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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2018xex321.htm
EX-31.2 - EXHIBIT 31.2 - Sculptor Capital Management, Inc.ozm-10xqx1q2018xex312.htm
EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2018xex311.htm
EX-10.10 - EXHIBIT 10.10 - Sculptor Capital Management, Inc.a1q1810qux1010.htm
EX-10.9 - EXHIBIT 10.9 - Sculptor Capital Management, Inc.a1q1810qex109.htm
EX-10.8 - EXHIBIT 10.8 - Sculptor Capital Management, Inc.a1q1810qex108.htm
EX-10.7 - EXHIBIT 10.7 - Sculptor Capital Management, Inc.a1q1810qex107.htm
EX-10.6 - EXHIBIT 10.6 - Sculptor Capital Management, Inc.d405423dex106.htm
EX-10.5 - EXHIBIT 10.5 - Sculptor Capital Management, Inc.d405423dex105.htm
EX-10.4 - EXHIBIT 10.4 - Sculptor Capital Management, Inc.d405423dex104.htm
EX-10.3 - EXHIBIT 10.3 - Sculptor Capital Management, Inc.d405423dex103.htm
EX-10.2 - EXHIBIT 10.2 - Sculptor Capital Management, Inc.d405423dex102.htm
EX-10.1 - EXHIBIT 10.1 - Sculptor Capital Management, Inc.d405423dex101.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 March 31, 2018
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
 
¨
  
Accelerated filer
 
þ
 
 
 
 
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 April 26, 2018, there were 191,134,505 Class A Shares and 304,339,478 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, 2017, dated February 23, 2018 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 Partnerships 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 our business
 
 
 
funds
 
The multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds 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
 
 
 
IPO
 
Our initial public offering of 36.0 million Class A Shares that occurred in November 2007


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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 Partnerships 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. We also use our website to distribute company information, and such information may be deemed material. Accordingly, investors should monitor our website, in addition to our press releases, SEC filings and public conference calls and webcast. The contents of our website are not, however, a part of this report.
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


3



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.


4



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS — UNAUDITED
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
609,240

 
$
469,513

Investments (includes assets measured at fair value of $294,418 and $224,722 as of March 31, 2018 and December 31, 2017, respectively)
309,181

 
238,974

Income and fees receivable
67,803

 
354,456

Due from related parties
33,451

 
28,202

Deferred income tax assets
361,739

 
375,230

Other assets, net
94,108

 
116,361

Assets of consolidated funds:
 

 
 
Investments of consolidated funds, at fair value
67,625

 
43,366

Other assets of consolidated funds
42,454

 
13,331

Total Assets
$
1,585,601

 
$
1,639,433

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 
 
 
Liabilities
 

 
 
Compensation payable
$
26,318

 
$
208,639

Unearned incentive
55,218

 
143,710

Due to related parties
281,512

 
281,555

Debt obligations
632,693

 
569,379

Other liabilities
58,578

 
75,122

Liabilities of consolidated funds:
 

 
 
Other liabilities of consolidated funds
41,908

 
11,340

Total Liabilities
1,096,227

 
1,289,745

 
 
 
 
Commitments and Contingencies (Note 15)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
468,012

 
445,617

 
 
 
 
Shareholders’ (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 191,129,773 and 189,573,210 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 304,339,478 and 339,339,478 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

Paid-in capital
3,111,139

 
3,102,074

Accumulated deficit
(3,524,919
)
 
(3,555,905
)
Shareholders’ deficit attributable to Class A Shareholders
(413,780
)
 
(453,831
)
Shareholders’ equity attributable to noncontrolling interests
435,142

 
357,902

Total Shareholders’ (Deficit) Equity
21,362

 
(95,929
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ (Deficit) Equity
$
1,585,601

 
$
1,639,433

See notes to consolidated financial statements.


5


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



 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
Management fees
$
72,450

 
$
86,255

Incentive income
50,834

 
51,626

Other revenues
4,542

 
776

Income of consolidated funds
584

 
495

Total Revenues
128,410

 
139,152


 
 
 
Expenses
 
 
 
Compensation and benefits
68,924

 
69,943

Interest expense
6,598

 
6,280

General, administrative and other
37,850

 
45,928

Expenses of consolidated funds
84

 
84

Total Expenses
113,456

 
122,235


 
 
 
Other Income
 
 
 
Net gains on investments in funds and joint ventures
312

 
721

Net gains of consolidated funds
492

 
235

Total Other Income
804

 
956


 
 
 
Income Before Income Taxes
15,758

 
17,873

Income taxes
3,012

 
12,056

Consolidated and Comprehensive Net Income
12,746

 
5,817

Less: Income attributable to noncontrolling interests
(8,635
)
 
(9,778
)
Less: Income attributable to redeemable noncontrolling interests
(621
)
 
(350
)
Net Income (Loss) Attributable to Och-Ziff Capital Management Group LLC
3,490

 
(4,311
)
Less: Change in redemption value of Preferred Units

 
(2,853
)
Net Income (Loss) Attributable to Class A Shareholders
$
3,490

 
$
(7,164
)
 
 
 
 
Earnings (Loss) per Class A Share
 
 
 
Income (Loss) per Class A Share - basic
$
0.02

 
$
(0.04
)
Income (Loss) per Class A Share - diluted
$
0.02

 
$
(0.04
)
Weighted-average Class A Shares outstanding - basic
192,230,917

 
186,226,675

Weighted-average Class A Shares outstanding - diluted
456,787,062

 
186,226,675

 
 
 
 
Dividends Paid per Class A Share
$
0.07

 
$
0.01


See notes to consolidated financial statements.


6




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, 2017
189,573,210

 
339,339,478

 
$
3,102,074

 
$
(3,555,905
)
 
$
(453,831
)
 
$
357,902

 
$
(95,929
)
Impact of adoption of ASU 2014-09

 

 

 
41,922

 
41,922

 
75,062

 
116,984

Capital contributions

 

 

 

 

 
750

 
750

Capital distributions

 

 

 

 

 
(17,690
)
 
(17,690
)
Cash dividends declared on Class A Shares

 

 

 
(13,354
)
 
(13,354
)
 

 
(13,354
)
Dividend equivalents on Class A restricted share units

 

 
1,072

 
(1,072
)
 

 

 

Equity-based compensation, net of taxes
1,556,563

 
(35,000,000
)
 
7,803

 

 
7,803

 
10,673

 
18,476

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

 

 
190

 

 
190

 
(190
)
 

Comprehensive net income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
3,490

 
3,490

 
8,635

 
12,125

As of March 31, 2018
191,129,773

 
304,339,478

 
$
3,111,139

 
$
(3,524,919
)
 
$
(413,780
)
 
$
435,142

 
$
21,362


See notes to consolidated financial statements.



7


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

 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net income
$
12,746

 
$
5,817

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
22,171

 
18,478

Depreciation, amortization and net gains and losses on fixed assets
2,372

 
4,212

Deferred income taxes
2,157

 
10,609

Net gains on investments in funds and joint ventures
(312
)
 
(721
)
Operating cash flows due to changes in:
 
 
 
Income and fees receivable
315,488

 
116,319

Due from related parties
(5,248
)
 
1,142

Other assets, net
23,342

 
18,070

Compensation payable
(184,414
)
 
(166,951
)
Unearned incentive income
10,930

 
4,791

Due to related parties
(43
)
 
113

Other liabilities
(16,435
)
 
(19,693
)
Consolidated funds related items:
 
 
 
Net gains of consolidated funds
(492
)
 
(235
)
Purchases of investments
(87,438
)
 
(47,831
)
Proceeds from sale of investments
63,739

 
49,750

Other assets of consolidated funds
(29,191
)
 
(3,068
)
Other liabilities of consolidated funds
30,567

 
1,456

Net Cash Provided by (Used in) Operating Activities
159,939

 
(7,742
)
 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(1,205
)
 
(1,335
)
Proceeds from sale of fixed assets

 
51,724

Purchases of United States government obligations
(7,435
)
 

Maturities of United States government obligations
13,000

 

Investments in funds
(77,990
)
 
(212
)
Return of investments in funds
3,353

 
3,373

Net Cash (Used in) Provided by Investing Activities
(70,277
)
 
53,550



8


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


 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(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
22,857

 
251

Distributions to noncontrolling and redeemable noncontrolling interests
(18,023
)
 
(4,563
)
Dividends on Class A Shares
(13,354
)
 
(1,849
)
Proceeds from debt obligations
60,719

 

Repayment of debt obligations
(69
)
 
(167,319
)
Principal payments under capital lease obligations
(462
)
 

Withholding taxes paid on vested RSUs
(1,327
)
 
(385
)
Equity-classified RSUs settled in cash
(276
)
 

Net Cash Provided by (Used in) Financing Activities
50,065

 
(23,811
)
Net Change in Cash and Cash Equivalents
139,727

 
21,997

Cash and Cash Equivalents, Beginning of Period
469,513

 
329,813

Cash and Cash Equivalents, End of Period
$
609,240

 
$
351,810

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
1,362

 
$
1,960

Income taxes
$
644

 
$
1,149


See notes to consolidated financial statements.


9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018




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, 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 (collectively the “funds”). 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 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 its funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the 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.
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 and their consolidated subsidiaries (collectively, the “Oz Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of OZ Management LP, OZ Advisors LP and OZ Advisors II LP other than the Company’s intermediate holding companies, 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, each 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, 2017 (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. All significant intercompany transactions and balances have been eliminated in consolidation.
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. For example, incentive income for the majority of the Company’s multi-strategy assets under management is recognized in the fourth quarter each year, based on full year investment performance.


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



Revenue Recognition Policies
The Company provides asset management services to its customers, including certain administrative services related to the funds’ operations, in exchange for management and incentive fees, which are included in the Company’s agreements with its customers. The services provided in connection with the identified performance obligations are satisfied over time. The agreements are generally automatically renewed on an annual basis unless the agreements are terminated by the general partner or directors of the respective funds.
Management Fees
Management fees for the Company’s multi-strategy funds typically range from 0.97% to 2.50% annually of assets under management based on the net asset value of these funds. For the Company’s opportunistic credit funds, management fees typically range from 0.75% to 1.75% based on the net asset value of these funds. Management fees for the Company’s CLOs within Institutional Credit Strategies are generally range from 0.43% to 0.50% based on the par value of the collateral and cash held in the CLOs. Management fees for the Company’s real estate funds typically range from 0.75% to 1.50% annually based on the amount of capital committed or invested during the investment period, and on the amount of invested capital after the investment period. Management fees are recognized over the period during which the related services are performed.
Management fees are generally calculated and paid to the Company on a quarterly basis in advance, based on the amount of assets under management at the beginning of the quarter. Management fees are prorated for capital inflows and redemptions during the quarter. Accordingly, changes in the Company’s management fee revenues from quarter to quarter are driven by changes in the quarterly opening balances of assets under management, the relative magnitude and timing of inflows and redemptions during the respective quarter, as well as the impact of differing management fee rates charged on those inflows and redemptions.
The Company considers management fees to be a form of variable consideration, as the amount earned each quarter may depend on various contingencies, such as the value of assets under management, capital inflows and outflows during the period, or changes in committed or invested capital. Management fees, however, are generally crystallized at the end of each reporting period and are not subject to clawback and, therefore, the value of the management fees the Company is entitled to receive at the end of each quarter is generally no longer subject to the constraint.
Incentive Income
The Company earns incentive income based on the cumulative performance of the funds over a commitment period. Prior to the adoption of new revenue recognition accounting guidance in 2018, incentive income was recognized at the end of the applicable commitment period when the amounts were contractually payable, or “crystallized,” and when no longer subject to clawback. Beginning in 2018, as a result of the adoption of the new revenue recognition accounting guidance, the Company recognizes incentive income when such amounts are probable of not significantly reversing.
Incentive income is typically equal to 20% of the realized and unrealized profits, net of management fees, attributable to each fund investor in the Company’s multi-strategy funds, open-end opportunistic credit funds and certain other funds, but it excludes unrealized gains and losses attributable to investments that the Company, as investment manager, believes lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance (“Special Investments”). For the Company’s closed-end opportunistic credit funds, real estate funds and certain other funds, incentive income is typically equal to 20% of the realized profits, net of management fees, attributable to each fund investor. For CLOs, incentive income is typically 20% of the excess cash flows available to the holders of the subordinated notes.
The Company’s ability to earn incentive income from some of its funds may be impacted by hurdle rates, whereby the Company is not entitled to incentive income until the investment returns exceed an agreed upon benchmark. For a portion of these assets subject to hurdle rates, once the investment performance has exceeded the hurdle rate, the Company may receive a preferential “catch-up” allocation, equal to a full 20% of the net profits attributable to investors in these assets.


11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



All of the Company’s multi-strategy funds and open-end opportunistic credit funds are subject to a perpetual loss carry forward, or perpetual “high-water mark,” meaning the Company will not be able to earn incentive income with respect to positive investment performance it generates for a fund investor in any year following negative investment performance until that loss is recouped, at which point a fund investor’s investment surpasses the high-water mark. The Company earns incentive income on any profits, net of management fees, in excess of the high-water mark.
The commitment period for most of the Company’s multi-strategy assets under management is for a period of one year on a calendar-year basis, and therefore it generally crystallizes incentive income annually on December 31. The Company may also recognize incentive income related to fund investor redemptions at other times during the year, as well as on assets under management subject to commitment periods that are longer than one year. The Company may also recognize incentive income for tax distributions related to these assets. Such distributions are amounts distributed to the Company to cover tax liabilities related to incentive income that has been accrued at the fund level but would otherwise not be recognized by the Company until it is probable that a significant reversal will not occur. These distributions are not subject to clawback once distributed to the Company.
Incentive income is considered variable consideration, the recognition of which is subject to constraint. Incentive income is no longer constrained when it is probable that a significant reversal will not occur. Determining the amount of incentive income to record is subject to qualitative and quantitative factors including, where a fund is in its life-cycle, whether the Company has received or is entitled to receive incentive income and potential sales of fund investments. The Company continuously evaluates whether there are additional considerations that could potentially impact the recognition of incentive income. To the extent that distributions have been received, but for which the recognition of incentive income is not appropriate, the Company will recognize a liability for unearned incentive income.
See Note 9 for additional information regarding the Company’s revenues.
Other Revenues
Other revenues consist primarily of interest income on investments in CLOs and cash and cash equivalents. Interest income is recognized on an effective yield basis. Additionally, prior to the sale of the Company’s aircraft in the first half of 2017, revenue related to non-business use of the corporate aircraft by certain executive managing directors was also included within other revenues. Revenue earned from non-business use of the corporate aircraft was recognized on an accrual basis based on actual flight hours.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific revenue recognition guidance. 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 adopted ASU 2014-09 using a modified retrospective application approach as of the beginning of the first quarter of 2018 to all contracts within the scope of the standard as of the date of adoption. As a result of the adoption of ASU 2014-09, the Company was required to recognize certain incentive income earlier than as prescribed under guidance in effect for fiscal year 2017, as the threshold for recognition of incentive income under ASU 2014-09 is that such amounts are probable of not significantly reversing. Prior to adoption to ASU 2014-09, the threshold for recognition was when incentive income was no longer subject to clawback and all contingencies had been resolved. The Company recognized an opening adjustment to shareholders’ equity of $117.0 million, which is net of $11.3 million of income tax, of which $41.9 million was attributable to Class A shareholders.


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The following table details the post-tax impact on the Company’s opening shareholders’ equity, by fund type, upon the adoption of ASU 2014-09:
 
(dollars in thousands)
 
 
Multi-strategy funds
$
2,727

Opportunistic credit funds
24,462

Real estate funds
89,795

Total
$
116,984

The adoption of this guidance resulted in a decrease to the liability for unearned incentive income of $99.4 million and an increase in income and fees receivable of $28.8 million.
None of the other changes to GAAP that went into effect in the three months ended March 31, 2018 had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
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 15 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 attributable to the Group A Units is driven by the earnings 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 attributable to noncontrolling interests:
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Group A Units
$
8,370

 
$
9,635

Other
265

 
143

 
$
8,635

 
$
9,778



13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Group A Units
$
430,535

 
$
353,791

Other
4,607

 
4,111

 
$
435,142

 
$
357,902

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:
 
Three Months Ended March 31, 2018
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
25,617

 
$
420,000

 
$
445,617

Capital contributions
22,107

 

 
22,107

Capital distributions
(333
)
 

 
(333
)
Comprehensive income
621

 

 
621

Ending Balance
$
48,012

 
$
420,000

 
$
468,012

Oz Operating Group Ownership
The Company’s equity interest in the Oz Operating Group increased to 42.2% as of March 31, 2018, from 41.5% as of December 31, 2017, (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 or Class A performance-based RSUs (“PSUs”); (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 or PSUs. 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 economic interest in the Oz Operating Group will decline when Group P Units begin to participate, as described in Note 10 in the Annual Report.


14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



4. INVESTMENTS AND FAIR VALUE DISCLOSURES
The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:
 
March 31, 2018
 
December 31, 2017
 
(dollars in thousands)
United States government obligations, at fair value(1)
$
7,448

 
$
12,973

CLOs, at fair value
286,970

 
211,749

Other funds and joint ventures, equity method
14,763

 
14,252

Total Investments
$
309,181

 
$
238,974

_______________
(1) Held by the Oz Operating Group and matures on August 16, 2018.
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 and investments in affiliated credit funds.


15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



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 measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2018:
 
As of March 31, 2018
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
62,780

 
$

 
$

 
$
62,780

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
7,448

 
$

 
$

 
$
7,448

CLOs(1)
$

 
$

 
$
286,970

 
$
286,970

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
48,491

 
$
19,134

 
$
67,625

_______________
(1) As of March 31, 2018, investments in CLOs had contractual principal amounts of $263.6 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.
The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2017:
 
As of December 31, 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
$
99,704

 
$

 
$

 
$
99,704

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
12,973

 
$

 
$

 
$
12,973

CLOs(1)
$

 
$

 
$
211,749

 
$
211,749

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
24,559

 
$
18,807

 
$
43,366

_______________
(1) As of December 31, 2017, investments in CLOs had contractual principal amounts of $189.2 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



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.
The following table summarizes the changes in the Company’s Level III investments for the three months ended March 31, 2018:

December 31, 2017

Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses

March 31, 2018















(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
211,749

 
$

 
$

 
$
76,622

 
$
(2,775
)
 
$
1,374

 
$
286,970


 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,807

 
$
1,004

 
$
(2,906
)
 
$
28,560

 
$
(26,563
)
 
$
232

 
$
19,134

The following table summarizes the changes in the Company’s Level III investments for the three months ended March 31, 2017
 
December 31, 2016
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
21,341

 
$

 
$

 
$

 
$

 
$
707

 
$
22,048

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,127

 
$
771

 
$
(4,878
)
 
$
27,497

 
$
(25,120
)
 
$
266

 
$
16,663

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 independent pricing services. There were no transfers between Levels I and II during the periods presented above.


17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The table below summarizes the net change in unrealized gains and losses on the Company’s Level III investments 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 March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
Included within investments:
 
 
 
CLOs
$
974

 
$
707

 
 
 
 
Investments of consolidated funds:
 
 
 
Bank debt
$
89

 
$
113

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.
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.
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 March 31, 2018. The Senior Notes are categorized as Level II and the CLO Investments Loans (as defined in Note 8) 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
MARCH 31, 2018



Assets Measured at Fair Value on a Non-Recurring Basis
The Company recognizes loans held for sale at the lower of cost or fair value. The Company reports the loans held for sale in other assets, net on its consolidated balance sheet. The Company had $6.5 million and $29.1 million of loans held for sale as of March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, all $6.5 million of the loans held for sale are categorized as Level II within the fair value hierarchy; and as of December 31, 2017, $26.7 million and $2.4 million loans held for sale are categorized as Level II and Level III within the fair value hierarchy, respectively. The fair value for the loans was determined using independent pricing services.
Loans Sold to CLOs Managed by the Company
During the three months ended March 31, 2018, the Company sold $23.4 million of loans to CLOs managed by the Company, and during three months ended March 31, 2017, the Company sold $27.4 million. These loans were previously purchased by the Company in the open market, and were sold for cash at cost to the CLOs. The loans were accounted for as transfers of financial assets and met the criteria for derecognition under GAAP. As of March 31, 2018 and December 31, 2017, the outstanding principal amount on the loans that have been sold to the CLOs was $77.2 million and $51.7 million, respectively. As of March 31, 2018, there were no delinquencies or credit losses related to the loans sold.
The Company invests in senior secured and subordinated notes issued by certain CLOs to which it sold the loans discussed above. These investments represent retained interests to the Company and 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). The retained interests are reported within investments on the Company’s consolidated balance sheet. During the three months ended March 31, 2018, the Company made investments of $24.9 million related to these retained interests. As of March 31, 2018 and December 31, 2017, the Company’s investments in these retained interests had a fair value of $96.1 million and $70.4 million, respectively. The Company is subject to risks associated with the performance of the underlying collateral and the market yield of the assets. The Company’s risk of loss from retained interest is limited to its investments in these interests. The Company receives quarterly payments of interest and principal, as applicable, on these retained interests. In the three months ended March 31, 2018, the Company received $3.7 million of interest and principal payments related to the retained interests. In the three months ended March 31, 2017, the Company received no interest or principal payments related to the retained interests.
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 investments in CLOs.
5. 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.


19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The table below presents the assets and liabilities of VIEs consolidated by the Company:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 

Assets of consolidated funds:
 

 
 

Investments of consolidated funds, at fair value
$
67,625

 
$
43,366

Other assets of consolidated funds
42,454

 
13,331

Total Assets
$
110,079

 
$
56,697

 
 
 
 
Liabilities
 

 
 

Liabilities of consolidated funds:
 

 
 

Other liabilities of consolidated funds
41,908

 
11,340

Total Liabilities
$
41,908

 
$
11,340

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, insignificant 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 along with the maximum risk of loss as a result of the Company’s involvement with VIEs:
 
March 31, 2018
 
December 31, 2017
 
(dollars in thousands)
Net assets of unconsolidated VIEs in which the Company has a variable interest
$
9,809,769

 
$
8,300,163

 
 
 
 
Maximum risk of loss as a result of the Company’s involvement with VIEs:
 
 
 
Unearned revenues
55,557

 
144,124

Income and fees receivable
23,652

 
24,953

Investments in funds
298,012

 
222,192

Maximum Exposure to Loss
$
377,221

 
$
391,269



20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



6. OTHER ASSETS, NET
The following table presents the components of other assets, net as reported in the consolidated balance sheets:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Fixed Assets:
 

 
 

  Leasehold improvements
$
53,444

 
$
53,419

  Computer hardware and software
46,592

 
44,190

  Furniture, fixtures and equipment
8,570

 
8,571

Accumulated depreciation and amortization
(61,081
)
 
(58,671
)
Fixed assets, net
47,525

 
47,509

Goodwill
22,691

 
22,691

Prepaid expenses
11,119

 
12,862

Loans held for sale
6,498

 
29,110

Other
6,275

 
4,189

Total Other Assets, Net
$
94,108

 
$
116,361

7. OTHER LIABILITIES
The following table presents the components of other liabilities as reported in the consolidated balance sheets:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Accrued expenses
$
22,081

 
$
21,955

Interest payable
7,954

 
2,970

Deferred rent credit
7,730

 
8,283

Loan trades payable
6,498

 
29,110

Other
14,315

 
12,804

Total Other Liabilities
$
58,578

 
$
75,122

8. DEBT OBLIGATIONS
As of March 31, 2018, other than additional secured loans to finance the purchase of the Company’s investments in CLOs (“CLO Investments Loans”), the Company’s outstanding indebtedness had not changed materially since December 31, 2017 (see the Company’s Annual Report for additional information). However, see Note 17 for events that have occurred subsequent to March 31, 2018, related to the Company’s debt obligations.
CLO Investments Loans
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, with any remaining balance due upon maturity.


21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The loans are subject to customary events of default and covenants and include terms that require the Company’s continued involvement with the CLOs. The CLO Investments Loans do not have any financial maintenance covenants.
The table below presents information related to CLO Investments Loans as of March 31, 2018 and December 31, 2017. Carrying values presented below are net of discounts, if any, and unamortized deferred financing costs. The maturity date for each CLO Investments Loan is the earlier of the final maturity date presented in the table below or the date at which the Company no longer holds a risk retention investment in the respective CLO.
Borrowing Date
 
Contractual Rate
 
Final Maturity Date
 
Carrying Value
 
 
 
 
 
 
March 2018
 
December 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
November 28, 2016

EURIBOR plus 2.23%

December 15, 2023
 
$
18,482

 
$
18,041

June 7, 2017

LIBOR plus 1.48%

November 16, 2029
 
17,208

 
17,217

July 21, 2017

LIBOR plus 1.43%

January 22, 2029
 
21,674

 
21,709

August 2, 2017
 
LIBOR plus 1.41%
 
January 21, 2030
 
21,670

 
21,686

August 17, 2017
 
LIBOR plus 1.43%
 
April 30, 2030
 
22,882

 
22,922

September 14, 2017

LIBOR plus 1.41%

April 22, 2030
 
25,426

 
25,468

September 14, 2017

EURIBOR plus 2.21%

September 14, 2024
 
20,035

 
19,561

November 21, 2017
 
LIBOR plus 1.34%
 
May 15, 2030
 
26,188

 
26,202

January 25, 2018
 
LIBOR plus 1.24%
 
July 22, 2030
 
21,797

 

January 26, 2018
 
EURIBOR plus 1.62%
 
January 31, 2025
 
18,685

 

February 21, 2018
 
LIBOR plus 1.27%
 
February 21, 2019
 
21,091

 

 
 
 
 
 
 
$
235,138

 
$
172,806

9. REVENUES
The following table presents management fees and incentive income recognized as revenues for the three months ended March 31, 2018:
 
Management Fees
 
Incentive Income
 
 
 
 
 
(dollars in thousands)
Multi-strategy funds
$
44,406

 
$
11,832

Credit


 


Opportunistic credit funds
11,107

 
34,235

Institutional Credit Strategies
11,193

 

Real estate funds
4,764

 
4,767

Other
980

 

Total
$
72,450

 
$
50,834



22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



A liability for unearned incentive income is generally recognized when the Company receives incentive income distributions from its funds, primarily its real estate funds, for which incentive income has not yet met the recognition threshold of being probably that a significant reversal of cumulative revenue will not occur. The following table presents the activity in the Company’s unearned incentive income for the three months ended March 31, 2018:
 
Unearned Incentive Income
 
(dollars in thousands)
Balance as of December 31, 2017
$
143,710

Effects of adoption of ASU 2014-09
(99,422
)
Amounts collected during the period
15,565

Amounts recognized during the period
(4,635
)
Balance as of March 31, 2018
$
55,218

The Company recognizes management fees over the period in which the performance obligation is satisfied. The Company records incentive income when it is probable that a significant reversal of income will not occur. The majority of management fees and incentive income receivable at each balance sheet date is generally collected during the following quarter.
The following table presents the composition of the Company’s income and fees receivable as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Management fees
$
21,998

 
$
21,242

Incentive income
45,805

 
333,214

Income and Fees Receivable
$
67,803

 
$
354,456

10. EQUITY-BASED COMPENSATION EXPENSES
The Company grants equity-based compensation in the form of RSUs, PSUs (as defined below), Group A Units, Group P Units and Class A Shares to its executive managing directors, employees and the independent members of the Board under the terms of the 2007 Equity Incentive Plan and the 2013 Incentive Plan.
The following table presents information regarding the impact of equity-based compensation grants on the Company’s consolidated statements of comprehensive income (loss): 
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Expense recorded within compensation and benefits
$
22,171

 
$
18,478

Corresponding tax benefit
$
1,726

 
$
1,782




23


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The following tables present activity related to the Company’s unvested equity awards for the three months ended March 31, 2018:
 
Equity-Classified Awards
 
Liability-Classified Awards
 
Equity-Classified Awards
 
Unvested RSUs
 
Weighted-Average
Grant-Date Fair Value
 
Unvested RSUs
 
Weighted-Average
Grant-Date Fair Value
 
Unvested PSUs
 
Weighted-Average
Grant-Date Fair Value
December 31, 2017
14,530,602

 
$
4.67

 

 
$

 

 
$

Granted
27,243,941

 
$
2.50

 

 
$

 
10,000,000

 
$
1.18

Vested
(2,206,083
)
 
$
3.79

 

 
$

 

 
$

Canceled or forfeited
(6,876,584
)
 
$
3.14

 

 
$

 

 
$

Modified from Group A Units and Group P Units
6,407,968

 
$
6.36

 
7,345,991

 
$
6.36

 

 
$

March 31, 2018
39,099,844

 
$
3.75

 
7,345,991

 
$
6.36

 
10,000,000

 
$
1.18


 
Group A Units
 
Group P Units
 
Unvested Group A Units
 
Weighted-Average
Grant-Date Fair Value
 
Unvested Group P Units
 
Weighted-Average
Grant-Date Fair Value
December 31, 2017
8,410,663

 
$
9.77

 
71,850,000

 
$
1.25

Vested
(1,200,000
)
 
$
9.75

 

 
$

Modified to RSUs
(6,000,000
)
 
$
9.75

 
(29,000,000
)
 
$
1.25

March 31, 2018
1,210,663

 
$
9.93

 
42,850,000

 
$
1.25


Restricted Share Units (RSUs)
In the three months ended March 31, 2018, a certain executive managing director forfeited 6,000,000 Group A Units and 29,000,000 Group P Units for RSUs and certain other profit-sharing interests. The forfeiture of the Partner Equity Units was accounted for as a modification to 6,407,968 equity-classified RSUs and 7,345,991 liability-classified RSUs, and other awards. The fair value of the modified awards was $6.36 per RSU and was derived from based on the fair value of the original awards immediately before they were modified. The Company will continue to recognize at least the minimum compensation expense that would have been previously recognized prior to the modification.
As of March 31, 2018, total unrecognized compensation expense related to equity-classified awards totaled $120.8 million with a weighted-average amortization period of 3.2 years. As of March 31, 2018, total unrecognized compensation expense related to liability-classified awards totaled $42.3 million with a weighted-average amortization period of 4.0 years. See the Company’s Annual Report for additional information regarding RSUs.
The following table presents information related to the settlement of RSUs: 
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Fair value of RSUs settled in Class A Shares
$
3,845

 
$
709

Fair value of RSUs settled in cash
$
276

 
$

Fair value of RSUs withheld to satisfy tax withholding obligations
$
1,327

 
$
385

Number of RSUs withheld to satisfy tax withholding obligations
945,829

 
173,270



24


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



PSUs
In 2018, the Company began granting PSUs. A PSU entitles the holder to receive a Class A Share, or cash equal to the fair value of a Class A Share at the election of the Board of Directors, upon completion of the requisite service period, as well as satisfying certain performance conditions based on achievement of targeted total shareholder return on Class A Shares. PSUs do not begin to accrue dividend equivalents until the requisite service period has been completed and performance conditions have been achieved.
In the three months ended March 31, 2018, the Company granted 10,000,000 of PSUs, at the weighted average grant date fair value $1.18 per unit. The fair value was determined using the Monte-Carlo simulation valuation model, with the following assumptions: volatility of 35%, dividend rate of 10%, and risk-free discount rate of 2.6%. The Company used historical volatility in its estimate of the expected volatility. As of March 31, 2018, total unrecognized compensation expense related to these units totaled $11.2 million with a weighted-average amortization period of 2.9 years.
The PSUs granted to-date vest subject to continued and uninterrupted service (“PSU Service Condition”) until the third anniversary of the grant date and the meeting of a market performance threshold of the total shareholder return on Class A Shares of the Company (“PSU Performance Condition”). The PSU Performance Condition is defined as follows: 20% of PSUs vest if a total shareholder return of 25% is achieved; an additional 40% of PSUs vest if a total shareholder return of 50% is achieved; an additional 20% of PSUs vest if a total shareholder return of 75% is achieved; and the final 20% of PSUs vest if a total shareholder return of 125% is achieved. In each case, the PSU Performance Condition must be met for each threshold by the sixth anniversary of the grant date. If the PSU grant has not satisfied both the PSU Service Condition and the PSU Performance Condition by the sixth anniversary of the grant date, it will be forfeited and canceled immediately.
Group A Units
As of March 31, 2018, total unrecognized compensation expense related to these units totaled $8.2 million with a weighted-average amortization period of 2.0 years. See the Company’s Annual Report for additional information regarding the Group A Units.
Group P Units
As of March 31, 2018, total unrecognized compensation expense related to the Group P Units totaled $37.3 million with a weighted-average amortization period of 2.6 years. See the Company’s Annual Report for additional information regarding the Group P Units.
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 19.1% and 67.5% for the three months ended March 31, 2018 and 2017, respectively. The reconciling items from the Company’s statutory rate to the effective tax rate were driven primarily by the following: (i) a portion


25


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



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; (ii) a portion of the income earned by the Company is subject to the New York City unincorporated business tax; and (iii) certain foreign subsidiaries are subject to foreign corporate income taxes.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA includes a broad range of tax reforms including a reduction in the corporate income tax rate to 21% from 35%, effective January 1, 2018. The Company considers all amounts recorded as a result of the TCJA to be provisional and subject to revision. The Company’s provisional amounts, including the remeasurement of the Company’s deferred income tax assets and related tax receivable agreement liability, are based on reasonable and supportable assumptions as of March 31, 2018. Any revisions will be treated in accordance with the measurement period guidance allowing for a period of up to one year after the enactment date of the TCJA to finalize the recording of the impact. There were no measurement period adjustments recognizes during the three months ended March 31, 2018.
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 March 31, 2018 and December 31, 2017, the Company had a liability for unrecognized tax benefits of $7.0 million. As of and for the three months ended March 31, 2018, the Company did not accrue interest or penalties related to uncertain tax positions. As of March 31, 2018, 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 $4.3 million as of March 31, 2018.
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 March 31,
 
2018
 
2017
 
(dollars in thousands)
Professional services
$
13,471

 
$
13,148

Information processing and communications
6,794

 
7,029

Occupancy and equipment
6,465

 
10,903

Recurring placement and related service fees
4,349

 
5,444

Insurance
1,852

 
1,960

Business development
1,090

 
2,757

Other expenses
3,829

 
4,687

Total General, Administrative and Other
$
37,850

 
$
45,928

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.


26


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



For the three months ended March 31, 2018 and 2017 the Company included 1,841,321 and 1,326,320 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 or PSUs in the calculations of dilutive earnings (loss) per Class A Share, as the applicable market performance conditions have not yet been met as of March 31, 2018.
The following tables present the computation of basic and diluted earnings (loss) per Class A Share:
Three Months Ended March 31, 2018
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
$
3,490

 
192,230,917

 
$
0.02

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Group A Units
4,776

 
264,556,145

 
 
 

RSUs

 

 
 
 
34,757,146

Diluted
$
8,266

 
456,787,062

 
$
0.02

 
 
Three Months Ended March 31, 2017
Net Loss Attributable to Class A Shareholders
 
Weighted- Average Class A Shares Outstanding
 
Loss Per Class A Share
 
Number of Antidilutive Units Excluded from Diluted Calculation
 
 
 
 
 
 
 
 
 
(dollars in thousands, except per share amounts)
Basic
$
(7,164
)
 
186,226,675

 
$
(0.04
)
 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Group A Units

 

 
 
 
287,004,764

RSUs

 

 
 
 
19,730,352

Diluted
$
(7,164
)
 
186,226,675

 
$
(0.04
)
 
 
14. RELATED PARTY TRANSACTIONS
Due from Related Parties
Amounts due from related parties relate primarily to amounts due from the funds for expenses paid on their behalf. These amounts are reimbursed to the Company on an ongoing basis.
Due to Related Parties
Amounts due to related parties relate primarily to future payments owed to the Company’s executive managing directors under the tax receivable agreement, as discussed further in Note 15. The Company made no payments under the tax receivable agreement in the three months ended March 31, 2018 and 2017, respectively.
The Company earns substantially all of its management fees and incentive income from the funds, which are considered related parties as the Company manages the operations of and makes investment decisions for these funds.
Management Fees and Incentive Income Earned from Related Parties and Waived Fees
As of March 31, 2018 and 2017, respectively, approximately $2.6 billion and $2.5 billion of the Company’s assets under management represented investments by the Company, its executive managing directors, employees and certain other related


27


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



parties in the Company’s funds. As of March 31, 2018 and 2017, approximately 74% and 65%, of these affiliated assets under management were not charged management fees and were not subject to an incentive income calculation.
The following table presents management fees and incentive income charged on investments held by related parties before the impact of eliminations related to the consolidated funds:
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Fees charged on investments held by related parties:
 
 
 
Management fees
$
2,082

 
$
2,691

Incentive income
$
1,264

 
$
1,878

Corporate Aircraft
The Company’s corporate aircraft were used for business purposes. From time to time, certain executive managing directors used the aircraft for personal use. For the three months ended March 31, 2017 the Company charged $291 thousand, for personal use of the aircraft by certain executive managing directors. Company sold its aircraft during the year ended December 31, 2017.
15. COMMITMENTS AND CONTINGENCIES
Tax Receivable Agreement
The purchase of Group A Units from the executive managing directors and the Ziffs with the proceeds from the 2007 Offerings, and subsequent taxable exchanges by them of Partner Equity Units for Class A Shares on a one-for-one basis (or, at the Company’s option, a cash equivalent), resulted, and, in the case of future exchanges, are anticipated to result, in an increase in the tax basis of the tangible and intangible assets of the Oz Operating Group that would not otherwise have been available. As a result, the Company expects that its future tax liability will be reduced. Pursuant to the tax receivable agreement entered into among the Company, the executive managing directors and the Ziffs, the Company has agreed to pay to the executive managing directors and the Ziffs 85% of the amount of tax savings, if any, actually realized by the Company.
The Company recorded its initial estimate of future payments under the tax receivable agreement as a decrease to paid-in capital and an increase in amounts due to related parties in the consolidated financial statements. Subsequent adjustments to the liability for future payments under the tax receivable agreement related to changes in estimated future tax rates or state income tax apportionment are recognized through current period earnings in the consolidated statements of comprehensive income (loss).
In connection with the departure of certain former executive managing directors since the IPO, the right to receive payments under the tax receivable agreement by those former executive managing directors was contributed to the Oz Operating Group. As a result, the Company expects to pay to the remaining executive managing directors and the Ziffs approximately 78% (from 85% at the time of the IPO) of the amount of cash savings, if any, in federal, state and local income taxes in the United States that the Company actually realizes as a result of the increases in tax basis.
The estimate of the timing and the amount of future payments under the tax receivable agreement involves several assumptions that do not account for the significant uncertainties associated with these potential payments, including an assumption that Oz Corp will have sufficient taxable income in the relevant tax years to utilize the tax benefits that would give rise to an obligation to make payments. The actual timing and amount of any actual payments under the tax receivable agreement will vary based upon these and a number of other factors. As of March 31, 2018, the estimated future payment under the tax receivable agreement was $280.0 million, which is recorded in due to related parties on the consolidated balance sheets.


28


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



Lease Obligations    
The Company has non-cancelable operating leases for its headquarters in New York expiring in 2029 and various other operating leases for its offices in London, Hong Kong, Mumbai, Beijing, Shanghai, Houston and other locations, expiring on various dates through 2024. The Company recognizes expense related to its operating leases on a straight-line basis over the lease term taking into account any rent holiday periods. The related lease commitments have not changed materially since December 31, 2017.
Litigation
From time to time, the Company is involved in litigation and claims incidental to the conduct of the Company’s business. The Company is also subject to extensive scrutiny by regulatory agencies globally that have, or may in the future have, regulatory authority over the Company and its business activities. This has resulted, or may in the future result, in regulatory agency investigations, litigation and subpoenas and costs related to each.
On May 5, 2014, a purported class of shareholders filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York (Menaldi v. Och-Ziff Capital Mgmt., et al.). The amended complaint asserted claims under the Securities Exchange Act of 1934 on behalf of all purchasers of Company securities from February 9, 2012 to August 22, 2014. Daniel Och, Joel Frank and Michael Cohen were also named as defendants. On March 16, 2015, all defendants moved to dismiss the amended complaint. On February 17, 2016, the court entered an order granting in part the motion to dismiss filed by the Company and Messrs. Och and Frank and dismissing Mr. Cohen from the action. On March 23, 2016, the Company and Messrs. Och and Frank filed their answer to the amended complaint. On November 18, 2016, plaintiffs filed a second amended complaint asserting claims under the Securities Exchange Act of 1934 on behalf of all purchasers of Company securities from November 18, 2011 to April 11, 2016. The second amended complaint alleges, among other things, breaches of certain disclosure obligations with respect to matters that were under investigation by the SEC and the DOJ, and names the Company and Messrs. Och, Frank and Cohen as defendants. On November 23, 2016, Mr. Cohen objected to being named as a defendant in the second amended complaint on procedural grounds. On December 21, 2016, the court directed the plaintiffs to file a motion for permission to renew their claims against Mr. Cohen. Plaintiffs filed their motion on January 7, 2017. On January 11, 2017, the Company filed a motion to dismiss those portions of the second amended complaint that seek to revive dismissed claims or assert new claims against it, and Messrs. Och and Frank filed motions to dismiss as well. On September 29, 2017, the Court granted the Company’s motion to dismiss in its entirety and dismissed Plaintiffs’ revived claims and new claims against the Company and Messrs. Och and Frank. The Court also dismissed Mr. Cohen from the case entirely and denied Plaintiffs’ request to file a further amended complaint. The Company believes the pending case is without merit and intends to defend it vigorously. The Company is unable to reasonably estimate the amount of loss or range of loss possible for this case.
In addition, in U.S. v. Oz Africa Management GP, LLC, Cr. No. 16-515 (NGG) (EDNY), certain former shareholders of a Canadian mining company filed a letter with the court stating they plan to seek restitution at the sentencing hearing for Oz Africa Management GP, LLC. The Company believes the threatened claim is without merit and intends to defend it vigorously.
Investment Commitments
From time to time, certain funds consolidated by the Company may have commitments to fund investments. These commitments are funded through contributions from investors in those funds, including the Company if it is an investor in the relevant fund.
The Company has unfunded capital commitments of $30.5 million to certain funds it manages. It expects to fund these commitments over the next three years. In addition, certain related parties of the Company, collectively, have unfunded capital commitments to funds managed by the Company of up to $67.2 million. The Company has guaranteed these commitments in the event any executive managing director fails to fund any portion when called by the fund. The Company has historically not funded any of these commitments and does not expect to in the future, as these commitments are expected to be funded by the Company’s executive managing directors individually.


29


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



Other Contingencies
The Company may purchase an asset and make an additional payment in order to resolve a potential commercial dispute. The Company has not accrued any liability in connection with the dispute and estimates that the possible loss may range from zero to $25.0 million.
In the normal course of business, the Company enters into contracts that provide a variety of general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications.
16. SEGMENT INFORMATION
The Company’s operating segments are the Oz Funds segment and the Company’s real estate business. The Oz Funds segment, which provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles, is currently the Company’s only reportable operating segment under GAAP. The Company’s real estate business, which provides asset management services to its real estate funds, is included in the Other Operations, as it does not meet the threshold of a reportable operating segment under GAAP.
In addition to analyzing the Company’s results on a GAAP basis, management also reviews its results on an “Economic Income” basis. Economic Income excludes the adjustments described below that are required for presentation of the Company’s results on a GAAP basis, but that management does not consider when evaluating operating performance in any given period. Management uses Economic Income as the basis on which it evaluates the Company’s financial performance and makes resource allocation and other operating decisions. Management considers it important that investors review the same operating information that it uses.
Economic Income is a measure of pre-tax operating performance that excludes the following from the Company’s results on a GAAP basis:
Income allocations to the Company’s executive managing directors on their direct interests in the Oz Operating Group. Management reviews operating performance at the Oz Operating Group level, where the Company’s operations are performed, prior to making any income allocations.
Equity-based compensation expenses, depreciation and amortization expenses, changes in the tax receivable agreement liability, and gains and losses on fixed assets and investments in funds, as management does not consider these items to be reflective of operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement.
Amounts related to the consolidated funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned in relation to total assets under management and fund performance.
In addition, expenses related to incentive income profit-sharing arrangements are generally recognized at the same time the related incentive income revenue is recognized, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund. Further, deferred cash compensation is expensed in full in the year granted for Economic Income, rather than over the service period for GAAP.
Finally, management reviews Economic Income revenues by presenting management fees net of recurring placement and related service fees, rather than considering these fees an expense, and by excluding the impact of eliminations related to the consolidated funds.


30


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



Management does not regularly review assets by operating segment in assessing operating segment performance and the allocation of company resources; therefore, the Company does not present total assets by operating segment. Substantially all interest income and all interest expense related to outstanding indebtedness is allocated to the Oz Funds segment.
Oz Funds Segment Results
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Oz Funds Segment:
 
 
 
Economic Income Revenues
$
113,647

 
$
126,724

Economic Income
$
51,275

 
$
43,446

Reconciliation of Oz Funds Segment Revenues to Consolidated Revenues
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Total consolidated revenues
$
128,410

 
$
139,152

Adjustment to management fees(1)
(4,741
)
 
(5,444
)
Adjustment to other revenues(2)
(39
)
 

Other Operations revenues
(9,399
)
 
(6,489
)
Income of consolidated funds
(584
)
 
(495
)
Economic Income Revenues - Oz Funds Segment
$
113,647

 
$
126,724

_______________
(1)
Adjustment to present management fees net of recurring placement and related service fees, as management considers these fees a reduction in management fees, not an expense. The impact of eliminations related to the consolidated funds is also removed.
(2)
Adjustment to exclude realized gains on sale of fixed assets.


31


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



Reconciliation of Oz Funds Segment Economic Income to Net Income (Loss) Attributable to Class A Shareholders
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Net Income (Loss) Attributable to Class A Shareholders—GAAP
$
3,490

 
$
(7,164
)
Change in redemption value of Preferred Units

 
2,853

Net Income (Loss) Attributable to Och-Ziff Capital Management Group LLC—GAAP
$
3,490

 
$
(4,311
)
Net income attributable to Group A Units
8,370

 
9,635

Equity-based compensation, net of RSUs settled in cash
21,895

 
18,478

Adjustment to recognize deferred cash compensation in the period of grant
12,783

 
(138
)
Income taxes
3,012

 
12,056

Allocations to Group D Units
1,390

 
3,360

Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance
(162
)
 
1,979

Depreciation, amortization and net gains and losses on fixed assets
2,372

 
4,212

Other adjustments
(408
)
 
(873
)
Other Operations
(1,467
)
 
(952
)
Economic Income - Oz Funds Segment
$
51,275

 
$
43,446

17. SUBSEQUENT EVENTS
Dividend
On May 2, 2018, the Company announced a cash dividend of $0.02 per Class A Share. The dividend is payable on May 21, 2018, to holders of record as of the close of business on May 14, 2018.
New Senior Credit Agreement
On April 10, 2018 (“the Closing Date”), OZ Management LP, as borrower, (the “Borrower”), and certain other subsidiaries, as guarantors, entered into a senior secured credit and guaranty agreement (the “Senior Credit Agreement”) consisting of (i) a $250 million term loan facility (the “Term Loan Facility”) and (ii) a $100 million revolving credit facility (the “Revolving Facility”). The Company borrowed the full amount available under the Term Loan Facility on the Closing Date. On May 1, 2018, the Company repaid $50.0 million of the amounts outstanding under the Term Loan Facility.
The Term Loan Facility initially matures five years after the Closing Date. The Revolving Facility initially matures four years and six months after the Closing Date. The maturity date of both the Term Loan Facility and the Revolving Facility may be extended pursuant to the terms of the Senior Credit Agreement. The proceeds of the loans under the Term Loan Facility together with cash on hand will be used to redeem the Senior Notes (as described above). The Company intends to use the proceeds of the Revolving Facility for working capital and general corporate purposes. As of the time of this filing, the Revolving Facility is undrawn.
Loans under the Term Loan Facility will bear interest at a per annum rate equal to, at the Company’s option, one, three or six month (or (i) twelve month with the consent of each lender or (ii) with respect to the loans under the Term Loan Facility on the Closing Date, any period of less than three months as may be agreed by the administrative agent and the Company) LIBOR plus a margin of 4.75%, or a base rate plus a margin of 3.75%. Loans under the Revolving Facility will bear interest at a per annum rate equal to, at the Company’s option, one, three or six month (or twelve months with the consent of each lender) LIBOR plus a margin of 1.75% to 2.75%, or a base rate plus a margin of 0.75% to 1.75%.


32


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2018



The Company is