and interest income. On the Balance Sheets, we have excluded amounts related to all consolidated entities. Management uses these Non-GAAP statements in addition to Consolidated GAAP Statements to measure the performance of its core asset management business.
The following table presents the reconciliation from GAAP to Deconsolidated Non-GAAP Statement of Operations for the three months ended June 30, 2014 and 2013:

 
 
For the Three Months Ended June 30,
 
 
2014
 
2013
(In thousands)
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Management fees
 
$
1,378

 
$
20,560

 
$
21,938

 
$
2,240

 
$
23,559

 
$
25,799

Net investment income
 
97

 
8,143

 
8,240

 
106

 
2,792

 
2,898

Total net revenues
 
1,475

 
28,703

 
30,178

 
2,346

 
26,351

 
28,697

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
8,047

 
—

 
8,047

 
6,986

 
—

 
6,986

Professional services
 
706

 
—

 
706

 
715

 
—

 
715

General and administrative expenses
 
2,259

 
—

 
2,259

 
1,843

 
—

 
1,843

Depreciation and amortization
 
2,870

 
—

 
2,870

 
4,278

 
—

 
4,278

Total expenses
 
13,882

 
—

 
13,882

 
13,822

 
—

 
13,822

Other Income (Expense) and Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on investments at fair value
 
1,121

 
(1,121
)
 
—

 
251

 
(251
)
 
—

Net gain (loss) on contingent liabilities at fair value
 
(1,529
)
 
—

 
(1,529
)
 
613

 
—

 
613

Corporate interest expense
 
(1,486
)
 
—

 
(1,486
)
 
(1,452
)
 
—

 
(1,452
)
Other, net
 
—

 
—

 
—

 
(5
)
 
—

 
(5
)
Net other income (expense) and gain (loss)
 
(1,894
)
 
(1,121
)
 
(3,015
)
 
(593
)
 
(251
)
 
(844
)
Operating income (loss)
 
(14,301
)
 
27,582

 
13,281

 
(12,069
)
 
26,100

 
14,031

Net results of Consolidated Entities
 
37,046

 
(37,046
)
 
—

 
53,102

 
(53,102
)
 
—

Income (loss) before income taxes
 
22,745

 
(9,464
)
 
13,281

 
41,033

 
(27,002
)
 
14,031

Income tax (expense) benefit
 
(6,837
)
 
—

 
(6,837
)
 
(6,488
)
 
—

 
(6,488
)
Net income (loss)
 
15,908

 
(9,464
)
 
6,444

 
34,545

 
(27,002
)
 
7,543

Net (income) loss attributable to noncontrolling interest in Consolidated Entities
 
(9,464
)
 
9,464

 
—

 
(27,002
)
 
27,002

 
—

Net income (loss) attributable to CIFC Corp.
 
$
6,444

 
$
—

 
$
6,444

 
$
7,543

 
$
—

 
$
7,543



    

43

The following table presents the reconciliation from GAAP to Deconsolidated Non-GAAP Statement of Operations for the six months ended June 30, 2014 and 2013:

 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
(In thousands)
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Management fees
 
$
2,990

 
$
40,803

 
$
43,793

 
$
4,883

 
$
41,714

 
$
46,597

Net investment income
 
194

 
14,042

 
14,236

 
97

 
3,890

 
3,987

Total net revenues
 
3,184

 
54,845

 
58,029

 
4,980

 
45,604

 
50,584

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
15,387

 
—

 
15,387

 
14,510

 
—

 
14,510

Professional services
 
1,752

 
—

 
1,752

 
2,638

 
—

 
2,638

General and administrative expenses
 
4,472

 
—

 
4,472

 
3,327

 
—

 
3,327

Depreciation and amortization
 
6,015

 
—

 
6,015

 
8,496

 
—

 
8,496

Total expenses
 
27,626

 
—

 
27,626

 
28,971

 
—

 
28,971

Other Income (Expense) and Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on investments at fair value
 
2,527

 
(2,527
)
 
—

 
600

 
(600
)
 
—

Net gain (loss) on contingent liabilities at fair value
 
(1,758
)
 
—

 
(1,758
)
 
499

 
—

 
499

Corporate interest expense
 
(2,953
)
 
—

 
(2,953
)
 
(2,934
)
 
—

 
(2,934
)
Net gain on the sale of management contracts
 
228

 
—

 
228

 
752

 
—

 
752

Other, net
 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Net other income (expense) and gain (loss)
 
(1,956
)
 
(2,527
)
 
(4,483
)
 
(1,085
)
 
(600
)
 
(1,685
)
Operating income (loss)
 
(26,398
)
 
52,318

 
25,920

 
(25,076
)
 
45,004

 
19,928

Net results of Consolidated Entities
 
86,128

 
(86,128
)
 
—

 
100,160

 
(100,160
)
 
—

Income (loss) before income taxes
 
59,730

 
(33,810
)
 
25,920

 
75,084

 
(55,156
)
 
19,928

Income tax (expense) benefit
 
(19,241
)
 
—

 
(19,241
)
 
(9,598
)
 
—

 
(9,598
)
Net income (loss)
 
40,489

 
(33,810
)
 
6,679

 
65,486

 
(55,156
)
 
10,330

Net (income) loss attributable to noncontrolling interest in Consolidated Entities
 
(33,810
)
 
33,810

 
—

 
(55,156
)
 
55,156

 
—

Net income (loss) attributable to CIFC Corp.
 
$
6,679

 
$
—

 
$
6,679

 
$
10,330

 
$
—

 
$
10,330











44


The following table presents the reconciliation from GAAP to Deconsolidated Non-GAAP Balance Sheets as of June 30, 2014 and December 31, 2013:

 
 
June 30, 2014
 
December 31, 2013
(In thousands)
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
 
Consolidated GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
22,046

 
$
—

 
$
22,046

 
$
25,497

 
$
(4,132
)
 
$
21,365

Restricted cash and cash equivalents
 
1,693

 
—

 
1,693

 
1,700

 
—

 
1,700

Due from brokers
 
—

 
—

 
—

 
18,813

 
(4,985
)
 
13,828

Investments at fair value
 
24,177

 
115,438

 
139,615

 
16,883

 
96,248

 
113,131

Receivables
 
2,550

 
3,718

 
6,268

 
2,120

 
3,814

 
5,934

Prepaid and other assets
 
3,833

 
—

 
3,833

 
5,104

 
(222
)
 
4,882

Deferred tax asset, net
 
50,815

 
—

 
50,815

 
57,675

 
—

 
57,675

Equipment and improvements, net
 
4,443

 
—

 
4,443

 
4,261

 
—

 
4,261

Intangible assets, net
 
19,707

 
—

 
19,707

 
25,223

 
—

 
25,223

Goodwill
 
76,000

 
—

 
76,000

 
76,000

 
—

 
76,000

Subtotal
 
205,264

 
119,156

 
324,420

 
233,276

 
90,723

 
323,999

Total assets of Consolidated Entities
 
12,580,111

 
(12,580,111
)
 
—

 
11,366,912

 
(11,366,912
)
 
—

TOTAL ASSETS
 
$
12,785,375

 
$
(12,460,955
)
 
$
324,420

 
$
11,600,188

 
$
(11,276,189
)
 
$
323,999

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
Due to brokers
 
$
1,036

 
$
—

 
$
1,036

 
$
5,499

 
$
(4,991
)
 
$
508

Dividend payable
 
—

 
—

 
—

 
—

 
—

 
—

Accrued and other liabilities
 
12,616

 
—

 
12,616

 
15,197

 
(270
)
 
14,927

Deferred purchase payments
 
1,348

 
—

 
1,348

 
1,179

 
—

 
1,179

Contingent liabilities at fair value
 
14,450

 
—

 
14,450

 
16,961

 
—

 
16,961

Long-term debt
 
139,697

 
—

 
139,697

 
139,164

 
—

 
139,164

Subtotal
 
169,147

 
—

 
169,147

 
178,000

 
(5,261
)
 
172,739

Total non-recourse liabilities of Consolidated Entities
 
12,095,720

 
(12,095,720
)
 
—

 
11,114,435

 
(11,114,435
)
 
—

TOTAL LIABILITIES
 
12,264,867

 
(12,095,720
)
 
169,147

 
11,292,435

 
(11,119,696
)
 
172,739

EQUITY
 
 
 
 
 

 
 
 
 
 
 
Common stock
 
21

 
—

 
21

 
21

 
—

 
21

Treasury stock
 
(914
)
 
—

 
(914
)
 
(914
)
 
—

 
(914
)
Additional paid-in capital
 
964,533

 
—

 
964,533

 
963,011

 
—

 
963,011

Retained earnings (deficit)
 
(808,367
)
 
—

 
(808,367
)
 
(810,858
)
 
—

 
(810,858
)
TOTAL CIFC CORP. STOCKHOLDERS’ EQUITY
 
155,273

 
—

 
155,273

 
151,260

 
—

 
151,260

Noncontrolling interest in Consolidated Funds
 
174,454

 
(174,454
)
 
—

 
5,107

 
(5,107
)
 
—

Appropriated retained earnings (deficit) of Consolidated Entities
 
190,781

 
(190,781
)
 
—

 
151,386

 
(151,386
)
 
—

TOTAL EQUITY
 
520,508

 
(365,235
)
 
155,273

 
307,753

 
(156,493
)
 
151,260

TOTAL LIABILITIES AND EQUITY
 
$
12,785,375

 
$
(12,460,955
)
 
$
324,420

 
$
11,600,188

 
$
(11,276,189
)
 
$
323,999









45

Liquidity and Capital Resources
 
As of June 30, 2014, total GAAP cash and cash equivalents decreased by $3.5 million to $22.0 million from $25.5 million as of December 31, 2013. For the six months ended June 30, 2014, we utilized $4.7 billion to purchase investments in our Consolidated Entities and received proceeds of $4.0 billion from the sale of investments in our Consolidated Entities. We used restricted cash of our Consolidated Entities of $120.3 million to fund our Consolidated Entities' activities. In addition, we received $2.5 billion of proceeds and made $1.8 billion of payments on Consolidated Entity related long-term debt during the quarter, paid down $4.3 million of contingent liabilities (related to fee sharing arrangements) and paid dividends of $4.2 million. Further, during the six months ended June 30, 2014 and 2013, we paid income taxes of $13.3 million and $14.5 million, respectively.
The table below is a reconciliation of selected cash flows data for the six months ended June 30, 2014 from GAAP to Non-GAAP:
 
For the Six Months Ended June 30,
(In thousands)
GAAP
 
Consolidation Adjustments
 
Deconsolidated Non-GAAP
Cash and Cash Equivalents, Beginning
$
25,497

 
$
(4,132
)
 
$
21,365

 
 
 
 
 
 
Net cash provided by/(used in) Operating Activities
(577,082
)
 
603,484

 
26,402

Net cash provided by/(used in) Investing Activities
(114,461
)
 
95,943

 
(18,518
)
Net cash provided by/(used in) Financing Activities
688,092

 
(695,295
)
 
(7,203
)
    Net change in Cash and Cash Equivalents
(3,451
)
 
4,132

 
681

 
 
 
 
 
 
Cash and Cash Equivalents, End
$
22,046

 
$
—

 
$
22,046

    
As of June 30, 2014, total deconsolidated non-GAAP cash and cash equivalents increased by $0.7 million to $22.0 million from $21.4 million as of December 31, 2013. For the six months ended June 30, 2014, cash flows from operations provided net cash proceeds of $26.4 million. Our net investment activity in CIFC managed CLO equity, warehouses and funds during the six months was $18.1 million. We paid down $4.3 million of contingent liabilities (related to fee sharing arrangements) and paid dividends of $4.2 million. In addition, during the six months ended June 30, 2014 and 2013, we paid income taxes of $13.3 million and $14.5 million, respectively.
On June 18, 2014, we gave notice to our convertible note holder of our intention to redeem the notes at their full par value of $25.0 million. On July 12, 2014, the note holder, DFR Holdings LLC, exercised its right to convert the notes into shares of common stock. Pursuant to the agreement, the Convertible Notes converted into 4,132,231 shares of common stock at an initial conversion price of $6.05 per share.
Our investments as of June 30, 2014 and December 31, 2013 are as follows:
Non-GAAP (1)
 
June 30, 2014
 
December 31, 2013

CIFC Managed CLO Equity (Residual Interests)
 
$
32,479

 
$
44,292

Warehouses (2)(3)
 
65,598

 
32,529

Other loan-based products (3)
 
41,538

 
36,310

Total
 
$
139,615

 
$
113,131


Explanatory Notes:
________________________________
(1)
Pursuant to GAAP, investments in consolidated CLOs, warehouses and certain other loan-based products are eliminated from "Investments at fair value" on our Consolidated Balance Sheets.
(2)
From time to time, we establish “warehouses”, entities designed to accumulate investments in advance of sponsoring new CLOs or other funds managed by us.  To establish a warehouse, we contribute equity capital to a newly formed entity which is typically levered (three to five times) and begins accumulating investments.  When the related CLO or fund is sponsored, typically three to nine months later, the warehouse is “terminated”, with it concurrently repaying the related financing and returning to CIFC our equity contribution, net of gains and losses, if any.
(3)
As of June 30, 2014 and December 31, 2013, $24.2 million and $16.9 million, respectively, of our investments in funds and warehouses was not consolidated and included on our Consolidated Balance Sheets.


46

Other Sources and Uses of Funds

Deferred Purchase Payments—In April 2011, we entered into a merger (the "Merger") with Commercial Industrial Finance Corp. ("Legacy CIFC"). As a result of the Merger, Legacy CIFC became CIFCAM, a wholly-owned subsidiary of CIFC. The consideration for the Merger included the payment to CIFC Parent Holdings LLC ("CIFC Parent"), the sole stockholder of Legacy CIFC, of $7.5 million of cash payable in three equal installments of $2.5 million (subject to certain adjustments). During six months ended June 30, 2013, we made the final deferred purchase payment related to the Merger of $2.5 million leaving no remaining amounts outstanding under this agreement.

In March 2010, we entered into an acquisition and investment agreement with DFR Holdings LLC ("DFR Holdings") and CNCIM pursuant to which we agreed to acquire all of the equity interests in CNCIM from DFR Holdings. The consideration for the CNCIM acquisition includes deferred purchase payments totaling $7.5 million in cash payable in five equal annual installments beginning in December 2010. The final remaining installment of $1.5 million is payable on December 9, 2014. As of June 30, 2014 and December 31, 2013, the fair value of the remaining deferred purchase payments of $1.3 million and $1.2 million, respectively, was included in the Condensed Consolidated Balance Sheets.

Contingent Liabilities at Fair Value—In addition to the consideration paid in connection with the Merger, we were required to pay CIFC Parent a portion of incentive fees earned on six CLOs managed by CIFCAM (the "Legacy CIFC CLOs"). The terms of these payments were as follows: (i) the first $15.0 million of incentive fees received (which was fulfilled in 2013), (ii) 50% of any incentive fees in excess of $15.0 million in aggregate received from the Legacy CIFC CLOs by the combined company over ten years from April 13, 2011 (the "Merger Closing Date") and (iii) payments relating to the present value of any such incentive fees from the Legacy CIFC CLOs that remain payable to the combined company after the tenth anniversary of the Merger Closing Date.

During the three and six months ended June 30, 2014, we made total payments of $1.9 million and $3.9 million, respectively, and during the three and six months ended June 30, 2013, we made total payments of $4.9 million and $7.8 million, respectively, related to these contingent liabilities. As of June 30, 2014, there are no remaining payments under item (i) and we made cumulative payments of $10.4 million under item (ii) to date.

 In addition, we also assumed contingent liabilities during the merger that primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree in December 2010. The assumed contingent liabilities are based on a fixed percentage of certain management fees from the CypressTree CLOs. These fixed percentages vary by CLO. From the Merger Closing Date to June 2013 the minimum fixed percentage was 55%, and effective July 2013, the minimum fixed percentage was 39%. During the three and six months ended June 30, 2014, we made payments of $0.2 million and $0.4 million, respectively, and during the three and six months ended June 30, 2013, we made payments of $1.1 million and $1.7 million, respectively, related to these contingent liabilities.
    
    

47

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

 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
 
 
 
(In years)
Recourse debt:
 

 
 

 
 
 
 
 
 
 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
21.3
 
$
95,000

 
1.00
%
 
21.8
October Junior Subordinated Notes (2)
25,000

 
3.72
%
 
21.3
 
25,000

 
3.73
%
 
21.8
Total Subordinated Notes Debt
$
120,000

 
1.57
%
 
21.3
 
$
120,000

 
1.57
%
 
21.8
 
 
 
 
 
 
 
 
 
 
 
 
Convertible Notes (3)
$
19,697

 
11.00
%
 
n/a (3)
 
$
19,164

 
10.00
%
 
3.9
Total recourse debt
$
139,697

 
 
 
 
 
$
139,164

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse Consolidated Entities' debt:
 

 
 

 
 
 
 
 
 
 
 
Consolidated CLOs (4)
$
11,042,200

 
1.58
%
 
8.7
 
$
10,336,453

 
1.43
%
 
8.3
Warehouses (5)
438,441

 
1.41
%
 
n/m
 
148,522

 
1.30
%
 
n/m
Total non-recourse Consolidated Entities' debt
$
11,480,641

 
1.57
%
 
8.7
 
$
10,484,975

 
1.43
%
 
8.3
Total long-term debt
$
11,620,338

 
 
 
 
 
$
10,624,139

 
 
 
 

Explanatory Notes:
________________________________
(1)
March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015 and 3 month LIBOR plus 2.58% until maturity on October 30, 2035.
(2)
October Junior Subordinated Notes bear interest at an annual rate of 3 month LIBOR plus 3.50% and mature on October 30, 2035.
(3)
As of June 30, 2014 and December 31, 2013, Convertible Notes were recorded net of a discount of $5.3 million and $5.8 million, respectively and paid interest at the stated rates of 11.00% and 10.00%, respectively. Including the discount, the effective rate of interest is 18.14% for both periods. The Convertible Notes have a $25.0 million aggregate principal amount. Subsequent to quarter end, our Convertible Notes outstanding were converted (see "Item 1—Consolidated Financial Statements—Notes 11 and 14").
(4)
Long-term debt of the Consolidated CLOs is recorded at fair value. The subordinated notes of Consolidated CLOs do not have a stated interest rate. Therefore, they are excluded from the calculation of the weighted average borrowing rate. As of June 30, 2014 and December 31, 2013, the par value of the Consolidated CLOs long-term debt (including subordinated notes) was $12.0 billion and $10.9 billion, respectively.
(5)
Long-term debt of warehouses not held by us is recorded at fair value. The fair value excludes the preferred shares of Warehouse(s) outstanding as of each respective period not held by us, which have a par value of $68.6 million and $67.5 million as of June 30, 2014 and December 31, 2013, respectively. They do not have a stated interest rate and are excluded from the calculation of the weighted average borrowing rate.

Covenants—Junior Subordinated Notes—The Junior Subordinated Notes contain certain restrictive covenants including (i) a requirement that all asset management activities to be conducted by CIFC Corp. and its subsidiaries, and which permits us to sell equity and material assets of DCM only if all management fees and proceeds from equity and asset sales are subject to the limits on restricted payments set forth in the Note Indentures, (ii) a debt covenant that permits CIFC Corp. and DCM to incur indebtedness only if the proceeds of such indebtedness are subject to the limits on restricted payments set forth in the Note Indentures and (iii) a restricted payments covenant that restricts our ability to pay dividends or make distributions in respect of our equity securities, subject to a number of exceptions and conditions.
Covenants—Convertible Notes—The Convertible Notes Agreement contains customary events of default and covenants including (i) that we will not, and will not permit any of our subsidiaries to, incur any indebtedness that is contractually subordinated in right of payment to our other indebtedness unless such indebtedness is also contractually subordinated in right of payment to the Convertible Notes on substantially similar terms; (ii) that we will not consolidate or merge with or into another person or sell, transfer or otherwise dispose of all or substantially all of our assets to another person unless certain conditions are satisfied; (iii) that, upon a change of control, we will offer to repurchase all or any part of the Convertible Notes of each holder of Convertible Notes at a purchase price in cash equal to 100% of the aggregate principal amount of the Convertible Notes repurchased, plus accrued and unpaid interest; and (iv) that we will use commercially reasonable efforts to keep the Conversion Shares listed on the NASDAQ Stock Market or another securities exchange on which our common stock is listed or quoted. Subsequent to quarter end, on July 12, 2014, the Convertible Notes were converted. See Subsequent Events below.

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Lease Commitments—The future minimum commitments under our lease agreement are as follows:
 
(In thousands)
2014 (6 months remaining)
$
803

2015
1,607

2016
1,607

2017
1,607

2018
1,680

Thereafter
7,010

 
$
14,314

 
Consolidated VIEs—Although we consolidate all the assets and liabilities of the Consolidated VIEs (includes the Consolidated CLOs, and warehouses), our maximum exposure to loss is limited to our investments and beneficial interests in the Consolidated VIEs and the receivables of management fees from the Consolidated VIEs. All of these items are eliminated upon consolidation. The assets of each of the Consolidated VIEs are administered by the trustee of each fund solely as collateral to satisfy the obligations of the Consolidated VIEs. If we were to liquidate, the assets of the Consolidated VIEs would not be available to our general creditors, and as a result, we do not consider them our assets. Additionally, the investors in the debt and residual interests of the Consolidated VIEs have no recourse to our general assets. Therefore, this debt is not our obligation.

Related Party Transactions

DFR Holdings—As of June 30, 2014 and December 31, 2013, DFR Holdings owned approximately 14.7 million shares of our common stock and $25.0 million aggregate principal amount of our Convertible Notes, which is convertible into approximately 4.1 million shares of our common stock. Subsequent to quarter end, on July 12, 2014, DFR Holdings exercised its right to convert the notes into shares of common stock (see Note 10, 11 and 16). In addition, DFR Holdings held warrants that entitle them the right to purchase 2.0 million shares of our voting common stock. As such, related party transactions also included (i) the interest expense on Convertible notes of $0.9 million and $1.8 million, respectively, during the three and six months ended June 30, 2014 and $0.9 million and $1.7 million, respectively, during the three and six months ended June 30, 2013, (ii) deferred purchase payments (see above—Deferred Purchase Payments and Contingent Liabilities and Other Commitments), and (iii) quarterly dividends (see "Item 1—Consolidated Financial Statements—Note 11"). For the three and six months ended June 30, 2013, total management fees from related parties was $13,000 and $25,000, respectively. We did not earn any management fees from DFR Holdings for the three and six months ended June 30, 2014.

We agreed to nominate to our Board of Directors six directors designated by DFR Holdings. The number of directors that can be designated by DFR Holdings is reduced in the event that DFR Holdings decreases its ownership (on a diluted basis) in CIFC. If DFR Holdings' ownership falls below 5%, it loses the right to designate any director. During the three and six months ended June 30, 2014, the directors earned an aggregate $0.2 million and $0.3 million, respectively, related to their services.

CIFC Parent—As of June 30, 2014, CIFC Parent no longer owns common shares of CIFC. However, during the six months ended June 30, 2013, CIFC Parent held 9.1 million shares of our common stock and invested in CLOs managed by CIFC.

As such, related party transactions for the three and six months ended June 30, 2014, included (i) contingent liabilities payments to CIFC Parent (see above—Deferred Purchase Payments and Contingent Liabilities and Other Commitments), (ii) CIFC Parent's investment of $1.3 million in two Consolidated Funds managed by CIFC as of June 30, 2014, (iii) fees to us for providing certain administrative services to CIFC Parent, and (iv) profits interests in CIFC Parent granted during 2011 to certain of our employees (see "Item 1—Consolidated Financial Statements—Note 11"). As of June 30, 2014 and December 31, 2013, total management fee receivables due from related parties was $12,500 and $167,000, respectively. For the three and six months ended June 30, 2014, total management fees from related parties was $12,500 and $25,000, respectively, and for the three and six months ended June 30, 2013, total management fees from related parties was $46,000 and $93,000, respectively.
Other—As of June 30, 2014 and December 31, 2013, a board member purchased $1.0 million of income notes in one of our sponsored CLOs, CIFC Funding 2013-II, Ltd., through an entity in which he is a 50% equity holder.
Funds—As of June 30, 2014, employees and directors of CIFC invested an aggregate $3.5 million in three different funds which CIFC invested in and manages. Employees are not charged a management fee on their investment. Directors were charged a fee, similar to certain other investors. For the three and six months ended June 30, 2014, that amount was de minimis.

49

Off-Balance Sheet Arrangements
As of June 30, 2014, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of June 30, 2014, we did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
Other—As of both June 30, 2014 and December 31, 2013, we fully funded our aggregate minimum commitment to invest $30.0 million in CIFC sponsored funds.
Subsequent Events
Subsequent to quarter end, we sponsored the issuance of a new CLO that represented approximately $700.0 million of new loan-based AUM. In addition, we priced another CLO that represented approximately $600 million of new loan-based AUM.

Subsequent to quarter end, we declared a cash dividend of $0.10 per share. The dividend will be paid on September 15, 2014 to shareholders of record as of the close of business on August 25, 2014.

On June 18, 2014, we gave notice to the convertible note holders of our intention to redeem the notes at their full par value of $25.0 million. On July 12, 2014, the note holder, DFR Holdings, exercised its right to convert the notes into 4,132,231 shares of common stock.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances.    

A summary of our critical accounting estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2013, in Management's Discussion and Analysis of Financial Condition. There have been no significant changes to our critical accounting estimates as of June 30, 2014.

Recent Accounting Updates
    
For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, see "Item 1—Condensed Consolidated Financial Statements—Note 3" of the Notes to the Condensed Consolidated Financial Statements.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by Item 7A.

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Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we carried out an evaluation, with the participation of our management, including our Principal Executive Officers and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Principal Executive Officers and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Change in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting as of the end of the reporting period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
    
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, our management, including our Principal Executive Officers and our Chief Financial Officer do not expect that our control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity's operating environment or deterioration in the degree of compliance with policies or procedures.

PART II. Other Information

Item 1.    Legal Proceedings

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

Item 1A.    Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I—Item 1A. Risk Factors of our 2013 Form 10-K.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

No common shares were repurchased during the three and six months ended June 30, 2014.

The indentures governing our Junior Subordinated Notes contain limits on share repurchases, subject to a number of exceptions and conditions. The share repurchases allowed under the share repurchase program are within these limits.

Item 3. Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
None.

51

Item 6.    Exhibits

Ex. No.
 
Description of Exhibit
10.1
 
Amended and Restated Non-Disclosure, Non-Competition, Non-Hiring, Non-Solicitation and Severance Agreement, dated June 13, 2014, by and between CIFC Corp. and Stephen J. Vaccaro (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.2
 
Non-Disclosure, Non-Competition, Non-Hiring, Non-Solicitation and Severance Agreement, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.3
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Stephen J. Vaccaro (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.4
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.5
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Stephen J. Vaccaro (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.6
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.7
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Stephen J. Vaccaro (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.8
 
Restricted Stock Unit Award Agreement, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.9
 
Stock Option Award Certificate, dated June 13, 2014, by and between CIFC Corp. and Stephen J. Vaccaro (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.10
 
Stock Option Award Certificate, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
10.11
 
Stock Option Award Certificate, dated June 13, 2014, by and between CIFC Corp. and Oliver Wriedt (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
31.1
 
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
 
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
***101.0
 
Financial statements from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2014, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets (unaudited); (ii) the Condensed Consolidated Statements of Operations (unaudited); (iii) the Condensed Consolidated Statements of Equity (unaudited), (iv) the Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Condensed Consolidated Financial Statements (unaudited) furnished herewith.


Explanatory Notes:
_________________________________________________________________________
*
Filed herewith.

*** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections.


52

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CIFC CORP.
 
 
(Registrant)
 
 
 
 
 
 
 
 
Date:
August 13, 2014
By:
/s/ STEPHEN J. VACCARO
 
 
Stephen J. Vaccaro, Co-President
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 13, 2014
By:
/s/ OLIVER WRIEDT
 
 
Oliver Wriedt, Co-President
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 13, 2014
By:
/s/ RAHUL AGARWAL
 
 
Rahul Agarwal, Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)


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