DFR Cifc Corp. (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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)

250 Park Avenue, 5 th  Floor, New York, NY 10177

(212) 624-1200

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

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.

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 20,255,430 shares of the registrant’s Common Stock outstanding as of November 11, 2011.

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CIFC CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

I NDEX

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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” and to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as “CNCIM.”

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this quarterly report on Form 10-Q, (the “Quarterly Report”), and the information incorporated by reference into this Quarterly Report are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include 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 management and incentive fee revenue;

·                   our ability to attract and retain qualified personnel;

·                   competitive conditions impacting us and the assets we manage;

·                   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;

·                   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;

·                   our ability to sell and/or liquidate investments held for sale in DFR Middle Market CLO Ltd.;

·                   the current economic environment in the United States; 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 economy;

·                   our ability to maintain our exemption from registration as an investment company pursuant to the Investment Company Act of 1940;

·                   the ability of Bounty Investments, LLC and CIFC Parent Holdings, LLC to exercise substantial control over our business;

·                   the outcome of legal or regulatory proceedings to which we are or may become a party;

·                   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 and the acquisition of CNCIM; and

·                   other risks described in Part I—Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 and Part II - Item 1A Risk Factors in this Quarterly Report, 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 generally our policy to not make any specific projections as to future earnings, nor do we endorse any projections regarding future performance that may be made by third parties.

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PART I.

ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

CIFC CORP. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements.

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CIFC CORP. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to condensed consolidated financial statements.

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CIFC CORP. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements.

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CIFC CORP. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 manages client assets, including collateralized loan obligations (“CLOs”), which have senior secured corporate loans (“SSCLs”) as the primary investments.  We earn investment advisory fees from managing investment products, principally the CLOs and also collateralized debt obligations (“CDOs”), which primarily invest in corporate debt and asset-backed securities (“ABS”), and other investment vehicles. We also manage our own fixed income investments.  These fixed income investments currently include SSCLs and other corporate debt and formerly included residential mortgage backed securities (“RMBS”). On April 13, 2011, we completed a merger with Commercial Industrial Finance Corp. (“Legacy CIFC”).  See Note 3 for a description of the merger.

Business Overview

We have historically reported our business in three segments, Investment Management, Principal Investing and Consolidated Investment Products.  As a result of the merger with Legacy CIFC (the “Merger”), and a shift to focus on our core investment management operations, management re-evaluated how it views the business.  As of September 30, 2011, we now view the business and its results of operations on an overall consolidated basis.  This is a result, in part, of the Merger and associated changes in our strategy to focus on the core asset management business. These factors resulted in changes to our internal management and reporting structure such that our historical Principal Investing and Consolidated Investment Products segments no longer meet the requirements of reportable segments on a stand-alone basis.  As a result, in the third quarter of 2011, we determined that we have only one reportable operating segment.  Information we have historically presented on a segment basis will now be presented on a consolidated basis.

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 the U.S., Europe, North Asia and Australia.  Our existing investment products are primarily CLOs and also include CDOs and other investment vehicles.  For a detailed description of CLOs see Collateralized Loan Obligations (CLOs) in Note 4.  These investment products are special purpose entities that pool the capital contributions 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, incentive fees based on the returns generated for certain investors. These activities had historically been included within our Investment Management segment.

We also manage, primarily through DFR Middle Market CLO Ltd. (“DFR MM CLO”), our own fixed income investments, which include SSCLs and other corporate debt. We consolidate the investments of DFR MM CLO because we own all of its subordinated notes. Historically, our fixed income investments also included significant investments in RMBS until we made the decision to liquidate this portfolio during the second quarter of 2011. Income from our fixed income investments are influenced by four factors: (i) the difference between the interest income we earn on our investment portfolio and the cost of our borrowings net of hedges, if any, (ii) the net recognized gains and losses, if any, on our investment portfolio, (iii) provision for loan losses, if any, and (iv) the volume or aggregate amount of such investments. The majority of these activities had historically been included within our Principal Investing segment.

We are required to consolidate the assets and liabilities of certain CLOs and 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”).  See Principles of Consolidation in Note 2 for additional information. The activities of the majority of these consolidated entities had historically been included within our Consolidated Investment Products segment.

2.  ACCOUNTING POLICIES AND RECENT ACCOUNTING UPDATES

Basis of Presentation —We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are in the form prescribed by the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X and the

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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, 2010, which are included in our Annual Report on Form 10-K filed with the SEC on March 31, 2011 (our “2010 10-K”). In the opinion of our management, 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 “variable interest entities” (and referred to herein as “VIEs”) with respect to which we are deemed under ASC 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 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 performance or other management fees in certain of our CLOs and CDOs can (but does not always) satisfy criteria (ii). As a result of ASC 810, we have determined that we must consolidate 21 of the 43 CLOs and CDOs that we manage, as described below in further detail.

Other than DFR MM CLO, in which we own all the subordinated notes, 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, 2011, we own a small portion of the total debt and subordinated notes issued by the CLOs. Where we had a direct investment, it was typically in the unrated, junior subordinated tranches of the CLOs. These unrated, junior subordinated tranches, referred to herein as “subordinated notes,” took the form of either subordinated notes or preference shares. For a detailed description of CLOs see Note 4.

In addition to the DFR MM CLO, which was historically consolidated under ASC Topic 810, effective January 1, 2010, we consolidate six additional CLOs and one CDO as a result of the adoption of the amendments to ASC Topic 810. In conjunction with the acquisition of Columbus Nova Credit Investments Management, LLC (“CNCIM”), effective June 9, 2010, we consolidate four additional CLOs (the “CNCIM CLOs”).  In conjunction with the merger with Legacy CIFC, effective April 13, 2011, we consolidate ten additional CLOs (the “CIFC CLOs”) (which, together with the ten CLOs and one CDO we previously consolidated, we refer to as the “Consolidated CLOs”).  As of September 30, 2011, our Consolidated CLOs included a total of 20 CLOs and one CDO.  See Consolidated CLOs in Note 4 for additional discussion of our Consolidated CLOs.

As of September 30, 2011, we had a variable interest in 21 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 $0.8 million and $1.0 million from the unconsolidated CLOs and CDOs as of September 30, 2011 and December 31, 2010, respectively.

We also consolidate a special purpose vehicle, CIFC Funding 2011-I, Ltd. (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 are SSCLs which we intend to eventually include within an expected new CLO to be issued by the Warehouse SPV and managed by CIFC Asset Management LLC (“CIFCAM”).  See Total Return Swap in Note 7 for more information on the Warehouse TRS.

Goodwill —Goodwill represents the excess cost of a business combination over the fair value of the net assets acquired. Goodwill is tested for impairment annually or more frequently when events or changes in circumstances indicate the asset might be impaired. The evaluation of goodwill for impairment requires us to make estimates and exercise significant judgment. During the three months ended September 30, 2011, there were no events or changes in circumstances that would indicate that the current carrying

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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 2011.

Correction of Prior Period Presentation — Subsequent to the issuance of the Company’s financial statements for the year ended December 31, 2010, we identified an omitted disclosure in the presentation of the assets and liabilities of the DFR MM CLO on the consolidated balance sheets.  As a result of the adoption of ASU 2009-17, in 2010, assets and liabilities of consolidated variable interest entities should be separately presented within a Company’s consolidated balance sheets, with parenthetical presentation as one acceptable method.  Historically only the assets and liabilities of the Consolidated CLOs were separately presented, thus the balance sheet as of December 31, 2010 has been corrected to separately present the assets and liabilities of the DFR MM CLO under the captions Assets and Liabilities of Consolidated Variable Interest Entities , aggregated with the assets and liabilities of the Consolidated CLOs.  This correction had no impact on total assets, liabilities, net income or cash flows.

Reclassifications —Certain amounts in the condensed consolidated financial statements as of December 31, 2010 and for the three and nine months ended September 30, 2010 have been reclassified to conform to the presentation as of September 30, 2011 and for the three and nine months ended September 30, 2011.  These reclassifications have been made primarily to more clearly present information about our consolidated variable interest entities within our condensed consolidated financial statements.

Condensed Consolidated Statements of Operations — Statement of operations activities related to the Consolidated CLOs, DFR MM CLO and the Warehouse TRS are now presented within the section “Results of Consolidated Variable Interest Entities”.  Net gain (loss) from activities of Consolidated Variable Interest Entities includes activities of variable interest entities previously presented within interest income, interest expense, provision for loan losses, net gain (loss) on investments, loans, derivatives and liabilities and other, net.  See Note 8 for the details of the components of net gain (loss) from activities of Consolidated Variable Interest Entities.  In addition, interest expense related to our corporate debt has been reclassified from interest expense within the “Revenues” section to corporate interest expense within the “Other Income (Expense) and Gain (Loss)” section.  Interest expense within the “Revenues” section now primarily includes interest expense related to repurchase agreements used to finance our RMBS portfolio prior to the liquidation of the portfolio during the second quarter of 2011.

Condensed Consolidated Statements of Cash Flows — Cash flows of the Consolidated CLOs, DFR MM CLO and the Warehouse TRS have now been presented separately within the condensed consolidated statements of cash flows to conform with the presentation of the Balance Sheet and Statement of Operations.

Significant Accounting Policies — Our significant accounting policies are discussed in the Notes to the Consolidated Financial Statements included in our 2010 10-K.

Recent Accounting Updates

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosure—Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amended ASC Topic 820— Fair Value Measurements and Disclosures (“ASC Topic 820”) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. ASU 2010-06 also clarified existing fair value disclosures about the level of disaggregation as well as inputs and valuation techniques used to measure fair value. We adopted in 2010 ASU 2010-06, with the exception of the requirement to provide disclosure of the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which we adopted in 2011. See Note 5 for required fair value disclosures, including the amendments to ASC Topic 820.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”). ASU 2011-02 amends ASC Topic 310 to provide new guidance to assist creditors in determining if a restructuring constitutes a troubled debt restructuring, thus requiring specific disclosures outlined in ASC Topic 310. ASU 2011-02 became effective for interim and annual periods beginning on or after June 15, 2011, and will be applied retrospectively to the beginning of the annual period of adoption. As such we have adopted the amendments to ASC Topic 310 for the three and nine months ended September 30, 2011, and the adoption did not have an impact on our condensed consolidated financial statements.  See Note 6 for the required disclosure relating to troubled debt restructurings during the three and nine months ended September 30, 2011.

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.

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ASU 2011-4 will be effective for interim and annual reporting periods beginning after December 15, 2011.  We are currently assessing the impacts ASU 2011-4 will have in our condensed consolidated financial statements.

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 will be effective for interim and annual reporting periods beginning after December 15, 2011.  We are currently assessing the alternative presentations.

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 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not intend to early adopt and do not expect this guidance to have any material impact on our condensed consolidated financial statements.

3. 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 CIFC Asset Management LLC (“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 (the “Stock Consideration”), (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 and the remaining of which are payable on the first and second anniversaries 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 million of incentive fees received by the combined company from certain CLOs currently managed by CIFCAM, (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 currently managed by CIFCAM and (vii) payments relating to the present value of any such incentive fees from certain CLOs currently managed by CIFCAM 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 September 30, 2011, and for the period from the Merger Closing Date to September 30, 2011.

Calculation of the purchase consideration in accordance with ASC Topic 805 — Business Combinations (“ASC Topic 805”) is as follows:

(1)            Represents the closing price of the Company’s 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.

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(4)            Represents the 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 payments total $5.0 million and are to be paid in two equal annual installments of $2.5 million, with the first payment being made on the first 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 payments are to be paid as follows: (i) the first $15.0 million of incentive fees received by the combined company from certain CLOs currently managed by CIFCAM, (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 currently managed by CIFCAM that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. The incentive fee payments were based on projected future incentive fees from the CLOs and were discounted to arrive at an estimated fair value.

The following is a summary of the recognized amounts of assets acquired and liabilities assumed as a result of the Merger:

(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:

The fair value of the intangible assets related to the investment management contracts of CIFCAM and its wholly-owned subsidiary, CypressTree Investment Management, LLC (“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 rates, recoveries 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 the expected remaining useful life. 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.

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The Company recorded amortization expense of $3.1 million and $6.0 million for the three and nine months ended September 30, 2011, respectively, related to the amortization of the intangible assets acquired.  The following table presents expected remaining amortization expense of the identifiable intangible assets acquired as of September 30, 2011:

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 advisory fees from the CypressTree CLOs.  These fixed percentages vary by CLO and have a minimum fixed percentage of 55%.  These contingent liability valuations are 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 will be remeasured at fair value at each reporting date and recorded within contingent liabilities on the condensed consolidated balance sheets.  The estimated fair value of the contingent liabilities are as follows:

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:

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 issuance 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, 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 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.

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Management is currently in the process of reviewing the final purchase price calculations related to identifiable intangible assets, goodwill, net deferred tax liabilities and contingent liabilities.

We have 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, for a net expense of $0.1 million and $1.5 million during the three and nine months ended September 30, 2011, respectively recorded within strategic transactions expenses in the condensed consolidated statements of operations.

As a result of the Merger, on the Closing Date we changed our name to CIFC Deerfield Corp. and moved our principal executive offices and corporate headquarters from 6250 North River Road, 12th Floor, Rosemont, Illinois 60018 to 250 Park Avenue, 5th Floor, New York, NY 10177.  In addition, the state of incorporation of CIFC Deerfield Corp. was changed from Maryland to Delaware.  On July 19, 2011, we changed our name to CIFC Corp.

Unaudited Pro Forma Financial Information

During the three and nine months ended September 30, 2011, we recognized net revenues of $7.8 million and $11.7 million, respectively, ($6.7 million and $9.8 million of which are eliminated upon consolidation during the three and nine months ended September 30, 2011, respectively) and net loss attributable to CIFC Corp. of $10.6 million and $16.8 million, respectively, related to CIFCAM and CypressTree. As a result of the Merger, we began to consolidate ten CIFC CLOs and as of September 30, 2011, we consolidated assets of $4.2 billion and non-recourse liabilities of $4.0 billion related to the CIFC CLOs. For the three and nine months ended September 30, 2011, we recorded net losses of $93.6 million and $162.5 million, respectively, related to the consolidation of the CIFC CLOs within net results of Consolidated Variable Interest Entities.

The following unaudited pro forma combined financial information gives effect to the Merger as well as the following transactions (collectively, the “Transactions”) (with the defined terms having the meanings described in the consolidated financial statements for the year ended December 31, 2010 and notes thereto included in our Annual Report on Form 10-K) as if they had been completed as of January 1, 2010: (1) the CNCIM Acquisition and issuance of the Acquisition Shares, and the issuance of the Convertible Notes; (2) the Senior Notes Discharge; (3) the Trust Preferred Exchange; and (4) the DPLC Restructuring.

This unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the Merger or the Transactions had been consummated during the period or as of the dates for which pro forma data is presented, nor is it necessarily indicative of future operating results of CIFC.  The pro forma combined financial information for the three and nine months ended September 30, 2011 and 2010 does not give effect to the application of ASC Topic 810 for the period prior to the Merger as it relates to the CIFC CLOs and for the period prior to the CNCIM acquisition as it relates to the four CNCIM CLOs.  In addition, the pro forma combined financial information for the three and nine months ended September 30, 2010 does not give effect to the Legacy CIFC acquisition of CypressTree for the period prior to the December 1, 2010 acquisition.

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4. CLOS AND CONSOLIDATED VARIABLE INTEREST ENTITIES

Collateralized Loan Obligations (CLOs)

The term CLO (which for purposes of the discussion in this section also includes the term CDO) generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investments purchased by the CLO are governed by extensive investment guidelines, including limits on the CLO’s exposure to any single industry or issuer and limits on the ratings of the CLO’s assets. Most CLOs have a defined investment period during which they are allowed to make investments or 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 the “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.  The majority of the subordinated notes of the CLOs we manage are owned by third parties. See Note 14 for disclosure of ownership of CLOs we manage by related parties. We own all of the subordinated notes of the DFR MM CLO and a significantly smaller portion of the subordinated notes of certain of the other CLOs we manage.  Our two principal stockholders own, either directly or indirectly, subordinated notes in ten of the Consolidated CLOs and two CLOs which we manage but do not consolidate.

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 receive investment advisory fees which 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.  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 specified parameters (usually referred to as a “waterfall” or “application of proceeds”).

Consolidated Variable Interest Entities

Consolidated CLOs

We consolidated the 21 Consolidated CLOs with assets of $8.0 billion and non-recourse liabilities of $7.7 billion into our condensed consolidated financial statements as of September 30, 2011. The Consolidated CLOs include the ten CIFC CLOs we consolidated effective April 13, 2011 in conjunction with the Merger. The CIFC CLOs include six CLOs managed by CIFCAM and four CLOs managed by CypressTree and, as of September 30, 2011, we consolidated assets of $4.2 billion and non-recourse liabilities of $4.0 billion related to these CLOs. Although we consolidate 100% 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 ($7.1 million and $9.3 million as of September 30, 2011 and December 31, 2010, respectively), our investment advisory fee receivables from the Consolidated CLOs ($2.2 million and $1.2 million as of September 30, 2011 and December 31, 2010, 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 respective Consolidated CLO. 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 the general creditors of CIFC, 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.

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.

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Net losses recorded for the Consolidated CLOs are not indicative of the cash flow distributions we receive from the Consolidated CLOs. For the three and nine months ended September 30, 2011, net losses of $218.8 million and $329.2 million, respectively, were recorded in our condensed consolidated statements of operations related to the Consolidated CLOs. For the three and nine months ended September 30, 2010, net losses of $21.6 million and $50.2 million, respectively, were recorded in 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 eliminations:

DFR MM CLO

We have consolidated the DFR MM CLO since its inception in 2007 and did not elect the fair value option for the assets and liabilities of DFR MM CLO.  As we no longer intend to hold the loans within DFR MM CLO to maturity, as of September 30, 2011, all loans held within DFR MM CLO were reclassified to loans held for sale from loans held for investment. Both loans held for sale and loans held for investment are components of loans, net of allowance for loan losses, as reflected on the condensed consolidated balance sheet. See Note 6 for additional information regarding the reclassification of the loans within DFR MM CLO to held for sale.  The long-term debt of DFR MM CLO is carried at par.  We consolidated assets of $173.3 million and liabilities of $122.7 million related to DFR MM CLO as of September 30, 2011.

Although we consolidate 100% of the assets and liabilities of DFR MM CLO, our maximum exposure to loss on our investment in this entity is 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 investment in DFR MM CLO is determined by the cash distributed to us on our investment therein which, from the date of our initial investment through September 30, 2011, has totaled $48.1 million on our subordinated notes investment and $4.5 million in interest on our debt investment. The DFR MM CLO’s debt holders have recourse only to the assets of the DFR MM CLO and not to our general assets. Our subordinated notes investment is subject to diversion of cash flows in accordance with the DFR MM CLO indenture.

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 gain (loss) from activities 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, 2010, we recorded net income of $1.5 million and $12.3 million, respectively, in our condensed consolidated statements of operations related to the DFR MM CLO.

We receive cash flow distributions from the DFR MM CLO consisting of interest on our debt investment and distributions on our subordinated note investment, which are eliminated in consolidation. The following table presents the components of the cash flow distributions from the DFR MM CLO.  The following table presents the components of the cash flow distributions from the DFR MM CLO before eliminations: