UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012  
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
 
Commission file number: 1-32551
 
CIFC CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-2008622
 (I.R.S. Employer Identification No.)
 
 
 
250 Park Avenue, 4 th  Floor, New York, NY
 (Address of principal executive offices)
 
10177
 (Zip code)
 
Registrant’s telephone number, including area code: 212-624-1200
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

There were 20,705,883 shares of the registrant’s common stock outstanding as of November 9, 2012 .
 


CIFC CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 























2

CERTAIN DEFINITIONS
 
Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. (formerly known as CIFC Deerfield Corp. and previously as Deerfield Capital Corp.) as “CIFC,” to CIFC and its subsidiaries as “we,” “us,” “our,” “our company” or “the Company,” to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as “CIFCAM,” to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as “DCM,” to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as “CypressTree,” to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as “CNCIM” and to CIFCAM, DCM, CypressTree and CNCIM together as the “Advisors.”
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements in this quarterly report on Form 10-Q (the “Quarterly Report”), and the information incorporated by reference into this Quarterly Report are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include statements regarding future results or expectations. Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made, various operating assumptions and predictions as to future facts and conditions, which may be difficult to accurately make and involve the assessment of events beyond our control. Caution must be exercised in relying on forward-looking statements. Our actual results may differ materially from the forward-looking statements contained in this Quarterly Report as a result of the following factors, among others:
 
•
reductions in assets under management and related investment advisory and incentive fee revenue;
•
our ability to complete future collateralized loan obligation (“CLO”) transactions, including our ability to effectively finance such transactions through warehouse facilities and the amounts we might be required to invest in new CLO transactions, and our ability to assume or otherwise acquire additional CLO management contracts on favorable terms, or at all;
•
our ability to accumulate sufficient qualified loans in our warehouse facilities and our exposure to market price risk and credit risk of the loan assets held in such warehouse facilities;
•
our ability to make investments in new investment products, realize fee-based income under our investment management agreements, grow our fee-based income and deliver strong investment performance;
•
our failure to realize the expected benefits of the merger with CIFCAM;
•
competitive conditions impacting us and the assets we manage;
•
our ability to attract and retain qualified personnel;
•
our receipt of future CLO subordinated investment advisory fees on a current basis;
•
the impact of certain accounting policies, including the required consolidation of numerous investment products that we manage into our financial statements on i) investors’ understanding of our actual business and financial performance, and ii) our ability to clearly communicate management’s view of such actual business and financial performance;
•
the current United States and global economic environment; disruptions to the credit and financial markets in the United States and globally; the impact of the downgrade of the United States credit rating; and contractions or limited growth as a result of uncertainty in the United States and global economies;
•
the ability of DFR Holdings, LLC and CIFC Parent Holdings LLC to exercise substantial control over our business;
•
impairment charges or losses initiated by adverse industry or market developments or other facts or circumstances;
•
the outcome of legal or regulatory proceedings to which we are or may become a party;
•
the impact of pending legislation and regulations or changes in, and our ability to remain in compliance with laws, regulations or government policies affecting our business, including investment management regulations and accounting standards;
•
our business prospects, the business prospects of and risks facing the companies in which we invest and our ability to identify material risks facing such companies;
•
our ability to maintain our exemption from registration as an investment company pursuant to the Investment Company Act of 1940;
•
reductions in the fair value of our assets;
•
limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms;
•
our ability to maintain adequate liquidity;
•
fluctuation of our quarterly results from quarter to quarter; and

3

•
other risks, described in Part I—Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 and from time to time in our other filings with the Securities and Exchange Commission.

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

EXPLANATORY NOTE
The delay in the filing of this Quarterly Report was due to our temporary inability to access our corporate headquarters and electronic data due to the impact of Hurricane Sandy. We have filed this Quarterly Report in accordance with the Order (Release No. 68224) issued by the United States Securities and Exchange Commission on November 14, 2012.



4

PART I.  
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (UNAUDITED)
CIFC CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
September 30,
2012
 
December 31,
2011
 
(In thousands, except share
and per share amounts)
ASSETS
 

 
 

Cash and cash equivalents
$
63,027

 
$
35,973

Due from brokers
5,504

 
—

Restricted cash and cash equivalents
1,732

 
2,229

Receivables
3,754

 
2,197

Prepaid and other assets
4,519

 
5,248

Deferred tax asset, net
54,957

 
57,756

Equipment and improvements, net
3,953

 
1,697

Intangible assets, net
47,576

 
55,574

Goodwill
76,000

 
67,924

Assets of Consolidated Variable Interest Entities:
 

 
 

Due from brokers
65,186

 
19,114

Restricted cash and cash equivalents
700,659

 
512,495

Investments and derivative assets at fair value
8,321,318

 
7,554,053

Loans held for sale
—

 
99,595

Receivables
38,281

 
26,858

Prepaid and other assets
6,884

 
1,879

Total assets of Consolidated Variable Interest Entities
9,132,328

 
8,213,994

TOTAL ASSETS
$
9,393,350

 
$
8,442,592

LIABILITIES
 

 
 

Due to brokers
$
13,926

 
$
—

Accrued and other liabilities
11,543

 
15,840

Deferred purchase payments
6,138

 
8,221

Contingent liabilities at fair value
34,724

 
39,279

Long-term debt
138,025

 
137,455

Liabilities of Consolidated Variable Interest Entities:
 

 
 

Due to brokers
343,973

 
147,367

Derivative liabilities
—

 
6,252

Accrued and other liabilities
637

 
50

Interest payable
15,486

 
11,975

Long-term debt
—

 
93,269

Long-term debt at fair value
8,535,621

 
7,559,568

Total liabilities of Consolidated Variable Interest Entities
8,895,717

 
7,818,481

TOTAL LIABILITIES
9,100,073

 
8,019,276

EQUITY
 

 
 

Preferred stock, par value $0.001:
 

 
 

100,000,000 shares authorized; 14,999,992 shares issued and zero outstanding
—

 
—

Common stock, par value $0.001:
 

 
 

500,000,000 shares authorized; 20,778,053 and 20,255,430 shares issued and 20,771,072 and 20,255,430 outstanding
21

 
20

Additional paid-in capital
952,458

 
943,440

Accumulated other comprehensive income (loss)
(4
)
 
(6
)
Retained earnings (deficit)
(830,041
)
 
(823,826
)
 
122,434

 
119,628

Less:
 
 
 

Treasury stock, at cost; 6,981 and zero shares
(50
)
 
—

TOTAL CIFC CORP. STOCKHOLDERS’ EQUITY
122,384

 
119,628

Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities
170,893

 
303,688

TOTAL EQUITY
293,277

 
423,316

TOTAL LIABILITIES AND EQUITY
$
9,393,350

 
$
8,442,592


See notes to condensed consolidated financial statements.
5


CIFC CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except share and per share amounts)
Revenues
 

 
 

 
 

 
 

Investment advisory fees
$
2,750

 
$
3,108

 
$
8,048

 
$
8,121

Net investment and interest income:
 

 
 

 
 

 
 

Investment and interest income
76

 
1

 
225

 
3,329

Interest expense
—

 
1

 
1

 
349

Net investment and interest income
76

 
—

 
224

 
2,980

Total net revenues
2,826

 
3,108

 
8,272

 
11,101

Expenses
 

 
 

 
 

 
 

Compensation and benefits
5,188

 
5,262

 
16,479

 
14,225

Professional services
1,220

 
1,544

 
3,620

 
3,884

Insurance expense
486

 
435

 
1,457

 
1,324

Other general and administrative expenses
335

 
748

 
1,887

 
2,437

Depreciation and amortization
3,802

 
4,907

 
13,325

 
11,572

Occupancy
416

 
440

 
1,057

 
1,037

Impairment of intangible assets
—

 
—

 
1,771

 
1,104

Restructuring charges
—

 
783

 
3,923

 
4,104

Total expenses
11,447

 
14,119

 
43,519

 
39,687

Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

Net gain (loss) on investments, loans, derivatives and liabilities
(5,768
)
 
4,588

 
(8,966
)
 
5,095

Corporate interest expense
(1,487
)
 
(1,445
)
 
(4,422
)
 
(4,222
)
Net gain on the sale of management contract
—

 
—

 
5,772

 
—

Strategic transactions expenses
(657
)
 
(71
)
 
(657
)
 
(1,459
)
Other, net
11

 
4

 
(468
)
 
7

Net other income (expense) and gain (loss)
(7,901
)
 
3,076

 
(8,741
)
 
(579
)
Operating income (loss)
(16,522
)
 
(7,935
)
 
(43,988
)
 
(29,165
)
Results of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

Net gain (loss) from activities of Consolidated Variable Interest Entities
(150,612
)
 
(218,335
)
 
(90,961
)
 
(309,844
)
Expenses of Consolidated Variable Interest Entities
(2,936
)
 
(1,847
)
 
(6,374
)
 
(4,794
)
Net results of Consolidated Variable Interest Entities
(153,548
)
 
(220,182
)
 
(97,335
)
 
(314,638
)
Income (loss) before income tax expense (benefit)
(170,070
)
 
(228,117
)
 
(141,323
)
 
(343,803
)
Income tax expense (benefit)
(1,757
)
 
(3,386
)
 
2,741

 
(4,523
)
Net income (loss)
(168,313
)
 
(224,731
)
 
(144,064
)
 
(339,280
)
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
169,001

 
218,807

 
137,849

 
329,193

Net income (loss) attributable to CIFC Corp.
$
688

 
$
(5,924
)
 
$
(6,215
)
 
$
(10,087
)
Earnings (loss) per share -
 

 
 

 
 

 
 

Basic
$
0.03

 
$
(0.29
)
 
$
(0.31
)
 
$
(0.59
)
Diluted
$
0.03

 
$
(0.29
)
 
$
(0.31
)
 
$
(0.59
)
Weighted-average number of shares outstanding -
 

 
 

 
 

 
 

Basic
19,957,041

 
20,426,118

 
20,201,304

 
17,038,258

Diluted
21,907,984

 
20,426,118

 
20,201,304

 
17,038,258

 

See notes to condensed consolidated financial statements.
6


CIFC CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net income (loss)
$
(168,313
)
 
$
(224,731
)
 
$
(144,064
)
 
$
(339,280
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation
2

 
(8
)
 
2

 
12

Other comprehensive income (loss)
2

 
(8
)
 
2

 
12

Comprehensive income (loss)
(168,311
)
 
(224,739
)
 
(144,062
)
 
(339,268
)
Comprehensive (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
169,001

 
218,807

 
137,849

 
329,193

Comprehensive income (loss) attributable to CIFC Corp.
$
690

 
$
(5,932
)
 
$
(6,213
)
 
$
(10,075
)


See notes to condensed consolidated financial statements.
7


CIFC CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine months ended September 30,
 
2012
 
2011
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income (loss)
$
(144,064
)
 
$
(339,280
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Net premium and discount (accretion) amortization on investments, loans and debt issuance costs
690

 
2,593

Share-based compensation
1,568

 
555

Net (gain) loss on investments at fair value
(434
)
 
(2,209
)
Net (gain) loss on liabilities at fair value
9,400

 
4,501

Net (gain) loss on loans
—

 
37

Net other (gain) loss
486

 
81

Net changes in undesignated derivatives
—

 
(7,416
)
Net gain on the sale of management contract
(5,772
)
 
—

Depreciation and amortization
13,325

 
11,572

Impairment of intangible assets
1,771

 
1,104

Loss on disposal of equipment and improvements
1,417

 
—

Lease expense greater (less) than payments
345

 
7

Deferred income tax expense (benefit)
2,798

 
(2,627
)
Consolidated Variable Interest Entity Related:
 

 
 

Net premium and discount (accretion) amortization on investments, loans and debt issuance costs
(1,443
)
 
(2,291
)
Net (gain) loss on investments at fair value
(266,614
)
 
266,910

Net (gain) loss on liabilities at fair value
582,124

 
200,655

Net (gain) loss on loans
727

 
(1,513
)
Net other (gain) loss
—

 
19

Provision for loan losses
—

 
15,413

Net changes in undesignated derivatives
(1,021
)
 
2,806

Changes in operating assets and liabilities:
 

 
 

Due from brokers
(5,504
)
 
5,228

Net (purchases) sales of investments at fair value
435

 
263,420

Receivables
(1,392
)
 
1,053

Prepaid and other assets
122

 
1,593

Due to brokers
13,926

 
(11,544
)
Accrued and other liabilities
(6,458
)
 
(3,897
)
Consolidated Variable Interest Entity Related:
 

 
 

Due from brokers
(46,072
)
 
36,624

Net (purchases) sales of investments at fair value
(214,965
)
 
35,734

Receivables
(10,338
)
 
4,646

Prepaid and other assets
(6,874
)
 
33

Due to brokers
196,577

 
(92,476
)
Accrued and other liabilities
4,185

 
(942
)
Net cash provided by (used in) operating activities
118,945

 
390,389

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Change in restricted cash and cash equivalents
497

 
(1,728
)
Proceeds from the sale of the DFR MM CLO
36,500

 
—

Proceeds from the sale of management contract
6,468

 
—

Proceeds from the sale of investments at fair value previously classified as available-for-sale
—

 
2,601

Principal receipts on investments at fair value previously classified as available-for-sale
—

 
315

Principal receipts on loans held for sale previously classified as held for investment
—

 
11

Net cash (paid) acquired from strategic transactions
(4,525
)
 
(4,306
)
Purchases of equipment and improvements
(1,763
)
 
(35
)
Consolidated Variable Interest Entity Related:
 

 
 

Change in restricted cash and cash equivalents
(169,735
)
 
30,326

Principal receipts on loans held for investment
—

 
72,051

Proceeds from sale of loans held for investment
—

 
6,303

Principal receipts on loans held for sale previously classified as held for investment
1,118

 
157

Proceeds from sale of loans held for sale previously classified as held for investment
—

 
4,106

Net cash provided by (used in) investing activities
(131,440
)
 
109,801

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net borrowings (payments) under repurchase agreements
—

 
(246,921
)
Repurchases of common stock
(3,768
)
 
—

Payment of stock and debt issuance costs
—

 
(1,934
)
Payment to settle warrants
(72
)
 
—

Deferred purchase payments and payments on contingent liabilities
(16,455
)
 
(4,618
)
Consolidated Variable Interest Entity Related:
 

 
 

Proceeds from issuance of long-term debt
884,091

 
105,700


See notes to condensed consolidated financial statements.
8


Payments made on long-term debt
(824,249
)
 
(374,813
)
Net cash provided by (used in) financing activities
39,547

 
(522,586
)
Foreign currency translation
2

 
18

Net increase (decrease) in cash and cash equivalents
27,054

 
(22,378
)
Cash and cash equivalents at beginning of period
35,973

 
50,106

Cash and cash equivalents at end of period
$
63,027

 
$
27,728

SUPPLEMENTAL DISCLOSURE:
 

 
 

Cash paid for interest
$
2,996

 
$
3,777

Cash paid for income taxes
1,624

 
2,446

Non-cash acquisition of equipment and improvements
2,234

 
—

Consolidated Variable Interest Entity Related:
 

 
 

Cash paid for interest
66,305

 
42,535

Settlement of interest receivables with increases in principal
3,887

 
3,813


See notes to condensed consolidated financial statements.
9


CIFC CORP. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.
ORGANIZATION
 
CIFC Corp. (formerly known as CIFC Deerfield Corp. and previously as Deerfield Capital Corp.) (“CIFC” and, together with its subsidiaries, “us,” “we” or “our”) is a Delaware corporation that specializes in managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. On April 13, 2011, we completed a merger (the “Merger”) with Commercial Industrial Finance Corp. (“Legacy CIFC”).
 
Business Overview
 
We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located primarily in North America, Europe, Asia and Australia. Our existing investment products are primarily collateralized loan obligations ("CLOs") and also include collateralized debt obligations ("CDOs") and other investment vehicles. For a detailed description of CLOs see Collateralized Loan Obligations in Note 4. The investment advisory fees paid to us by these investment products are our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of management fees based on the amount of assets held in the investment product and, in certain cases, incentive fees based on the returns generated for certain investors.
 
We formerly managed our own fixed income investments, which included SSCLs and other corporate debt. This was primarily accomplished through our investments in the DFR Middle Market CLO, Ltd. (the “DFR MM CLO”) prior to their sale. We had historically consolidated the DFR MM CLO as we owned all of its subordinated notes. On February 7, 2012 we completed the sale of our investments in and our rights to manage the DFR MM CLO and deconsolidated this entity. Historically, our fixed income investments also included significant investments in residential mortgage-backed securities (“RMBS”) until we made the decision to liquidate this portfolio during the second quarter of 2011.  Additionally, we also may utilize our liquidity to acquire SSCLs, generally to warehouse such SSCLs until they can be included as collateral for new CLOs and other funds we manage.
 
We are required to consolidate into our financial statements certain variable interest entities (“VIEs”), which include certain of the CLOs, CDOs and other entities we manage, in accordance with consolidation guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810— Consolidation (“ASC Topic 810”), as amended by Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”) as they are VIEs with respect to which we are deemed to be the primary beneficiary. See Variable Interest Entities in Note 2 for additional information.
 
2.
ACCOUNTING POLICIES AND RECENT ACCOUNTING UPDATES
 
Basis of Presentation — We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and they are in the form prescribed by the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X and the instructions to Form 10-Q. Accordingly, we do not include all of the information and footnotes for complete financial statements. The interim unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2011 , which are included in our Annual Report on Form 10-K filed with the SEC on March 30, 2012 (our “2011 10-K”). In our opinion, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of our financial position, results of operations and cash flows have been included. The nature of our business is such that the results of any interim period information are not necessarily indicative of results for a full year.
 
Principles of Consolidation —The condensed consolidated financial statements include the financial statements of CIFC and (i) our wholly-owned subsidiaries, (ii) subsidiaries in which we have a controlling interest and (iii) certain other entities known under GAAP as VIEs with respect to which we are deemed under ASC Topic 810 to be the primary beneficiary. All intercompany balances and transactions have been eliminated upon consolidation. This consolidation, particularly with respect to the VIEs, significantly impacts our financial statements.
 
Variable Interest Entities —ASC Topic 810 requires the consolidation of the assets, liabilities and results of operations of a VIE into the financial statements of the enterprise that is the VIE’s primary beneficiary, through its controlling financial interest in the VIE. ASC Topic 810 also provides a framework for determining whether an entity should be considered a VIE

10

and accordingly evaluated for consolidation. Pursuant to this framework, we consider all relevant facts to determine whether an entity is a VIE and, if so, whether our relationship with the entity (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If we determine that we do have a variable interest in the entity, we perform an analysis to determine whether we are deemed to be the primary beneficiary.
 
For CLOs and CDOs, if we are deemed to (i) have the power to direct the activities of the CLO or CDO that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the CLO or CDO, then we are deemed to be the primary beneficiary of the CLO or CDO and are required to consolidate the CLO or CDO. Generally, our contractual relationship as collateral manager of the CLOs and CDOs described herein satisfies criteria (i) of the prior sentence, and our ownership interests in and/or ability to earn certain incentive or other management fees in certain of our CLOs and CDOs can (but does not always) satisfy criteria (ii).
 
We have a variable interest in each of the CLOs and CDOs we manage due to the provisions of their respective management agreements and direct investments in certain of the CLOs. With respect to these direct investments, as of September 30, 2012 , we own a small portion of the total debt and subordinated notes issued by the CLOs. Where we have a direct investment, it is typically in the unrated, junior subordinated tranches of the CLOs. These unrated, junior subordinated tranches, referred to herein as “subordinated notes,” take the form of either subordinated notes or preference shares. For a detailed description of CLOs see Note 4.
 
As of September 30, 2012 , we consolidated 23 CLOs and one CDO (the “Consolidated CLOs”) under the amendments to ASC Topic 810. The Consolidated CLOs are comprised of: (i)  six CLOs and one CDO we began to consolidate on January 1, 2010 (the adoption date of the amendments to ASC Topic 810), (ii)  four CLOs we began to consolidate on June 9, 2010 in conjunction with the acquisition of Columbus Nova Credit Investments Management LLC (“CNCIM”), (iii)  ten CLOs we began to consolidate on April 13, 2011 in conjunction with the Merger (the “CIFC CLOs”), and (iv)  three new CLOs closed or newly consolidated during 2012. The three newly consolidated CLOs include (i) CIFC Funding 2011-I, Ltd. (“CIFC CLO 2011-I”) which we began to consolidate upon its close in January 2012, (ii) CIFC Funding 2012-I, Ltd. ("CIFC CLO 2012-I") which we began to consolidate upon its close in July 2012, and (iii) Navigator CDO 2006, Ltd. ("Navigator 2006 CLO") which we began to consolidate on the closing date of the GECC transaction (as described in Note 3). See Consolidated CLOs in Note 4 for additional discussion of our Consolidated CLOs.

As of September 30, 2012 , we had a variable interest in 22 additional CLOs and CDOs that were not consolidated as we are not the primary beneficiary with respect to those VIEs. Our maximum exposure to loss associated with unconsolidated CLOs and CDOs is limited to future investment advisory fees and receivables. We recorded investment advisory fee receivables totaling $0.7 million and $0.9 million from the unconsolidated CLOs and CDOs as of September 30, 2012 and December 31, 2011 , respectively.
 
As of September 30, 2012, we also consolidated a special purpose vehicle, CIFC Funding 2012-III, Ltd. ("CIFC 2012-III Warehouse"), an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. See CIFC 2012-III Warehouse in Note 4 for more information.

As of December 31, 2011 , we also consolidated a special purpose vehicle (the “Warehouse SPV”), under ASC Topic 810. During the second quarter of 2011 , the Warehouse SPV entered into a total return swap (the “Warehouse TRS”) agreement with Citibank, N.A. (“Citibank”). The reference obligations under the Warehouse TRS agreement were SSCL exposures that we accumulated and were ultimately included within CIFC CLO 2011-I, the CLO that closed in January 2012 and is managed by CIFC Asset Management LLC (“CIFCAM”). We deconsolidated the Warehouse SPV in January 2012 in conjunction with the settlement of the Warehouse TRS and the closing of CIFC CLO 2011-I. See Total Return Swap in Note 7 for more information on the Warehouse TRS.

Fair Value Measurements and Presentation —In accordance with ASC Topic 820— Fair Value Measurements and Disclosures (“ASC Topic 820”), we have categorized our financial instruments carried at fair value into a three-level fair value hierarchy based on the transparency of the inputs to the valuation of the asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is determined by the lowest level of input that is significant to the fair value measurement. The assessment of significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The three levels are defined as follows:
 
Level 1 —inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 

11

The types of assets included in Level 1 are generally equity securities or derivatives listed on an exchange with active markets. We held no Level 1 securities as of September 30, 2012 or December 31, 2011 .
 
Level 2 —inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Our assets and liabilities generally included in this category are loans where asset valuations are provided by third-party pricing services or our comparable companies pricing model, corporate bonds and investments in CLOs or CDOs where asset valuations are provided by third-party pricing services (prior to our valuation methodology change effective December 31, 2011 ), long-term debt of our Consolidated CLOs (prior to our valuation methodology change effective September 30, 2011) and the Warehouse TRS.
 
Level 3 —inputs to the valuation methodology include significant unobservable inputs to the fair value measurement. This includes situations where there is little, if any, market activity for the asset or liability.

Our assets and liabilities generally included in this category are corporate bonds, investments in CLOs or CDOs, loans where asset valuations are not provided by third-party pricing services or our comparable companies pricing model, warrants, long-term debt of our Consolidated CLOs (including the subordinated notes) and the conversion feature contained in our senior subordinated convertible notes ("Convertible Notes").
 
Determination of Fair Values
 
As defined in ASC Topic 820, fair value is the price a market participant would receive in the sale of an asset, or pay to transfer a liability, in an orderly transaction at the measurement date. Where available, fair value is based on observable market prices or parameters or is derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are utilized. These valuation models involve our estimation and judgment, the degree of which is dependent on both the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized for disclosure purposes based on the level of judgment associated with the inputs used to measure their value as described above. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
 
Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that market participants are willing to pay for an asset. Ask prices represent the lowest price market participants are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, our policy is to take the mid-point in the bid-ask spread to value these assets and liabilities as a practical expedient for determining fair value permissible under ASC Topic 820. Fair value is a market-based measure considered from the perspective of the market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, when market assumptions are not readily available, our assumptions are set to reflect those that we believe market participants would use in pricing the asset or liability at the measurement date.
 
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and, current market conditions. Determinations of fair value require more judgment to the extent that the valuation is based on inputs that are either less observable or unobservable in the market. Accordingly, the degree of judgment we exercise in determining fair value is greatest for assets and liabilities classified in Level 3.
 
The fair value process is monitored by our Valuation Committee. The Valuation Committee is chaired by our Chief Investment Officer and is comprised of investment, finance, valuation and risk management professionals. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources.  Meetings are held regularly to discuss and analyze the significant assumptions utilized in our internally developed models and to review the valuations provided by third-party pricing services for reasonableness. We engage reputable third-party pricing services and regularly review the valuation methodologies provided by those third-party pricing services to ensure the fair value measurement provided by those services is in accordance with ASC Topic 820.
 
The following is a description of our valuation methodologies for financial assets and liabilities measured at fair value by class as required by ASC Topic 820, including the general classification of such instruments pursuant to the valuation hierarchy described above. Under certain market conditions, we may make adjustments to the valuation methodologies

12

described below. We maintain a consistent policy for the process of identifying when and by how such adjustments should be made. To the extent that we make a significant fair value adjustment, the valuation classification would generally be considered Level 3 within the fair value hierarchy.  We determined our classes of financial assets and liabilities based on our analysis of the nature, characteristics and risks of such financial assets and liabilities at fair value.
 
Loans —Loans are generally valued via a third-party pricing service.  The value represents a composite of the mid-point in the bid-ask spread of broker quotes or is based on the composite price of a different tranche of the same or similar security if broker quotes are unavailable for the specific tranche we own.  Loans valued in this manner are classified as Level 2 within the fair value hierarchy.  When a value from a third-party pricing service is unavailable, the value may be based on our comparable companies pricing model (an internally developed model using composite or other observable comparable market inputs).  Loans valued in this manner are classified as Level 2 within the fair value hierarchy.  When sufficient data points are not available to utilize the comparable companies pricing model, the value may be based on an internally developed model using data including unobservable market inputs.  Loans valued in this manner are classified as Level 3 within the fair value hierarchy.
 
Corporate Bonds —Corporate bonds are generally valued via a third-party pricing service.  The inputs to the valuation include trades, discount rates and forward yield curves. Although the inputs used in the third-party pricing services valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective December 31, 2011 , we concluded corporate bonds priced in this manner would be classified as Level 3 within the fair value hierarchy.  Prior to this change, corporate bonds priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Corporate bonds valued in this manner are classified as Level 3 within the fair value hierarchy.
 
Other Assets —Other assets at fair value primarily represent investments in CLOs or CDOs which are generally valued via a third-party pricing service. The inputs to the valuation include trades, discount rates, forward yield curves, and loan level information (including loan loss, recovery and default rates, prepayment speeds and other security specific information obtained from the trustee and other service providers related to the product being valued). Although the inputs used in the third-party pricing service’s valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective December 31, 2011 , we concluded other assets priced in this manner would be classified as Level 3 within the fair value hierarchy. Prior to this change, other assets priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Inputs to the internally developed model include the structure of the product being valued, estimates related to loan default, recovery and discount rates. Other assets valued in this manner are classified as Level 3 within the fair value hierarchy.

Contingent Liabilities —The fair value of the contingent liabilities is determined via a third-party valuation firm and is based on discounted cash flow models. The models are based on projections of the relevant future investment advisory fee cash flows from the CLOs managed by CIFCAM and its wholly-owned subsidiary, CypressTree Investment Management, LLC (“CypressTree”), and utilize both observable and unobservable inputs in the determination of fair value. See Quantitative Information about Level 3 Assets and Liabilities in Note 5 for further information regarding the significant inputs to these valuation models.  The contingent liabilities are classified as Level 3 within the fair value hierarchy.
 
Long-Term Debt of the Consolidated CLOs —Long-term debt of the Consolidated CLOs consists of debt and subordinated notes of the Consolidated CLOs. Effective September 30, 2011 , the fair value of the debt and subordinated notes of the Consolidated CLOs is based upon discounted cash flow models and utilizes both observable and unobservable inputs in the determination of fair value. See Quantitative Information about Level 3 Assets and Liabilities in Note 5 for further information regarding the significant inputs to these valuation models. The debt and subordinated notes of the Consolidated CLOs are classified as Level 3 within the fair value hierarchy.
 
Prior to September 30, 2011, the fair value for the debt of the Consolidated CLOs was generally valued via a third-party pricing service.  The debt of our Consolidated CLOs valued in this manner was classified as Level 2 within the fair value hierarchy. Prior to September 30, 2011 , the subordinated notes of the Consolidated CLOs were valued by management by considering, among other things, available broker quotes. If a broker quote was unavailable, the subordinated notes of Consolidated CLOs were valued using internally developed models consistent with the current methodology described above.  The subordinated notes of our Consolidated CLOs valued in this manner were classified as Level 3 within the fair value hierarchy.


13

Reclassifications —Certain amounts in the condensed consolidated statement of cash flows for the nine months ended September 30, 2011 have been reclassified to conform to the presentation for the nine months ended September 30, 2012.

Recent Accounting Updates —In May 2011, the FASB issued ASU No. 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-4”). ASU 2011-4 amends ASC Topic 820 to converge the fair value framework between U.S. GAAP and International Financial Reporting Standards. ASU 2011-4 clarifies existing fair value measurement guidance, updates the fair value measurement principles for certain financial instruments and expands fair value disclosure requirements. ASU 2011-4 is effective for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2011. We have adopted ASU 2011-4 and the adoption did not have a material impact on our condensed consolidated financial statements.  The additional disclosures required by ASU 2011-4 are included within Note 5.
 
In June 2011, the FASB issued ASU No. 2011-5, Presentation of Comprehensive Income (“ASU 2011-5”). ASU 2011-5 amends ASC Topic 220— Comprehensive Income to require entities to report components of comprehensive income either in a single continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-5 does not change the items that must be reported in other comprehensive income. ASU 2011-5 is effective for interim and annual reporting periods beginning after December 15, 2011. We have adopted ASU 2011-5 and we have elected to present a separate statement of comprehensive income.
 
In September 2011, the FASB issued ASU No. 2011-8, Testing Goodwill for Impairment (“ASU 2011-8”). ASU 2011-8 amends ASC Topic 350— Intangibles—Goodwill and Other to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-8 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We have adopted these amendments and do not expect the amendments to have a material impact on our condensed consolidated financial statements. We perform our goodwill impairment test in the fourth quarter of each year, and on an interim basis if necessary.

3.
STRATEGIC TRANSACTIONS
 
GECC Transaction

On September 24, 2012 (the "Closing Date"), the Company closed a five year strategic relationship with General Electric Capital Corporation's (“GE Capital”) Bank Loan Group. The Company believes that this strategic relationship could provide CIFC with significant new opportunities to create new CIFC-managed investment products, including those involving GE Capital loan originations and/or vehicles which GE Capital provides financing. Further, partnering with GE Capital positions the Company for unique opportunities given GE Capital's strength as a leading corporate lender coupled with CIFC's loan asset management platform.

Pursuant to the transaction: (i) a commercial council (the “Commercial Council”) comprised of senior members of both GE Capital and the Company was formed to explore joint business opportunities; (ii) the Company and GE Capital entered into a referral agreement (the “Referral Agreement”) pursuant to which (a) GE Capital will refer certain potential investment advisory clients (“Referred Clients”) to the Company for a period of five years (which may be extended for up to two consecutive one year periods) and (b) the Company is obligated to pay GE Capital 15% of any advisory fees in excess of $9.0 million earned from Referred Clients in the aggregate; and (iii) GE Capital Debt Advisors LLC, a wholly owned indirect subsidiary of GE Capital (“GECDA”), exited the business of providing certain loan management services to third parties and assigned to CIFCAM its role as manager of four “Navigator” CLOs (the “Navigator Management Agreements”). The transaction described in this paragraph shall hereinafter be referred to as the “GECC Transaction”.

The GECC Transaction is considered a taxable business combination in accordance with ASC Topic 805- Business Combinations (“ASC Topic 805”). As consideration for the GECC Transaction, on the Closing Date the Company (i) issued 1.0 million shares of its common stock to GE Capital Equity Investments, Inc., a wholly-owned subsidiary of GE Capital (“GECEII”), with a Closing Date fair value of $7.5 million , (ii) issued a warrant to GECEII to purchase 2.0 million shares of a newly created class of non-voting stock (the “GECEII Warrant”) at a per share exercise price of $6.375 with an estimated Closing Date fair value of $3.7 million and (iii) paid to GECDA $4.5 million in cash, subject to certain adjustments.


14

On the Closing Date, the Company and GECEII entered into an investment agreement setting forth certain rights and obligations of GECEII as a stockholder of the Company, including a right of GECEII to designate a member of the board of directors (the "Board") so long as GECEII (together with its affiliates) owns at least 5% of the outstanding capital stock of the Company, calculated assuming the full conversion of all outstanding Convertible Notes into common stock and the full exercise of the GECEII Warrant.
 
Calculation of the purchase consideration in accordance with ASC Topic 805 is as follows:
 
 
(In thousands,
except share and
per share
information)
 
Shares issued
1,000,000

 
Multiplied by Closing Date share price
$
7.51

(1)
Value of shares
$
7,510

 
 
 
 
Warrants issued
2,000,000

 
Multiplied by Closing Date estimated fair value per warrant
$
1.83

(2)
Value of warrants
$
3,660

 
 
 
 
Cash
$
4,525

 
Total purchase consideration
$
15,695

 
 _________________________________
(1)
Represents the closing price of the Company's common stock on the Closing Date.
(2)
The estimated fair value per warrant was determined utilizing a Black-Scholes model with the assistance of an independent valuation firm.

 The following is a summary of the recognized amounts of assets acquired and liabilities assumed as a result of the GECC Transaction:
 
 
(In thousands)
Receivables
$
147

Identifiable intangible assets
7,470

Excess of purchase consideration over identifiable net assets acquired - Goodwill
8,078

 
$
15,695


The fair values of the assets acquired were estimated by management with the assistance of an independent valuation firm. The identifiable intangible assets acquired by asset class are as follows:
 
 
Closing Date
Estimated Fair Value
 
Closing Date Estimated
Average Remaining Useful Life
 
(In thousands)
 
(In years)
Intangible asset class:
 

 
 
Investment management contracts
$
3,660

 
3
Referral Arrangement
3,810

 
7
 
$
7,470

 
 

The fair value of the intangible assets related to the Navigator Management Agreements were determined utilizing an excess earnings approach based upon projections of future investment advisory fees from the CLOs. Significant inputs to the investment advisory fee projections include the structure of the CLOs and estimates related to loan default, recovery and discount rates. The intangible assets related to the management contracts are amortized based on a ratio of expected discounted cash flows from the contracts over their expected remaining useful lives.


15

The fair value of the intangible asset related to the Referral Arrangement (a defined term intended to encompass both referrals under the Referral Agreement described herein and any other business GE Capital may refer to us) was determined utilizing an excess earnings approach based upon projections of future revenues generated from the relationship. Significant inputs utilized in the projections include the structure of potential new investment vehicles generating revenues, the timing of investments in such vehicles and discount rates. The intangible assets related to the Referral Arrangement will be amortized based on estimated discounted cash flows of the significant projected future revenue streams. See Note 9 for additional disclosures regarding intangible assets.
 
Tax deductible goodwill of $8.1 million is the excess of the total purchase consideration over the identifiable tangible and intangible assets acquired in the GECC Transaction. This goodwill relates to the additional strategic opportunities that management believes will be available to the Company as a result of the association with GE Capital primarily sourced through the Commercial Council, including, but not limited to (i) growth in AUM, (ii) newly developed CIFC-managed investment products and business lines and (iii) preferred access to GE Capital originated loans.

CIFC considered whether the requirement under the Referral Agreement for the Company to pay GE Capital 15% of any investment advisory fee in excess of the first $9.0 million that we receive from Referred Clients constituted contingent consideration for the GECC Transaction. Management determined that the estimated fair value for this obligation was immaterial as of the Closing Date. Future payments to GE Capital under the Referral Agreement, if any, will be accounted for under ASC Topic 450 - Contingencies .

Management is still in the process of finalizing the purchase price calculations and allocations related to identifiable intangible assets, goodwill and contingent liabilities, pending finalization of revenue projections.

The Company expensed GECC Transaction-related costs as incurred. For the three and nine months ended September 30, 2012 , the Company incurred costs related to the GECC Transaction of $0.7 million which are recorded within strategic transactions expenses in the condensed consolidated statements of operations.

Pro forma disclosures have not been provided for the GECC Transaction as retrospective application requires significant estimates of amounts which the Company is unable to distinguish objectively. Principally, the GECC transaction did not include the acquisition of a stand-alone business that had financial statements. Given the strategic nature of the transaction, a significant amount of the expected benefits are based on future revenue streams from products that have not yet been developed. Investment advisory fee revenues related to the Navigator Management Agreements prior to the Closing Date of the GECC transaction (and therefore excluded from net income attributable to CIFC Corp.) were $1.0 million and $3.4 million for the three and nine months ended September 30, 2012, respectively, and $1.4 million and $4.6 million for the three and nine months ended September 30, 2011, respectively. This includes investment advisory fees from Navigator 2006 CLO which would have been eliminated in consolidation of $0.4 million and $1.2 million for the three and nine months ended September 30, 2012, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2011, respectively.

During the three months ended September 30, 2012 the Company recorded net income attributable to CIFC Corp. of $18,000 related to the investment advisory fees from the Navigator CLOs which represents accrued investment advisory fees from the Navigator Management Agreements from the Closing Date through September 30, 2012 .

As a result of the GECC Transaction, the Company consolidated one Navigator CLO, Navigator 2006 CLO. As of the Closing Date, the Company consolidated assets of $316.8 million and non-recourse liabilities of $313.2 million related to this CLO. As of September 30, 2012 , the Company consolidated assets of $320.0 million and non-recourse liabilities of $314.0 million related to this CLO. For the three months ended September 30, 2012 , the Company recorded a net income of $0.9 million related to Navigator 2006 CLO within net results of Consolidated Variable Interest Entities.

Merger with Legacy CIFC

On April 13, 2011 (the “Merger Closing Date”), we completed the Merger with Legacy CIFC. As a result of the Merger, Legacy CIFC became CIFCAM and a wholly-owned subsidiary of CIFC. The consideration for the Merger paid or payable to CIFC Parent Holdings LLC (“CIFC Parent”), the sole stockholder of Legacy CIFC, consisted of (i)  9,090,909 shares of our common stock, (ii)  $7.5 million in cash, payable in three equal installments of $2.5 million (subject to certain adjustments), the first of which was paid on the Merger Closing Date, the second of which was paid on April 13, 2012 and the final installment is payable on the second anniversary of the Merger Closing Date, (iii)  $4.2 million in cash as consideration for the cash balance at Legacy CIFC on the Merger Closing Date (adjusted for certain items), (iv) out-of pocket costs and expenses incurred by Legacy CIFC and CIFC Parent in connection with the Merger of approximately $2.9 million , (v) the first $15.0

16

million of incentive fees received by the combined company from certain CLOs managed by CIFCAM as of the Merger Closing Date, (vi)  50% of any incentive fees in excess of $15.0 million in the aggregate received by the combined company over the next ten years from certain CLOs managed by CIFCAM as of the Merger Closing Date and (vii) payments relating to the present value of any such incentive fees from certain CLOs managed by CIFCAM as of the Merger Closing Date that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. The Merger is reflected in our condensed consolidated financial statements as of December 31, 2011 and September 30, 2012 , and for the period from the Merger Closing Date to September 30, 2012 .
 
Calculation of the purchase consideration in accordance with ASC Topic 805 is as follows:
 
 
(In thousands,
except share and
per share
information)
 
Shares issued
9,090,909

 
Multiplied by Merger Closing Date share price
$
6.15

(1
)
Value of shares
$
55,909

 
Cash
6,683

(2
)
Certain acquisition-related expenses of seller paid by the Company
2,769

(3
)
Fair value of fixed deferred payments to the seller
4,571

(4
)
Fair value of contingent deferred payments to the seller
19,793

(5
)
Total purchase consideration
$
89,725

 
 _________________________________
(1)
Represents the closing price of our common stock on the Merger Closing Date.
(2)
Represents cash consideration paid on the Merger Closing Date. Includes $4.2 million as consideration for the estimated Merger Closing Date cash balance at Legacy CIFC, adjusted for certain items, and a $2.5 million installment cash payment.
(3)
Represents estimated out-of pocket costs and expenses incurred by Legacy CIFC and CIFC Parent in connection with the Merger. This excludes $0.2 million of out-of-pocket costs and expenses charged to additional paid-in capital.
(4)
Represents the Merger Closing date fair value of fixed deferred payments to CIFC Parent per the Agreement and Plan of Merger dated as of December 21, 2010, (as amended from time to time, the “Merger Agreement”). These fixed deferred payments totaled $5.0 million and the first $2.5 million installment was paid on the first anniversary of the Merger Closing Date and the second installment payment is payable on the second anniversary of the Merger Closing Date. The $2.5 million payments are not contingent on any performance, but rather are due as a result of the passage of time and were discounted to arrive at an estimated fair value.
(5)
Represents the fair value of contingent deferred payments to CIFC Parent per the Merger Agreement.

The following is a summary of the recognized amounts of assets acquired and liabilities assumed as a result of the Merger:
 
 
(In thousands)
Cash and cash equivalents
$
5,146

Restricted cash and cash equivalents
122

Receivables
5,144

Prepaid and other assets
330

Equipment and improvements, net
234

Accrued and other liabilities
(2,537
)
Net deferred tax liabilities (1)
(5,888
)
Contingent liabilities (1)
(19,244
)
Additional paid-in capital adjustment
(83
)
Identifiable intangible assets
49,900

Excess of purchase consideration over identifiable net assets acquired - Goodwill (1)
56,601

 
$
89,725

 _________________________________

17

(1)
Items included adjustments since the initial purchase accounting disclosed as of June 30, 2011. Net deferred tax liabilities were increased by $0.6 million and contingent liabilities decreased by $1.1 million , resulting in a decrease to goodwill of $0.5 million .
 
The fair values of the assets acquired and the liabilities assumed were estimated by management with the assistance of an independent valuation firm. The identifiable intangible assets acquired by asset class are as follows:
 
 
Merger Closing Date
Estimated Fair Value
 
Merger Closing Date Estimated
Average Remaining Useful Life
 
(In thousands)
 
(In years)
Intangible asset class:
 

 
 
Investment management contracts
$
46,460

 
6
Trade name
1,250

 
10
Technology
820

 
2
Non-compete agreements
1,370

 
7
 
$
49,900

 
 
 
The fair value of the intangible assets related to the investment management contracts of CIFCAM and CypressTree, were determined utilizing an excess earnings approach based upon projections of future investment advisory fees from the CLOs. Significant inputs to the investment advisory fee projections include the structure of the CLOs and estimates related to loan default, recovery and discount rates. The intangible assets related to the management contracts are amortized based on a ratio of expected discounted cash flows from the contracts over their expected remaining useful lives. The fair value of the intangible assets related to the “Commercial Industrial Finance Corp.” and “CIFC” trade names and technology were determined utilizing a relief from royalty method applied to expected cash flows and are amortized on a straight-line basis over their estimated remaining useful lives. The fair value of the intangible assets associated with the non-compete agreements was determined using a lost cash flows analysis and are amortized on a straight-line basis over the estimated remaining useful life.  See Note 9 for additional disclosures regarding our intangible assets.
 
The contingent liabilities assumed in the Merger primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree on December 1, 2010 and contingent liabilities Legacy CIFC assumed in its acquisition of CypressTree related to required payments to the prior sellers of CypressTree and the broker of that sale. These contingent liabilities are based on a fixed percentage of certain investment advisory fees from the CypressTree CLOs. These fixed percentages vary by CLO and have a minimum fixed percentage of 55% . These contingent liability valuations were based on discounted cash flow projections of future investment advisory fees earned on the CLOs managed by CypressTree. These contingent liabilities and the contingent deferred payment liabilities for the Merger are remeasured at fair value at each reporting date and recorded within contingent liabilities at fair value on the consolidated balance sheets. See Note 10 for additional disclosures regarding our contingent liabilities.

Goodwill of $56.6 million is the excess of the total purchase consideration over the identifiable tangible and intangible assets acquired in the Merger. Goodwill relates to (i) the additional strategic opportunities that we believe will be available to us as a result of our increased scale, improved financial condition, an experienced management team and the addition of the CIFCAM CLO fund family, which has market leading performance in the U.S. managed CLO segment, (ii) the expected close of new CLOs and other investment products based on our corporate credit expertise and (iii) the expected cost synergies from the Merger.
 
The Merger with Legacy CIFC was a nontaxable business combination. Consequently, the future amortization expense related to approximately $37.7 million of the identifiable intangible assets associated with the CLOs managed by CIFCAM will not be deductible for income tax purposes. In accordance with GAAP applicable to nontaxable business combinations, on the Merger Closing Date we recorded a deferred tax liability of approximately $17.2 million for the future amortization of these intangible assets. Other taxable or deductible temporary differences related primarily to Legacy CIFC’s net operating loss carryforwards and its acquisition of CypressTree resulted in a Merger Closing Date net deferred tax asset of approximately $11.3 million . The net deferred tax liability from all of these temporary differences was $5.9 million and this amount was added to goodwill.
 
We expensed Merger-related costs (other than those related to stock issuance) as incurred. For the three and nine months ended September 30, 2011 , we incurred costs related to the Merger of $0.2 million and $3.3 million , respectively, offset by $0.1 million and $1.8 million of reclassifications to additional paid-in capital for stock issuance costs for the same periods,

18

for net expenses of $0.1 million and $1.5 million for the three and nine months ended September 30, 2011 , respectively, recorded within strategic transactions expenses in the condensed consolidated statements of operations.
 
We finalized our accounting for the Merger during the fourth quarter of 2011.
 
4.
CLOs AND CONSOLIDATED VARIABLE INTEREST ENTITIES
 
Collateralized Loan Obligations
 
The term CLO (which for purposes of the discussion in this note also includes the term CDO unless otherwise noted) generally refers to a special purpose vehicle that owns a portfolio of investments (SSCLs in the case of CLOs and typically asset-backed or other securities in the case of CDOs) and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period which they are allowed to make investments and reinvest capital as it becomes available.
 
CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is issued at a specified spread over LIBOR and normally has the first claim on the earnings on the CLO’s investments after payment of certain fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLOs’ investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is referred to as the CLO’s “subordinated notes.” The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLOs’ investments after all of the other tranches of notes and certain other fees and expenses are paid. While the majority of the subordinated notes of the CLOs we manage are owned by third parties, we do own a portion of the subordinated note tranches of certain of the CLOs we manage.
 
CLOs, which are designed to serve as investments for third party investors, generally have an investment manager that selects and actively manages the underlying assets to achieve target investment performance, including avoidance of loss. In exchange for these services, CLO managers typically receive three types of investment advisory fees: senior management fees, subordinated management fees and incentive fees. CLOs also generally appoint a trustee, custodian and collateral administrator, who are responsible for holding a CLO’s investments, collecting investment income and distributing that income in accordance with the waterfall.
 
Consolidated Variable Interest Entities
 
Consolidated CLOs
 
Consolidated CLOs with assets of $9.1 billion and non-recourse liabilities of $8.9 billion were consolidated into our condensed consolidated financial statements as of September 30, 2012 . Consolidated CLOs with assets of $8.0 billion and non-recourse liabilities of $7.7 billion were consolidated into our condensed consolidated financial statements as of December 31, 2011 . Although we consolidate all of the assets, liabilities and subordinated notes of the Consolidated CLOs, our maximum exposure to loss related to the Consolidated CLOs is limited to our investments and beneficial interests in the Consolidated CLOs ( $37.6 million and $7.0 million as of September 30, 2012 and December 31, 2011 , respectively), our investment advisory fee receivables from the Consolidated CLOs ( $2.3 million and $2.1 million as of September 30, 2012 and December 31, 2011 , respectively), and our future investment advisory fees, all of which are eliminated upon consolidation.
 
The assets of each of the Consolidated CLOs are held solely as collateral to satisfy the obligations of the Consolidated CLOs. We do not own and have no right to the benefits from, nor do we bear the risks associated with, the assets held by the Consolidated CLOs, beyond our minimal direct investments and beneficial interests in, and investment advisory fees generated from, the Consolidated CLOs. If CIFC were to liquidate, the assets of the Consolidated CLOs would not be available to our general creditors, and as a result, we do not consider them our assets. Additionally, the investors in the Consolidated CLOs have no recourse to our general assets for the debt issued by the Consolidated CLOs. Therefore, this debt is not our obligation.
 

19

We have elected the fair value option for all assets and liabilities of the Consolidated CLOs. We have determined that, although the subordinated notes of the Consolidated CLOs have certain characteristics of equity, they are recorded as debt on our condensed consolidated balance sheets, as the subordinated notes have a stated maturity indicating a date on which they are mandatorily redeemable and redemption is required only upon liquidation or termination of the CLO and not upon liquidation or termination of CIFC.

Net income (loss) recorded for the Consolidated CLOs is not indicative of the cash flow distributions we receive from the Consolidated CLOs. For the three and nine months ended September 30, 2012 we recorded net losses of $169.0 million and $137.8 million , respectively, within our condensed consolidated statements of operations related to the Consolidated CLOs. For the three and nine months ended September 30, 2011 we recorded net losses of $218.8 million and $329.2 million , respectively, within our condensed consolidated statements of operations related to the Consolidated CLOs.
 
We receive cash flow distributions from the Consolidated CLOs consisting of investment advisory fees, and, to the extent that we have debt, subordinated notes or other investments in our Consolidated CLOs, interest and distributions on such investments, which are eliminated in consolidation. The following table presents the components of the cash flow distributions from the Consolidated CLOs before fee sharing and eliminations:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Investment advisory fees
$
13,775

 
$
12,619

 
$
36,657

 
$
30,304

Interest on debt investments
36

 
34

 
109

 
104

Subordinated note distributions
1,363

 
746

 
2,414

 
2,439

Total cash flow distributions
$
15,174

 
$
13,399

 
$
39,180

 
$
32,847

 
DFR MM CLO
 
We consolidated the DFR MM CLO since its inception in 2007 because we owned all of its subordinated notes.  On February 7, 2012, we sold our investments in and our rights to manage the DFR MM CLO for $36.5 million and deconsolidated the entity. This resulted in a deconsolidation of assets of $108.9 million and liabilities of $72.4 million . We did not elect the fair value option for the assets and liabilities of DFR MM CLO.  As of December 31, 2011 , we consolidated assets of $130.3 million (primarily cash and loan investments classified as held for sale as described in further detail at Note 6) and liabilities of $93.6 million (primarily long-term debt carried at par) related to the DFR MM CLO. Although we consolidated all of the assets and liabilities of DFR MM CLO, our maximum exposure to loss on our investment in this entity had been limited to our initial investment of $69.0 million ( $50.0 million of subordinated notes and $19.0 million of debt). The economic impact of our investments in DFR MM CLO had been determined by the cash distributed to us on our investment therein which, from the date of our initial investment through the date of sale, totaled $52.2 million on our subordinated notes investment and $4.8 million in interest on our debt investment. The DFR MM CLO’s debt holders had recourse only to the assets of the DFR MM CLO and not to our general assets.
 
For the three and nine months ended September 30, 2012 , we recorded net losses of zero and $0.2 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations related to the DFR MM CLO.  For the three and nine months ended September 30, 2011 , we recorded a net losses of $5.2 million and $5.0 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations related to the DFR MM CLO.  For the three and nine months ended September 30, 2011 , we received cash flow distributions from the DFR MM CLO consisting of interest on our debt investment of $0.2 million and $0.6 million , respectively, and distributions on our subordinated note investment of $2.8 million and $9.4 million , respectively, which were eliminated in consolidation. No distributions were received during the three and nine months ended September 30, 2012 .
 
Warehouse SPV
 
We consolidated the Warehouse SPV since its inception during the second quarter of 2011 . We deconsolidated the Warehouse SPV in January 2012 in conjunction with the settlement of the Warehouse TRS and the closing of CIFC CLO 2011-I.  We consolidated assets of $46.5 million and liabilities of $0.6 million related to the Warehouse SPV as of December 31, 2011 . Although we had consolidated all of the assets and liabilities of the Warehouse SPV, our maximum exposure to loss was limited to our investment in this entity, which was $46.5 million as of December 31, 2011 . For the three and nine months ended

20

September 30, 2012 , we recorded net income of zero and $1.4 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV. For the three and nine months ended September 30, 2011 , we recorded net losses of $5.6 million and $5.0 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV.  See Note 7 for more information on the Warehouse SPV and its investment, the Warehouse TRS.

CIFC 2012-III Warehouse

In September 2012, we began consolidating a special purpose vehicle, CIFC 2012-III Warehouse, an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. Our maximum exposure to loss related to CIFC 2012-III Warehouse is limited to our $25.2 million investment (as of September 30, 2012) in the entity. We consolidated assets of $38.1 million and liabilities of $12.9 million related to the CIFC 2012-III Warehouse as of September 30, 2012. For the three and nine months ended September 30, 2012 , we recorded net income of $0.1 million in net results of Consolidated VIEs within our condensed consolidated statements of operations for CIFC 2012-III Warehouse. 

5.
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Assets and liabilities measured at fair value on a recurring basis
 
The following tables present the financial instruments carried at fair value on a recurring basis, by class and by level within the ASC Topic 820 valuation hierarchy:
 
 
September 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Estimated Fair Value
 
(In thousands)
Assets
 

 
 

 
 

 
 

Investments and derivative assets of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

Loans
$
—

 
$
8,162,128

 
$
5,466

 
$
8,167,594

Corporate bonds
—

 
—

 
74,826

 
74,826

Other
—

 
—

 
78,848

 
78,848

Derivative assets
—

 
—

 
50

 
50

Total investments and derivative assets of Consolidated Variable Interest Entities
—

 
8,162,128

 
159,190

 
8,321,318

Total Assets
$
—

 
$
8,162,128

 
$
159,190

 
$
8,321,318

Liabilities
 

 
 

 
 

 
 

Contingent liabilities at fair value
$
—

 
$
—

 
$
34,724

 
$
34,724

Liabilities at fair value of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

Long-term debt
—

 
—

 
8,535,621

 
8,535,621

Total liabilities of Consolidated Variable Interest Entities
—

 
—

 
8,535,621

 
8,535,621

Total Liabilities
$
—

 
$
—

 
$
8,570,345

 
$
8,570,345

 

21

 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Estimated Fair Value
 
(In thousands)
Assets
 

 
 

 
 

 
 

Investments and derivative assets of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

Loans
$
—

 
$
7,327,141

 
$
19,729

 
$
7,346,870

Corporate bonds
—

 
—

 
154,096

 
154,096

Other
—

 
—

 
47,806

 
47,806

Derivative assets
—

 
—

 
5,281

 
5,281

Total investments and derivative assets of Consolidated Variable Interest Entities
—

 
7,327,141

 
226,912

 
7,554,053

Total Assets
$
—

 
$
7,327,141

 
$
226,912

 
$
7,554,053

Liabilities
 

 
 

 
 

 
 

Contingent liabilities at fair value
$
—

 
$
—

 
$
39,279

 
$
39,279

Liabilities at fair value of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

Derivative liabilities
—

 
6,252

 
—

 
6,252

Long-term debt
—

 
—

 
7,559,568

 
7,559,568

Total liabilities of Consolidated Variable Interest Entities
—

 
6,252

 
7,559,568

 
7,565,820

Total Liabilities
$
—

 
$
6,252

 
$
7,598,847

 
$
7,605,099


Changes in Level 3 recurring fair value measurements
 
The following tables summarize by class the changes in financial assets and liabilities measured at fair value classified within Level 3 of the valuation hierarchy. Net realized and unrealized gains (losses) for Level 3 financial assets and liabilities measured at fair value are included within Net gain (loss) on investments, loans, derivatives and liabilities and net gain (loss) from activities of Consolidated Variable Interest Entities in the condensed consolidated statements of operations. 

22

 
Level 3 Financial Assets at Fair Value
 
Three months ended September 30, 2012
 
Nine months ended September 30, 2012
 
Investment and Derivative Assets of Consolidated Variable Interest Entities
 
Investment and Derivative Assets of Consolidated Variable Interest Entities
 
Loans
 
Corporate
Bonds
 
Other
 
Derivative
Assets
 
Total
 
Loans
 
Corporate
Bonds
 
Other
 
Derivative
Assets
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
4,371

 
$
107,912

 
$
72,644

 
$
56

 
$
184,983

 
$
19,729

 
$
154,096

 
$
47,806

 
$
5,281

 
$
226,912

Transfers into Level 3
—


—

 
—

 
—

 
—

 
4,058

(1
)
—

 
—

 
—

 
4,058

Transfers out of   Level  3
—

 
—

 
—

 
—

 
—

 
(5,453
)
(2
)
—

 
—

 
—

 
(5,453
)
Transfers in due to consolidation or acquisition
660

 
—

 
863

 
—

 
1,523

 
660

 
—

 
863

 
—

 
1,523

Transfers out due to deconsolidation
—

 
—

 
—

 
—

 
—

 
—

 
(5,708
)


—

 
—

 
(5,708
)
Transfers between classes
—

 
—

 
—

 
—

 
—

 
—

 
(33,290
)
(3
)
33,290

(3
)
—

 
—

Net realized/unrealized gains (losses)
325

 
811

 
10,662

 
(6
)
 
11,792

 
1,658

 
6,341

 
12,626

 
(5,227
)
 
15,398

Purchases
185

 
—

 
—

 
—

 
185

 
436

 
—

 
7,255

 
—

 
7,691

Sales
—

 
(33,897
)
 
(432
)
 
—

 
(34,329
)
 
(1,430
)
 
(45,450
)
 
(10,245
)
 
(4
)
 
(57,129
)
Settlements
(75
)
 
—

 
(4,889
)
 
—

 
(4,964
)
 
(14,192
)
 
(1,163
)
 
(12,747
)
 
—

 
(28,102
)
Estimated fair value, end of period
$
5,466

 
$
74,826

 
$
78,848

 
$
50

 
$
159,190

 
$
5,466

 
$
74,826

 
$
78,848

 
$
50

 
$
159,190

Change in unrealized gains (losses) for the period for the assets held as of the end of the period
$
318

 
$
572

 
$
9,323

 
$
(6
)
 
$
10,207

 
$
55

 
$
4,922

 
$
7,179

 
$
(11
)
 
$
12,145

 

23

 
Level 3 Financial Assets at Fair Value
 
Three months ended September 30, 2011
 
Nine months ended September 30, 2011
 
 
 
Investment and Derivative Assets of Consolidated Variable
Interest Entities
 
 
 
 
 
Investment and Derivative Assets of Consolidated Variable
Interest Entities
 
 
 
Investments at
fair value
 
Loans
 
Corporate
Bonds
 
Other
 
Derivative
Assets
 
Total
 
Investments at
fair value
 
Loans
 
Corporate
Bonds
 
Other
 
Derivative
Assets
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
—

 
$
8,387

 
$
11,336

 
$
13,948

 
$
481

 
$
34,152

 
$
2,429

 
$
31,476

 
$
14,032

 
$
23,103

 
$
259

 
$
71,299

Net transfers in (out) of Level 3
—

 
12,859

(4
)
5,940

(4
)
(1,844
)
(6
)
8,232

 
25,187

 
—

 
(7,264
)
(5
)
5,940

(4
)
(3,176
)
(6
)
8,232

 
3,732

Transfer in due to consolidation or acquisition
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,160

 
239

 
12,830

 
276

 
14,505

Net realized/unrealized gains (losses)
—

 
(45
)
 
(637
)
 
(502
)
 
(326
)
 
(1,510
)
 
(29
)
 
1,859

 
356

 
595

 
(380
)
 
2,401

Purchases
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,482

 
—

 
—

 
—

 
3,482

Sales
—

 
—

 
(40
)
 
(147
)
 
(93
)
 
(280
)
 
(2,140
)
 
—

 
(40
)
 
(21,897
)
 
(93
)
 
(24,170
)
Issuances
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(16,753
)
 
(7,094
)
 
—

 
—

 
(23,847
)
Settlements
—

 
(7,250
)
 
(3,166
)
 
—

 
—

 
(10,416
)
 
(260
)
 
(9
)
 
—

 
—

 
—

 
(269
)
Estimated fair value, end of period
$
—

 
$
13,951

 
$
13,433

 
$
11,455

 
$
8,294

 
$
47,133

 
$
—

 
$
13,951

 
$
13,433

 
$
11,455

 
$
8,294

 
$
47,133

 _________________________________
(1)
The transfers into Level 3 represent loans valued by an internally developed model utilizing unobservable market inputs as of September 30, 2012 which were previously valued by the comparable companies pricing model or a third-party pricing service.
(2)
The transfers out of Level 3 represent loans valued by the comparable companies pricing model or a third-party pricing service as of September 30, 2012 which were previously valued by an internally developed model utilizing unobservable market inputs.
(3)
The transfers between classes represent investments in CLOs and CDOs classified as corporate bonds as of December 31, 2011 .
(4)
The transfers into Level 3 represent positions valued by an internally developed model utilizing unobservable market inputs as of September 30, 2011 which were previously valued by the comparable companies pricing model or a third-party pricing service. The transfers into Level 3 were partially offset by positions valued by the comparable companies pricing model or a third-party pricing service which were previously valued by an internally developed model utilizing unobservable market inputs.
(5)
The transfers out of Level 3 represent positions valued by the comparable companies pricing model or a third-party pricing service as of September 30, 2011 which were previously valued by an internally developed model utilizing unobservable market inputs.  These transfers out of Level 3 were partially offset by positions valued by an internally developed model utilizing unobservable market inputs as of September 30, 2011 which were previously valued by the comparable companies pricing model or a third-party pricing service.
(6)
The transfers out of Level 3 represent certain investments valued by the comparable companies pricing model or a third-party pricing service as of September 30, 2011 which were previously valued by an internally developed model utilizing unobservable market inputs.


24

 
Level 3 Financial Liabilities at Fair Value
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Variable Interest Entities
 
Total
 
Contingent Liabilities at Fair Value
 
Long-term Debt of Consolidated Variable Interest Entities
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
31,796

 
$
7,894,238

 
$
7,926,034

 
$
39,279

 
$
7,559,568

 
$
7,598,847

Transfers into Level 3
—

 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
(4,500
)
(1
)
(4,500
)
 
—

 
(4,500
)
(1
)
(4,500
)
Transfer in due to consolidation or acquisition
—

 
313,093

 
313,093

 
—

 
313,093

 
313,093

Net realized/unrealized (gains) losses
6,059

 
332,752

 
338,811

 
9,400

 
582,124

 
591,524

Purchases
—

 
105

 
105

 
—

 
62,905

 
62,905

Sales
—

 
—

 
—

 
—

 
(5,000
)
 
(5,000
)
Issuances
—

 
443,807

 
443,807

 
—

 
821,184

 
821,184

Settlements
(3,131
)
 
(443,874
)
 
(447,005
)
 
(13,955
)
 
(793,753
)
 
(807,708
)
Estimated fair value, end of period
$
34,724

 
$
8,535,621

 
$
8,570,345

 
$
34,724

 
$
8,535,621

 
$
8,570,345

Change in unrealized gains (losses) for the period for the liabilities held as of the end of the period
$
(5,441
)
 
$
(268,358
)
 
$
(273,799
)
 
$
(9,209
)
 
$
(381,878
)
 
$
(391,087
)
 
 
Level 3 Financial Liabilities at Fair Value
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
Derivative
Liabilities
 
Contingent
Liabilities at Fair
Value
 
Long-term Debt of
Consolidated
Variable Interest
Entities
 
Total
 
Derivative
Liabilities
 
Contingent
Liabilities at Fair
Value
 
Long-term Debt of
Consolidated
Variable Interest
Entities
 
Total
 
(In thousands)
Estimated fair value, beginning of period
$
9,920

 
$
41,004

 
$
483,112

 
$
534,036

 
$
11,155

 
$
—

 
$
202,844

 
$
213,999

Net transfers in (out) of Level 3
—

 
—


7,006,110

(2
)
7,006,110

 
—

 
—


7,006,110

(2
)
7,006,110

Transfer in due to consolidation or acquisition
—

 
—

 
—

 
—

 
—

 
—

 
265,032

 
265,032

Net realized/unrealized (gains) losses
(6,190
)
 
1,600

 
36,043

 
31,453

 
(7,425
)
 
4,501

 
51,279

 
48,355

Purchases
—

 
(1,134
)
(3
)
—

 
(1,134
)
 
—

 
39,037

(4
)
—

 
39,037

Sales
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Settlements
—

 
(2,550
)
 
—

 
(2,550
)
 
—

 
(4,618
)
 
—

 
(4,618
)
Estimated fair value, end of period
$
3,730

 
$
38,920

 
$
7,525,265

 
$
7,567,915

 
$
3,730

 
$
38,920

 
$
7,525,265

 
$
7,567,915

 _________________________________
(1)
The transfers out of Level 3 represent our purchase of subordinated notes of one of the Consolidated CLOs during the periods presented, which results in the subordinated notes being eliminated in consolidation.
(2)
The transfers into Level 3 represent the change of valuation methodology of the debt of the Consolidated CLOs from an externally developed model to an internally developed model using significant unobservable inputs.
(3)
Represents a change in the initial purchase accounting of the assumed contingent liabilities related to the Merger.
(4)
Represents the contingent deferred payments which were a component of the Merger consideration and contingent liabilities assumed in the Merger as described in further detail in Note 10.
 
Quantitative Information about Level 3 Assets & Liabilities
 
ASC Topic 820, as amended by ASU 2011-4, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy.  Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service

25

and the information regarding the unobservable inputs is not reasonably available to us.  As such, the disclosure provided below provides quantitative information only about the significant unobservable inputs used in the valuation of our contingent liabilities and the long-term debt of our Consolidated CLOs as of September 30, 2012 .
 
The valuation of both our contingent liabilities and the long-term debt of the Consolidated CLOs begins with a model of projected cash flows for the relevant CLO.  In addition to the structure of each of the CLOs (as provided in the indenture for each CLO), the following table provides quantitative information about the significant unobservable inputs utilized in this projection as of September 30, 2012 .  Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement of contingent liabilities and the long-term debt of the Consolidated CLOs, as shown in the table.

Significant Unobservable Input
 
Range
 
Impact of Increase in Input
on Fair Value
Measurement (2)
Default rate (1)
 
0-3%
 
Decrease
Recovery rate (1)
 
70-75%
 
Increase
Pre-payment rate (1)
 
20-30%
 
Decrease
Reinvestment spread above LIBOR
 
3-4%
 
Increase
Reinvestment price
 
99.50
 
Increase
 _________________________________
(1)
Generally an increase in the default rate would be accompanied by a directionally opposite change in assumption for the recovery and pre-payment rates.
(2)
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
 
The valuation of the contingent liabilities as of September 30, 2012 discounts the investment advisory fees subject to fee-sharing arrangements provided from the projected cash flow model (described above) at discount rates ranging from 6% to 15% .  The discount rate varies by type of investment advisory fee (senior management fee, subordinated management fee, or incentive fee), the priority of that investment advisory fee in the waterfall of the CLO and the relative risk associated with the respective investment advisory fee cash flow projections. Increases (decreases) in the discount rates in isolation would result in a lower (higher) fair value measurement.
 
The valuation of the long-term debt of the Consolidated CLOs as of September 30, 2012 discounts the cash flows to each tranche of debt and subordinated notes provided from the projected cash flow model (described above) at discount rates ranging from 1.3% to 9.0% above LIBOR for the debt tranches and a discount rate of 15% for the subordinated notes tranches.  The discount rate varies by the original credit rating of each tranche of debt or year of issuance for the subordinated notes. Increases (decreases) in the discount rates in isolation would result in a lower (higher) fair value measurement.
 
Assets measured at fair value on a nonrecurring basis
 
Certain assets are measured at fair value on a nonrecurring basis, meaning that the instruments are measured at fair value only in certain circumstances (for example, when held at the lower of cost or fair value). As of September 30, 2012 , there were no assets or liabilities measured at fair value on a nonrecurring basis.  The following table presents the financial instruments measured at fair value on a nonrecurring basis, by caption in the condensed consolidated balance sheets and by level within the ASC Topic 820 valuation hierarchy as of December 31, 2011 :
 
 
Level 1
 
Level 2
 
Level 3
 
 
Estimated Fair Value
 
(In thousands)
Loans held for sale
$
—

 
$
—

 
$
99,595

(1
)
 
$
99,595

 _________________________________
(1)
Represents the loans held within DFR MM CLO. The December 31, 2011 carrying value of the loans held for sale within DFR MM CLO was reduced to $12.0 million below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO for $36.5 million .



26

Carrying Value and Estimated Fair Value of Financial Assets and Liabilities
 
The carrying amounts and estimated fair values of our financial assets and liabilities for which the disclosure of fair values is required, were as follows:
 
 
As of September 30, 2012
 
As of December 31, 2011
 
Carrying
Value
 
Estimated
Fair
Value
 
Carrying
Value
 
Estimated
Fair
Value
 
(In thousands)
Financial assets:
 

 
 

 
 

 
 

Cash and cash equivalents (1)
$
63,027

 
$
63,027

 
$
35,973

 
$
35,973

Restricted cash and cash equivalents (1)
1,732

 
1,732

 
2,229

 
2,229

Financial assets of Consolidated Variable Interest Entities:
 

 
 

 
 

 
 

Restricted cash and cash equivalents (1)
700,659

 
700,659

 
512,495

 
512,495

Investments and derivative assets at fair value
8,321,318

 
8,321,318

 
7,554,053

 
7,554,053

Loans held for sale (2)
—

 
—

 
99,595

 
99,595

Financial liabilities:
 

 
 

 
 

 
 

Deferred purchase payments (3)
6,138

 
6,138

 
8,221

 
8,221

Contingent liabilities at fair value
34,724

 
34,724

 
39,279

 
39,279

Long-term debt:
 

 
 

 
 

 
 

Convertible Notes (4)
18,025

 
30,248

 
17,455

 
24,743

Junior Subordinated Notes (5)
120,000

 
43,160

 
120,000

 
40,302

Financial liabilities of Consolidated Variable Interest Entities:
 

 
 

 
 

 
 

Derivative liabilities
—

 
—

 
6,252

 
6,252

Long-term debt:
 

 
 

 
 

 
 

DFR MM CLO (6)
—

 
—

 
93,269

 
86,955

Consolidated CLOs
8,535,621

 
8,535,621

 
7,559,568

 
7,559,568

_________________________________
(1)
Carrying amounts approximate the fair value due to the short-term nature of these instruments.
(2)
The December 31, 2011 carrying value of the loans held for sale (which were all held within DFR MM CLO) was reduced to $12.0 million below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO for $36.5 million .
(3)
The carrying amount approximates fair value. This represents the fixed deferred purchase payments payable to DFR Holdings as part of the consideration for the acquisition of CNCIM and the fixed deferred purchase payments payable to CIFC Parent as part of the Merger consideration.
(4)
The estimated fair value of our Convertible Notes was determined using a third-party valuation firm that used a binomial tree model which utilizes significant unobservable inputs, including volatility and yield assumptions.  This methodology is classified as Level 3 within the fair value hierarchy.
(5)
Junior Subordinated Notes includes both our March and October Junior Subordinated Notes (defined in Note 11). The estimated fair values of our Junior Subordinated Notes were determined using a discounted cash flow model which utilizes significant unobservable inputs, including yield and forward LIBOR curve assumptions.  This methodology is classified as Level 3 within the fair value hierarchy.
(6)
The estimated fair values of the long-term debt of the DFR MM CLO was calculated using the same methodology as described above for the long-term debt of the Consolidated CLOs and is classified as Level 3 within the fair value hierarchy.
 
The loans and other investments classified as investments at fair value of the Consolidated CLOs are diversified over many industries, primarily as a result of industry concentration limits outlined in the indentures of each CLO, and as such we do not believe we have any significant concentration risk.


27


6.
LOANS AND LOANS HELD FOR SALE
 
We historically held investments in loans which were not included within the Consolidated CLOs and for which the fair value option was not elected. During the periods presented, these loans were primarily held within the DFR MM CLO.  The loans held within the DFR MM CLO were classified as loans held for investment (carried at cost, less allowance for loan losses) until September 30, 2011, when all of the loans within DFR MM CLO were reclassified to loans held for sale (carried at lower of cost or fair value) since, as of such date, we no longer intended to hold the loans within the DFR MM CLO to maturity.  As of December 31, 2011 , loans held for sale had a carrying value of $99.6 million and was comprised solely of loans held within the DFR MM CLO. The December 31, 2011 carrying value of the loans held for sale within DFR MM CLO was reduced to $12.0 million below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO. On February 7, 2012, we sold our investments in and rights to manage the DFR MM CLO for $36.5 million and deconsolidated the DFR MM CLO.  As of September 30, 2012 we no longer have any loans held for investment or loans held for sale.
 
For the three and nine months ended September 30, 2012 we recorded net losses of zero and $0.7 million , respectively, on loans held for sale within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations.  For the three and nine months ended September 30, 2011 we recorded net gains of $0.2 million and $1.5 million , respectively, on loans held for sale and loans held for investment within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations. In addition, during the three and nine months ended September 30, 2011 ,we recorded provisions for loan losses of $7.5 million and $15.4 million , respectively, within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations related to loans held within the DFR MM CLO which were classified as loans held for investment.
 
7.
DERIVATIVE INSTRUMENTS
 
The following table is a summary of our derivative instruments:
 
 
Number of
Contracts
 
Notional
Amount
 
Assets
 
Liabilities
 
Net Fair Value
 
 
 
(In thousands)
September 30, 2012:
 

 
 

 
 

 
 

 
 

Warrants
2

 
n/m

 
$
—

 
$
—

 
$
—

Total derivatives
2

 
$
—

 
$
—

 
$
—

 
$
—

Derivatives of Consolidated Variable Interest Entities:
 

 
 

 
 

 
 

 
 

Warrants
11

 
n/m

 
$
50

 
$
—

 
$
50

Total derivatives of Consolidated Variable Interest Entities
11

 
$
—

 
$
50

 
$
—

 
$
50

December 31, 2011:
 

 
 

 
 

 
 

 
 

Warrants
2

 
n/m

 
$
—

 
$
—

 
$
—

Total derivatives
2

 
$
—

 
$
—

 
$
—

 
$
—

Derivatives of Consolidated Variable Interest Entities:
 

 
 

 
 

 
 

 
 

Warrants
11

 
n/m

 
$
67

 
$
—

 
$
67

Total return swap
1

 
$
218,925

 
—

 
(650
)
 
(650
)
Unfunded debt commitments
6

 
99,967

 
5,214

 
—

 
5,214

Unfunded loan commitments
16

 
83,281

 
—

 
(5,602
)
 
(5,602
)
Total derivatives of Consolidated Variable Interest Entities
34

 
$
402,173

 
$
5,281

 
$
(6,252
)
 
$
(971
)
_________________________________
n/m—not meaningful


28

The following table is a summary of the net gain (loss) on derivatives included in net gain (loss) on investments, loans, derivatives and liabilities in the condensed consolidated statements of operations:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Embedded Derivative
$
—

 
$
6,188

 
—

 
7,424

Net gain (loss) on derivatives
$
—

 
$
6,188

 
$
—

 
$
7,424

 
The following table is a summary of the net gain (loss) on derivatives included in net gain (loss) from activities of Consolidated Variable Interest Entities in the condensed consolidated statements of operations:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Interest rate swaps
$
—

 
$
16

 
$
—

 
$
(15
)
Warrants
(1
)
 
(327
)
 
(12
)
 
(380
)
Total return swap
—

 
(5,383
)
 
1,414

 
(4,825
)
Unfunded debt commitments
—

 
4,603

 
(5,214
)
 
2,087

Unfunded loan commitments
—

 
(1,334
)
 
5,400

 
(1,441
)
Net gain (loss) on derivatives
$
(1
)
 
$
(2,425
)
 
$
1,588

 
$
(4,574
)
 
Total Return Swap
 
During the second quarter of 2011, we entered into a total return swap (the Warehouse TRS) agreement with Citibank through the Warehouse SPV. On January 19, 2012, the Warehouse SPV settled its obligations under the Warehouse TRS in connection with closing CIFC CLO 2011-I. We received proceeds of $47.4 million upon the settlement of the Warehouse TRS, of which we invested $17.4 million in the subordinated notes of CIFC CLO 2011-I.
 
Under the Warehouse TRS, we received the income on the reference obligations (including gains on terminated reference obligations) and paid Citibank an amount equal to LIBOR plus an agreed upon margin on the outstanding notional amount of the reference obligations and losses on terminated reference obligations. As of December 31, 2011 the notional amount of SSCLs included as reference obligations of the Warehouse TRS was $218.9 million and we had $46.5 million of cash posted as collateral under the Warehouse TRS, which is included within restricted cash and cash equivalents of consolidated variable interest entities on our condensed consolidated balance sheets at that date.
 
Embedded Derivative
 
Our Convertible Notes contain a conversion feature with certain antidilution provisions that caused the conversion feature to be deemed an embedded derivative instrument (the "Embedded Derivative"). Such antidilution provisions expired in December 2011 and as a result of their expiration, we reclassified the fair value of the Embedded Derivative to additional paid-in capital.
 
Interest Rate Swaps
 
With respect to our Consolidated CLOs, interest rate swaps may be entered into by a CLO to protect it from a mismatch between any fixed interest rates on its assets and the floating interest rates on its debt. The interest rate swap held in the Consolidated CLOs matured during the year ended December 31, 2011 .
 
Warrants
 
CIFC and our Consolidated CLOs hold warrants to purchase equity interests in companies with respect to which they are, or were, also a debt holder. These warrants were typically issued in connection with renegotiations and amendments of the loan agreements.

29



Unfunded Debt and Loan Commitments
 
Certain of our Consolidated CLOs have debt structures which include unfunded revolvers. Unfunded debt commitments represent the estimated fair value of those unfunded revolving debt facilities. Our Consolidated CLOs also include holdings of unfunded revolvers of loan facilities. Unfunded loan commitments represent the estimated fair value of those unfunded revolvers of loan facilities. See Note 17 for more information on unfunded loan commitments.
 
8.
NET GAIN (LOSS) ON INVESTMENTS, LOANS, DERIVATIVES AND LIABILITIES AND NET GAIN (LOSS) FROM ACTIVITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES
 
The following table is a summary of the components of our net gain (loss) on investments, loans, derivatives and liabilities:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net gain (loss) on investments at fair value
$
291

 
$
—

 
$
434

 
$
2,209

Net gain (loss) on liabilities at fair value
(6,059
)
 
(1,600
)
 
(9,400
)
 
(4,501
)
Net gain (loss) on loans
—

 
—

 
—

 
(37
)
Net gain (loss) on derivatives
—

 
6,188

 
—

 
7,424

Net gain (loss) on investments, loans, derivatives and liabilities
$
(5,768
)
 
$
4,588

 
$
(8,966
)
 
$
5,095

 
The following table is a summary of the components of our net gain (loss) from activities of Consolidated Variable Interest Entities:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Investment and interest income
$
99,097

 
$
88,198

 
$
295,545

 
$
218,366

Interest expense
25,246

 
16,917

 
71,857

 
42,171

Net investment and interest income
73,851

 
71,281

 
223,688

 
176,195

Provision for loan losses
—

 
7,549

 
—

 
15,413

Net investment and interest income after provision for loan losses
73,851

 
63,732

 
223,688

 
160,782

Net gain (loss) on investments at fair value
108,290

 
(262,695
)
 
266,614

 
(266,910
)
Net gain (loss) on liabilities at fair value
(332,752
)
 
(17,132
)
 
(582,124
)
 
(200,655
)
Net gain (loss) on loans
—

 
185

 
(727
)
 
1,513

Net gain (loss) on derivatives
(1
)
 
(2,425
)
 
1,588

 
(4,574
)
Dividend and other income gain (loss)
—

 
—

 
—

 
—

Net gain (loss) from activities of Consolidated Variable Interest Entities
$
(150,612
)
 
$
(218,335
)
 
$
(90,961
)
 
$
(309,844
)
 

30


9.
INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
 
Weighted-Average Remaining Estimated Useful Life
 
Gross Carrying
Amount (1)
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(In years)
 
(In thousands)
September 30, 2012:
 
 
 

 
 

 
 

Investment management contracts
5.5
 
$
76,047

 
$
34,477

 
$
41,570

Technology
0.0
 
7,706

 
7,706

 
—

Referral arrangement
7.0
 
3,810

 
—

 
3,810

Non-compete agreements
5.3
 
1,535

 
401

 
1,134

Trade name
8.5
 
1,250

 
188

 
1,062

Total intangible assets
 
 
$
90,348

 
$
42,772

 
$
47,576

December 31, 2011:
 
 
 

 
 

 
 

Investment management contracts
6.2
 
$
76,748

 
$
25,362

 
$
51,386

Technology
0.5
 
7,706

 
5,991

 
1,715

Non-compete agreements
6.0
 
2,065

 
748

 
1,317

Trade name
9.3
 
1,250

 
94

 
1,156

Total intangible assets
 
 
$
87,769

 
$
32,195

 
$
55,574

_________________________________
(1)
Gross carrying amounts exclude any amounts related to assets impaired as of the date presented.
 
During the three and nine months ended September 30, 2012 , we recorded amortization of intangible assets of $3.6 million and $13.0 million , respectively. During the three and nine months ended September 30, 2011 , we recorded amortization of intangible assets of $4.7 million and $11.1 million , respectively.
 
The following table presents expected amortization expense of the existing intangible assets:
 
 
(In thousands)
Remainder of 2012
$
4,373

2013
15,086

2014
10,876

2015
7,111

2016
4,180

2017
2,301

Thereafter
3,649

 
$
47,576

 
As a result of the GECC Transaction we acquired investment management contract intangible assets of $3.7 million and a referral arrangement intangible asset of $3.8 million during the three months ended September 30, 2012. See Note 3 for additional information.

On January 27, 2012, we completed the sale of our rights to manage Gillespie CLO PLC (“Gillespie”), a European CLO which had been managed by DCM. The sale price was comprised of a $7.1 million payment on the closing date and contingent payments of up to approximately $1.1 million . We recorded a net gain on the sale of Gillespie of $5.8 million within Net gain on the sale of management contract in the condensed consolidated statements of operations for the nine months ended September 30, 2012 .  This gain was net of a $0.7 million for impairment of the intangible asset associated with the Gillespie management contract and $0.6 million of outstanding receivables from Gillespie.
 

31

During June 2012, we received notice that a holder of the majority of the subordinated notes of Primus CLO I, Ltd. (“Primus I”) exercised their rights to call the CLO for redemption. As a result of the call of Primus I, during the nine months ended September 30, 2012 , we recorded a $1.8 million expense to fully impair the intangible asset associated with the Primus I management contract.
 
10.
CONTINGENT LIABILITIES AT FAIR VALUE
 
Our contingent liabilities are comprised of contingent deferred payments which were a component of the Merger consideration and contingent liabilities assumed in the Merger as described in Note 3. These contingent liabilities are remeasured at fair value (as described in Note 2) at each reporting date and recorded within contingent liabilities at fair value on the condensed consolidated balance sheets. The estimated fair value of the contingent liabilities are as follows:
 
 
Estimated Fair Value
 
September 30, 2012
 
December 31, 2011
 
(In thousands)
Contingent liabilities assumed
$
5,340

 
$
16,418

Contingent deferred payments for the Merger
29,384

 
22,861

Total contingent liabilities
$
34,724

 
$
39,279

 
The following table presents the changes in fair value of contingent liabilities recorded within net gain (loss) on investments, loans, derivatives and liabilities on the condensed consolidated statements of operations:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Contingent liabilities assumed
$
(1,227
)
 
$
(730
)
 
$
1,012

(1
)
$
(930
)
Contingent deferred payments for the Merger
(4,832
)
 
(870
)
 
(10,412
)
 
(3,571
)
Total net gain (loss) on contingent liabilities
$
(6,059
)
 
$
(1,600
)
 
$
(9,400
)
 
$
(4,501
)
_________________________________
(1)
Includes a $2.5 million gain to revalue the contingent liabilities associated with Primus I to zero as a result of the call of the CLO.  See Note 9 for additional information.

During the three and nine months ended September 30, 2012 , we made payments of $1.6 million and $10.1 million , respectively, related to the contingent liabilities assumed in the Merger.  These payments during the three and nine months ended September 30, 2012 , included $0.3 million and $6.2 million , respectively, of one-time earn out payments for three of the CypressTree management contracts which will reduce the required payments going forward related to such management contracts.
 
During the three and nine months ended September 30, 2012 , we made payments of $1.6 million and $3.9 million , respectively, related to the contingent deferred payments for the Merger.  As of September 30, 2012 and December 31, 2011 , the remaining payments under item (v) as described in Note 3 were $8.3 million and $12.1 million , respectively.

32


 
11.
LONG-TERM DEBT
 
Recourse debt refers to debt where the lenders have recourse to our unencumbered assets to satisfy our obligations under such debt. All of the debt of the Consolidated Variable Interest Entities is non-recourse debt. Non-recourse debt refers to debt where the lenders have recourse only to specific assets pledged as collateral to the lenders.

The following table summarizes our long-term debt:
 
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
(In thousands)
 
 
 
(In years)
September 30, 2012:
 

 
 

 
 
Recourse Debt:
 

 
 

 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
23.1
October Junior Subordinated Notes (2)
25,000

 
3.95
%
 
23.1
Convertible Notes (3)
18,025

 
9.00
%
 
5.2
Total Recourse Debt
138,025

 
2.58
%
 
20.8
Consolidated Variable Interest Entities Debt:
 

 
 

 
 
Consolidated CLOs (4)
8,535,621

 
1.17
%
 
7.6
Total long-term debt
$
8,673,646

 
1.19
%
 
7.8
December 31, 2011:
 

 
 

 
 
Recourse Debt:
 

 
 

 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
23.9
October Junior Subordinated Notes (2)
25,000

 
3.93
%
 
23.9
Convertible Notes (3)
17,455

 
8.00
%
 
6.0
Total Recourse Debt
137,455

 
2.42
%
 
21.6
Consolidated Variable Interest Entities Debt:
 

 
 

 
 
DFR MM CLO (5)
93,269

 
1.68
%
 
7.6
Consolidated CLOs (4)
7,559,568

 
1.01
%
 
7.3
Total Consolidated Variable Interest Entities Debt
7,652,837

 
1.02
%
 
7.3
Total long-term debt
$
7,790,292

 
1.04
%
 
7.5
_________________________________
(1)
The $95.0 million in aggregate principal amount of the March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015. Thereafter, the March Junior Subordinated Notes will bear interest at an annual rate of LIBOR plus 2.58% until maturity on October 30, 2035.
(2)
The $25.0 million of aggregate principal amount of the October Junior Subordinated Notes bear interest at an annual rate of LIBOR plus 3.50% and mature on October 30, 2035.
(3)
The Convertible Notes principal outstanding of $25.0 million is presented net of a $7.0 million discount as of September 30, 2012 and a $7.5 million discount as of December 31, 2011 . The Convertible Notes currently pay interest at the 9.00% stated rate; however, including the discount, the effective rate of interest is 18.14% . The Convertible Notes will mature on December 9, 2017.
(4)
Long-term debt of the Consolidated CLOs is recorded at fair value. This includes the fair value of the subordinated notes issued by the Consolidated CLOs. However, the subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate. The par value of the Consolidated CLOs long-term debt (including subordinated notes) was $9.1 billion and $8.9 billion as of September 30, 2012 and December 31, 2011 , respectively.
(5)
Excludes $19.0 million of DFR MM CLO Class D Notes and $50.0 million of subordinated notes that we previously owned and eliminated upon consolidation. Had this debt been included, the weighted-average borrowing rate would have been 2.14% as of December 31, 2011 . The subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate.
 

33

As a result of the February 2012 sale of our investments in and our rights to manage the DFR MM CLO, we deconsolidated the DFR MM CLO.  As of December 31, 2011 , the carrying value of the assets held in the DFR MM CLO, which are the only assets to which the DFR MM CLO debt holders have recourse for repayment was $130.3 million .
 
During the three months ended September 30, 2012 , the Consolidated CLOs issued $443.8 million of debt, paid down $380.1 million of their outstanding debt and distributed $63.7 million to the holders of their subordinated notes. During the nine months ended September 30, 2012 , the Consolidated CLOs issued $821.2 million of debt, made net borrowings under revolving credit facilities of $57.8 million , paid down $622.3 million of their outstanding debt and distributed $171.5 million to the holders of their subordinated notes.  Additionally, the consolidation of Navigator 2006 CLO contributed an increase in Consolidated CLO debt of $313.1 million during the three and nine months ended September 30, 2012 . The carrying value of the assets of the Consolidated CLOs, which are the only assets to which the Consolidated CLO debt holders have recourse for repayment was $9.1 billion and $8.0 billion as of September 30, 2012 and December 31, 2011 , respectively.
 
12.
EQUITY
 
Common Stock
 
Shares of common stock outstanding totaled 20,771,072 and 20,255,430 as of September 30, 2012 and December 31, 2011 , respectively.  In addition, we have outstanding Convertible Notes that are convertible into 4,132,231  shares (the “Conversion Shares”) of common stock (such amount may be adjusted in certain events or increased in connection with the payment of in-kind interest at an initial conversion price of $6.05 per share, subject to adjustment).
 
During the three months ended September 30, 2012 , we issued 1,000,000 shares related to the GECC Transaction. Additionally, during the nine months ended September 30, 2012 , we granted and issued 20,922 shares of common stock comprised of 6,974 shares of common stock to each of the three independent directors of our Board as a component of their compensation. These grants were fully vested and were expensed based on the $7.17 price of our common stock on the grant date.  We recorded $0.2 million in expense within other general and administrative expenses on the condensed consolidated statements of operations during the nine months ended September 30, 2012 related to these grants.  In addition, during the nine months ended September 30, 2012 , we issued 67,328 shares to settle restricted stock unit grants and repurchased 572,608 shares of our common stock, both as described in further detail below.
 
Share Repurchase Program
 
On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. During the three and nine months ended September 30, 2012 , we repurchased 61,333 and 572,608 shares, respectively, in open-market transactions for an aggregate cost (including transaction costs) of $0.4 million and $3.8 million , respectively, with an average price per share of $7.26 and $6.58 , respectively.  As of September 30, 2012 we were authorized to repurchase up to an additional $6.2 million of our common stock. During the three months ended September 30, 2012 , the Board authorized the constructive retirement of 565,627 shares with an aggregate cost of $3.7 million which was reclassified from treasury stock to additional paid-in capital. As a result we reclassified the cost of the shares constructively retired from treasury stock to additional paid-in capital on the condensed consolidated balance sheet. The 6,981 of repurchased shares not yet retired as of September 30, 2012, are reflected within treasury stock on the condensed consolidated balance sheets.

GECEII Warrant

On the Closing Date of the GECC transaction, we issued the GECEII Warrant which gives the holder the right to purchase 2.0 million shares of a newly created class of non-voting stock. The GECEII Warrant has an exercise price of $6.375 per share, is immediately exercisable and expires September 24, 2014. The GECEII Warrant will be automatically exercised on a net share issuance basis upon the consummation of a change of control transaction or a liquidation event involving the Company. During the three months ended September 30, 2012 , we recorded an $3.7 million increase to Additional paid-in capital on the condensed consolidated balance sheet for the Closing Date fair value of the warrants. See Note 3 for additional information.
 
Stock Options
 
We issue stock-based awards to certain of our employees and recognize related stock-based compensation for these equity awards in our condensed consolidated financial statements. These awards are issued pursuant to the CIFC Corp. 2011 Stock Option and Incentive Plan (the “2011 Stock Plan”).  On May 29, 2012, our stockholders approved an amendment to the

34

2011 Stock Plan to increase the aggregate number of shares authorized for issuance under the 2011 Stock Plan by 1,650,000 to 4,181,929 .
 
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the grant. During the three and nine months ended September 30, 2012 we recorded stock-based compensation expense of $0.5 million and $1.3 million , respectively, on the condensed consolidated statements of operations within compensation and benefits. During the three and nine months ended September 30, 2011 we recorded stock-based compensation expense of $0.3 million and $0.4 million on the condensed consolidated statements of operations within compensation and benefits. As of September 30, 2012 , there was $7.7 million of estimated unrecognized compensation expense related to unvested awards, net of estimated forfeitures. This cost is expected to be recognized over a weighted average vesting period of 3.1  years.

We estimate the fair value of stock-based awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model includes assumptions regarding dividend yield, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive stock-based awards.
 
In addition to the exercise and grant date prices of these awards, we utilized certain weighted average assumptions to estimate the initial fair value of stock-based awards. Weighted average assumptions related to our stock-based awards (by period issued) are listed in the table below:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2012 (1)
 
2011
 
2012
 
2011
Expected dividend yield
N/A
 
—

 
—

 
—

Expected volatility
N/A
 
47.89
%
 
50.52
%
 
47.89
%
Risk-free interest rate
N/A
 
1.90
%
 
1.27
%
 
1.99
%
Expected life (years)
N/A
 
6.11

 
6.09

 
6.11

_________________________________
(1)
We did not issue stock-based awards during the three months ended September 30, 2012 .
 
The stock-based awards granted have exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of 10 years and a vesting period of approximately 4 years. In addition to time based vesting requirements, certain of the awards also contain performance vesting criteria. The expected dividend yield is the expected annual dividend as a percentage of the fair market value of the stock on the date of grant. The expected volatility is estimated by considering the historical volatility of our stock, the historical and implied volatility of peer companies and our expectations of volatility for the expected life of the stock-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for an instrument which closely approximates the expected option term. The expected option term is the number of years we estimate that the stock-based award will be outstanding prior to exercise. The expected life of the stock-based awards issued is determined by using the simplified method.
 

35

The following table summarizes certain 2011 Stock Plan activity during the nine months ended September 30, 2012 :
 
 
Number of Shares
Underlying Stock-Based Awards
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate Intrinsic
Value
 
 
 
 
 
(In years)
 
(In thousands)
Outstanding as of January 1, 2012
1,550,000

 
$
7.20

 
 
 
 

Granted (1)
2,208,251

 
5.04

 
 
 
 

Expired/canceled (2)
(260,000
)
 
7.25

 
 
 
 

Exercised
—

 
—

 
 
 
 

Outstanding at March 31, 2012
3,498,251

 
$
5.83

 
 
 
 
Granted (1)
—

 
—

 
 
 
 
Expired/canceled (2)
(124,688
)
 
6.29

 
 
 
 
Exercised
—

 
$
—

 
 
 
 
Outstanding at June 30, 2012
3,373,563

 
$
5.82

 
 
 
 

Granted (1)
—

 
—

 
 
 
 

Expired/canceled (2)
—

 
—

 
 
 
 

Exercised
—

 
—

 
 
 
 

Outstanding at September 30, 2012
3,373,563

 
$
5.82

 
9.16
 
$
5,068

Exercisable at September 30, 2012
334,688

 
$
7.25

 
8.71
 
$
23

Vested and Expected to vest at September 30, 2012
3,036,207

 
$
5.82

 
9.16
 
$
4,561

_________________________________
(1)
On March 21, 2012 we proposed an amendment to the 2011 Stock Plan to increase the aggregate number of shares authorized for issuance under the Plan by 1,650,000 . The amendment received shareholder approval on May 29, 2012. Approximately 950,000 of the stock-based awards granted during the nine months ended September 30, 2012 were contingent upon such approval.
(2)
The forfeited stock-based awards are returned to the grant pool for possible reissuance under the 2011 Stock Plan.

Restricted Stock Units
 
Each of the restricted stock units outstanding represents the right to receive one share of our common stock, subject to acceleration upon the occurrence of certain specified events. The number of restricted stock units may be adjusted, as determined by our Board, in connection with any stock dividends, stock splits, subdivisions or consolidations of shares (including reverse stock splits) or similar changes in our capitalization.
 
The following table summarizes our restricted stock units activity:
 
 
2012
 
2011
Restricted stock units outstanding as of January 1
170,688

 
397,052

Settled (1)
—

 
(248,069
)
Restricted stock units outstanding as of March 31
170,688

 
148,983

Granted
—

 
21,705

Settled (1)
(67,328
)
 
—

Restricted stock units outstanding as of June 30
103,360

 
170,688

Granted
—

 
—

Settled (1)
—

 
—

Restricted stock units outstanding as of September 30
103,360

 
170,688

_________________________________
(1)
Settled represents the gross number of restricted stock units settled during the period.  Restricted stock units are settled with the issuance of common stock to the restricted stock unit holder.  During the three months ended June 30, 2012, we issued 60,095 shares of common stock to settle restricted stock grants from 2009 and 7,233 shares of common stock to settle the first 1/3 annual installment of the restricted stock units granted in 2011.  During the three months

36

ended March 31, 2011, we issued 163,709  shares of common stock to settle the restricted stock unit grants from 2008, which were net of 84,360  shares of common stock withheld to satisfy income tax withholding obligations of certain of the recipients.
 
During the three and nine months ended September 30, 2012 , we did not grant any restricted stock units.  During the nine months ended September 30, 2011 , we granted 7,235 restricted stock units to each of the three independent directors of our Board as a component of their compensation. These grants are fully vested, settle 1/3 annually over three years on the anniversary of the grant date and were fully expensed upon grant based on the $6.22 price of our common stock on the grant date.  We recorded $0.1 million in expense within other general and administrative expenses on the condensed consolidated statements of operations during the nine months ended September 30, 2011 .
 
The restricted stock units outstanding as of September 30, 2012 are all fully vested and are comprised of the 14,472 remaining 2011 grants and the 88,888 remaining grants to certain members of our Board issued during 2010.  The 2010 grants settle three years from the date of the grant and were fully expensed upon grant based on the $4.50 price of our common stock on grant date.
 
Other Warrants
 
Other warrants outstanding totaled 225,000 and 250,000 as of September 30, 2012 and December 31, 2011 , respectively.  These fully vested warrants were issued in connection with the restructuring of an investment product we formerly managed. The warrants give the holders the right to purchase shares of our common stock at an exercise price of $4.25 per share and expire on April 9, 2014.  During the nine months ended September 30, 2012 we settled 25,000 of the then outstanding warrants for cash payment.  The decision to settle the warrants in cash, rather than shares was at our discretion.

Appropriated Retained Earnings (Deficit) of Consolidated Variable Interest Entities
 
Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities initially represented the excess fair value of the Consolidated CLOs’ assets over the Consolidated CLOs’ liabilities at the date of the adoption of the amendments to ASC Topic 810. On the Closing Date, we recorded an increase to appropriate retained earnings (deficit) of Consolidated Variable Interest Entities for the excess fair value of Navigator 2006 CLO's assets over Navigator 2006 CLO's liabilities on the Closing Date of $5.1 million . During 2011, we recorded an increase to appropriated retained earnings (deficit) of Consolidated Variable Interest Entities for the excess fair value of the CIFC CLOs' assets over the CIFC CLOs’ liabilities at the Merger Closing Date of $285.0 million . Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities is adjusted each period for the net income (loss) attributable to Consolidated CLOs.

13.
EARNINGS (LOSS) PER SHARE
 
The following table presents the calculation of basic and diluted earnings (loss) per share:
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Net income (loss) attributable to CIFC Corp.
$
688

 
$
(5,924
)
 
$
(6,215
)
 
$
(10,087
)
 
 
 
 
 
 
 
 
Weighted-average shares used in basic calculation
19,957

 
20,426

 
20,201

 
17,038

   Dilutive effect of:
 
 
 
 
 
 
 
      Warrants
117

 
—

 
—

 
—

      Stock options
1,834

 
—

 
—

 
—

Weighted-average shares used in diluted calculation
21,908

 
20,426

 
20,201

 
17,038

Earnings (loss) per share -
 

 
 

 
 
 
 

Basic
$
0.03

 
$
(0.29
)
 
$
(0.31
)
 
$
(0.59
)
Diluted
$
0.03

 
$
(0.29
)
 
$
(0.31
)
 
$
(0.59
)
 

37

For the three months ended September 30, 2012 , the Conversion Shares related to the Convertible Notes were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive under the if-converted method. For the nine months ended September 30, 2012 and the three and nine months ended September 30, 2011 , the Conversion Shares related to the Convertible Notes and the stock options and warrants outstanding during the respective periods were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive under the if-converted method for the Conversion Shares and the treasury stock method for the stock options and warrants.  The weighted-average shares outstanding utilized in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 takes into account the repurchases of our common shares on the repurchase date. See the Note 12 for more information on the share repurchase program.
 
14.
INCOME TAXES
 
We file a consolidated U.S. federal and several state income tax returns with all of our domestic corporate subsidiaries. The entities that comprise our Consolidated CLOs are foreign entities that are generally exempt from U.S. federal and state income taxes. Income taxes, if any, are the responsibility of the entity’s subordinated notes owners. Consequently, our condensed consolidated statements of operations do not include a provision for income tax expense (benefit) related to the pre-tax income (loss) of our Consolidated CLOs. However, to the extent that we hold a subordinated note interest in these entities, we are required to include our proportionate share of their income in the calculation of our taxable income.
 
For the three months ended September 30, 2012 and 2011 , we recorded income tax benefits of $1.8 million and $3.4 million , respectively. For the nine months ended September 30, 2012 and 2011 , we recorded income tax expense of $2.7 million and an income tax benefit of $4.5 million , respectively.  Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the three months ended September 30, 2012 was 164% , compared to our effective tax rate for the three months ended September 30, 2011 of 36% .  Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the nine months ended September 30, 2012 was (79)% , compared to our effective tax rate for the nine months ended September 30, 2011 of 31% .  The difference between our statutory rate and our effective tax rate for the three and nine months ended September 30, 2012 is primarily attributable to state income taxes and certain discrete and permanent items during the periods, including fair value changes of certain contingent liabilities related to the Merger and the sale of our rights to manage Gillespie. We expect the tax rate for the full year 2012 to approximate (9)% , excluding discrete items. This difference between the statutory tax rate and our expected effective rate is primarily state income taxes and the result of permanent tax adjustments related to the Merger.
 
We have recorded net deferred tax assets of $55.0 million , net of a valuation allowance of $11.7 million , as of September 30, 2012 and net deferred tax assets of $57.8 million , net of a valuation allowance of $27.9 million as of December 31, 2011 .  We have recorded deferred income taxes as of September 30, 2012 and December 31, 2011 in accordance with ASC Topic 740— Income Taxes (“ASC Topic 740”). We record deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities and their respective income tax bases. As required by ASC Topic 740, we evaluate the likelihood of realizing tax benefits in future periods, which requires the recognition of a valuation allowance to reduce any deferred tax assets to an amount that is more likely than not to be realized. Under ASC Topic 740, we are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. As of September 30, 2012 and December 31, 2011 , our evaluation concluded that there was a need for a valuation allowance related to our ability to utilize net operating losses (“NOLs”) and net capital losses (“NCLs”) against income taxable in Illinois. Legislation enacted in 2011 suspends the utilization of NOLs in Illinois until 2014 and, coupled with our expected apportionment of future taxable income, it is now more likely than not that the state tax benefit of the loss carryforwards will not be realized in Illinois. Additionally, as a result of the sale of our investments in DFR MM CLO, as of December 31, 2011 , an additional allowance was recorded related to the NCL’s derived from the pending sale.  Upon the closing of the sale, the deferred tax assets and associated valuation allowance were removed as they were deemed permanently impaired.
 
Prior to the acquisition of CNCIM, we had substantial federal NOLs and NCLs which were available to offset future taxable income or capital gains. The June 2010 issuance of the shares associated with the acquisition of CNCIM resulted in an ownership change as defined in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Ownership Change”). As a result of the Ownership Change, our ability to use our NOLs, NCLs and certain recognized built-in losses to reduce our taxable income in future years is generally limited to an annual amount (the “Section 382 Limitation”) based primarily on a percentage of the fair market value of our common stock immediately prior to the Ownership Change, subject to certain adjustments. This annual amount is approximately $1.3 million . NOLs and NCLs that exceed the Section 382 Limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period; however, if the carryforward period for any NOLs or NCLs expires before that loss is fully utilized, the unused portion will provide no

38

future benefit. As of September 30, 2012 , our combined loss carryforwards without regard to the Merger were approximately $31.1 million and will begin to expire in 2028.
 
The Merger resulted in an Ownership Change of Legacy CIFC thereby resulting in a Section 382 Limitation of approximately $9.5 million annually on our ability to utilize the Legacy CIFC NOLs to reduce taxable income. As of September 30, 2012 , our combined federal NOL, NCL and built-in loss carryforwards related to Legacy CIFC were approximately $0.7 million .
 
For periods prior to our Ownership Change, the utilization of NOLs and NCLs resulted in no provision for federal or state income taxes. As a result of our Ownership Change and Section 382 Limitation, we may no longer be able to offset all of our taxable income with our NOLs and NCLs; therefore, we may be required to pay current federal and state taxes on our current year net taxable income. Management is still assessing the Section 382 implications of the GECC Transaction. We have no reserve for uncertain tax positions at any time in the three and nine months ended September 30, 2012 or as of December 31, 2011 .
 
15.
RELATED PARTY TRANSACTIONS
 
DFR Holdings is considered a related party as a result of its ownership of 4,545,455 shares of our common stock, issued as part of the consideration for the acquisition of CNCIM. As such, the accrual and payment of interest on the Convertible Notes and on the deferred purchase payments are considered related party transactions. Fees paid to members of our Board prior to the Merger who are representatives of DFR Holdings totaled zero and $46,000 for the three and nine months ended September 30, 2011 , respectively.  In addition, affiliates of DFR Holdings previously held investments in all four of the CLOs managed by CNCIM (the “CNCIM CLOs”) and as of September 30, 2012 and December 31, 2011 , held investments in zero and two of the CNCIM CLOs, respectively. We also have a management agreement in place with DFR Holdings to provide certain administrative and support services to DFR Holdings. We recorded receivables on the condensed consolidated balance sheets of $5,000 and $7,000 as of September 30, 2012 and December 31, 2011 , respectively, related to this management agreement.  We recorded investment advisory fees related to this management agreement in the condensed consolidated statements of operations of $15,000 and $20,000 for the three months ended September 30, 2012 and 2011, respectively, and $55,000 and $37,000 for the nine months ended September 30, 2012 and 2011 , respectively.
 
CIFC Parent is considered a related party as a result its ownership of 9,090,909 shares of our common stock, issued as part of the consideration for the Merger. As such, the accrual and payment of the deferred purchase payments (including those classified as contingent liabilities) are considered related party transactions. In addition, as of September 30, 2012 and December 31, 2011 CIFC Parent either directly or indirectly holds investments in ten CLOs we manage, eight of which are Consolidated CLOs. We also have a management agreement in place with CIFC Parent to provide certain administrative and support services to CIFC Parent. The receivables on the condensed consolidated balance sheets of $17,000 and $17,000 as of September 30, 2012 and December 31, 2011 , respectively, are related to this management agreement. We recorded investment advisory fees related to this management agreement in the condensed consolidated statements of operations of $50,000 and $48,000 for the three months ended September 30, 2012 and 2011 , respectively, and $150,000 and $88,000 for the nine months ended September 30, 2012 and 2011 , respectively.

16.
RESTRUCTURING CHARGES
 
Following completion of the Merger, we began executing a plan to realize the expected economies of scale of the combined company, in part through a reduction of the workforce. The majority of the expected severance and associated termination benefits related to the reduction of the workforce were included within restructuring charges during the year ended December 31, 2011 ; however, payments are expected to continue through the remainder of 2012 . In addition, following the Merger we have disposed of certain non-core activities and assets and we closed our Rosemont, Illinois office in furtherance of our efforts to consolidate operations at our corporate headquarters in New York, New York.

In conjunction with the closure of our Rosemont, Illinois office, on March 16, 2012, we entered into a Lease Termination Agreement (the “Agreement”) with GLL US Office, LP (the “Landlord”) related to our lease of the 12t h  floor of 6250 North River Road, Rosemont, Illinois 60018. The effect of the Agreement was to terminate, as of March 31, 2012 upon satisfaction of the conditions set forth in the Agreement, the lease dated July 11, 2005, as amended on October 29, 2009, between the Landlord and CIFC Corp. (the “Rosemont Lease”). In order for the incoming tenant to assume the lease on off-market terms and to cover certain other expenses related to the termination of the Rosemont Lease, we paid to the Landlord, the incoming tenant and our broker aggregate fees equal to approximately $2.6 million , net of our $0.5 million security deposit that was returned by the Landlord.
 

39

The table below provides a rollforward of the accrued restructuring charges.
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2012
 
2011
 
2012
 
 
2011
 
(In thousands)
Accrued Restructuring Charges at beginning of period
$
779

 
$
3,273

 
$
1,490

 
 
$
—

Provision for Restructuring Charges
—

 
783

 
3,923

(1
)
 
4,104

Payments for Restructuring Charges
(305
)
 
(537
)
 
(4,156
)
 
 
(585
)
Non-Cash Settlement of Restructuring Charges
—

 
—

 
(783
)
(2
)
 
—

Accrued Restructuring Charges at end of period
$
474

 
$
3,519

 
$
474

 
 
$
3,519

_________________________________
(1)
The increase to the provision during the nine month ended September 30, 2012 is primarily composed of $3.1 million of lease termination fees and the loss on disposal of associated equipment and improvements of $1.4 million , partially offset by a $0.6 million reversal of deferred rent payments recorded in conjunction with the termination of the Rosemont Lease.
(2)
Non-cash settlement of restructuring charges represents the loss on disposal of equipment and improvements partially offset by the reversal of deferred rent payments noted above.
 
17.
COMMITMENTS AND CONTINGENCIES
 
Legal Proceedings
 
In the ordinary course of business, we may be subject to legal and regulatory proceedings and examinations that are generally incidental to our ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings or examinations, we do not believe their disposition will have a material adverse effect on our condensed consolidated financial statements.
 
In addition, in connection with activities of one of our investment advisor subsidiaries that occurred prior to our acquisition of such investment advisor, we expect to make certain voluntary reimbursements and other payments to certain investors and CLOs currently or formerly managed by such investment advisor. As a result of a contractual arrangement we expect to be fully indemnified for these payments by the seller of such investment advisor and do not believe they will have a material adverse impact on our consolidated financial statements.
 
Lease Commitments
 
On September 16, 2011, we entered into a new lease agreement related to our corporate headquarters at 250 Park Avenue, New York (the “Lease”).  The Lease commenced on July 6, 2012 and has a term of 10.5 years . The Lease replaced the prior lease for our corporate headquarters, which expired on July 20, 2012. The future minimum commitments under the Lease are as follows:
 
 
(In thousands)
Remainder of 2012
$
402

2013
1,205

2014
1,607

2015
1,607

2016
1,607

Thereafter
10,296

 
$
16,724

 

40

Other Commitments and Contingencies
 
We had unfunded investment commitments on loans within the Consolidated CLOs of $65.3 million and $83.3 million as of September 30, 2012 and December 31, 2011 , respectively. The timing and amount of additional funding on these loans are at the discretion of the borrower, to the extent the borrower satisfies certain requirements and provides certain documentation.

18.
SUBSEQUENT EVENTS
 
In connection with the preparation of the condensed consolidated financial statements in accordance with ASC Topic 855— Subsequent Events , we evaluated subsequent events after the balance sheet date of September 30, 2012 . There have been no significant subsequent events since September 30, 2012 that require adjustment to or additional disclosure in these condensed consolidated financial statements.

41

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion together with our condensed consolidated financial statements and notes thereto included in Part I—Item 1. Condensed Consolidated Financial Statements and Notes (Unaudited) of this Quarterly Report on Form 10-Q (the “Quarterly Report”) .   The statements in this discussion regarding the industry outlook and our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Special Note Regarding Forward-Looking Statements and Part I—Item 1A. Risk Factors in our 2011 Annual Report on Form 10-K. Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. (formerly known as CIFC Deerfield Corp. and previously as Deerfield Capital Corp.) as “CIFC,” to CIFC and its subsidiaries as “we,” “us,” “our,” “our company” or “the Company,” to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as “CIFCAM,” to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as “DCM,” to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as “CypressTree,” to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as “CNCIM” and to CIFCAM, DCM, CypressTree and CNCIM together as the “Advisors.”
 
Overview
 
We are an asset manager organized as a Delaware corporation that manages approximately $13.6 billion  of client assets as of September 30, 2012 . We specialize in managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. Our core assets under management (“AUM”) are currently held almost exclusively in collateralized loan obligations (“CLOs” as further described below). Our AUM are comprised of approximately $11.0 billion of client assets within loan-based products we consider as our ongoing core business and $2.6 billion of client assets which are not considered part of our ongoing core business, consisting primarily of asset-backed securities (“ABS”) collateralized debt obligations (“CDOs” as further described below). We plan to close new SSCL based products, including CLOs and other fund products, subject to market conditions and other factors. We do not expect to close new ABS CDOs, and we do not consider managing ABS CDOs to be one of our core activities going forward. We earn investment advisory fees from managing investment products, and these investment advisory fees are the economic basis of our business.

On April 13, 2011, we completed a merger (the “Merger”) with Commercial Industrial Finance Corp. (“Legacy CIFC”), an asset manager focused primarily on management of corporate credit investments for third party investors. Following the Merger, we have re-focused on our core asset management business and, in a process that began in 2011 and most of which was completed during the first quarter of 2012, exited non-core activities and assets. We have and expect to continue to devote capital to initiate and support our asset management business.
 
Our Business
 
The Merger made CIFC one of the largest independent SSCL managers globally. The Merger was primarily effected as a stock transaction with the result that we are more strongly capitalized as we acquired Legacy CIFC, including the rights to manage the Legacy CIFC CLO management contracts, without significantly increasing our long-term debt. In acquiring Legacy CIFC, we also acquired CypressTree, a credit asset manager that Legacy CIFC acquired in December 2010, and CypressTree’s CLO management contracts. We are now comprised of four asset management subsidiaries: CIFCAM, CNCIM, CypressTree and DCM. All are operated jointly on Legacy CIFC’s investment management platform.
 
Following the Merger, management re-focused on our core business as a fee-based corporate credit asset manager for third party investors. In a process that began in 2011 and most of which was completed during the first quarter of 2012, we exited non-core activities and assets, including the sales of (1) our residential mortgage-backed securities (“RMBS”) portfolio in 2011, (2) our rights to manage our sole European CLO, Gillespie CLO PLC (“Gillespie”), and (3) our investments in (and our rights to manage) the DFR Middle Market CLO Ltd. (“DFR MM CLO”). While the Gillespie management contract did relate to the core business, we do not have a presence in Europe at this time. Our investments in and rights to manage the DFR MM CLO likewise were related to our core expertise in corporate credit obligations, but management decided to sell these interests in the DFR MM CLO because (i) the DFR MM CLO did not generate contractual investment advisory fee revenues, (ii) the risk profile of the loans underlying our investment in DFR MM CLO were not deemed suitable, and (iii) it tied up a substantial amount of capital.

As we focus on growing our core asset management business, we expect to utilize our cash to capitalize or seed new investment vehicles generating investment advisory fee revenues, including warehouses from time-to-time to facilitate closing

42

new CLOs or other funds, and co-investments alongside third party investors in new CLOs we manage. We may also utilize our liquidity to acquire SSCLs directly, generally to warehouse such SSCLs until they can be included as collateral for new CLOs and other funds we manage. We may also utilize cash and other sources of liquidity to consummate further strategic business combinations.

Following the Merger, our operations were moved from Rosemont, Illinois to Legacy CIFC’s office in New York, New York, now our headquarters. Integration of the management teams is now complete and we have made several key additions to the management team.
 
As part of the re-evaluation of our view of the business following the Merger, we developed a non-GAAP financial measure, Adjusted Earnings Before Taxes (“AEBT”). We believe AEBT reflects the nature and substance of our business and the economic results driven by investment advisory fee revenues received from the management of client funds, which are primarily CLOs. We are required under GAAP to consolidate into our financial statements certain variable interest entities (“VIEs”), which include certain of the CLOs, CDOs and other entities we manage (as described in further detail below under Required Consolidation of Consolidated Variable Interest Entities ). This required consolidation results in a presentation that materially differs from the way management views the business. Management expects to continue to develop and review our non-GAAP financial measures. See AEBT (Non-GAAP) for a complete description, reconciliation and discussion of AEBT.
 
GECC Transaction
 
On September 24, 2012 (the "Closing Date"), the Company closed a five year strategic relationship with General Electric Capital Corporation's (“GE Capital”) Bank Loan Group. The Company believes that this strategic relationship could provide CIFC with significant new opportunities to create new CIFC-managed investment products, including those involving GE Capital loan originations and/or vehicles for which GE Capital provides financing. Further, partnering with GE Capital positions the Company for unique opportunities given GE Capital's strength as a leading corporate lender coupled with CIFC's loan asset management platform.

Pursuant to the transaction: (i) a commercial council (the “Commercial Council”) comprised of senior members of both GE Capital and the Company was formed to explore joint business opportunities; (ii) the Company and GE Capital entered into a referral agreement (the “Referral Agreement”) pursuant to which (a) GE Capital will refer certain potential investment advisory clients (“Referred Clients”) to the Company for a period of five years (which may be extended for up to two consecutive one year periods) and (b) the Company is obligated to pay GE Capital 15% of any advisory fees in excess of $9.0 million earned from Referred Clients in the aggregate; and (iii) GE Capital Debt Advisors LLC, a wholly owned indirect subsidiary of GE Capital (“GECDA”), exited the business of providing certain loan management services to third parties and assigned to CIFCAM its role as manager of four “Navigator” CLOs. The transaction described in this paragraph shall hereinafter be referred to as the “GECC Transaction”.

The GECC Transaction is considered a taxable business combination in accordance with ASC Topic 805- Business Combinations (“ASC Topic 805”). As consideration for the GECC Transaction, on the Closing Date the Company, (i) issued 1.0 million shares of its common stock to GE Capital Equity Investments, Inc., a wholly-owned subsidiary of GE Capital (“GECEII”), with a Closing Date fair value of $7.5 million , (ii) issued a warrant to GECEII to purchase 2.0 million shares of a newly created class of non-voting stock (the “GECEII Warrant”) at a per share exercise price of $6.375 with an estimated Closing Date fair value of $3.7 million and (iii) paid to GECDA $4.5 million in cash, subject to certain adjustments. As a result of the GECC Transaction the Company recorded intangible assets related to the acquired management agreements and Referral Arrangement (a defined term intended to encompass both referrals under the Referral Agreement described herein and any other business GE Capital may refer to us) of $3.7 million and $3.8 million , respectively, goodwill of $8.1 million and other assets of $0.1 million .
 
Core Asset Management Activities
 
We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located primarily in North America, Europe, Asia and Australia. Our existing investment products are primarily CLOs and also include CDOs and other investment vehicles. These investment products are special purpose entities that pool the capital of multiple investors. The investment advisory fees paid to us by these investment products are our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of management fees based on the amount of assets held in the investment product and, in certain cases, include incentive fees based on the returns generated for certain investors.
 

43

Investment advisory fees differ from product to product, but in general for CLOs, the primary investment product we manage, consist of the following:
 
•
Senior management fees (payable before the interest payable on the debt securities issued by such CLOs) that generally range from 12.5 to 20 basis points annually on the principal balance of the underlying collateral of such CLOs.
 
•
Subordinated management fees (payable after the interest payable on the debt securities issued by such CLOs and certain other expenses) that generally range from 15 to 35 basis points annually on the principal balance of the underlying collateral of such CLOs.
 
•
Incentive fees which vary based on the terms of each CLO. Certain CLOs do not pay incentive fees at all or have only an incentive fee that is paid to the manager thereof after certain investors’ returns exceed an internal rate of return hurdle. Upon achievement of this hurdle, the manager is paid a percentage (generally 20%) of residual cash flows in excess of this hurdle. A limited number of CLOs also have an incentive fee which is paid to the manager thereof after investors’ annual cash on cash returns exceed a hurdle. Upon achievement of this hurdle, the manager is paid an additional fee (generally 15 basis points annually on the principal balance of the underlying collateral of the CLO).
 
Investment advisory fees on the CDOs we manage also differ from product to product, but in general they consist of a senior management fee (payable before the interest payable on the debt securities issued by such CDOs) that ranges from 5 to 25 basis points annually of the principal balance of the underlying collateral of such CDOs and a subordinate management fee (payable after the interest payable on the debt securities issued by such CDOs and certain other expenses) that ranges from 5 to 35 basis points annually of the principal balance of the underlying collateral of such CDOs. Only a limited number of the CDOs we manage are currently paying subordinated management fees.

Required Consolidation of Consolidated Variable Interest Entities
 
We are required to consolidate into our financial statements certain VIEs, which include certain of the CLOs, CDOs and other entities we manage in accordance with consolidation guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810— Consolidation (“ASC Topic 810”), as amended by Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”) as they are VIEs with respect to which we are deemed to be the primary beneficiary.
 
As of September 30, 2012 , we consolidated 23 CLOs and one CDO (the “Consolidated CLOs”), under the amendments to ASC Topic 810. The Consolidated CLOs are comprised of: (i)  six CLOs and one CDO we began to consolidate on January 1, 2010 (the adoption date of the amendments to ASC Topic 810), (ii)  four CLOs we began to consolidate on June 9, 2010 in conjunction with the acquisition of CNCIM (the “CNCIM CLOs”), (iii)  ten CLOs we began to consolidate on April 13, 2011 in conjunction with the Merger (the “CIFC CLOs”), and (iv)  three new CLOs closed or newly consolidated during 2012. The three newly consolidated CLOs include (i) CIFC Funding 2011-I, Ltd. (“CIFC CLO 2011-I”) which we began to consolidate upon its close in January 2012, (ii) CIFC Funding 2012-I, Ltd. ("CIFC CLO 2012-I") which we began to consolidate upon its close in July 2012, and (iii) Navigator CDO 2006, Ltd. ("Navigator 2006 CLO") which we began to consolidate on the Closing Date of the GECC Transaction.
 
The assets of the Consolidated CLOs are held solely as collateral to satisfy the obligations of the Consolidated CLOs. We do not own and have no right to the benefits from, nor do we bear the risks associated with, the assets held by the Consolidated CLOs, beyond our minimal direct investments and beneficial interests in, and investment advisory fees generated from, the Consolidated CLOs. If CIFC were to liquidate, the assets of the Consolidated CLOs would not be available to our general creditors, and as a result, we do not consider them our assets. Additionally, the investors in the Consolidated CLOs have no recourse to our general assets for the debt issued by the Consolidated CLOs. Therefore, this debt is not our obligation.
 
In addition to the Consolidated CLOs, we consolidate or have consolidated certain other VIEs. We consolidated the DFR MM CLO since its inception in 2007 because we owned all of its subordinated notes. On February 7, 2012, we sold our investments in and our rights to manage the DFR MM CLO for $36.5 million and deconsolidated the entity.  We consolidated a special purpose vehicle (the “Warehouse SPV”) since its inception during the second quarter of 2011.  The Warehouse SPV entered into a total return swap (the “Warehouse TRS”) and the reference obligations under the Warehouse TRS agreement were SSCL exposures that we accumulated and were ultimately included in CIFC CLO 2011-I.  We deconsolidated the Warehouse SPV in January 2012 in conjunction with the settlement of the Warehouse TRS and the closing of CIFC CLO 2011-I. Although we consolidated all of the assets and liabilities of the Warehouse SPV, our maximum exposure to loss was limited

44

to our investment in this entity, which was $46.5 million as of December 31, 2011 . In September 2012, we began consolidating a special purpose vehicle, CIFC Funding 2012-III, Ltd. ("CIFC 2012-III Warehouse"), an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. Our maximum exposure to loss is limited to our $25.2 million investment (as of September 30, 2012) in the entity.

Collateralized Loan Obligations
 
The term CLO (which for purposes of this section also includes the term CDO unless otherwise noted) generally refers to a special purpose vehicle that owns a portfolio of investments (SSCLs in the case of CLOs and typically asset-backed or other securities in the case of CDOs) and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period which they are allowed to make investments and reinvest capital as it becomes available.
 
CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is issued at a specified spread over LIBOR and normally has the first claim on the earnings on the CLO’s investments after payment of certain fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLOs’ investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is commonly referred to as the CLO’s “subordinated notes” or "equity." The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLOs’ investments after all of the other tranches of notes and certain other fees and expenses are paid. While the majority of the subordinated notes of the CLOs we manage are owned by third parties, we do own a portion of the subordinated note tranches of certain of the CLOs we manage. Our investments and beneficial interests in the Consolidated CLOs amounted to $37.6 million and $7.0 million as of September 30, 2012 and December 31, 2011 , respectively.
 
CLOs, which are designed to serve as investments for third party investors, generally have an investment manager to select and actively manage the underlying assets to achieve target investment performance, including avoidance of loss. In exchange for these services, CLO managers typically receive three types of investment advisory fees: senior management fees, subordinated management fees and incentive fees. CLOs also generally appoint a trustee and collateral administrator, who are responsible for holding the CLOs’ investments, collecting investment income and distributing that income in accordance with the waterfall.
 
Market and Economic Conditions
 
Market conditions improved in the quarter as the economy continued its stable but slow rate of growth. Price volatility in financial assets moderated in the absence of surprises, particularly with respect to the Euro zone. The syndicated loan market experienced generally larger volumes with a vast majority of the new loans brought to market used to refinance existing loans, while prices firmed in the absence of net new supply. The CLO market set a post crisis new issuance record and benefited from a number of new entrants, particularly in the senior most level of the capital structure. As CLO tranche yields tightened throughout the quarter all aspects of the Company's business benefited from favorable market and economic conditions.

AUM
 
Investment advisory fees paid by the investment products we manage on behalf of third party investors are our primary source of revenue. These fees typically consist of management fees based on the account’s assets and, in some cases, incentive fees based on the returns we generate for the account.
 

45


The following table summarizes the AUM for our significant investment product categories:
 
 
September 30, 2012
 
June 30, 2012
 
December 31, 2011
 
Number of Accounts
 
AUM (1)
 
Number of Accounts
 
AUM (1)
 
Number of Accounts
 
AUM (1)
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
 
(In thousands)
CLOs
31

 
$
10,653,465

 
28

 
$
9,946,769

 
29

 
$
10,555,255

Other Loan-Based Products
2

 
320,042

 
1

 
133,828

 
1

 
73,249

Total Loan-Based AUM
33

 
10,973,507

 
29

 
10,080,597

 
30

 
10,628,504

ABS CDOs
10

 
2,514,437

 
10

 
2,621,011

 
10

 
2,931,478

Corporate Bond CDOs
4

 
96,034

 
4

 
104,165

 
4

 
271,072

Total AUM
47

 
$
13,583,978

 
43

 
$
12,805,773

 
44

 
$
13,831,054

_________________________________
(1)
AUM numbers generally reflect the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLOs and CDOs and are as of the date of the last trustee report received for each CLO and CDO prior to the respective AUM date.
 
During the three and nine months ended September 30, 2012 , total AUM increased by $0.8 billion and decreased by $0.2 billion , respectively. During the three and nine months ended September 30, 2012 , CLO AUM increased by $0.7 billion and $0.1 billion , respectively. During the three months ended September 30, 2012 , CLO AUM increased primarily due to (i) the successful close of CIFC CLO 2012-I during July 2012 with AUM of $0.4 billion as of September 30, 2012 , (ii) the completion of the GECC Transaction which resulted in the acquisition of the rights to manage the four Navigator CLOs with AUM of $0.7 billion as of September 30, 2012 , partially offset by (iii) the call of two CLOs we previously managed, Primus CLO I, Ltd. (“Primus I”) and Long Grove CLO Ltd., which were substantially redeemed in the third quarter and together reduced CLO AUM by approximately $0.4 billion . During the nine months ended September 30, 2012 , CLO AUM activity also included an increase for the successful close of CIFC CLO 2011-I during January 2012 with AUM of $0.4 billion as of September 30, 2012 and declines in CLO AUM for those CLOs that are out of their "reinvestment periods", after which periods capital in such funds is returned to investors as the underlying assets held by them pay down. Most of the CLOs and CDOs we manage have passed their first optional call date and are generally callable by their subordinated note holders, subject to satisfaction of certain conditions.

CDO AUM declined by $0.1 billion and $0.6 billion during the three and nine months ended September 30, 2012 , respectively, primarily due to the exit of their scheduled “reinvestment periods”. All existing CDOs are static and, as we do not expect to close new CDOs, we expect CDO AUM to continue to decline going forward as these funds run-off per their contractual terms.
 
GAAP Results
 
The sections below up to and including Liquidity and Capital Resources are presented in accordance with GAAP, unless otherwise noted.

Results of Consolidated Operations
 
The following table presents our comparative condensed consolidated statement of operations for the three and nine months ended September 30, 2012 and 2011 .
 
Please note that management also uses non-GAAP financial measures to analyze performance and manage operations. We believe the non-GAAP financial measure reflected in the AEBT (Non-GAAP) section below should be reviewed in conjunction with our condensed consolidated financial statements and discussion of our GAAP Results. A detailed description and reconciliation from GAAP net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measure used by management, is set forth in the AEBT (Non-GAAP) section.

46

 
Three months ended September 30,
 
Variance
 
Nine months ended September 30,
 
Variance
 
2012
 
2011
 
2012 vs. 2011
 
2012
 
2011
 
2012 vs. 2011
 
(In thousands, except share and per share amounts)
Revenues
 

 
 

 
 

 
 

 
 

 
 

Investment advisory fees
$
2,750

 
$
3,108

 
$
(358
)
 
$
8,048

 
$
8,121

 
$
(73
)
Net investment and interest income:
 

 
 

 
 

 
 

 
 

 
 

Investment and interest income
76

 
1

 
75

 
225

 
3,329

 
(3,104
)
Interest expense
—

 
1

 
(1
)
 
1

 
349

 
(348
)
Net investment and interest income
76

 
—

 
76

 
224

 
2,980

 
(2,756
)
Total net revenues
2,826

 
3,108

 
(282
)
 
8,272

 
11,101

 
(2,829
)
Expenses
 

 
 

 
 

 
 

 
 

 
 

Compensation and benefits
5,188

 
5,262

 
(74
)
 
16,479

 
14,225

 
2,254

Professional services
1,220

 
1,544

 
(324
)
 
3,620

 
3,884

 
(264
)
Insurance expense
486

 
435

 
51

 
1,457

 
1,324

 
133

Other general and administrative expenses
335

 
748

 
(413
)
 
1,887

 
2,437

 
(550
)
Depreciation and amortization
3,802

 
4,907

 
(1,105
)
 
13,325

 
11,572

 
1,753

Occupancy
416

 
440

 
(24
)
 
1,057

 
1,037

 
20

Impairment of intangible assets
—

 
—

 
—

 
1,771

 
1,104

 
667

Restructuring charges
—

 
783

 
(783
)
 
3,923

 
4,104

 
(181
)
Total expenses
11,447

 
14,119

 
(2,672
)
 
43,519

 
39,687

 
3,832

Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

 
 

 
 

Net gain (loss) on investments, loans, derivatives and liabilities
(5,768
)
 
4,588

 
(10,356
)
 
(8,966
)
 
5,095

 
(14,061
)
Corporate interest expense
(1,487
)
 
(1,445
)
 
(42
)
 
(4,422
)
 
(4,222
)
 
(200
)
Net gain on the sale of management contract
—

 
—

 
—

 
5,772

 
—

 
5,772

Strategic transactions expenses
(657
)
 
(71
)
 
(586
)
 
(657
)
 
(1,459
)
 
802

Other, net
11

 
4

 
7

 
(468
)
 
7

 
(475
)
Net other income (expense) and gain (loss)
(7,901
)
 
3,076

 
(10,977
)
 
(8,741
)
 
(579
)
 
(8,162
)
Operating income (loss)
(16,522
)
 
(7,935
)
 
(8,587
)
 
(43,988
)
 
(29,165
)
 
(14,823
)
Results of Consolidated Variable Interest Entities
 

 
 

 
 

 
 

 
 

 
 

Net gain (loss) from activities of Consolidated Variable Interest Entities
(150,612
)
 
(218,335
)
 
67,723

 
(90,961
)
 
(309,844
)
 
218,883

Expenses of Consolidated Variable Interest Entities
(2,936
)
 
(1,847
)
 
(1,089
)
 
(6,374
)
 
(4,794
)
 
(1,580
)
Net results of Consolidated Variable Interest Entities
(153,548
)
 
(220,182
)
 
66,634

 
(97,335
)
 
(314,638
)
 
217,303

Income (loss) before income tax expense (benefit)
(170,070
)
 
(228,117
)
 
58,047

 
(141,323
)
 
(343,803
)
 
202,480

Income tax expense (benefit)
(1,757
)
 
(3,386
)
 
1,629

 
2,741

 
(4,523
)
 
7,264

Net income (loss)
(168,313
)
 
(224,731
)
 
56,418

 
(144,064
)
 
(339,280
)
 
195,216

Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
169,001

 
218,807

 
(49,806
)
 
137,849

 
329,193

 
(191,344
)
Net income (loss) attributable to CIFC Corp.
$
688

 
$
(5,924
)
 
$
6,612

 
$
(6,215
)
 
$
(10,087
)
 
$
3,872

Earnings (loss) per share -
 

 
 

 
 

 
 

 
 

 
 

Basic
$
0.03

 
$
(0.29
)
 
$
0.32

 
$
(0.31
)
 
$
(0.59
)
 
$
0.28

Diluted
$
0.03

 
$
(0.29
)
 
$
0.32

 
$
(0.31
)
 
$
(0.59
)
 
$
0.28

Weighted-average number of shares outstanding -
 
 

 
 

 
 

 
 

 
 

Basic
19,957,041

 
20,426,118

 
 

 
20,201,304

 
17,038,258

 
 

Diluted
21,907,984

 
20,426,118

 
 

 
20,201,304

 
17,038,258

 
 

 

47

Net income attributable to CIFC Corp. was $0.7 million , or $0.03 per fully diluted share, for the three months ended September 30, 2012 , compared to a net loss attributable to CIFC Corp. of $5.9 million , or $0.29 per fully diluted share, for the three months ended September 30, 2011 . Net loss attributable to CIFC Corp. was $6.2 million , or $0.31 per fully diluted share, for the nine months ended September 30, 2012 , compared to a net loss attributable to CIFC Corp. of $10.1 million , or $0.59 per fully diluted share, for the nine months ended September 30, 2011 .
 
Net revenues decreased by $ 0.3 million and $2.8 million for the three and nine months ended September 30, 2012 , respectively, compared to the prior year periods. The decrease for the nine months ended September 30, 2012 is primarily the result of a decrease in net investment and interest income of $2.8 million , compared to the prior year period, due to the liquidation of the RMBS portfolio during the second quarter of 2011.
 
Total expenses decreased by $2.7 million for the three months ended September 30, 2012 , compared to the prior year period. This decrease was primarily driven by a $1.1 million decline in depreciation and amortization and a $0.8 million decline in restructuring charges.  The decline in depreciation and amortization is primarily the result of the inclusion during the prior year period of amortization on technology intangible assets which were fully amortized as of June 30, 2012 and declines in amortization on intangible assets associated with investment management contracts. Total expenses increased by $3.8 million for the nine months ended September 30, 2012, compared to the prior year period. The increase was primarily driven by increases in compensation and benefits of $2.3 million and depreciation and amortization of $1.8 million . The increase in compensation and benefits includes the effects of the Merger as well as several additions to the senior management team. The increase in depreciation and amortization for the nine months ended September 30, 2012, compared to the prior year period, is primarily due to the current year period inclusion of amortization on intangible assets acquired in the Merger for the entire period and the prior year period including the amortization on those intangible assets in the post-Merger period only. This increase in depreciation and amortization was partially offset by the decreases in depreciation and amortization during the three months ended September 30, 2012, as compared to the prior year period, described above.
 
Net other income (expense) and gain (loss) decreased by $11.0 million and $8.2 million for the three and nine months ended September 30, 2012, respectively, compared to the prior year periods.  These decreases are primarily the result of fluctuations in fair value of contingent liabilities that resulted in increased unrealized losses during the three and nine months ended September 30, 2012 and certain other items which were exclusive to the 2011 periods. We experienced increased losses on our contingent liabilities of $4.5 million and $4.9 million for the three and nine months ended September 30, 2012, respectively, as compared to the prior year periods. Additionally, the three and nine months ended September 30, 2011 included gains of $6.2 million and $7.4 million , respectively, on the change in fair value of the conversion feature on our senior subordinated convertible notes (the “Convertible Notes”) which until the expiration of the anti-dilution provisions associated with the conversion feature in December 2011, was deemed to be an embedded derivative instrument (the “Embedded Derivative”) and was required to be recorded at fair value. The nine months ended September 30, 2011 also included $2.2 million of net gains on RMBS and other proprietary investments which we no longer hold. These decreases in net other income (expense) and gain (loss) were partially offset by the $5.8 million gain on the sale of our rights to manage Gillespie during the nine months ended September 30, 2012.

Net results of Consolidated VIEs increased by $66.6 million and $217.3 million for the three and nine months ended September 30, 2012 , respectively, compared to the prior year periods. These increases are primarily the result of increases in net gain (loss) from activities of Consolidated VIEs of $67.7 million and $218.9 million for the three and nine months ended September 30, 2012 , respectively, compared to the prior year periods. This increase in net gain (loss) from activities of Consolidated VIEs is primarily the result of fluctuations in the valuation of the investments and debt of the Consolidated CLOs. In addition, the net results of Consolidated VIEs for the nine months ended September 30, 2011 do not include the activity of the CIFC CLOs prior to the April 13, 2011 closing date of the Merger. For the nine months ended September 30, 2012 and 2011 net results of Consolidated VIEs include net losses related to the CIFC CLOs of $52.8 million  and $162.5 million , respectively.
 
We recognized an income tax benefit of $1.8 million and income tax expense of $2.7 million for the three and nine months ended September 30, 2012 , respectively, compared to income tax benefits of $3.4 million and $4.5 million for the prior year periods, respectively.  Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the three months ended September 30, 2012 was 164% , compared to our effective tax rate for the three months ended September 30, 2011 of 36% .  Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the nine months ended September 30, 2012 was (79)% , compared to our effective tax rate for the nine months ended September 30, 2011 of 31% .  The difference between our statutory rate and our effective tax rate for the three and nine months ended September 30, 2012 is primarily attributable to state income taxes and certain discrete and permanent adjustments during the period, including fair value changes on certain contingent liabilities related to the Merger and the sale of our rights to manage Gillespie.  We expect the tax rate for the full year 2012 to approximate (9)% , excluding discrete items. This difference between our statutory tax rate and our effective rate is primarily state income taxes and the result of permanent tax adjustments related to the Merger.

48


Changes in Financial Condition
 
During the three months ended September 30, 2012, we completed the GECC Transaction. Additionally, during the three months ended September 30, 2012, we made a $9.0 million investment in CIFC CLO 2012-I and a $4.5 million investment in another Legacy CIFC CLO. We also invested $25.1 million ( $13.6 million in cash and $11.5 million in SSCL's) in the preference shares of the CIFC 2012-III Warehouse.

Additionally, during the nine months ended September 30, 2012 , we settled our obligations under the Warehouse TRS and closed CIFC CLO 2011-I in January 2012. We received proceeds of $47.4 million upon the settlement of the Warehouse TRS, of which we invested $17.4 million in the subordinated notes of CIFC CLO 2011-I. During January 2012 we also completed the sale of our rights to manage our sole European CLO, Gillespie, for a $7.1 million payment on the closing date and contingent payments of up to approximately $1.1 million. During February 2012, we completed the sale of our investments in and our rights to manage the DFR MM CLO for an aggregate price of $36.5 million and deconsolidated this CLO.
 
Liquidity and Capital Resources
 
Cash Flows
 
In accordance with GAAP, we are required to consolidate certain VIEs as discussed in Required Consolidation of Consolidated Variable Interest Entitie s.  As a result, our condensed consolidated statements of cash flows include the cash flows of these VIEs.  Cash held by the consolidated VIEs is not available for our general use, and our cash is not available for the general use of the consolidated VIEs.  Accordingly, the table below presents a summary of our condensed consolidated statement of cash flows separately and before consolidation of the consolidated VIEs, as the cash flows of the consolidated VIEs do not form part of our cash flow management process, nor do they form part of our liquidity evaluations and decisions for the reasons noted. 
 
Before
Consolidation
 
Impact of
Consolidation
 
Total
 
(In thousands)
Cash and cash equivalents, January 1, 2012
$
35,973

 
$
—

 
$
35,973

Cash flows from operating activities
41,005

 
77,940

 
118,945

Cash flows from investing activities
6,342

 
(137,782
)
 
(131,440
)
Cash flows from financing activities
(20,295
)
 
59,842

 
39,547

Foreign currency translation
2

 
—

 
2

Net change in cash and cash equivalents
27,054

 
—

 
27,054

Cash and cash equivalents, September 30, 2012
$
63,027

 
$
—

 
$
63,027

 
The discussion that follows focuses on our cash flows as presented in the “Before Consolidation” column of the table.

Our operating activities provided cash of $41.0 million for the nine months ended September 30, 2012 . Significant operating activities included the receipt of proceeds from our investment in the Warehouse SPV of $47.4 million and an investment in CIFC 2012-III Warehouse of $25.1 million. During the period we also utilized cash to acquire positions in our on-balance sheet warehouse.  While we sold all of our on-balance sheet warehouse positions prior to September 30, 2012 , we had a net receivable of $8.4 million for net unsettled purchases and sales.  Additionally, cash flows from operating activities include the receipt of investment advisory fees and net investment and interest income and the payment of operating expenses.
 
Our investing activities provided cash of $6.3 million for the nine months ended September 30, 2012 . Investing activities included proceeds from the sale of DFR MM CLO of $36.5 million and proceeds from the sale of the Gillespie CLO management contract of $6.5 million. These cash inflows were partially offset by cash outlows for the purchase of investments in several CLOs we manage of $30.8 million, the Closing Date cash payment for the GECC Transaction of $4.5 million and purchases of equipment and improvements of $1.8 million.
 
Our financing activities used cash of $20.3 million for the nine months ended September 30, 2012 .  Financing activities primarily consisted of $14.0 million of payments associated with our contingent liabilities (See Contingent Liabilities and Other Commitments below for additional information), $3.8 million in share repurchases and a $2.5 million deferred purchase payment related to the Merger.

49

 
Liquidity
 
We believe that our current cash and cash equivalents, along with expected future cash flows from operations, among other things, are adequate to meet our anticipated liquidity requirements. As of September 30, 2012 , unrestricted cash and cash equivalents totaled $63.0 million .
 
Other Sources and Uses of Funds
 
Share Repurchase Program
 
On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. During the three and nine months ended September 30, 2012 , we repurchased 61,333 and 572,608 shares in open-market transactions for an aggregate cost (including transaction costs) of $0.4 million and $3.8 million , respectively, with an average price per share of $7.26 and $6.58 , respectively.  As of September 30, 2012 we were authorized to repurchase up to an additional $6.2 million of our common stock.
 
Legacy CIFC Merger and CNCIM Acquisition Deferred Purchase Payments
 
The final remaining deferred purchase payment related to the Merger is $2.5 million, payable on April 13, 2013. During the three months ended June 30, 2012, we made a $2.5 million payment for the second installment of the deferred purchase payments related to the Merger. Remaining deferred purchase payments related to the acquisition of CNCIM aggregate to $4.5 million and are payable in equal annual installments of $1.5 million with the next payment being payable on December 9, 2012. The present value of the remaining deferred purchase payments of $6.1 million is included in the condensed consolidated balance sheets.
 
Contingent Liabilities and Other Commitments
 
In connection with the Merger, we established or assumed certain contingent liabilities that combine to have an estimated fair value of $34.7 million as of September 30, 2012 .

The contingent liabilities that resulted from the Merger have an estimated fair value of $29.4 million as of September 30, 2012 and are payable to CIFC Parent. The terms of these payments are as follows: (i) the first $15.0 million of incentive fees received by the combined company from certain CLOs managed by CIFCAM as of April 13, 2011 (the “Merger Closing Date”), (ii) 50% of any incentive fees in excess of $15.0 million in aggregate received by the combined company over the next ten years from certain CLOs currently managed by CIFCAM and (iii) payments relating to the present value of any such incentive fees from certain CLOs managed by CIFCAM as of the Merger Closing Date that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. During the three and nine months ended September 30, 2012 , we made payments of $1.6 million and $3.9 million , respectively, related to these contingent liabilities.  As of September 30, 2012 and December 31, 2011 , the remaining payments under item (i) were $8.3 million and $12.1 million , respectively.
 
The contingent liabilities assumed in the Merger with Legacy CIFC primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree on December 1, 2010 and contingent liabilities Legacy CIFC assumed in its acquisition of CypressTree related to required payments to the prior sellers of CypressTree and the broker of that sale. The assumed contingent liabilities have an estimated fair value of $5.3 million as of September 30, 2012 and are based on a fixed percentage of certain advisory fees from the CypressTree CLOs. These fixed percentages vary by CLO and have a minimum fixed percentage of 55% . During the three and nine months ended September 30, 2012 , we made payments of $1.6 million and $10.1 million , respectively, related to these contingent liabilities.  These payments during the three and nine months ended September 30, 2012 , included $0.3 million and $6.2 million , respectively, of one-time earn out payments for three of the CypressTree management contracts which will reduce the required payments going forward related to such management contracts.
 
On September 16, 2011, we entered into a new lease agreement for our corporate headquarters at 250 Park Avenue, 4 th  floor, New York, New York (the “Lease”). The Lease commenced on July 6, 2012 and has a term of 10.5 years . The Lease replaced the prior lease for our corporate headquarters, which expired on July 20, 2012. The future minimum commitments under the Lease are as follows:
 

50

 
(In thousands)
Remainder of 2012
$
402

2013
1,205

2014
1,607

2015
1,607

2016
1,607

Thereafter
10,296

 
$
16,724

 
On March 16, 2012, we entered into a Lease Termination Agreement (the “Agreement”) with GLL US Office, LP (the “Landlord”) related to our lease of the 12 th  floor of 6250 North River Road, Rosemont, Illinois 60018. The effect of the Agreement was to terminate, as of March 31, 2012 upon satisfaction of the conditions set forth in the Agreement, the lease dated July 11, 2005, as amended on October 29, 2009, between the Landlord and CIFC Corp (the “Rosemont Lease”). In order for the incoming tenant to assume a lease on off-market terms and to cover certain other expenses related to the termination of the Rosemont Lease, we paid the Landlord, the incoming tenant and our broker aggregate fees equal to approximately $2.6 million , net of our $0.5 million security deposit that was returned by the Landlord. The execution of the Agreement was in furtherance of our efforts following the Merger to consolidate operations at our corporate headquarters in New York, New York.

CIFC 2012-III Warehouse

In September 2012, we began consolidating a special purpose vehicle, CIFC 2012-III Warehouse, an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. Our maximum exposure to loss is limited to our $25.2 million investment (as of September 30, 2012) in the entity. We consolidated assets of $38.1 million and liabilities of $12.9 million related to the CIFC 2012-III Warehouse as of September 30, 2012. For the three and nine months ended September 30, 2012 , we recorded net income of $0.1 million in net results of Consolidated VIEs within our condensed consolidated statements of operations for CIFC 2012-III Warehouse. 
 
Total Return Swap Warehouse for CIFC CLO 2011-I
 
During the second quarter of 2011, we entered into the Warehouse TRS with Citibank through the Warehouse SPV. On January 19, 2012, the Warehouse SPV settled its obligations under the Warehouse TRS and acquired the loans which were reference obligations under the Warehouse TRS from the warehouse provider in connection with closing CIFC CLO 2011-I. We received proceeds of $47.4 million upon the settlement of the Warehouse TRS, of which we invested $17.4 million in the subordinated notes of CIFC CLO 2011-I and paid $3.6 million in expenses related to the closing of CIFC CLO 2011-I. These expenses were included within professional fees in our condensed consolidated statements of operations for the three months ended December 31, 2011 because they were estimable and probable as of December 31, 2011.

For the three and nine months ended September 30, 2012 , we recorded net income of zero and $1.4 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV.  For the three and nine months ended September 30, 2011 , we recorded net losses of $5.6 million  and $5.0 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV.
 
DFR MM CLO
 
Prior to the sale of our investments in and our rights to manage the DFR MM CLO in February 2012, our investments in DFR MM CLO consisted of subordinated notes with a face amount of $50.0 million and debt with a face amount of $19.0 million . Prior to the sale, the economic impact of our investments in DFR MM CLO had been determined by the cash flows distributed to us on these investments. From the date of our initial investment through the date of sale, such distributions totaled $52.2 million on our subordinated notes investment and $4.8 million in interest on our debt investment. For the three and nine months ended September 30, 2011 , we received cash flow distributions from the DFR MM CLO consisting of interest on our debt investment of $0.2 million and $0.6 million , respectively, and distributions on our subordinated note investment of $2.8 million and $9.4 million , respectively, which were eliminated in consolidation. No distributions were received during the three and nine months ended September 30, 2012 .


51

For the three and nine months ended September 30, 2012 , we recorded net losses of zero and $0.2 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the DFR MM CLO.  For the three and nine months ended September 30, 2011 , we recorded net losses of $5.2 million and $5.0 million , respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the DFR MM CLO.  

Long-Term Debt
 
Recourse debt refers to debt where the lenders have recourse to our unencumbered assets to satisfy our obligations under such debt. All of the debt of the Consolidated Variable Interest Entities is non-recourse debt. Non-recourse debt refers to debt where the lenders have recourse only to specific assets pledged as collateral to the lenders.
 
The following table summarizes our long-term debt:
 
 
Carrying
Value
 
Current
Weighted Average
Borrowing Rate
 
Weighted Average
Remaining Maturity
 
(In thousands)
 
 
 
(In years)
September 30, 2012:
 

 
 

 
 
Recourse Debt:
 

 
 

 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
23.1
October Junior Subordinated Notes (2)
25,000

 
3.95
%
 
23.1
Convertible Notes (3)
18,025

 
9.00
%
 
5.2
Total Recourse Debt
138,025

 
2.58
%
 
20.8
Consolidated Variable Interest Entities Debt:
 

 
 

 
 
Consolidated CLOs (4)
8,535,621

 
1.17
%
 
7.6
Total long-term debt
$
8,673,646

 
1.19
%
 
7.8
December 31, 2011:
 

 
 

 
 
Recourse Debt:
 

 
 

 
 
March Junior Subordinated Notes (1)
$
95,000

 
1.00
%
 
23.9
October Junior Subordinated Notes (2)
25,000

 
3.93
%
 
23.9
Convertible Notes (3)
17,455

 
8.00
%
 
6.0
Total Recourse Debt
137,455

 
2.42
%
 
21.6
Consolidated Variable Interest Entities Debt:
 

 
 

 
 
DFR MM CLO (5)
93,269

 
1.68
%
 
7.6
Consolidated CLOs (4)
7,559,568

 
1.01
%
 
7.3
Total Consolidated Variable Interest Entities Debt
7,652,837

 
1.02
%
 
7.3
Total long-term debt
$
7,790,292

 
1.04
%
 
7.5
 _________________________________
(1)
The $95.0 million in aggregate principal amount of the March Junior Subordinated Notes bear interest at an annual rate of 1% through April 30, 2015. Thereafter, the March Junior Subordinated Notes will bear interest at an annual rate of LIBOR plus 2.58% until maturity on October 30, 2035.
(2)
The $25.0 million of aggregate principal amount of the October Junior Subordinated Notes bear interest at an annual rate of LIBOR plus 3.50% and mature on October 30, 2035.
(3)
The Convertible Notes principal outstanding of $25.0 million is presented net of a $7.0 million discount as of September 30, 2012 and a $7.5 million discount as of December 31, 2011 . The Convertible Notes currently pay interest at the 9.00% stated rate; however, including the discount, the effective rate of interest is 18.14% . The Convertible Notes will mature on December 9, 2017.
(4)
Long-term debt of the Consolidated CLOs is recorded at fair value. This includes the fair value of the subordinated notes issued by the Consolidated CLOs. However, the subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate. The par value of the Consolidated CLOs long-term debt (including subordinated notes) was $9.1 billion and $8.9 billion as of September 30, 2012 and December 31, 2011 , respectively.

52

(5)
Excludes $19.0 million of DFR MM CLO Class D Notes and $50.0 million of subordinated notes that we previously owned and eliminated upon consolidation. Had this debt been included, the weighted-average borrowing rate would have been 2.14% as of December 31, 2011 . The subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate.
 
As a result of the February 2012 sale of our investments in and our rights to manage the DFR MM CLO, we deconsolidated the DFR MM CLO.  As of December 31, 2011 , the carrying value of the assets held in the DFR MM CLO, which are the only assets to which the DFR MM CLO debt holders have recourse for repayment was $130.3 million .
 
During the three months ended September 30, 2012 , the Consolidated CLOs issued $443.8 million of debt, paid down $380.1 million of their outstanding debt and distributed $63.7 million to the holders of their subordinated notes. During the nine months ended September 30, 2012 , the Consolidated CLOs issued $821.2 million of debt, made net borrowings under revolving credit facilities of $57.8 million , paid down $622.3 million of their outstanding debt and distributed $171.5 million to the holders of their subordinated notes. Additionally, the consolidation of Navigator 2006 CLO contributed an increase in Consolidate CLO debt of $313.1 million during the three and nine months ended September 30, 2012. The carrying value of the assets of the Consolidated CLOs, which are the only assets to which the Consolidated CLO debt holders have recourse for repayment was $9.1 billion and $8.0 billion as of September 30, 2012 and December 31, 2011 , respectively.
 

 
AEBT (Non-GAAP)
 
AEBT is a non-GAAP financial measure that management utilizes to analyze our performance and manage our operations. This non-GAAP financial measure was developed by management after the Merger given the shift to focus on our core asset management business. We believe AEBT reflects the nature and substance of the business and the economic results driven by investment advisory fee revenues from the management of client funds, which are primarily CLOs.
 
We are required under GAAP to consolidate certain VIEs, which include certain of the CLOs we manage. This required consolidation results in a presentation that materially differs from the way management views the business and as a result management developed AEBT, a non-GAAP metric for measuring performance of our core business.
 
AEBT includes the following:
 
1.
Investment advisory fees net of any fee sharing arrangements;
a.
In accordance with our revenue recognition policy, senior management fees are recognized as revenue on an accrual basis, while subordinated and incentive management fees are recognized on a cash basis.
2.
Net investment and interest income as follows:
a.
Distributions on our investments in CLO subordinated notes;
b.
Interest income on our investments in CLO debt investments;
c.
Net interest income from balance sheet investments (which included RMBS until the liquidation of that portfolio);
d.
Net investment and interest income from warehouses established from time-to-time to facilitate closing new CLOs or other funds and gains (losses) on assets within such warehouses, determined and accrued upon formalizing a transaction (not upon settlement);
e.
Realized gains (losses) from dispositions of core assets;
3.
Routine expenses directly attributable to generating revenues;
4.
Corporate interest expense;
5.
Depreciation and amortization expenses of fixed assets.
 
AEBT excludes the following:
 
1.
Realized and unrealized gains (losses) on dispositions of non-core assets;
2.
Unrealized gains (losses) on core assets;
3.
Non-recurring operating expenses, and one-time strategic transaction expenses (such as related to the GECC Transaction and Merger);
4.
Non-cash expenses such as amortization and impairment of intangible assets;
5.
Income taxes.
 

53

Detailed reconciliations from GAAP net income (loss) attributable to CIFC Corp. to AEBT are provided below within Reconciliation from GAAP to AEBT.
 
AEBT provided herein may not be comparable to similar measures presented by other companies, and is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore, may be defined differently by other companies. In addition, AEBT should be considered in addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.
 
The following table presents our adjusted components of AEBT for the three and nine months ended September 30, 2012 and 2011 :
 
 
Adjusted three months ended September 30,
 
 
 
Adjusted nine months ended September 30,
 
 
 
2012
 
2011
 
Variance 2012 vs. 2011
 
2012
 
2011
 
Variance 2012 vs. 2011
 
(In thousands)
Revenues
 

 
 

 
 

 
 

 
 

 
 

Investment advisory fees
$
13,613

 
$
11,985

 
$
1,628

 
$
37,692

 
$
28,517

 
$
9,175

Net investment and interest income:
 

 
 

 
 

 
 

 
 

 
 

Investment and interest income
1,822

 
5,651

 
(3,829
)
 
3,808

 
18,241

 
(14,433
)
Interest expense
—

 
582

 
(582
)
 
142

 
1,037

 
(895
)
Net investment and interest income
1,822

 
5,069

 
(3,247
)
 
3,666

 
17,204

 
(13,538
)
Total net revenues
15,435

 
17,054

 
(1,619
)
 
41,358

 
45,721

 
(4,363
)
Expenses
 

 
 

 
 

 
 

 
 

 
 

Compensation and benefits
5,188

 
5,262

 
(74
)
 
16,479

 
13,951

 
2,528

Professional services
1,220

 
1,544

 
(324
)
 
4,277

 
3,884

 
393

Insurance expense
486

 
435

 
51

 
1,457

 
1,324

 
133

Other general and administrative expenses
335

 
748

 
(413
)
 
1,887

 
2,437

 
(550
)
Depreciation and amortization
153

 
169

 
(16
)
 
324

 
463

 
(139
)
Occupancy
416

 
440

 
(24
)
 
1,057

 
1,037

 
20

Corporate interest expense
1,487

 
1,445

 
42

 
4,422

 
4,222

 
200

Total expenses
9,285

 
10,043

 
(758
)
 
29,903

 
27,318

 
2,585

AEBT (1)
$
6,150

 
$
7,011

 
$
(861
)
 
$
11,455

 
$
18,403

 
$
(6,948
)
_________________________________
(1)
See Reconciliation from GAAP to AEBT for detailed reconciliations from the GAAP net income (loss) attributable to CIFC Corp. to AEBT. We refined our definition of AEBT to include warehouse net investment and interest income during the fourth quarter of 2011. As such, the previously disclosed AEBT for the three and nine months ended September 30, 2011 have been recast to include such net investment and interest income.
 
The following sections provide a discussion of the variances in the adjusted components of AEBT for the periods presented.

54


Net Revenues

Investment Advisory Fees

The following table summarizes the investment advisory fee revenues from the CLOs, CDOs and other investment products we manage:
 
 
Three months ended September 30,
 
Variance
 
Nine months ended September 30,
 
Variance
 
2012
 
2011
 
2012 vs. 2011
 
2012
 
2011
 
2012 vs. 2011
 
(In thousands)
Senior Management Fees:
 

 
 

 
 

 
 

 
 

 
 

CLOs
$
4,114

 
$
4,134

 
$
(20
)
 
$
12,188

 
$
10,396

 
$
1,792

ABS CDOs
492

 
505

 
(13
)
 
1,498

 
1,562

 
(64
)
Corporate Bonds CDOs
120

 
224

 
(104
)
 
501

 
769

 
(268
)
Total Senior Management Fees
4,726

 
4,863

 
(137
)
 
14,187

 
12,727

 
1,460

Subordinated Management Fees:
 

 
 

 
 

 
 

 
 

 
 

CLOs
7,515

 
6,908

 
607

 
21,243

 
15,074

 
6,169

ABS CDOs
—

 
—

 
—

 
—

 
—

 
—

Corporate Bonds CDOs
—

 
—

 
—

 
72

 
156

 
(84
)
Total Subordinated Management Fees
7,515

 
6,908

 
607

 
21,315

 
15,230

 
6,085

Deferred Management Fees:
 

 
 

 
 

 
 

 
 

 
 

CLOs
438

 
—

 
438

 
561

 
—

 
561

ABS CDOs
—

 
—

 
—

 
—

 
—

 
—

Corporate Bonds CDOs
—

 
—

 
—

 
—

 
—

 
—

Total Deferred Management Fees
438

 
—

 
438

 
561

 
—

 
561

Incentive Management Fees:
 

 
 

 
 

 
 

 
 

 
 

CLOs
728

 
81

 
647

 
1,160

 
168

 
992

ABS CDOs
—

 
—

 
—

 
—

 
—

 
—

Corporate Bonds CDOs
—

 
—

 
—

 
—

 
2

 
(2
)
Total Incentive Management Fees
728

 
81

 
647

 
1,160

 
170

 
990

Total CLO and CDO Advisory Fees:
 

 
 

 
 

 
 

 
 

 
 

CLOs
12,795

 
11,123

 
1,672

 
35,152

 
25,638

 
9,514

ABS CDOs
492

 
505

 
(13
)
 
1,498

 
1,562

 
(64
)
Corporate Bonds CDOs
120

 
224

 
(104
)
 
573

 
927

 
(354
)
Total CLO and CDO Advisory Fees
$
13,407

 
$
11,852

 
$
1,555

 
$
37,223

 
$
28,127

 
$
9,096

Total Other Advisory Fees
206

 
133

 
73

 
469

 
390

 
79

Total Advisory Fee Revenues
13,613

 
11,985

 
1,628

 
37,692

 
28,517

 
9,175

   
During the three and nine months ended September 30, 2012 and 2011 , we earned investment advisory fees from our management of CLOs, CDOs and other investment products. Investment advisory fees from our management of CLOs and CDOs totaled $13.4 million and $37.2 million for the three and nine months ended September 30, 2012 , respectively, and $11.9 million and $28.1 million for the three and nine months ended September 30, 2011 , respectively. Investment advisory fees from CLOs comprised 94% and 93% of total investment advisory fees we earned during the three and nine months ended

55

September 30, 2012 , respectively, and 93% and 90% of total investment advisory fees we earned during the three and nine months ended September 30, 2011 , respectively.

CLO investment advisory fee revenue increased by $1.7 million and $9.5 million for the three and nine months ended September 30, 2012 , respectively, as compared to the prior year periods. The increases in CLO investment advisory fee revenues for the three months ended September 30, 2012 are primarily the result of the closing(s) of CIFC 2011-1 and CIFC 2012-1 during 2012. During the three months ended September 30, 2012, we collected the first payment of subordinated investment advisory fees for CIFC 2011-I. While most CLOs pay us advisory fees quarterly, a CLOs initial payment may relate to a period longer than one quarter. Additionally, during the three months ended September 30, 2012, we collected an incentive fee payment from a CLO which reached its incentive management fee hurdle during the period and a one-time deferred management fee payment. The increases in CLO investment advisory fee revenues for the nine months ended September 30, 2012 are primarily the result of the aforementioned and the addition of investment advisory fees from CIFCAM and CypressTree as a result of the Merger, which were only included in revenues during the 2011 period subsequent to the Merger.
 
Net investment and interest income
 
The following table summarizes our net investment and interest income:
 
 
Three months ended September 30,
 
Variance
 
Nine months ended September 30,
 
Variance
 
2012
 
2011
 
2012 vs. 2011
 
2012
 
 
2011
 
2012 vs. 2011
 
(In thousands)
Investment and interest income:
 

 
 

 
 

 
 

 
 
 

 
 

Investments in CLOs
$
1,455

 
$
3,871

 
$
(2,416
)
 
$
2,690

 
 
$
12,702

 
$
(10,012
)
RMBS
—

 
—

 
—

 
—

 
 
3,231

 
(3,231
)
Warehouse assets interest income
76

 
2,279

 
(2,203
)
 
903

 
 
2,687

 
(1,784
)
Warehouse assets realized gains (losses)
291

 
(500
)
 
791

 
212

(1
)
 
(480
)
 
692

Other investments
—

 
1

 
(1
)
 
3

 
 
101

 
(98
)
Total investment and interest income
1,822

 
5,651

 
(3,829
)
 
3,808

 
 
18,241

 
(14,433
)
Interest expense:
 

 
 

 
 

 
 

 
 
 

 
 

Repurchase agreements
—

 
—

 
—

 
—

 
 
347

 
(347
)
Warehouse liabilities
—

 
581

 
(581
)
 
141

 
 
688

 
(547
)
Other
—

 
1

 
(1
)
 
1

 
 
2

 
(1
)
Total interest expense
—

 
582

 
(582
)
 
142

 
 
1,037

 
(895
)
Net investment and interest income
$
1,822

 
$
5,069

 
$
(3,247
)
 
$
3,666

 
 
$
17,204

 
$
(13,538
)
_________________________________
(1)
Excludes $1.4 million loss determined and accrued upon formalizing a transaction (not upon settlement) which was included within GAAP net income (loss) attributable to CIFC Corp. during the nine months ended September 30, 2012 , and within AEBT within the three months ended December 31, 2011.

Net investment and interest income decreased by $3.2 million and $13.5 million for the three and nine months ended September 30, 2012 , as compared to the prior year periods. The decrease in net investment and interest income is based on several factors, the most significant of which were (i) the sale of our investments in the DFR MM CLO during the first quarter of 2012 and (ii) the liquidation of our RMBS portfolio in the second quarter of 2011. These decreases were partially offset by the receipt of the first subordinated note distribution of $1.0 million on our investment in CIFC 2011-1. While most CLOs make distributions quarterly, a CLO's initial distribution often relates to a period longer than one quarter.
 

56

Expenses
 
Expenses decreased $0.8 million and increased $2.6 million for the three and nine months ended September 30, 2012 , respectively, as compared to the prior year periods. The decrease in expenses for the three months ended September 30, 2012 compared to the prior period was primarily due to decreases in professional services and other general and administrative expenses of $0.3 million and $0.4 million , respectively. The increase in expenses for the nine months ended September 30, 2012 compared to the prior period was primarily due to an increase of compensation and benefits of $2.5 million . This includes the effect of several additions to the senior management team.
 
Net income (loss) on Consolidated Variable Interest Entities excluded from AEBT
 
As noted above, AEBT excludes net unrealized gains (losses) on our investment holdings in VIEs, with the exception of gains (losses) within the Warehouse TRS determined and accrued upon formalizing a transaction (not upon settlement). The table below provides details of the net unrealized gains (losses) on our investments in the Consolidated CLOs and CIFC 2012-III Warehouse and the GAAP net income (loss) of the DFR MM CLO and the Warehouse SPV which are included within net income attributable to CIFC Corp., but excluded from AEBT.
 
 
Three months ended September 30,
 
Variance 2012 vs. 2011
 
Nine months ended September 30,
 
Variance 2012 vs. 2011
 
2012
 
2011
 
 
2012
 
2011
 
 
(In thousands)
Net unrealized gains (losses) on investments in Consolidated CLOs
$
503

 
$
(2,914
)
 
$
3,417

 
$
(345
)
 
$
(2,382
)
 
$
2,037

Net unrealized gains (losses) on investment in CIFC 2012-III Warehouse
120

 
—

 
120

 
120

 
—

 
120

Consolidated net income (loss) of the DFR MM CLO (1)
—

 
(5,157
)
 
5,157

 
(169
)
 
(5,036
)
 
4,867

Consolidated net income (loss) of the Warehouse SPV (2)
—

 
(5,567
)
 
5,567

 
1,431

 
(5,004
)
 
6,435

Total net income (loss) on Consolidated Variable Interest Entities excluded from AEBT
$
623

 
$
(13,638
)
 
$
14,261

 
$
1,037

 
$
(12,422
)
 
$
13,459

_________________________________ 
(1)
AEBT excludes the GAAP net income (loss) for the DFR MM CLO and includes distributions received on our investments in DFR MM CLO.
(2)
AEBT excludes the GAAP net income of the Warehouse SPV which requires accounting for the Warehouse TRS as a derivative. The GAAP net income of the Warehouse SPV for the nine months ended September 30, 2012 of $1.4 million is comprised of $0.7 million of interest income, $0.2 million of interest expense, $2.5 million of unrealized gains and $1.6 million of realized losses underlying the Warehouse TRS. AEBT for the nine months ended September 30, 2012 includes net interest income from the Warehouse TRS and gains (losses) on assets within the Warehouse TRS (excluding $1.4 million in losses determined and accrued upon formalizing a transaction (not upon settlement) which was included within GAAP net income and within AEBT during the three months ended December 31, 2011).  The GAAP net loss of the Warehouse SPV for the three months ended September 30, 2011 of $5.6 million is comprised of $2.3 million of interest income, $0.6 million of interest expense, $0.2 million of other expense, $6.6 million of unrealized losses and $0.5 million of realized losses underlying the Warehouse TRS. The GAAP net loss of the Warehouse SPV for the nine months ended September 30, 2011 of $5.0 million is comprised of $2.7 million of interest income, $0.7 million of interest expense, $0.2 million of other expense, $6.3 million of unrealized losses and $0.5 million of realized losses underlying the Warehouse TRS.
 
Reconciliation from GAAP to AEBT
 
To derive AEBT, we start with our GAAP statement of operations, deconsolidate the Consolidated CLOs and then eliminate and adjust certain other items. The deconsolidated GAAP results represent the components of Net income (loss) attributable to CIFC Corp.

57



The table below provides a reconciliation from GAAP net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measure used by management, for the three months ended September 30, 2012 :
 
 
Three months ended September 30, 2012
 
 
Consolidated GAAP
 
Consolidation Adjustments (1)
 
Deconsolidated GAAP
 
Reconciling and Non-Recurring Items
 
 
Adjusted Totals To Compute AEBT
 
 
(In thousands)
 
Revenues
 

 
 

 
 

 
 

 
 
 

 
Investment advisory fees
$
2,750

 
$
13,374

 
$
16,124

 
$
(2,511
)
(2
)
 
$
13,613

 
Net investment and interest income:
 

 
 

 
 

 
 

 
 
 

 
Investment and interest income
76

 
1,455

 
1,531

 
291

(3
)
 
1,822

 
Interest expense
—

 
—

 
—

 
—

 
 
—

 
Net investment and interest income
76

 
1,455

 
1,531

 
291

 
 
1,822

 
Total net revenues
2,826

 
14,829

 
17,655

 
(2,220
)
 
 
15,435

 
Expenses
 

 
 

 
 

 
 

 
 
 

 
Compensation and benefits
5,188

 
—

 
5,188

 
—

 
 
5,188

 
Professional services
1,220

 
—

 
1,220

 
—

 
 
1,220

 
Insurance expense
486

 
—

 
486

 
—

 
 
486

 
Other general and administrative expenses
335

 
—

 
335

 
—

 
 
335

 
Depreciation and amortization
3,802

 
—

 
3,802

 
(3,649
)
(4
)
 
153

 
Occupancy
416

 
—

 
416

 
—

 
 
416

 
Corporate interest expense
—

 
—

 
—

 
1,487

(5
)
 
1,487

 
Impairment of intangible assets
—

 
—

 
—

 
—


 
—

 
Restructuring charges
—

 
—

 
—

 
—


 
—

 
Total expenses
11,447

 
—

 
11,447

 
(2,162
)
 
 
9,285

 
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

 
 
 

 
Net gain (loss) on investments, loans, derivatives and liabilities
(5,768
)
 
624

 
(5,144
)
 
5,144

(6
)
 
—

 
Corporate interest expense
(1,487
)
 
—

 
(1,487
)
 
1,487

(5
)
 
—

 
Strategic transactions expense
(657
)
 
—

 
(657
)
 
657

(7
)
 
—

 
Other, net
11

 
—

 
11

 
(11
)
(6
)
 
—

 
Net other income (expense) and gain (loss)
(7,901
)
 
624

 
(7,277
)
 
7,277

 
 
—

 
Operating income (loss)
(16,522
)
 
15,453

 
(1,069
)
 
7,219

 
 
6,150

 
Net results of Consolidated Variable Interest Entities
(153,548
)
 
153,548

 
—

 
—

 
 
—

 
Income (loss) before income tax expense (benefit)
(170,070
)
 
169,001

 
(1,069
)
 
7,219

 
 
6,150

 
Income tax expense (benefit)
(1,757
)
 
—

 
(1,757
)
 
1,757

(8
)
 
—

 
Net income (loss)
(168,313
)
 
169,001

 
688

 
5,462

 
 
6,150

 
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
169,001

 
(169,001
)
 
—

 
—

 
 
—

 
Net income (loss) attributable to CIFC Corp.
$
688

 
$
—

 
$
688

 
$
5,462

 
 
$
6,150

(A)

58


The table below provides a reconciliation from GAAP net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measure used by management, for the three months ended September 30, 2011 :
 
 
Three months ended September 30, 2011
 
 
Consolidated GAAP
 
Consolidation Adjustments (1)
 
Deconsolidated GAAP
 
Reconciling and Non-Recurring Items
 
 
Adjusted Totals To Compute AEBT
 
 
(In thousands)
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Investment advisory fees
$
3,108

 
$
11,424

 
$
14,532

 
$
(2,547
)
(2
)
 
$
11,985

 
Net investment and interest income:
 

 
 

 
 

 
 

 
 
 

 
Investment and interest income
1

 
839

 
840

 
4,811

(3
)
 
5,651

 
Interest expense
1

 
—

 
1

 
581

(9
)
 
582

 
Net investment and interest income
—

 
839

 
839

 
4,230

 
 
5,069

 
Total net revenues
3,108

 
12,263

 
15,371

 
1,683

 
 
17,054

 
Expenses
 

 
 

 
 

 
 

 
 
 

 
Compensation and benefits
5,262

 
—

 
5,262

 
—


 
5,262

 
Professional services
1,544

 
—

 
1,544

 
—

 
 
1,544

 
Insurance expense
435

 
—

 
435

 
—

 
 
435

 
Other general and administrative expenses
748

 
—

 
748

 
—

 
 
748

 
Depreciation and amortization
4,907

 
—

 
4,907

 
(4,738
)
(4
)
 
169

 
Occupancy
440

 
—

 
440

 
—

 
 
440

 
Corporate interest expense
—

 
—

 
—

 
1,445

(5
)
 
1,445

 
Restructuring charges
783

 
—

 
783

 
(783
)
(10
)
 
—

 
Total expenses
14,119

 
—

 
14,119

 
(4,076
)
 
 
10,043

 
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

 
 
 

 
Net gain (loss) on investments, loans, derivatives and liabilities
4,588

 
(2,914
)
 
1,674

 
(1,674
)
(6
)
 
—

 
Corporate interest expense
(1,445
)
 
—

 
(1,445
)
 
1,445

(5
)
 
—

 
Strategic transactions expenses
(71
)
 
—

 
(71
)
 
71

(7
)
 
—

 
Other, net
4

 
—

 
4

 
(4
)
(6
)
 
—

 
Net other income (expense) and gain (loss)
3,076

 
(2,914
)
 
162

 
(162
)
 
 
—

 
Operating income (loss)
(7,935
)
 
9,349

 
1,414

 
5,597

 
 
7,011

 
Net results of Consolidated Variable Interest Entities
(220,182
)
 
209,458

 
(10,724
)
 
10,724

(11
)
 
—

 
Income (loss) before income tax expense (benefit)
(228,117
)
 
218,807

 
(9,310
)
 
16,321

 
 
7,011

 
Income tax expense (benefit)
(3,386
)
 
—

 
(3,386
)
 
3,386

(8
)
 
—

 
Net income (loss)
(224,731
)
 
218,807

 
(5,924
)
 
12,935

 
 
7,011

 
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
218,807

 
(218,807
)
 
—

 
—

 
 
—

 
Net income (loss) attributable to CIFC Corp.
$
(5,924
)
 
$
—

 
$
(5,924
)
 
$
12,935

 
 
$
7,011

(A)


59

The table below provides a reconciliation from GAAP net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measure used by management, for the nine months ended September 30, 2012 :
 
 
Nine months ended September 30, 2012
 
 
Consolidated GAAP
 
Consolidation Adjustments (1)
 
Deconsolidated GAAP
 
Reconciling and Non-Recurring Items
 
 
Adjusted Totals To Compute AEBT
 
 
(In thousands)
 
Revenues
 

 
 

 
 

 
 

 
 
 

 
Investment advisory fees
$
8,048

 
$
36,787

 
$
44,835

 
$
(7,143
)
(2
)
 
$
37,692

 
Net investment and interest income:
 

 
 

 
 

 
 

 
 
 

 
Investment and interest income
225

 
2,689

 
2,914

 
894

(3
)
 
3,808

 
Interest expense
1

 
—

 
1

 
141

(9
)
 
142

 
Net investment and interest income
224

 
2,689

 
2,913

 
753

 
 
3,666

 
Total net revenues
8,272

 
39,476

 
47,748

 
(6,390
)
 
 
41,358

 
Expenses
 

 
 

 
 

 
 

 
 
 

 
Compensation and benefits
16,479

 
—

 
16,479

 
—

 
 
16,479

 
Professional services
3,620

 
—

 
3,620

 
657

(12
)
 
4,277

 
Insurance expense
1,457

 
—

 
1,457

 
—

 
 
1,457

 
Other general and administrative expenses
1,887

 
—

 
1,887

 
—

 
 
1,887

 
Depreciation and amortization
13,325

 
—

 
13,325

 
(13,001
)
(4
)
 
324

 
Occupancy
1,057

 
—

 
1,057

 
—

 
 
1,057

 
Corporate interest expense
—

 
—

 
—

 
4,422

(5
)
 
4,422

 
Impairment of intangible assets
1,771

 
—

 
1,771

 
(1,771
)
(13
)
 
—

 
Restructuring charges
3,923

 
—

 
3,923

 
(3,923
)
(10
)
 
—

 
Total expenses
43,519

 
—

 
43,519

 
(13,616
)
 
 
29,903

 
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

 
 
 

 
Net gain (loss) on investments, loans, derivatives and liabilities
(8,966
)
 
(224
)
 
(9,190
)
 
9,190

(6
)
 
—

 
Corporate interest expense
(4,422
)
 
—

 
(4,422
)
 
4,422

(5
)
 
—

 
Strategic transaction expenses
(657
)
 
—

 
(657
)
 
657

(7
)
 
—

 
Net gain on the sale of management contract
5,772

 
—

 
5,772

 
(5,772
)
(14
)
 
—

 
Other, net
(468
)
 
—

 
(468
)
 
468

(6
)
 
—

 
Net other income (expense) and gain (loss)
(8,741
)
 
(224
)
 
(8,965
)
 
8,965

 
 
—

 
Operating income (loss)
(43,988
)
 
39,252

 
(4,736
)
 
16,191

 
 
11,455

 
Net results of Consolidated Variable Interest Entities
(97,335
)
 
98,597

 
1,262

 
(1,262
)
(11
)
 
—

 
Income (loss) before income tax expense (benefit)
(141,323
)
 
137,849

 
(3,474
)
 
14,929

 
 
11,455

 
Income tax expense (benefit)
2,741

 
—

 
2,741

 
(2,741
)
(8
)
 
—

 
Net income (loss)
(144,064
)
 
137,849

 
(6,215
)
 
17,670

 
 
11,455

 
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
137,849

 
(137,849
)
 
—

 
—

 
 
—

 
Net income (loss) attributable to CIFC Corp.
$
(6,215
)
 
$
—

 
$
(6,215
)
 
$
17,670

 
 
$
11,455

(A)

60


The table below provides a reconciliation from GAAP net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measure used by management, for the nine months ended September 30, 2011 :
 
 
Nine months ended September 30, 2011
 
 
Consolidated GAAP
 
Consolidation Adjustments (1)
 
Deconsolidated GAAP
 
Reconciling and Non-Recurring Items
 
 
Adjusted Totals To Compute AEBT
 
 
(In thousands)
 
Revenues
 

 
 

 
 

 
 

 
 
 

 
Investment advisory fees
$
8,121

 
$
24,263

 
$
32,384

 
$
(3,867
)
(2
)
 
$
28,517

 
Net investment and interest income:
 

 
 

 
 

 
 

 
 
 

 
Investment and interest income
3,329

 
2,714

 
6,043

 
12,198

(3
)
 
18,241

 
Interest expense
349

 
—

 
349

 
688

(9
)
 
1,037

 
Net investment and interest income
2,980

 
2,714

 
5,694

 
11,510

 
 
17,204

 
Total net revenues
11,101

 
26,977

 
38,078

 
7,643

 
 
45,721

 
Expenses
 

 
 

 
 

 
 

 
 
 

 
Compensation and benefits
14,225

 
—

 
14,225

 
(274
)
(15
)
 
13,951

 
Professional services
3,884

 
—

 
3,884

 
—

 
 
3,884

 
Insurance expense
1,324

 
—

 
1,324

 
—

 
 
1,324

 
Other general and administrative expenses
2,437

 
—

 
2,437

 
—

 
 
2,437

 
Depreciation and amortization
11,572

 
—

 
11,572

 
(11,109
)
(4
)
 
463

 
Occupancy
1,037

 
—

 
1,037

 
—

 
 
1,037

 
Corporate interest expense
—

 
—

 
—

 
4,222

(5
)
 
4,222

 
Impairment of intangible assets
1,104

 
—

 
1,104

 
(1,104
)
(13
)
 
—

 
Restructuring charges
4,104

 
 

 
4,104

 
(4,104
)
(10
)
 
—

 
Total expenses
39,687

 
—

 
39,687

 
(12,369
)
 
 
27,318

 
Other Income (Expense) and Gain (Loss)
 

 
 

 
 

 
 

 
 
 

 
Net gain (loss) on investments, loans, derivatives and liabilities
5,095

 
(2,382
)
 
2,713

 
(2,713
)
(6
)
 
—

 
Corporate interest expense
(4,222
)
 
—

 
(4,222
)
 
4,222

(5
)
 
—

 
Strategic transactions expenses
(1,459
)
 
—

 
(1,459
)
 
1,459

(7
)
 
—

 
Other, net
7

 
—

 
7

 
(7
)
(6
)
 
—

 
Net other income (expense) and gain (loss)
(579
)
 
(2,382
)
 
(2,961
)
 
2,961

 
 
—

 
Operating income (loss)
(29,165
)
 
24,595

 
(4,570
)
 
22,973

 
 
18,403

 
Net results of Consolidated Variable Interest Entities
(314,638
)
 
304,598

 
(10,040
)
 
10,040

(11
)
 
—

 
Income (loss) before income tax expense (benefit)
(343,803
)
 
329,193

 
(14,610
)
 
33,013

 
 
18,403

 
Income tax expense (benefit)
(4,523
)
 
—

 
(4,523
)
 
4,523

(8
)
 
—

 
Net income (loss)
(339,280
)
 
329,193

 
(10,087
)
 
28,490

 
 
18,403

 
Net (income) loss attributable to noncontrolling interest and Consolidated Variable Interest Entities
329,193

 
(329,193
)
 
—

 
—

 
 
—

 
Net income (loss) attributable to CIFC Corp.
$
(10,087
)
 
$
—

 
$
(10,087
)
 
$
28,490

 
 
$
18,403

(A)
_________________________________
(A)
Represents AEBT.
(1)    Adjustments to eliminate the impact of the Consolidated CLOs.
(2)
Adjustments to reflect AEBT net of fee sharing arrangements. During the three and nine months ended September 30, 2012 , we eliminated certain fee sharing arrangements related to CLOs managed by CypressTree, resulting in CIFC Corp. retaining more of the investment advisory fees received from these CLOs. In order to eliminate these fee sharing arrangements, we made payments of $0.3 million and $6.2 million during the three and nine months ended September 30, 2012 , respectively.
(3)
The establishment of interest income for distributions received on our investments in the DFR MM CLO, interest income and realized gains (losses) underlying the Warehouse TRS and realized gains (losses) on the on-balance sheet warehouses. Through February 7, 2012, we owned 100% of the subordinated notes of the DFR MM CLO and were required to consolidate the DFR MM CLO. As management views the economic impact of our

61

investments in the DFR MM CLO as the distributions received on those investments, the calculation of AEBT eliminates the GAAP net income (loss) on the DFR MM CLO (included within Net Results of Consolidated Variable Interest Entities) and includes the distributions received on our investments in the DFR MM CLO. As management views the economic impact of the Warehouse TRS to be similar to a traditional warehouse borrowing arrangement, the calculation of AEBT eliminates the GAAP net income (loss) on the Warehouse TRS (included within Net Results of Consolidated Variable Interest Entities) and includes the net interest income and gains (losses) underlying the Warehouse TRS. This excludes a loss of $1.4 million determined and accrued upon formalizing a transaction (not upon settlement) which was included within GAAP net income during the nine months ended September 30, 2012 and within AEBT during the three months ended December 31, 2011.
(4)    Elimination of intangible asset amortization.
(5)    Reclassification of corporate interest expense from other income (expense) and gain (loss) to expenses.
(6)    Elimination of net gains (losses) on our proprietary investments and items (primarily non-recurring in nature) which are included within Other, net.
(7)    Elimination of strategic transactions expenses.
(8)
Elimination of income tax expense (benefit).
(9)    Adjustment establishes interest expense underlying the Warehouse TRS.
(10)    Elimination of restructuring charges.
(11)    Elimination of the GAAP net income (loss) related to the DFR MM CLO and the Warehouse TRS.
(12)
Elimination of the benefit of the insurance settlement received related to the reimbursement received of legal fees associated with our settlement with the SEC which was previously disclosed in the March 31, 2011 10-Q filing. In addition, eliminates certain professional fees related to the sale of our investments in the DFR MM CLO.
(13)    Elimination of impairment of intangible assets.
(14)    Elimination of the net gain on the sale of our rights to manage Gillespie.
(15)    Elimination of certain incentive compensation related to certain net gains (losses) on investments which are not included as a component of AEBT.


Recent Developments
 
On November 9, 2012 we closed a new CLO, CIFC Funding 2012-II, Ltd. (“CIFC 2012-II”), representing approximately $725.0 million of additional CLO AUM. We invested $4.3 million in the subordinated notes and we began earning investment advisory fees relating to CIFC CLO 2012-II upon the November closing.
 
Critical Accounting Policies and Estimates
 
Our significant accounting policies are disclosed in our 2011 10-K. Our most critical accounting policies involve judgments and estimates that could affect our reported assets and liabilities, as well as our reported revenues and expenses. These accounting policies and estimates are discussed below. We believe that all of the judgments and estimates inherent in our financial statements were reasonable as of the date thereof, based upon information available to us at the time. We rely on management’s experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Under varying conditions, we could report materially different amounts arising under these critical accounting policies.

Fair Value Measurements and Presentation — In accordance with ASC Topic 820— Fair Value Measurements and Disclosures (“ASC Topic 820”), we have categorized our financial instruments carried at fair value into a three-level fair value hierarchy based on the transparency of the inputs to the valuation of the asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is determined by the lowest level of input that is significant to the fair value measurement. The assessment of significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The three levels are defined as follows:
 
Level 1 —inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
The types of assets included in Level 1 are generally equity securities or derivatives listed on an exchange with active markets. We held no Level 1 securities as of September 30, 2012 or December 31, 2011.
 
Level 2 —inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Our assets and liabilities generally included in this category are loans where asset valuations are provided by third-party pricing services or our comparable companies pricing model, corporate bonds and investments in CLOs or CDOs where asset valuations are provided by third-party pricing services (prior to our valuation methodology change effective December 31, 2011), long-term debt of our Consolidated CLOs (prior to our valuation methodology change effective September 30, 2011) and our total return swap.
 

62

Level 3 —inputs to the valuation methodology include significant unobservable inputs to the fair value measurement. This includes situations where there is little, if any, market activity for the asset or liability.
 
Our assets and liabilities generally included in this category are corporate bonds, investments in CLOs or CDOs, loans where asset valuations are not provided by third-party pricing services or our comparable companies pricing model, warrants, long-term debt of our Consolidated CLOs (including the subordinated notes) and the conversion feature contained in our senior subordinated convertible notes, which was initially deemed an embedded derivative instrument prior to its reclassification to equity during December 2011.
 
Determination of Fair Values
 
As defined in ASC Topic 820, fair value is the price a market participant would receive in the sale of an asset, or pay to transfer a liability, in an orderly transaction at the measurement date. Where available, fair value is based on observable market prices or parameters or is derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are utilized. These valuation models involve our estimation and judgment, the degree of which is dependent on both the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized for disclosure purposes based on the level of judgment associated with the inputs used to measure their value as described above. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
 
Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that market participants are willing to pay for an asset. Ask prices represent the lowest price market participants are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, our policy is to take the mid-point in the bid-ask spread to value these assets and liabilities as a practical expedient for determining fair value permissible under ASC Topic 820. Fair value is a market-based measure considered from the perspective of the market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, when market assumptions are not readily available, our assumptions are set to reflect those that we believe market participants would use in pricing the asset or liability at the measurement date.
 
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and, current market conditions. Determinations of fair value require more judgment to the extent that the valuation is based on inputs that are either less observable or unobservable in the market. Accordingly, the degree of judgment we exercise in determining fair value is greatest for assets and liabilities classified in Level 3.

The fair value process is monitored by our Valuation Committee. The Valuation Committee is chaired by our Chief Investment Officer and is comprised of investment, finance, valuation and risk management professionals. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources.  Meetings are held regularly to discuss and analyze the significant assumptions utilized in our internally developed models and to review the valuations provided by third-party pricing services for reasonableness.  We engage reputable third-party pricing services and regularly review the valuation methodologies provided by those third-party pricing services to ensure the fair value measurement provided by those services is in accordance with ASC Topic 820.
 
The following is a description of our valuation methodologies for financial assets and liabilities measured at fair value by class as required by ASC Topic 820, including the general classification of such instruments pursuant to the valuation hierarchy described above. Under certain market conditions, we may make adjustments to the valuation methodologies described below. We maintain a consistent policy for the process of identifying when and by how such adjustments should be made. To the extent that we make a significant fair value adjustment, the valuation classification would generally be considered Level 3 within the fair value hierarchy.  We determined our classes of financial assets and liabilities based on our analysis of the nature, characteristics and risks of such financial assets and liabilities at fair value.
 
Loans —Loans are generally valued via a third-party pricing service.  The value represents a composite of the mid-point in the bid-ask spread of broker quotes or is based on the composite price of a different tranche of the same or similar security if broker quotes are unavailable for the specific tranche we own.  Loans valued in this manner are classified as Level 2 within the fair value hierarchy.  When a value from a third-party pricing service is unavailable, the value may be based on our comparable companies pricing model (an internally developed model using composite or other observable comparable market inputs).  Loans valued in this manner are classified as Level 2 within the fair value hierarchy.  When sufficient data points are not available to utilize the comparable companies pricing model, the value may be based on an internally developed model

63

using data including unobservable market inputs.  Loans valued in this manner are classified as Level 3 within the fair value hierarchy.
 
Corporate Bonds —Corporate bonds are generally valued via a third-party pricing service.  The inputs to the valuation include trades, discount rates and forward yield curves. Although the inputs used in the third-party pricing services valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective December 31, 2011, we concluded corporate bonds priced in this manner would be classified as Level 3 within the fair value hierarchy.  Prior to this change, corporate bonds priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Corporate bonds valued in this manner are classified as Level 3 within the fair value hierarchy.
 
Other Assets —Other assets at fair value primarily represent investments in CLOs or CDOs which are generally valued via a third-party pricing service. The inputs to the valuation include trades, discount rates, forward yield curves, and loan level information (including loan loss, recovery and default rates, prepayment speeds and and other security specific information obtained from the trustee and other service providers related to the product being valued). Although the inputs used in the third-party pricing services valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective December 31, 2011, we concluded other assets priced in this manner would be classified as Level 3 within the fair value hierarchy. Prior to this change, other assets priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote.  Inputs to the internally developed model include the structure of the product being valued, estimates related to loan default, recovery and discount rates. Other assets valued in this manner are classified as Level 3 within the fair value hierarchy.
 
Contingent Liabilities —The fair value of the contingent liabilities is determined via a third-party valuation firm and is based on discounted cash flow models. The models are based on projections of the relevant future investment advisory fee cash flows from the CLOs managed by CIFCAM and its wholly-owned subsidiary, CypressTree, and utilize both observable and unobservable inputs in the determination of fair value. Significant inputs to the valuation models include the structure of the underlying CLO and estimates related to loan default, recovery and discount rates.  The contingent liabilities are classified as Level 3 within the fair value hierarchy.
 
Long-Term Debt of the Consolidated CLOs —Long-term debt of the Consolidated CLOs consists of debt and subordinated notes of the Consolidated CLOs. Effective September 30, 2011, the fair value of the debt and subordinated notes of the Consolidated CLOs is based upon discounted cash flow models and utilizes both observable and unobservable inputs in the determination of fair value. Significant inputs to the valuation models include the structure of the Consolidated CLO and estimates related to loan default, recovery and discount rates. The debt and subordinated notes of the Consolidated CLOs are classified as Level 3 within the fair value hierarchy.
 
Prior to September 30, 2011, the fair value for the debt of the Consolidated CLOs was generally valued via a third-party pricing service.  The debt of our Consolidated CLOs valued in this manner was classified as Level 2 within the fair value hierarchy. Prior to September 30, 2011, the subordinated notes of the Consolidated CLOs were valued by management by considering, among other things, available broker quotes. If a broker quote was unavailable, the subordinated notes of Consolidated CLOs were valued using internally developed models consistent with the current methodology described above.  The subordinated notes of our Consolidated CLOs valued in this manner were classified as Level 3 within the fair value hierarchy.
 
Variable Interest Entities —ASC Topic 810 requires the consolidation of the assets, liabilities and results of operations of a VIE into the financial statements of the enterprise that is the VIE’s primary beneficiary, through its controlling financial interest in the VIE. ASC Topic 810 also provides a framework for determining whether an entity should be considered a VIE and accordingly evaluated for consolidation. Pursuant to this framework, we consider all relevant facts to determine whether an entity is a VIE and, if so, whether our relationship with the entity (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If we determine that we do have a variable interest in the entity, we perform an analysis to determine whether we are deemed to be the primary beneficiary.
 
For CLOs and CDOs, if we are deemed to (i) have the power to direct the activities of the CLO or CDO that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the CLO or CDO, then we are deemed to be the primary beneficiary of the CLO or CDO and are required to consolidate the CLO or CDO. Generally, our contractual relationship as collateral manager of the CLOs and CDOs

64

described herein satisfies criteria (i) of the prior sentence and our ownership interests in and/or ability to earn certain incentive or other management fees in certain of our CLOs and CDOs can (but does not always) satisfy criteria (ii).
 
Goodwill and Other Intangible Assets — Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Goodwill has been recognized as a result of the acquisition of CNCIM and the Merger with Legacy CIFC. In accordance with ASC Topic 350— Intangibles—Goodwill and Other (“ASC Topic 350”), goodwill is not amortized. We periodically (at least on an annual basis in the fourth quarter of each year) review goodwill, considering factors such as our projected cash flows and revenues and earnings multiples of comparable companies, to determine whether the carrying value of the goodwill is impaired. If the goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs. We have one overall reporting unit for which goodwill is tested for impairment. The evaluation of goodwill and intangible assets for impairment requires us to make estimates and exercise significant judgment. During the three and nine months ended September 30, 2012 , there were no events or changes in circumstances that would indicate that the current carrying amount of goodwill might be impaired; accordingly, we did not perform an interim impairment test.  Our next annual impairment test of goodwill will be performed and completed in the fourth quarter of 2012.
 
Intangible assets are comprised of finite-lived assets acquired in a business combination. The largest component of our intangible assets are those associated with the CLO investment management contracts. The intangible assets associated with CLO investment management contracts are amortized over their useful lives, either on a straight line basis (intangible assets associated with the acquisition of DCM) or based on a ratio of expected discounted cash flows from the contracts (intangible assets associated with the acquisition of CNCIM and the Merger with Legacy CIFC). We consider our own assumptions in the underlying investment advisory fee projections which include the structure of the CLOs and estimates related to loan default rates, recoveries and discount rates. A change in those projections could have a significant impact on our amortization expense.
 
Finite-lived intangible assets are tested for impairment if events or changes in circumstances indicate that the asset might be impaired. An impairment charge is recorded if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Impairment testing for the intangible assets associated with our CLO investment management contracts includes a comparison of the estimated remaining undiscounted cash flows related to those CLO management contracts to the carrying value of the intangible asset. If the carrying value of the intangible asset is less than the estimated remaining undiscounted cash flows, no further testing is performed and the intangible asset is not deemed impaired. If the carrying value of the intangible asset is greater than the estimated remaining undiscounted cash flows, then further analysis is performed to determine if the asset is impaired, including an analysis of the estimated remaining discounted cash flows.
 
Income Taxes —We account for income taxes in accordance with ASC Topic 740— Income Taxes (“ASC Topic 740”). Deferred tax assets and liabilities are recognized for the future income tax consequences (temporary differences) attributable to the difference between the carrying amounts of assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. We recognize the effect of change in income tax laws or rates on deferred tax assets and liabilities in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount that is more likely than not to be realized.
 
ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC Topic 740 requires us to evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more likely than not threshold would be recorded as tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income taxes.
 
Our provision for income taxes represents our total estimate of the liability that we have incurred for doing business each year. Annually, we file tax returns that represent our filing positions within each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable income determinations. Because determinations of our annual provisions are subject to judgments and estimates, it is possible that actual results will vary from those recognized in our financial statements. As a result, it is likely that additions to, or reductions of, income tax expense will occur each year for prior reporting periods as actual tax returns and tax audits are settled.
 
Net deferred tax assets have been recognized based on management’s belief that taxable income of the appropriate character, more likely than not, will be sufficient to realize the benefits of these assets over time. In the event that actual results

65

differ from our expectations, we may be required to record additional valuation allowances on our deferred tax assets, which may have a significant effect on our financial condition and results of operations.
 
Recent Accounting Updates
 
See Note 2 to our condensed consolidated financial statements for our discussion of recent accounting updates.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2012 , we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of September 30, 2012 , we did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide the information required by Item 3.

ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and our Interim Chief Financial Officer concluded that our disclosure controls and procedures are effective.
 
Change in Internal Control Over Financial Reporting
 
 During the three months ended September 30, 2012, we instituted a new investment management tracking system which we utilize to assist in accounting for our consolidated variable interest entities. Other than this change, there have been no changes in our internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, our management, including our Chief Executive Officer and our Interim Chief Financial Officer do not expect that our control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
 
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
None.
 
ITEM 1A.
RISK FACTORS
 
There have been no material changes in our risk factors from those disclosed in Part I — Item 1A. Risk Factors of our 2011 10-K.

66



ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The number and average price of shares of common stock purchased during the nine months ended September 30, 2012 are set forth in the table below:
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as part of
Publicly Announced
Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
April 1 - April 30, 2012
103,336

 
$
5.89

 
103,336

 
$
9,391,556

May 1 - May 31, 2012
204,567

 
6.37

 
204,567

 
8,088,514

June 1 - June 30, 2012
203,372

 
6.94

 
203,372

 
6,677,430

July 1 - July 31, 2012
54,452

 
7.26

 
54,452

 
6,282,166

August 1 - August 31, 2012
11

 
7.28

 
11

 
6,282,085

September 1 - September 30, 2012
6,870

 
7.27

 
6,870

 
6,232,140

Total
572,608

 
6.58

 
572,608

 
6,232,140

 
Share Repurchase Program
 
On March 29, 2012, we announced that our Board approved a $10.0 million share repurchase program. Under the program, the repurchases may be made in open-market or in private transactions and may be made pursuant to SEC Rule 10b5-1 trading plans. Shares may be repurchased from time to time and in such amounts as market conditions warrant, subject to price ranges set by management and regulatory considerations.  The share repurchase program does not have an expiration date. During the three and nine months ended September 30, 2012 , we repurchased 61,333 and 572,608 shares in open-market transactions for an aggregate cost (including transaction costs) of $0.4 million and $3.8 million , respectively, with an average price per share of $7.26 and $6.58 , respectively.  As of September 30, 2012 we were authorized to repurchase up to an additional $6.2 million of our common stock.
 
The indentures governing our Junior Subordinated Notes contain limits on share repurchases, subject to a number of exceptions and conditions.  The share repurchases allowed under the share repurchase program are within these limits.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5.
OTHER INFORMATION
 
None.
 

67


ITEM 6.
EXHIBITS
 
Ex. No.
 
Description of Exhibit
 
 
 
3.1
 
Certificate of Incorporation of CIFC Corp., as amended (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the SEC on April 14, 2011).

 
 
 
3.2
 
Certificate of Ownership and Merger, dated as of April 13, 2011, merging CIFC Deerfield Corp. into Deerfield Capital Corp. (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on April 14, 2011).

 
 
 
3.3
 
Certificate of Ownership and Merger, dated as of July 19, 2011, merging CIFC Corp. into CIFC Deerfield Corp., a Delaware corporation (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 20, 2011).



 
 
 
3.4
 
Certificate of Designation of Series A Convertible Non-Voting Preferred Stock (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on September 25, 2012).

 
 
 
3.5
 
Bylaws of CIFC Corp. (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form
8-K filed with the SEC on July 20, 2011).

 
 
 
10.1
 
Asset Purchase Agreement, dated July 30, 2012, by and among GE Capital Debt Advisors LLC, General Electric Capital Corporation, CIFC Asset Management LLC and CIFC Corp. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2012).
 
 
 
10.2
 
Second Amended and Restated Registration Rights Agreement, dated as of September 24, 2012, by and among CIFC Corp., GE Capital Equity Investments, Inc., CIFC Parent Holdings LLC and DFR Holdings LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 25, 2012).
 
 
 
10.3
 
Second Amended and Restated Stockholders Agreement, dated as of September 24, 2012, by and among CIFC Corp., CIFC Parent Holdings LLC and DFR Holdings LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 25, 2012).

 
 
 
10.4
 
Investment Agreement, dated as of September 24, 2012, by and between CIFC Corp. and GE Capital Equity Investments, Inc. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on September 25, 2012).
 
 
 
10.5
 
Form of Warrant (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed with the SEC on September 25, 2012).
 
 
 
31.1
 
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
31.2
 
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
101
 
Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements furnished herewith.**

*
Filed herewith.
**
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

68

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
CIFC CORP.
 
(Registrant)
 
 
 
 
 
 
Date: November 16, 2012
By:
/s/ PETER GLEYSTEEN
 
Peter Gleysteen, Chief Executive Officer and Director
 
(Principal Executive Officer)
 
 
 
Date: November 16, 2012
By:
/s/ ROBERT C. MILTON III
 
Robert C. Milton III, Interim Chief Financial Officer
 
(Principal Financial and Accounting Officer)

69
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Cifc Corp. (MM) (NASDAQ:DFR)
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