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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx2q2017xex321.htm
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EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx2q2017xex311.htm
EX-10.1 - EXHIBIT 10.1 - Sculptor Capital Management, Inc.exhibit101-creditagreement.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
Commission File Number 001-33805
 
 
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
26-0354783
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
 
9 West 57th Street, New York, New York 10019
(Address of Principal Executive Offices)
Registrant’s telephone number: (212) 790-0000
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ
As of July 27, 2017, there were 185,218,971 Class A Shares and 339,339,478 Class B Shares outstanding.
 
 





OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
TABLE OF CONTENTS
 
 
 
Page
PART I — FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 



i



Defined Terms
2007 Offerings
 
Refers collectively to our IPO and the concurrent private offering of approximately 38.1 million Class A Shares to DIC Sahir Limited, a wholly owned indirect subsidiary of Dubai Holdings LLC
 
 
 
active executive managing directors
 
Executive managing directors who remain active in our business
 
 
 
Annual Report
 
Our annual report on Form 10-K for the year ended December 31, 2016, dated March 1, 2017 and filed with the SEC
 
 
 
Class A Shares
 
Our Class A Shares, representing Class A limited liability company interests of Och-Ziff Capital Management Group LLC, which are publicly traded and listed on the NYSE
 
 
 
Class B Shares
 
Class B Shares of Och-Ziff Capital Management Group LLC, which are not publicly traded, are currently held solely by our executive managing directors and have no economic rights but entitle the holders thereof to one vote per share together with the holders of our Class A Shares
 
 
 
CLOs
 
Collateralized loan obligations
 
 
 
Exchange Act
 
Securities Exchange Act of 1934, as amended
 
 
 
executive managing directors
 
The current limited partners of the Oz Operating Group entities other than our intermediate holding companies, including our founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company
 
 
 
funds
 
The multi-strategy, opportunistic credit, real estate and equity funds, Institutional Credit Strategies products and other alternative investment vehicles for which we provide asset management services
 
 
 
GAAP
 
U.S. generally accepted accounting principles
 
 
 
Group A Units
 
Refers collectively to one Class A operating group unit in each of the Oz Operating Partnerships. Group A Units are equity interests held by our executive managing directors
 
 
 
Group B Units
 
Refers collectively to one Class B operating group unit in each of the Oz Operating Partnerships. Group B Units are equity interests held by our intermediate holding companies
 
 
 
Group D Units
 
Refers collectively to one Class D operating group unit in each of the Oz Operating Partnerships. Group D Units are non-equity, limited partner profits interests held by our executive managing directors
 
 
 
Group P Units
 
Refers collectively to one Class P operating group unit in each of the Oz Operating Partnerships. Group P Units are equity interests held by our executive managing directors
 
 
 
Institutional Credit Strategies
 
Our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions
 
 
 
intermediate holding companies
 
Refers collectively to Oz Corp and Oz Holding, both of which are wholly owned subsidiaries of Och-Ziff Capital Management Group LLC
 
 
 


1



IPO
 
Our initial public offering of 36.0 million Class A Shares that occurred in November 2007
 
 
 
NYSE
 
New York Stock Exchange
 
 
 
the Company, the firm, we, us, our
 
Refers, unless the context requires otherwise, to Och-Ziff Capital Management Group LLC, a Delaware limited liability company, and its consolidated subsidiaries, including the Oz Operating Group
 
 
 
Oz Corp
 
Och-Ziff Holding Corporation, a Delaware corporation
 
 
 
Oz Holding
 
Och-Ziff Holding LLC, a Delaware limited liability company
 
 
 
Oz Operating Group
 
Refers collectively to the Oz Operating Partnerships and their consolidated subsidiaries
 
 
 
Oz Operating Partnerships
 
Refers collectively to OZ Management LP, OZ Advisors LP and OZ Advisors II LP
 
 
 
Partner Equity Units
 
Refers collectively to the Group A Units and Group P Units.
 
 
 
Preferred Units
 
One Class A cumulative preferred unit in each of the Oz Operating Group entities collectively represents one “Preferred Unit.” Certain of our executive managing directors collectively own 100% of the Preferred Units
 
 
 
Registrant
 
Och-Ziff Capital Management Group LLC, a Delaware limited liability company
 
 
 
SEC
 
U.S. Securities and Exchange Commission
 
 
 
Securities Act
 
Securities Act of 1933, as amended
 
 
 
Special Investments
 
Investments that we, as investment manager, believe lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance
 
 
 
Ziffs
 
Refers collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons


2



Available Information
We file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. We make available free of charge on our website (www.ozm.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those filings as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Also posted on our website in the “Public Investors – Corporate Governance” section are charters for our Audit Committee; Compensation Committee; Nominating, Corporate Governance and Conflicts Committee and Corporate Responsibility and Compliance Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report or any other SEC filing. Copies of our SEC filings or corporate governance materials are available without charge upon written request to Och-Ziff Capital Management Group LLC, 9 West 57th Street, New York, New York 10019, Attention: Office of the Secretary.
Any materials we file with the SEC are also publicly available through the SEC’s website (www.sec.gov) or may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
No statements herein, available on our website or in any of the materials we file with the SEC constitute, or should be viewed as constituting, an offer of any fund.
Forward-Looking Statements
Some of the statements under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which we refer to as the “MD&A,” “Part I — Item 3. Quantitative and Qualitative Disclosures About Market Risk,” “Part II — Item 1A. Risk Factors” and elsewhere in this quarterly report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that reflect our current views with respect to, among other things, future events and financial performance. We generally identify forward-looking statements by terminology such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate,” “opportunity,” “comfortable,” “assume,” “remain,” “maintain,” “sustain,” “achieve,” “see,” “think,” “position” or the negative version of those words or other comparable words.
Any forward-looking statements contained herein are based upon historical information and on our current plans, estimates and expectations. The inclusion of this or other forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.
We caution that forward-looking statements are subject to numerous assumptions, estimates, risks and uncertainties, including but not limited to the following: global economic, business, market and geopolitical conditions; U.S. and foreign regulatory developments relating to, among other things, financial institutions and markets, government oversight, fiscal and tax policy; the outcome of third-party litigation involving us; the consequences of the Foreign Corrupt Practices Act settlements with the SEC and the U.S. Department of Justice (the “DOJ”); conditions impacting the alternative asset management industry; our ability to retain existing fund investor capital; our ability to successfully compete for fund investors, assets, professional talent and investment opportunities; our ability to retain our active executive managing directors, managing directors and other investment professionals; our successful formulation and execution of our business and growth strategies; our ability to appropriately manage conflicts of interest and tax and other regulatory factors relevant to our business; and assumptions relating to our operations, investment performance, financial results, financial condition, business prospects, growth strategy and liquidity.
If one or more of these or other risks or uncertainties materialize, or if our assumptions or estimates prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors are not and should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to our Annual Report.
There may be additional risks, uncertainties and factors that we do not currently view as material or that are not known. The forward-looking statements contained in this report are made only as of the date of this report. We do not undertake to update any forward-looking statement because of new information, future developments or otherwise.


3



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS — UNAUDITED
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
275,865

 
$
329,813

Investments (includes assets measured at fair value of $143,218 and $21,341 as of June 30, 2017 and December 31, 2016, respectively)
159,682

 
37,980

Income and fees receivable
81,120

 
176,638

Due from related parties
30,013

 
20,494

Deferred income tax assets
683,321

 
695,441

Other assets, net
125,877

 
169,984

Assets of consolidated funds:
 

 
 
Investments of consolidated funds, at fair value
233,100

 
37,661

Other assets of consolidated funds
35,404

 
17,544

Total Assets
$
1,624,382

 
$
1,485,555

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 

 
 
Liabilities
 

 
 
Compensation payable
$
47,343

 
$
206,106

Due to related parties
522,434

 
522,101

Debt obligations
429,202

 
577,128

Other liabilities (includes liabilities measured at fair value of $0 and $8,204 as of June 30, 2017 and December 31, 2016, respectively)
194,638

 
174,994

Liabilities of consolidated funds:
 

 
 
Debt obligations of consolidated CLO, at fair value
110,938

 

Other liabilities of consolidated funds
110,205

 
15,197

Total Liabilities
1,414,760

 
1,495,526

 
 
 
 
Commitments and Contingencies (Note 15)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
444,678

 
284,121

 
 
 
 
Shareholders’ (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 185,214,692 and 184,843,255 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 339,339,478 and 297,317,019 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

 

Paid-in capital
3,078,150

 
3,097,431

Accumulated deficit
(3,560,482
)
 
(3,563,452
)
Shareholders’ deficit attributable to Class A Shareholders
(482,332
)
 
(466,021
)
Shareholders’ equity attributable to noncontrolling interests
247,276

 
171,929

Total Shareholders’ (Deficit) Equity
(235,056
)
 
(294,092
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ (Deficit) Equity
$
1,624,382

 
$
1,485,555

See notes to consolidated financial statements.


4


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
Management fees
$
80,082

 
$
143,399

 
$
166,337

 
$
300,309

Incentive income
66,115

 
8,136

 
117,741

 
38,723

Other revenues
1,781

 
585

 
2,557

 
1,164

Income of consolidated funds
968

 
438

 
1,463

 
804

Total Revenues
148,946

 
152,558

 
288,098

 
341,000


 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and benefits
69,679

 
57,743

 
139,622

 
112,004

Interest expense
5,152

 
5,937

 
11,432

 
11,323

General, administrative and other
35,165

 
272,527

 
81,093

 
540,196

Expenses of consolidated funds
460

 
33

 
544

 
299

Total Expenses
110,456

 
336,240

 
232,691

 
663,822


 
 
 
 
 
 
 
Other Income
 
 
 
 
 
 
 
Changes in tax receivable agreement liability

 
26

 

 
171

Net gains on investments in funds and joint ventures
65

 
250

 
786

 
499

Net gains of consolidated funds
385

 
816

 
620

 
1,361

Total Other Income
450

 
1,092

 
1,406

 
2,031


 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
38,940

 
(182,590
)
 
56,813

 
(320,791
)
Income taxes
3,244

 
10,911

 
15,300

 
29,450

Consolidated and Comprehensive Net Income (Loss)
35,696

 
(193,501
)
 
41,513

 
(350,241
)
Less: (Income) loss attributable to noncontrolling interests
(22,142
)
 
115,592

 
(31,920
)
 
203,437

Less: Income attributable to redeemable noncontrolling interests
(456
)
 
(662
)
 
(806
)
 
(1,123
)
Net Income (Loss) Attributable to Och-Ziff Capital Management Group LLC
13,098

 
(78,571
)
 
8,787

 
(147,927
)
Less: Change in redemption value of Preferred Units

 

 
(2,853
)
 

Net Income (Loss) Attributable to Class A Shareholders
$
13,098

 
$
(78,571
)
 
$
5,934

 
$
(147,927
)
 
 
 
 
 
 
 
 
Earnings (Loss) per Class A Share
 
 
 
 
 
 
 
Income (Loss) per Class A Share - basic
$
0.07

 
$
(0.43
)
 
$
0.03

 
$
(0.81
)
Income (Loss) per Class A Share - diluted
$
0.07

 
$
(0.44
)
 
$
0.03

 
$
(0.81
)
Weighted-average Class A Shares outstanding - basic
186,142,576

 
182,454,677

 
186,183,971

 
182,501,762

Weighted-average Class A Shares outstanding - diluted
186,142,576

 
479,771,696

 
186,183,971

 
182,501,762

 
 
 
 
 
 
 
 
Dividends Paid per Class A Share
$
0.02

 
$

 
$
0.03

 
$



See notes to consolidated financial statements.


5



OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) — UNAUDITED
 
Och-Ziff Capital Management Group LLC
 
 
 
 
 
Number of
Class A
Shares
 
Number of
Class B
Shares
 
Paid-in
Capital
 
Accumulated
Deficit
 
Shareholders' Deficit
Attributable to Class A
Shareholders
 
Shareholders' Equity
Attributable to
Noncontrolling Interests
 
Total
Shareholders’
Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
As of December 31, 2016
184,843,255

 
297,317,019

 
$
3,097,431

 
$
(3,563,452
)
 
$
(466,021
)
 
$
171,929

 
$
(294,092
)
Capital contributions

 

 

 

 

 
592

 
592

Capital distributions

 

 

 

 

 
(10,197
)
 
(10,197
)
Cash dividends declared on Class A Shares

 

 

 
(5,552
)
 
(5,552
)
 

 
(5,552
)
Equity-based compensation, net of taxes
371,437

 
172,459

 
16,745

 

 
16,745

 
24,187

 
40,932

Dividend equivalents on Class A restricted share units

 

 
265

 
(265
)
 

 

 

Relinquishment of Group A Units (Note 3)

 
(30,000,000
)
 

 

 

 

 

Class B Shares granted to holders of Group P Units (Note 3)

 
71,850,000

 

 

 

 

 

Impact of changes in Oz Operating Group ownership (Note 3)

 

 
(12,219
)
 

 
(12,219
)
 
12,219

 

Dilution of proceeds from tax receivable agreement waiver (Note 3)

 

 
(21,219
)
 

 
(21,219
)
 
21,219

 

Change in redemption value of Preferred Units

 

 
(2,853
)
 

 
(2,853
)
 
(4,593
)
 
(7,446
)
Comprehensive net income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
8,787

 
8,787

 
31,920

 
40,707

As of June 30, 2017
185,214,692

 
339,339,478

 
$
3,078,150

 
$
(3,560,482
)
 
$
(482,332
)
 
$
247,276

 
$
(235,056
)
See notes to consolidated financial statements.



6


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net income (loss)
$
41,513

 
$
(350,241
)
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
41,438

 
38,013

Depreciation, amortization and net gains and losses on fixed assets
5,456

 
6,982

Deferred income taxes
12,206

 
23,440

Net gains on investments in funds and joint ventures
(786
)
 
(499
)
Operating cash flows due to changes in:
 
 
 
Income and fees receivable
95,518

 
78,143

Due from related parties
(9,519
)
 
(11,758
)
Other assets, net
(14,447
)
 
6,196

Due to related parties
333

 
(370
)
Compensation payable
(158,639
)
 
(159,362
)
Other liabilities
19,515

 
393,258

Consolidated funds related items:
 
 
 
Net gains of consolidated funds
(620
)
 
(1,361
)
Purchases of investments
(189,826
)
 
(142,310
)
Proceeds from sale of investments
96,664

 
138,775

Other assets of consolidated funds
(14,597
)
 
2,764

Other liabilities of consolidated funds
6,420

 
38

Net Cash (Used in) Provided by Operating Activities
(69,371
)
 
21,708

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(3,292
)
 
(6,244
)
Proceeds from sale of fixed assets (Note 7)
57,599

 

Purchases of United States government obligations
(99,468
)
 
(29,915
)
Maturities of United States government obligations

 
18,500

Investments in funds
(23,609
)
 
(7,556
)
Return of investments in funds
2,647

 
952

Other, net

 
(17
)
Net Cash Used in Investing Activities
(66,123
)
 
(24,280
)
 
 
 
 


7


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)


 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Cash Flows from Financing Activities
 
 
 
Issuance and sale of Preferred Units, net of issuance costs
150,054

 

Contributions from noncontrolling and redeemable noncontrolling interests
2,842

 
441

Distributions to noncontrolling and redeemable noncontrolling interests
(10,197
)
 
(20
)
Dividends on Class A Shares
(5,552
)
 

Proceeds from debt obligations
17,466

 
120,000

Proceeds from debt obligations of consolidated CLO
94,882

 

Repayment of debt obligations
(167,319
)
 
(1,818
)
Withholding taxes paid on vested RSUs
(630
)
 
(2,053
)
Other, net

 
113

Net Cash Provided by Financing Activities
81,546

 
116,663

Net Change in Cash and Cash Equivalents
(53,948
)
 
114,091

Cash and Cash Equivalents, Beginning of Period
329,813

 
254,070

Cash and Cash Equivalents, End of Period
$
275,865

 
$
368,161

 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
10,958

 
$
9,959

Income taxes
$
2,180

 
$
7,618

Non-cash transactions:
 
 
 
Assets related to the initial consolidation of CLO
$
100,156

 
$

Liabilities related to the initial consolidation of CLO
$
99,878

 
$


See notes to consolidated financial statements.


8


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017


1. OVERVIEW
Och-Ziff Capital Management Group LLC (the “Registrant”), a Delaware limited liability company, together with its consolidated subsidiaries (collectively, the “Company”), is a global alternative asset management firm with offices in New York, London, Hong Kong, Mumbai, Beijing, Shanghai and Houston. The Company provides asset management services to its investment funds (the “funds”), which pursue a broad range of global investment opportunities. The Company currently manages multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds and other alternative investment vehicles. Through Institutional Credit Strategies, the Company’s asset management platform that invests in performing credits, the Company manages collateralized loan obligations (“CLOs”) and other customized solutions for its clients.
The Company’s primary sources of revenues are management fees, which are based on the amount of the Company’s assets under management, and incentive income, which is based on the investment performance of the funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the funds.
The Company currently has two operating segments: the Oz Funds segment and the Companys real estate business. The Oz Funds segment is currently the Company’s only reportable operating segment under U.S. generally accepted accounting principles (“GAAP”) and provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles. The Company’s real estate business, which provides asset management services to its real estate funds, is included within Other Operations, as it does not meet the threshold of a reportable operating segment under GAAP.
The Company generates substantially all of its revenues in the United States. The liability of the Company’s Class A Shareholders is limited to the extent of their capital contributions.
The Company conducts its operations through OZ Management LP, OZ Advisors LP and OZ Advisors II LP (collectively, the “Oz Operating Partnerships,” and collectively with their consolidated subsidiaries, the “Oz Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of the Oz Operating Partnerships other than the Company’s intermediate holding companies, and include the Company’s founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company. References to the Company’s “active executive managing directors” refer to executive managing directors who remain active in the Company’s business. References to the “Ziffs” refer collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons. References to the Company’s “intermediate holding companies” refer, collectively, to Och-Ziff Holding Corporation (“Oz Corp”) and Och-Ziff Holding LLC, both of which are wholly owned subsidiaries of the Registrant.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited, interim, consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s unaudited, interim, consolidated financial statements have been included and are of a normal and recurring nature. The results of operations presented for the interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year, primarily because of the majority of incentive income and actual amounts of discretionary cash bonuses being recorded in the fourth quarter each year. All significant intercompany transactions and balances have been eliminated in consolidation.


9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

Interim Accrual of Annual Discretionary Cash Bonus
In the first quarter of 2017, the Company decided to provide a minimum annual discretionary cash bonus. As a result of this decision, the Company will accrue the minimum annual discretionary cash bonus on a straight-line basis during the year. The total amount of discretionary cash bonuses ultimately recognized for the full year, which is determined in the fourth quarter of each year, could differ materially from the minimum amount accrued, as the total discretionary cash bonus is dependent upon a variety of factors, including fund performance for the year. 
Reclassifications
The Company has reclassified the changes in tax receivable agreement liability from general, administrative and other expenses to other income (loss) in the consolidated statements of comprehensive income (loss). The Company also reclassified its investments in funds, joint ventures and United States government obligations from other assets, net to investments in the Company’s consolidated balance sheets. These reclassifications had no impact on the Company’s financial position or results of operations, and prior period amounts have been reclassified to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. The requirements of ASU 2016-09 were effective for the Company beginning in the first quarter of 2017. As permitted under the new guidance, the Company has made an accounting policy election to account for forfeitures on share-based compensation arrangements as they occur. Prior to the adoption of ASU 2016-09, the Company was required to estimate forfeitures. The decision to no longer estimate forfeitures was not material to the financial statements. Additionally, the Company will recognize all income tax effects of awards within consolidated and comprehensive net income when the awards vest or are settled. Prior to the adoption of ASU 2016-09, excess tax benefits were recorded to paid-in capital, while tax deficiencies were recorded in consolidated and comprehensive net income to the extent in excess of previously recorded excess tax benefits. The amendments related to the recognition of excess tax benefits and tax deficiencies in the statement of comprehensive income were applied prospectively.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties that Are under Common Control. The guidance was effective for the Company beginning in the first quarter of 2017. ASU 2016-17 amended the consolidation guidance with respect to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity (“VIE”). Under the amended guidance, a reporting entity considers its indirect economic interests in a VIE held through related parties that are under common control on a proportionate basis, consistent with the way it would evaluate its indirect economic interests held through related parties that are not under common control. The adoption of ASU 2016-17 did not have a material impact on the Company’s consolidated financial statements.
None of the other changes to GAAP that went into effect in the six months ended June 30, 2017 has had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605-Revenue Recognition and most industry-specific revenue recognition guidance throughout the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company is in the process of implementing the new revenue guidance and is continuing to evaluate the effect the ASU will have on its consolidated financial statements, including, whether the Company: (a) will be required to recognize incentive income earlier than as prescribed under current guidance, (b) should present certain revenue streams on a gross or net basis depending on whether it is identified as principal or agent in a transaction where the standard’s core principle is


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

one of control and not risks and rewards, as is the cash with the current guidance, and (c) whether certain costs associated with business development and deal origination, which are currently recognized as an expense as incurred, should be initially deferred and subsequently recognized as an expense over a specified period. The ASU also introduces new qualitative and quantitative disclosure requirements and requires disaggregation of revenue information beyond that which is currently required, that will significantly impact the information presented in the notes to the Company’s consolidated financial statements. The Company expects to adopt ASU 2014-09 using a modified retrospective application approach in the first quarter of 2018.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 significantly changes accounting for lease arrangements, in particular from the perspective of the lessee. The Company is not currently a lessor in any significant lease arrangements, but is a lessee in several lease arrangements that would be impacted by the ASU. The Company has determined that most of its operating leases will be reported as lease obligations, along with offsetting right to use assets on its consolidated balance sheet at their present value, and will continue to recognize associated expenses within consolidated net income (loss) in a manner similar to the existing accounting for leases (i.e., on a straight-line basis over the lease term). Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The requirements of ASU 2016-02 are effective for the Company beginning in the first quarter of 2019. See Note 17 of the Company’s Annual Report for details related to the Company’s existing operating lease obligations.
None of the other changes to GAAP that are not yet effective are expected to have a material effect on the Company’s consolidated financial statements.
3. NONCONTROLLING INTERESTS AND OZ OPERATING GROUP OWNERSHIP
Noncontrolling interests represent ownership interests in the Company’s subsidiaries held by parties other than the Company, and primarily relate to the Group A Units held by the Company’s executive managing directors and fund investors’ interests in the consolidated funds. Net income (loss) attributable to the Group A Units is driven by the earnings (losses) of the Oz Operating Group. Net income attributable to fund investors’ interests in consolidated funds is driven by the earnings of those funds.
The following table presents the components of the net income (loss) attributable to noncontrolling interests:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Group A Units
$
22,010

 
$
(115,632
)
 
$
31,645

 
$
(203,651
)
Consolidated funds

 

 

 
262

Other
132

 
40

 
275

 
(48
)
 
$
22,142

 
$
(115,592
)
 
$
31,920

 
$
(203,437
)
The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Group A Units
$
242,864

 
$
166,521

Other
4,412

 
5,408

 
$
247,276

 
$
171,929



11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The Preferred Units and fund investors’ interests in certain consolidated funds are redeemable outside of the Company’s control. These interests are classified within redeemable noncontrolling interests in the consolidated balance sheets. The following table presents the activity in redeemable noncontrolling interests:
 
Six Months Ended June 30, 2017
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
21,621

 
$
262,500

 
$
284,121

Change in redemption value of Preferred Units

 
7,446

 
7,446

Preferred Units issuance, net of issuance costs

 
150,054

 
150,054

Capital contributions
2,251

 

 
2,251

Comprehensive income
806

 

 
806

Ending Balance
$
24,678

 
$
420,000

 
$
444,678

Oz Operating Group Ownership
The Company’s equity interest in the Oz Operating Group increased to 40.9% as of June 30, 2017, from 38.3% as of December 31, 2016, (excluding Group P Units, as they are not yet participating in the economics of the Oz Operating Group). Changes in the Company’s interest in the Oz Operating Group have historically been, and in the future may be, driven by the following: (i) the exchange of Group A Units and Group P Units for an equal number of Class A Shares, at which time the related Class B Shares are also canceled; (ii) the issuance of Class A Shares under the Company’s Amended and Restated 2007 Equity Incentive Plan and 2013 Incentive Plan related to the settlement of RSUs; (iii) the forfeiture of Group A Units and Group P Units by a departing executive managing director; and (iv) the repurchase of Class A Shares and Group A Units. The Company’s interest in the Oz Operating Group is expected to continue to increase over time as additional Class A Shares are issued upon the exchange of Group A Units and Group P Units, as well as the settlement of vested RSUs. These increases will be offset upon any conversion by an executive managing director of Group D Units, which are not considered equity for GAAP purposes, into Group A Units, at which time an equal number of Class B Shares is also issued to the executive managing director. Additionally, the Company’s interest in the Oz Operating Group will decline when Group P Units begin to participate as described below.
Group P Units, 2017 Incentive Program and Limited Partnership Agreements Amendments
On February 13, 2017, the Company’s board of directors approved the Och-Ziff Capital Management Group LLC 2017 Incentive Program (the “2017 Incentive Program”). Under the terms of the 2017 Incentive Program, the Company granted Group P Units (an “Incentive Award”) to certain executive managing directors. One Class P common unit in each Oz Operating Partnership, collectively, is referred to as a “Group P Unit.”
The Company granted 71.9 million Group P Units in March 2017, at the average fair value of $1.25 per unit. The fair value was determined using the Monte-Carlo simulation valuation model, with the following assumptions: volatility of 35.7%, dividend rate of 10.0%, and risk-free discount rate of 2.2%. The requisite service period for these Incentive Awards was estimated to be 3.9 years at the time of the grant. Total unrecognized stock-based compensation expense related to unvested awards was $89.5 million. There were 71.9 million Group P Units outstanding as of June 30, 2017.
A grant of Group P Units will conditionally vest upon the applicable executive managing directors satisfying a service condition (the “Service Condition”) and certain market performance-based targets, expressed as percentages (the “Performance Condition”) being satisfied, as follows: 20% of Units vest upon a Performance Condition of 25% being achieved (i.e., total shareholder return from the contractually determined reference price of $3.21); an additional 40% (for a total of 60%) of Units vest upon a Performance Condition of 50% being achieved; an additional 20% (for a total of 80%) of Units vest upon a Performance Condition of 75% being achieved; and an additional 20% (for a total of 100%) of the Units vest upon a


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

Performance Condition of 125% being achieved. Achievement of the applicable Performance Conditions earlier than estimated can materially affect the amount of equity-based compensation expense recognized by the Company in any given period.
Executive managing directors will be entitled to receive distributions on their Group P Units only after satisfaction of the Service Condition and the Performance Condition, from which time the executive managing director will be entitled to receive the same distributions per Unit on each Group P Unit as holders of Group A Units and Group D Units.
If a holder of an Incentive Award has not satisfied both the Service Condition and the applicable Performance Condition has not been met with respect to the units comprising such Incentive Award by the sixth anniversary of the respective grant date, such units will be forfeited and canceled immediately.
Upon satisfaction of the Service Condition and the Performance Condition, Group P Units may be exchanged at the executive managing director’s discretion for Class A Shares (or the cash value thereof, as determined by the Board) provided that sufficient Appreciation (as defined in the Limited Partnership Agreements) has occurred for each Group P Unit to have become economically equivalent to a Group A Unit. Upon the exchange of a Group P Unit for a Class A Share (or the cash equivalent), the exchanging executive managing director will have a right to potential future payments owed to him or her under the tax receivable agreement.
Effective March 1, 2017, the Board of Directors approved amendments to the Limited Partnership Agreements of the Oz Operating Partnerships that, in addition to the events discussed above, adjust the measurement thresholds used in determining whether sufficient Appreciation has taken place for Group D Units issued prior to March 1, 2017, to have become economically equivalent to Group A Units. This amendment makes it more likely that outstanding Group D Units will convert to Group A Units.
On May 9, 2017, upon approval by the Company’s shareholders of the amendment to the 2013 Incentive Plan, each holder of Group P Units received a number of Class B Shares equal to the number of Group P Units held. One Class B Share will be canceled for each Class A Share issued upon the exchange of a Group P Unit.
Relinquishment of Group A Units
Oz Corp and Oz Holding, as the general partners of the Oz Operating Partnerships, entered into a Relinquishment Agreement with Daniel S. Och and certain family trusts over which Mr. Och has investment control (the “Och Trusts”) effective as of March 1, 2017 (the “Relinquishment Agreement”). Pursuant to the Relinquishment Agreement, Mr. Och and the Och Trusts agreed to cancel, in the aggregate, 30.0 million of their vested Group A Units. The Relinquishment Agreement provides that if any of the Group D Units granted to James S. Levin on March 1, 2017 are forfeited, such forfeited units (up to an aggregate amount of 30.0 million) shall be reallocated to Mr. Och and the Och Trusts pursuant to the terms of the Limited Partnership Agreements. The Company accounted for the transaction as a repurchase of Group A Units for no consideration. A corresponding number of Class B Shares were also canceled.
Dilution of Proceeds from Tax Receivable Agreement Waiver
In September 2016, the Company amended the tax receivable agreement to provide that no amounts will be due or payable under the tax receivable agreement by Oz Corp, one of the Company’s wholly owned intermediate holding companies, with respect to the 2015 and 2016 taxable years. During the first quarter of 2017, Oz Corp contributed to the Oz Operating Group the cash previously set aside for such payments, which resulted in a reallocation of such contribution between the Company’s paid-in capital and the paid-in capital of the Group A Units (including within noncontrolling interests).


13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

4. INVESTMENTS AND FAIR VALUE DISCLOSURES
The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:
 
June 30, 2017
 
December 31, 2016
 
(dollars in thousands)
United States government obligations, at fair value(1)
$
99,495

 
$

CLOs, at fair value
43,723

 
21,341

Other funds and joint ventures, equity method
16,464

 
16,639

Total Investments
$
159,682

 
$
37,980

_______________
(1) Held by the Oz Operating Group and matures December 21, 2017.
Fair Value Disclosures
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date (i.e., an exit price). Due to the inherent uncertainty of valuations of investments that are determined to be illiquid or do not have readily ascertainable fair values, the estimates of fair value may differ from the values ultimately realized, and those differences can be material.
GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively-quoted prices generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value.
Assets and liabilities measured at fair value are classified into one of the following categories:
Level I – Fair value is determined using quoted prices that are available in active markets for identical assets or liabilities. The types of assets and liabilities that would generally be included in this category are certain listed equities, U.S. government obligations and certain listed derivatives.
Level II – Fair value is determined using quotations received from dealers making a market for these assets or liabilities (“broker quotes”), valuations obtained from independent third-party pricing services, the use of models or other valuation methodologies based on pricing inputs that are either directly or indirectly market observable as of the measurement date. The types of assets and liabilities that would generally be included in this category are certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, less liquid equity securities, forward contracts and certain over the-counter (“OTC”) derivatives.
Level III – Fair value is determined using pricing inputs that are unobservable in the market and includes situations where there is little, if any, market activity for the asset or liability. The fair value of assets and liabilities in this category may require significant judgment or estimation in determining fair value of the assets or liabilities. The fair value of these assets and liabilities may be estimated using a combination of observed transaction prices, independent pricing services, relevant broker quotes, models or other valuation methodologies based on pricing inputs that are neither directly or indirectly market observable. The types of assets and liabilities that would generally be included in this category include real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, certain OTC derivatives, residential and commercial mortgage-backed securities, asset-backed securities, collateralized debt obligations, investments in affiliated credit funds as well as debt obligations of the consolidated CLO.


14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Fair Value Measurements Categorized within the Fair Value Hierarchy
The following table summarizes the Company’s investments including assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of June 30, 2017:
 
As of June 30, 2017
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
119,756

 
$

 
$

 
$
119,756

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
99,495

 
$

 
$

 
$
99,495

CLOs(1)
$

 
$

 
$
43,723

 
$
43,723

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
186,477

 
$
39,338

 
$
225,815

Corporate bonds

 
7,285

 

 
7,285

 
$

 
$
193,762

 
$
39,338

 
$
233,100

 
 
 
 
 
 
 
 
Liabilities, at Fair Value
 
 
 
 
 
 
 
Liabilities of consolidated funds:
 
 
 
 
 
 
 
Senior debt obligations of consolidated CLO
$

 
$
83,381

 
$

 
$
83,381

Preferred shares of consolidated CLO

 
27,557

 

 
27,557

Debt Obligations of Consolidated CLO, at Fair Value
$

 
$
110,938

 
$

 
$
110,938

_______________
(1) As of June 30, 2017, investments in CLOs had contractual principal amounts of $43.3 million outstanding.
The Company elected to measure its investments in CLOs at fair value through consolidated net income (loss) in order to simplify its accounting for these instruments. Changes in fair value of these investments are included within net gains on investments in funds and joint ventures in the consolidated statements of comprehensive income (loss). The Company accrues interest income on its investments in CLOs using the effective interest method.
As further discussed in Note 6, the Company consolidated a CLO warehouse vehicle beginning in the second quarter of 2017. The Company elected to measure the debt obligations of the consolidated CLO at fair value through consolidated net income (loss) in order to mitigate the accounting mismatch between the carrying values of the assets and liabilities of the consolidated CLO. Changes in fair value of these assets and liabilities are included within net gains (losses) of consolidated funds in the consolidated statements of comprehensive income (loss). The Company accrues interest income and interest expense of the consolidated CLO using the effective interest method.


15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The following table summarizes assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2016:
 
As of December 31, 2016
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
139,974

 
$

 
$

 
$
139,974

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
CLOs(1)
$

 
$

 
$
21,341

 
$
21,341

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
19,534

 
$
18,127

 
$
37,661

 
 
 
 
 
 
 
 
Liabilities, at Fair Value
 
 
 
 
 
 
 
Included within other liabilities:
 
 
 
 
 
 
 
Obligation to deliver loans subject to forward sale agreement included within other liabilities
$

 
$
8,204

 
$

 
$
8,204

_______________
(1) As of December 31, 2016, investment in CLO had contractual principal amounts of $21.3 million outstanding.
Reconciliation of Fair Value Measurements Categorized within Level III
The Company assumes that any transfers between Level I, Level II or Level III occur at the beginning of the reporting period presented. Gains and losses, excluding those of the consolidated funds are recorded within net gains on investments in funds and joint ventures in the consolidated statements of comprehensive income (loss), and gains and losses of the consolidated funds are recorded within net gains (losses) of consolidated funds. Amounts related to the deconsolidation of the Company’s funds upon the adoption of ASU 2015-02 on January 1, 2016 are included within investment sales.
The following tables summarize the changes in the Company’s Level III assets and liabilities for the three months ended June 30, 2017:
 
March 31, 2017
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
(1)
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
22,048

 
$

 
$

 
$
20,200

 
$

 
$
1,475

 
$
43,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
16,663

 
$
5,207

 
$
(13,255
)
 
$
37,771

 
$
(8,122
)
 
$
1,074

 
$
39,338

_______________
(1) Amounts related to the initial consolidation of the Company’s CLO are included within issuances.


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The following tables summarize the changes in the Company’s Level III assets for the three months ended June 30, 2016
 
March 31, 2016
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
 
 
 
 
Bank debt
$
3,981

 
$
489

 
$

 
$
27,612

 
$
(23,408
)
 
$
194

 
$
8,868

The following tables summarize the changes in the Company’s Level III assets and liabilities for the six months ended June 30, 2017:

December 31, 2016

Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
(1)
 
Investment
Sales / Settlements
 
Gains / Losses

June 30, 2017















(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
21,341

 
$

 
$

 
$
20,200

 
$

 
$
2,182

 
$
43,723


 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,127

 
$
4,323

 
$
(16,478
)
 
$
65,268

 
$
(33,242
)
 
$
1,340

 
$
39,338

_______________
(1) Amounts related to the initial consolidation of the Company’s CLO are included within issuances.
The following table summarizes the changes in the Company’s Level III assets for the six months ended June 30, 2016
 
December 31, 2015
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank debt
$
1,998,423

 
$
460

 
$

 
$
47,227

 
$
(2,037,742
)
 
$
500

 
$
8,868

Real estate investments
719,957

 

 

 

 
(719,957
)
 

 

Residential mortgage-backed securities
323,571

 

 

 

 
(323,571
)
 

 

Collateralized debt obligations
83,759

 

 

 

 
(83,759
)
 

 

Energy and natural resources limited partnerships
70,604

 

 

 

 
(70,604
)
 

 

Commercial real estate debt
18,295

 

 

 

 
(18,295
)
 

 

Corporate bonds

 

 

 

 

 

 

Asset-backed securities
23,739

 

 

 

 
(23,739
)
 

 

Commercial mortgage-backed securities
13,803

 

 

 

 
(13,803
)
 

 

Other investments (including derivatives, net)
1,938

 

 

 

 
(1,938
)
 

 

 
$
3,254,089

 
$
460

 
$

 
$
47,227

 
$
(3,293,408
)
 
$
500

 
$
8,868

Transfers out of Level III presented in the tables above resulted from the fair values of certain securities becoming market observable, with fair value determined using independent pricing services. Transfers into Level III presented in the table above resulted from the valuation of certain investments with decreased market observability, with fair values determined using


17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

broker quotes or independent pricing services. There were no transfers between Levels I and II during the periods presented above.
The table below summarizes the net change in unrealized gains and losses on the Company’s Level III assets and liabilities held as of the reporting date. These gains and losses are included within net gains of consolidated funds in the Company’s consolidated statements of comprehensive income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
CLOs
$
1,475

 
$

 
$
2,182

 
$

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$
272

 
$
69

 
$
385

 
$
100

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III
Investments in CLOs and bank debt are valued using independent pricing services and thus there are no unobservable valuation inputs used in determining their fair value to disclose. For valuation methodologies of investments that were deconsolidated on January 1, 2016, please refer to the Company’s Annual Report.
Senior debt obligations and preferred shares of the consolidated CLO are based on the fair value of the financial assets of the consolidated CLO, less the fair value of any beneficial interests held by the Company, as the Company believes the fair value of the financial assets are more observable. The Company measures the fair value of beneficial interests that it holds using independent pricing services.
Valuation Process for Fair Value Measurements Categorized within Level III
The Company has established a Valuation Committee to provide oversight of the monthly valuation results of the investments held by the Company and the funds. The Valuation Committee has assigned the responsibility of performing price verification and related quality controls in accordance with the Valuation Policy to the Valuation Controls Group. The Valuation Controls Group performs price verification procedures on all of the investments which include, but are not limited to the following: reviewing independent pricing provided by third-party valuation vendors, reviewing and collecting broker quotes and reviewing valuation models. The Valuation Controls Group performs additional quality controls to support valuation techniques including but not limited to: back testing, stale pricing reviews, and vendor due diligence. When pricing or verification sources cannot be obtained from external sources or if external prices are deemed unreliable, additional procedures are performed by the Valuation Controls Group, which may include comparing unobservable inputs to observable inputs for similar positions, reviewing subsequent market activities, performing comparisons of actual versus projected performance indicators, and reviewing the valuation methodology and key inputs. Independent third party valuation firms may be used to corroborate internal valuations.
Fair Value of Other Financial Instruments
Management estimates that the carrying value of the Company’s other financial instruments, including its debt obligations, approximated their fair values as of June 30, 2017. The Senior Notes are categorized as Level II and the CLO Investments Loans (both as defined in Note 9) are categorized as Level III within the fair value hierarchy. The fair value of the Senior Notes and the CLO Investments Loans were determined using independent pricing services.


18


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

Assets Measured at Fair Value on a Non-Recurring Basis
As of June 30, 2017, the Company measured its loans held for sale at fair value. See Note 7 for the carrying values of these assets. These non-recurring fair value measurements are categorized as follows: $34.3 million as Level II and $3.0 million as Level III. The fair value for the loans held for sale was determined using independent pricing services.
As of December 31, 2016, the Company measured its aircraft held for sale at fair value, less cost to sell, and loans held for sale at fair value. See Note 7 for the carrying values of these assets. These non-recurring fair value measurements are categorized as Level III for the aircraft and Level II for the loans held for sale. The fair value for the aircraft was determined using recent market sales for comparable aircraft and bids received, and the Company assesses whether recent bids are supportive of transactions seen in recent sales for similar aircraft. The fair value for the loans held for sale was determined using independent pricing services.
5. TRANSFERS OF FINANCIAL ASSETS
Investments in CLOs and Related Transactions
In the second quarter of 2017 and the fourth quarter of 2016, the Company purchased $20.2 million and $21.5 million, respectively, of notes issued by CLOs it manages. These investments, which are in the form of a 5% vertical strip (i.e., 5% of each of the senior and subordinated tranches of notes issues by each CLO) were required under the recently enacted risk retention rules in the U.S. and Europe. These investments represent retained interests to the Company under GAAP. The retained interests are reported within investments on the Company’s consolidated balance sheet (see Note 4).
The Company uses independent pricing services to value its investments in the CLOs, and therefore the only key assumption is the price provided by such service. A corresponding adverse change of 10% or 20% on price would have a corresponding impact on the fair value of the Company’s investment. As of June 30, 2017, the Company had not yet received payments on its investments in the CLOs nor any management fees from those CLOs and does not expect to receive any payments until July 2017, in accordance with the underlying contractual agreements.
Related to the CLOs described above, in the second quarter of 2017, the Company purchased $25.6 million of loans in the open market and sold the loans at cost to a CLO managed by the Company. In the fourth quarter of 2016, the Company purchased $27.4 million of Euro-denominated loans in the open market and contemporaneously entered into a forward sale agreement to sell the loans at cost to a European CLO managed by the Company, which it sold at cost during the first quarter of 2017. The loans that were sold were accounted for as transfers of financial assets and met the criteria for derecognition under GAAP. As of June 30, 2017, the Company had $37.4 million of additional loans held for sale that it expects to sell at cost to a CLO managed by the Company.
6. VARIABLE INTEREST ENTITIES
In the ordinary course of business, the Company sponsors the formation of funds that are considered VIEs. See Note 2 of the Company’s Annual Report for a discussion of entities that are VIEs and the evaluation of those entities for consolidation by the Company.
In the second quarter of 2017, the Company consolidated one of the CLOs it manages as a result of increasing its investment in the vehicle, which provided the Company with a controlling financial interest in the VIE. As of June 30, 2017, the CLO was in warehouse, and had not yet issued notes to potential investors.


19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The table below presents the assets and liabilities of VIEs consolidated by the Company:
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 

Assets of consolidated funds:
 

 
 

Investments of consolidated funds, at fair value
$
233,100

 
$
37,661

Other assets of consolidated funds
35,404

 
17,544

Total Assets
$
268,504

 
$
55,205

 
 
 
 
Liabilities
 

 
 

Liabilities of consolidated funds:
 

 
 

Debt obligations of consolidated CLO
110,938

 

Other liabilities of consolidated funds
110,205

 
15,197

Total Liabilities
$
221,143

 
$
15,197

The assets presented in the table above belong to the investors in those funds, are available for use only by the fund to which they belong, and are not available for use by the Company. The consolidated funds have no recourse to the general credit of the Company with respect to any liability.
The Company’s direct involvement with funds that are VIEs and not consolidated by the Company is generally limited to providing asset management services and, in certain cases, direct investments in the VIEs. The maximum exposure to loss represents the potential loss of current investments or income and fees receivables from these entities, as well as the obligation to repay unearned revenues, primarily incentive income subject to clawback, in the event of any future fund losses. The Company has commitments to certain funds that are VIEs as discussed in Note 15. The Company does not provide, nor is it required to provide, any type of non-contractual financial or other support to its VIEs that are not consolidated.
The table below presents the net assets of VIEs in which the Company has variable interests:
 
June 30, 2017
 
December 31, 2016
 
(dollars in thousands)
Net assets of unconsolidated VIEs in which the Company has a variable interest
$
4,741,268

 
$
4,069,617

 
 
 
 
Maximum risk of loss as a result of the Company's involvement with VIEs:
 
 
 
Unearned revenues
107,475

 
96,409

Income and fees receivable
6,914

 
13,074

Investments in funds
56,086

 
35,868

Maximum Exposure to Loss
$
170,475

 
$
145,351



20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

7. OTHER ASSETS, NET
The following table presents the components of other assets, net as reported in the consolidated balance sheets:
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Fixed Assets:
 

 
 

Corporate aircraft held for sale
$

 
$
56,251

Leasehold improvements
53,419

 
54,414

Computer hardware and software
41,879

 
40,093

Furniture, fixtures and equipment
8,565

 
8,919

Accumulated depreciation and amortization
(53,820
)
 
(49,890
)
Fixed assets, net
50,043

 
109,787

Loans held for sale
37,360

 
8,204

Goodwill
22,691

 
22,691

Prepaid expenses
12,278

 
12,753

Trades receivable for loans subject to forward sale agreement

 
10,391

Other
3,505

 
6,158

Total Other Assets, Net
$
125,877

 
$
169,984

During the six months ended June 30, 2017, the Company sold its corporate aircraft for $57.6 million. As a result, the Company recognized a net gain on sale of $1.3 million in the period. The gain is included within other revenues in the consolidated statements of comprehensive income (loss).
8. OTHER LIABILITIES
The following table presents the components of other liabilities as reported in the consolidated balance sheets:
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Unearned incentive income
$
107,475

 
$
96,079

Loan trades payable
37,472

 
10,391

Accrued expenses
25,275

 
30,728

Deferred rent credit
9,422

 
15,046

Interest payable
2,244

 
2,654

Obligation to deliver loans subject to forward sale agreement, at fair value

 
8,204

Other
12,750

 
11,892

Total Other Liabilities
$
194,638

 
$
174,994

9. DEBT OBLIGATIONS
As of June 30, 2017, the Company’s outstanding indebtedness (excluding debt obligations of the consolidated funds) was primarily comprised of senior notes (the “Senior Notes”) and two secured loans to finance the purchase of the Company’s investments in CLOs (“CLO Investments Loans”).


21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

Senior Notes
On November 20, 2014, the Company issued $400.0 million of Senior Notes due November 20, 2019, unless earlier redeemed or repurchased. The Senior Notes were issued at a price of 99.417% of the aggregate principal amount and bear interest at a rate per annum of 4.50% payable semiannually in arrears. The Senior Notes are unsecured and unsubordinated obligations issued by a subsidiary of the Company, Och-Ziff Finance Co. LLC (“Och-Ziff Finance”), and are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by OZ Management LP, OZ Advisors LP and OZ Advisors II LP (collectively, the “Senior Notes Guarantors”).
The Senior Notes may be redeemed from time to time at the Company’s option, in whole or in part, at a redemption price equal to the greater of 100% of the principal amount to be redeemed and a make-whole redemption price (as defined in the Senior Notes indenture), in either case, plus any accrued and unpaid interest. If a change of control repurchase event occurs, the Company will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount, plus any accrued and unpaid interest.
The Senior Notes do not have any financial maintenance covenants. However, the Senior Notes include certain covenants, including limitations on Och-Ziff Finance’s and, as applicable, the Senior Notes Guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their respective subsidiaries or merge, consolidate or sell, transfer or lease all or substantially all assets. The Senior Notes also provide for customary events of default, bankruptcy, insolvency or reorganization that may cause the Senior Notes to become immediately due and payable, plus any accrued and unpaid interest.
Revolving Credit Facility
On November 20, 2014, the Company entered into a $150.0 million, 5-year unsecured Revolving Credit Facility, which was subsequently amended on December 29, 2015 and on June 13, 2017, the proceeds of which may be used for working capital, general corporate purposes or other liquidity needs. The facility matures on November 20, 2019. The borrower under the Revolving Credit Facility is OZ Management LP and the facility is guaranteed by OZ Advisors LP, OZ Advisors II LP and Och-Ziff Finance. The Company is able to increase the maximum amount of credit available under the facility to $225.0 million if certain conditions are satisfied.
The Company is subject to a fee of 0.10% to 0.25% per annum on undrawn commitments during the term of the Revolving Credit Facility. Outstanding borrowings will bear interest at a rate per annum of LIBOR plus 1.00% to 2.00%, or a base rate plus 0% to 1.00%. The commitment fees and the spreads over LIBOR or the base rate are based on OZ Management LP’s credit rating throughout the term of the facility. As of June 30, 2017, the current rates for borrowings would be LIBOR plus 2.00%, and the undrawn commitment fee was 0.25%.
In March 2017, the Company repaid its outstanding obligation under the Revolving Credit Facility in full, and as a result has $150.0 million available under the facility as of June 30, 2017.
The Revolving Credit Facility includes two financial maintenance covenants. The first covenant prohibits total fee-paying assets under management as of the last day of any fiscal quarter to be less than $22.0 billion for two successive quarters. The second covenant prohibits the economic income leverage ratio (as defined in the Revolving Credit Facility) from exceeding: (i) 4.00 to 1.00 for each fiscal quarter ending on or prior to December 31, 2017; (ii) 3.50 to 1.00 for each fiscal quarter ending on or after March 31, 2018 but on or prior to December 31, 2018; and (iii) 3.00 to 1.00 for each fiscal quarter ending on or after March 31, 2019. As of June 30, 2017, the Company was in compliance with the financial maintenance covenants.
The Revolving Credit Facility allows a limited right to cure an event of default resulting from noncompliance with the economic income leverage ratio test with an equity contribution made to the borrower, OZ Management LP. Such cure right may not be used more than two times in any four-quarter period or more than three times during the term of the facility.


22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The Revolving Credit Facility includes provisions that restrict or limit, among other things, the ability of the Oz Operating Group from:
Incurring certain additional indebtedness or issuing certain equity interest.
Creating liens.
Paying dividends or making certain other payments when there is a default or event of default under the Revolving Credit Facility.
Merging, consolidating, selling or otherwise disposing of its assets.
Engaging in certain transactions with shareholders or affiliates.
Engaging in a substantially different line of business.
Amending its organizational documents in a manner materially adverse to the lenders.
The Revolving Credit Facility permits the Oz Operating Group to incur, among other things, up to $150.0 million of indebtedness, up to an additional $400.0 million of indebtedness for financing of investments in CLOs in order to comply with risk retention regulatory requirements, and additional indebtedness so long as, after giving effect to the incurrence of such indebtedness, it is in compliance with an economic income leverage ratio as described above and no default or event of default has occurred and is continuing. The facility also permits the Oz Operating Group to create liens to, among other things, secure indebtedness related to financing of CLO risk retention investments, as described above, as well as other indebtedness and obligations of up to $50.0 million.
Aircraft Loan
In February 2014, the Company entered into the Aircraft Loan to finance installment payments towards the purchase of a corporate aircraft. In March 2017, the Company sold the aircraft and repaid the outstanding principal balance in the amount of $46.4 million.
CLO Investments Loans
From time-to-time, the Company enters into loans to finance portions of its investments in CLOs (collectively “the CLO Investments Loans”). These loans are collateralized by the investments in CLOs held by the Company. In general, the Company will make interest and principal payments on the loans at such time interest payments are received on its investments in the CLOs, and will make principal payments on the loans to the extent principal payments are received on its investments in the CLOs. 
In June 2017, the Company entered into a $17.5 million loan that bears interest at a rate of LIBOR plus 1.48%, and for which any remaining unpaid principal balance is due in May 2030. In November 2016, the Company entered into a €15.2 million loan that bears interest at a rate of EURIBOR plus 2.23%, and for which any remaining unpaid principal balance is due in December 2023. The loans are subject to customary events of default and covenants and includes terms that require the Company’s continued involvement with the CLOs. As of June 30, 2017, $34.8 million of principal was outstanding under the CLO Investments Loans.
Debt Obligations of Consolidated CLO
In the second quarter of 2017, the Company consolidated a CLO in warehouse that it manages. As a result, the debt obligations of the CLO are included in the Company’s consolidated balance sheet. The debt obligations will be repaid upon the launch of the CLO (i.e., end of the warehouse period). Debt obligations of the consolidated CLO are collateralized by the assets held by the CLO, which generally consist of corporate loans, corporate bonds and other securities. As of June 30, 2017, the fair value of the CLO assets was $209.7 million.


23


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

The table below presents information related to debt obligations of the consolidated CLO. The preferred shares have no stated interest rate, and are entitled to any excess cash flows after contractual payments are made to the senior debt obligations. The debt obligations of consolidated CLO are carried at fair value in the Company’s consolidated balance sheets.
 
As of June 30, 2017
 
Borrowings Outstanding
 
Fair Value
 
Interest Rate
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Senior debt obligations of consolidated CLO
$
83,381

 
$
83,381

 
1.10%
Preferred shares of consolidated CLO
24,997

 
27,557

 
n/a
 
$
108,378

 
$
110,938

 
 
10. PREFERRED UNITS
Pursuant to a securities purchase agreement, dated September 29, 2016 (the “Purchase Agreement”), certain of the Company’s executive managing directors, including Daniel S. Och (the “EMD Purchasers”), agreed to purchase up to a total of 400,000 Preferred Units for an aggregate amount of up to $400.0 million. On October 5, 2016, the Company completed a $250.0 million issuance and sale of 250,000 Preferred Units. On January 23, 2017, the Company completed an additional $150.0 million issuance and sale of 150,000 Preferred Units. As of June 30, 2017, 400,000 Preferred Units remained issued and outstanding.
Distributions on the Preferred Units are payable on the liquidation preference amount and on a cumulative basis at an initial distribution rate of 0% per annum until February 19, 2020 (the “Step-up Date”), after which the distribution rate will increase in stages thereafter to a maximum of 10% per annum on and after the eighth anniversary of the Step-up Date. Subject to certain exceptions, unless distributions on the Preferred Units are declared and paid in cash for the then current distribution period and all preceding periods after the initial closing, the Oz Operating Partnerships may not declare or pay distributions on or repurchase any of their equity securities that rank equal with or junior to the Preferred Units.
Following the occurrence of a change of control event, the Oz Operating Partnerships will redeem the Preferred Units at a redemption price equal to the liquidation preference plus all accumulated but unpaid distributions (collectively, the “liquidation value”). For so long as the Oz Operating Partnerships do not redeem all of the outstanding Preferred Units, the distribution rate will increase by 7% per annum, beginning on the 31st day following such change in control. The Oz Operating Partnerships will not be required to effect such redemption until the earlier of (i) 91 days after the maturity date of the Revolving Credit Facility and (ii) the payment in full of all loans and other obligations and the termination of all commitments thereunder.
The Oz Operating Partnerships may, at their option, redeem the Preferred Units at a price equal to: (i) 105% of the liquidation value until the day immediately prior to the Step-up Date; (ii) 103% of the liquidation value thereafter until the day immediately prior to the first anniversary of the Step-up Date; (iii) 101% of the liquidation value thereafter until the day immediately prior to the second anniversary of the Step-up Date; and (iv) thereafter at a price equal to the liquidation value. In addition, from and after March 31, 2020, if the amounts that were distributed to partners of the Oz Operating Partnerships in respect of their equity interests in the Oz Operating Partnerships (other than amounts distributed in respect of tax distributions or certain other distributions) or utilized for repurchase of units by such entities (or which were available but not used for such purposes) for the immediately preceding fiscal year were in excess of $100 million in the aggregate, then an amount equal to 20% of such excess shall be utilized to redeem Preferred Units on a pro rata basis for an amount equal to the liquidation value.
Furthermore, if the average closing price of the Company’s Class A Shares exceeds $15.00 per share for the previous 20 trading days, the Oz Operating Partnerships have agreed to use their reasonable best efforts to redeem all of the outstanding Preferred Units as promptly as practicable. If such event occurs prior to February 19, 2020, the Company has agreed to use its reasonable best efforts to obtain consents from its lenders in order to redeem the Preferred Units as promptly as practicable.


24


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

Although the Preferred Units do not have voting rights, the consent of the holders’ committee, which initially consists of Daniel S. Och as sole member, is required to effect (i) any amendment to or waiver of the terms of the Preferred Units or (ii) any amendment to the limited partnership agreements of the Oz Operating Partnerships that would have an adverse effect on any holder of the Preferred Units. Under the terms of the Preferred Units, the Oz Operating Partnerships are prohibited from issuing any equity securities (or any debt or other securities convertible into equity securities of such entity) that rank equally with, or senior to, the Preferred Units, without the prior written consent of the holders’ committee.
11. INCOME TAXES
The computation of the effective tax rate and provision at each interim period requires the use of certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences, and the likelihood of recovering deferred tax assets existing as of the balance sheet date. The estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as tax laws and regulations change. Additionally, the amount of incentive income and discretionary cash bonuses recorded in any given quarter can have a significant impact on the Company’s effective tax rate. Accordingly, the effective tax rate for interim periods is not indicative of the tax rate expected for a full year.
The Registrant and each of the Oz Operating Partnerships are partnerships for U.S. federal income tax purposes. Due to the Company’s legal structure, only a portion of the income earned by the Company is subject to corporate-level tax rates in the United States and in foreign jurisdictions.
The provision for income taxes includes federal, state and local taxes in the United States and foreign taxes at an approximate effective tax rate of 8.3% and -6.0% for the three months ended June 30, 2017 and 2016, respectively, and 26.9% and -9.2% for the six months ended June 30, 2017 and 2016, respectively. The reconciling items from the Company’s statutory rate to the effective tax rate were driven primarily by the following: (i) a portion of the Company’s consolidated net income is not subject to federal, state and local corporate income taxes in the United States, as these amounts are allocated to the executive managing directors on their Group A Units or to fund investors in the Company’s consolidated funds (each of which is included within noncontrolling interests); (ii) a portion of the income earned by the Company is subject to the New York City unincorporated business tax; (iii) certain foreign subsidiaries are subject to foreign corporate income taxes; and (iv) the valuation allowance on the Company’s foreign tax credits increased during the period.
In accordance with GAAP, the Company recognizes tax benefits for amounts that are “more likely than not” to be sustained upon examination by tax authorities. For uncertain tax positions in which the benefit to be realized does not meet the “more likely than not” threshold, the Company establishes a liability, which is included within other liabilities in the consolidated balance sheets.
As of June 30, 2017 and December 31, 2016, the Company had a liability for unrecognized tax benefits of $7.0 million. As of and for the three and six months ended June 30, 2017, the Company did not accrue interest or penalties related to uncertain tax positions. As of June 30, 2017, the Company does not believe that there will be a significant change to the uncertain tax positions during the next 12 months. The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate was $4.6 million as of June 30, 2017.


25


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2017

12. GENERAL, ADMINISTRATIVE AND OTHER
The following table presents the components of general, administrative and other expenses as reported in the consolidated statements of comprehensive income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands)
Professional services
$
8,608

 
$
19,820

 
$
21,756

 
$
43,195

Occupancy and equipment
7,574

 
9,163

 
18,477

 
18,491

Information processing and communications
7,182

 
8,325

 
14,211

 
18,674

Recurring placement and related service fees
5,217

 
10,023

 
10,661

 
22,554

Business development
2,213

 
3,789

 
4,970

 
8,458

Insurance
1,924

 
4,027

 
3,884

 
8,031

Other expenses
2,447

 
3,095

 
7,134

 
6,508

 
35,165

 
58,242

 
81,093

 
125,911

Settlements expense

 
214,285

 

 
414,285

Total General, Administrative and Other
$
35,165

 
$
272,527

 
$
81,093

 
$
540,196

13. EARNINGS (LOSS) PER CLASS A SHARE
Basic earnings (loss) per Class A Share is computed by dividing the net income (loss) attributable to Class A Shareholders by the weighted-average number of Class A Shares outstanding for the period.
For the three months ended June 30, 2017 and 2016 the Company included 978,294 and 1,062,801 RSUs respectively, that have vested but have not been settled in Class A Shares in the weighted-average Class A Shares outstanding used to calculate basic and diluted earnings (loss) per Class A Share. For the six months ended June 30, 2017 and 2016 the Company included 1,150,924 and 1,213,680 RSUs respectively, that have vested but have not been settled in Class A Shares in the weighted-average Class A Shares outstanding used to calculate basic and diluted earnings (loss) per Class A Share.
The Company did not include the Group P Units in the calculations of dilutive earnings (loss) per Class A Share, as the applicable Performance Condition has not yet been met as of June 30, 2017 (see Note 3).
The following tables present the computation of basic and diluted earnings (loss) per Class A Share:
Three Months Ended June 30, 2017
Net Income Attributable to Class A Shareholders
 
Weighted-Average
Class A Shares
Outstanding
 
Earnings Per Class A Share
 
Number of
Antidilutive Units
Excluded from
Diluted Calculation
 
 
 
 
 
 
 
 
 
(dollars in thousands, except per share amounts)
Basic
$
13,098

 
186,142,576

 
$
0.07

 
 
Effect of dilutive securities: