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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
or
☐
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: 001-33805
SCULPTOR CAPITAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
 
 
Delaware
 
26-0354783
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
9 West 57th Street, New York, New York 10019
(Address of principal executive offices)
(212) 790-0000
(Registrant’s telephone number, including area code)
OCH-ZIFF CAPITAL MANAGEMENT GROUP INC.
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbols
 
Name of each exchange on which registered
Class A Shares
 
SCU
 
New York Stock Exchange
 
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  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
  
Accelerated filer
☑
 
 
 
 
Non-accelerated filer
☐
  
Smaller reporting company
☐
 
 
 
 
 
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 4, 2019, there were 20,788,825 Class A Shares and 29,208,952 Class B Shares outstanding.
 
 




SCULPTOR CAPITAL MANAGEMENT, INC.
TABLE OF CONTENTS
 
 
 
Page
PART I — FINANCIAL INFORMATION
 
 
 
Item 1.
4
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
10
 
 
 
Item 2.
45
 
 
 
Item 3.
85
 
 
 
Item 4.
86
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
88
 
 
 
Item 1A.
88
 
 
 
Item 2.
88
 
 
 
Item 3.
88
 
 
 
Item 4.
88
 
 
 
Item 5.
88
 
 
 
Item 6.
89
 
 
90



i

Defined Terms
2007 Offerings
 
Refers collectively to our IPO and the concurrent private offering of approximately 38.1 million Class A Shares to DIC Sahir Limited, a wholly owned indirect subsidiary of Dubai Holdings LLC
 
 
 
active executive managing directors
 
Executive managing directors who remain active in our business
 
 
 
Annual Report
 
Our annual report on Form 10-K for the year ended December 31, 2018, dated March 15, 2019 and filed with the SEC
 
 
 
Class A Shares
 
Our Class A Shares, representing Class A common stock of Sculptor Capital Management, Inc., which are publicly traded and listed on the NYSE
 
 
 
Class B Shares
 
Class B Shares of Sculptor Capital Management, Inc., which are not publicly traded, are currently held solely by our executive managing directors and have no economic rights but entitle the holders thereof to one vote per share together with the holders of our Class A Shares
 
 
 
CLOs
 
Collateralized loan obligations
 
 
 
the Company, Sculptor Capital, the firm, we, us, our
 
Refers, unless the context requires otherwise, to the Registrant and its consolidated subsidiaries, including the Sculptor Operating Group
 
 
 
Exchange Act
 
Securities Exchange Act of 1934, as amended
 
 
 
executive managing directors
 
The current executive managing directors of the Company, and, except where the context requires otherwise, also includes certain executive managing directors who are no longer active in our business
 
 
 
funds
 
The multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds and other alternative investment vehicles for which we provide asset management services
 
 
 
GAAP
 
U.S. generally accepted accounting principles
 
 
 
Group A Units
 
Refers collectively to one Class A operating group unit in each of the Sculptor Operating Partnerships. Group A Units are limited partner interests held by our executive managing directors
 
 
 
Group A-1 Units
 
Refers collectively to one Class A-1 operating group unit in each of the Sculptor Operating Partnerships. Group A-1 Units are limited partner interests held by our executive managing directors
 
 
 
Group B Units
 
Refers collectively to one Class B operating group unit in each of the Sculptor Operating Partnerships. Group B Units are limited partner interests held by Sculptor Corp
 
 
 
Group D Units
 
Refers collectively to one Class D operating group unit in each of the Sculptor Operating Partnerships. Group D Units are limited partner interests held by our executive managing directors
 
 
 
Group E Units
 
Refers collectively to one Class E operating group unit in each of the Sculptor Operating Partnerships. Group E Units are limited partner interests held by our executive managing directors
 
 
 


1

Group P Units
 
Refers collectively to one Class P operating group unit in each of the Sculptor Operating Partnerships. Group P Units are limited partner interests held by our executive managing directors
 
 
 
Institutional Credit Strategies
 
Our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions
 
 
 
IPO
 
Our initial public offering of 3.6 million Class A Shares that occurred in November 2007
 
 
 
NYSE
 
New York Stock Exchange
 
 
 
Partner Equity Units
 
Refers collectively to the Group A Units, Group E Units and Group P Units
 
 
 
Preferred Units
 
One Class A cumulative preferred unit in each of the Sculptor Operating Partnerships collectively represents one “Preferred Unit.” Certain of our executive managing directors collectively own 100% of the Preferred Units. Preferred Units issued in 2016 and 2017 are, collectively, referred to as “2016 Preferred Units.” Preferred Units issued in 2019 are referred to as “2019 Preferred Units.”
 
 
 
PSUs
 
Class A performance-based RSUs
 
 
 
Recapitalization
 
Refers to the recapitalization of our business that occurred in February 2019. As part of the Recapitalization, a portion of the interests held by our active and former executive managing directors were reallocated to existing members of senior management. In addition, we restructured the previously outstanding senior debt and Preferred Units.
 
 
 
Registrant
 
Sculptor Capital Management, Inc., a Delaware corporation
 
 
 
RSUs
 
Class A restricted share units
 
 
 
Sculptor Corp
 
Sculptor Capital Holding Corporation, a Delaware corporation
 
 
 
Sculptor Operating Group
 
Refers collectively to the Sculptor Operating Partnerships and their consolidated subsidiaries
 
 
 
Sculptor Operating Partnerships
 
Refers collectively to Sculptor Capital LP, Sculptor Capital Advisors LP and Sculptor Capital Advisors II LP
 
 
 
SEC
 
U.S. Securities and Exchange Commission
 
 
 
Securities Act
 
Securities Act of 1933, as amended
 
 
 
Special Investments
 
Investments that we, as investment manager, believe lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance


2

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


3




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS — UNAUDITED
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
126,814

 
$
315,809

Restricted cash
4,954

 
8,075

Investments (includes assets measured at fair value of $438,720 and $361,378, including assets sold under agreements to repurchase of $95,782 and $62,186 as of September 30, 2019, and December 31, 2018, respectively)
497,548

 
389,897

Income and fees receivable
34,812

 
82,843

Due from related parties
21,715

 
20,754

Deferred income tax assets
328,789

 
355,025

Operating lease assets
118,411

 
—

Other assets, net
79,958

 
82,403

Assets of consolidated funds:
 
 
 
Investments of consolidated funds, at fair value
—

 
171,495

Other assets of consolidated funds
649

 
21,090

Total Assets
$
1,213,650

 
$
1,447,391

 
 
 
 
Liabilities and Shareholders’ Equity (Deficit)
 
 
 
Liabilities
 

 
 
Compensation payable
$
63,537

 
$
105,036

Unearned incentive income
63,391

 
61,397

Due to related parties
211,361

 
281,821

Operating lease liabilities
130,294

 
—

Debt obligations
284,700

 
289,987

Securities sold under agreements to repurchase
94,745

 
62,801

Other liabilities
58,857

 
63,603

Liabilities of consolidated funds:
 
 
 
Other liabilities of consolidated funds
388

 
14,541

Total Liabilities
907,273

 
879,186

 
 
 
 
Commitments and Contingencies (Note 19)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 4)
150,000

 
577,660

 
 
 
 
Shareholders’ Equity (Deficit)
 

 
 

Class A Shares, $0.01 and no par value, 100,000,000 and 100,000,000 shares authorized, 20,749,306 and 19,905,126 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
207

 
—

Class B Shares, $0.01 and no par value, 75,000,000 and 75,000,000 shares authorized, 29,208,952 and 29,458,948 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
292

 
—

Additional paid-in capital
100,416

 
3,135,841

Accumulated deficit
(390,458
)
 
(3,564,727
)
Shareholders’ deficit attributable to Class A Shareholders
(289,543
)
 
(428,886
)
Shareholders’ equity attributable to noncontrolling interests
445,920

 
419,431

Total Shareholders’ Equity (Deficit)
156,377

 
(9,455
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Equity (Deficit)
$
1,213,650

 
$
1,447,391

See notes to consolidated financial statements.


4

SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
Management fees
$
62,956

 
$
70,675

 
$
187,979

 
$
213,718

Incentive income
30,423

 
19,303

 
118,378

 
104,793

Other revenues
3,646

 
3,342

 
12,458

 
11,751

Income of consolidated funds
1,820

 
507

 
6,732

 
1,741

Total Revenues
98,845

 
93,827

 
325,547

 
332,003


 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and benefits
78,343

 
74,635

 
244,767

 
218,061

Interest expense
6,323

 
4,820

 
19,054

 
18,923

General, administrative and other
48,272

 
50,289

 
114,487

 
136,648

Expenses of consolidated funds
507

 
(5
)
 
646

 
103

Total Expenses
133,445

 
129,739

 
378,954

 
373,735


 
 
 
 
 
 
 
Other (Loss) Income
 
 
 
 
 
 
 
Changes in tax receivable agreement liability
—

 
—

 
5,362

 
—

Net losses on early retirement of debt
(218
)
 
—

 
(6,271
)
 
(14,303
)
Net (losses) gains on investments
(2,169
)
 
(541
)
 
3,668

 
(1,014
)
Net (losses) gains of consolidated funds
(460
)
 
290

 
3,768

 
756

Total Other (Loss) Income
(2,847
)
 
(251
)
 
6,527

 
(14,561
)

 
 
 
 
 
 
 
Loss Before Income Taxes
(37,447
)
 
(36,163
)
 
(46,880
)
 
(56,293
)
Income taxes
(1,446
)
 
(860
)
 
12,074

 
(372
)
Consolidated and Comprehensive Net Loss
(36,001
)
 
(35,303
)
 
(58,954
)
 
(55,921
)
Less: Net loss attributable to noncontrolling interests
11,435

 
21,140

 
26,653

 
33,945

Less: Net income attributable to redeemable noncontrolling interests
(574
)
 
(374
)
 
(8,745
)
 
(1,327
)
Net Loss Attributable to Sculptor Capital Management, Inc.
(25,140
)
 
(14,537
)
 
(41,046
)
 
(23,303
)
Less: Change in redemption value of Preferred Units
—

 
—

 
44,364

 
—

Net (Loss) Income Attributable to Class A Shareholders
$
(25,140
)
 
$
(14,537
)
 
$
3,318

 
$
(23,303
)
 
 
 
 
 
 
 
 
(Loss) Earnings per Class A Share
 
 
 
 
 
 
 
(Loss) Earnings per Class A Share - basic
$
(1.20
)
 
$
(0.75
)
 
$
0.16

 
$
(1.21
)
(Loss) Earnings per Class A Share - diluted
$
(1.20
)
 
$
(0.75
)
 
$
0.12

 
$
(1.21
)
Weighted-average Class A Shares outstanding - basic
20,907,021


19,265,777

 
20,703,211

 
19,248,528

Weighted-average Class A Shares outstanding - diluted
20,907,021


19,265,777

 
28,165,978

 
19,248,528


See notes to consolidated financial statements.


5

SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) — UNAUDITED

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Number of Class A Shares
 
 
 
 
 
 
 
Beginning balance
20,631,750

 
19,126,958

 
19,905,126

 
18,957,321

Equity-based compensation
117,556

 
33,767

 
844,180

 
203,404

Ending Balance
20,749,306

 
19,160,725

 
20,749,306

 
19,160,725

 
 
 
 
 
 
 
 
Number of Class B Shares
 
 
 
 
 
 
 
Beginning balance
29,208,952

 
30,383,948

 
29,458,948

 
33,933,948

Equity-based compensation
—

 
(350,000
)
 
(249,996
)
 
(3,900,000
)
Ending Balance
29,208,952

 
30,033,948

 
29,208,952

 
30,033,948

 
 
 
 
 
 
 
 
Class A Shares Par Value
 
 
 
 
 
 
 
Beginning balance
$
206

 
$
—

 
$
—

 
$
—

Equity-based compensation
1

 
—

 
2

 
—

Reclassification upon corporate conversion
—

 
—

 
205

 
—

Ending Balance
$
207

 
$
—

 
$
207

 
$
—

 
 
 
 
 
 
 
 
Class B Shares Par Value
 
 
 
 
 
 
 
Beginning balance
$
292

 
$
—

 
$
—

 
$
—

Reclassification upon corporate conversion
—

 
—

 
292

 
—

Ending Balance
$
292

 
$
—

 
$
292

 
$
—

 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Beginning balance
$
70,875

 
$
3,119,464

 
$
3,135,841

 
$
3,102,074

Dividend equivalents on Class A restricted share units
483

 
90

 
961

 
967

Equity-based compensation, net of taxes
29,058

 
9,238

 
69,376

 
26,066

Reclassification upon corporate conversion
—

 
—

 
(3,235,728
)
 
—

Impact of changes in Sculptor Operating Group ownership
—

 
(205
)
 
(124
)
 
(520
)
Reallocation of equity and income tax effects of Recapitalization
—

 
—

 
35,408

 
—

Amendment to tax receivable agreement
—

 
—

 
50,318

 
—

Change in redemption value of Preferred Units
—

 
—

 
44,364

 
—

Ending Balance
$
100,416

 
$
3,128,587

 
$
100,416

 
$
3,128,587

 
 
 
 
 
 
 
 
Accumulated Deficit
 
 
 
 
 
 
 
Beginning balance
$
(358,204
)
 
$
(3,540,803
)
 
$
(3,564,727
)
 
$
(3,555,905
)
Impact of adoption of ASU 2014-09
—

 
—

 
—

 
41,922

Cash dividends declared on Class A Shares
(6,631
)
 
(3,829
)
 
(18,955
)
 
(21,006
)
Dividend equivalents on Class A restricted share units
(483
)
 
(90
)
 
(961
)
 
(967
)
Reclassification upon corporate conversion
—

 
—

 
3,235,231

 
—

Comprehensive net loss, excluding amounts attributable to redeemable noncontrolling interests
(25,140
)
 
(14,537
)
 
(41,046
)
 
(23,303
)
Ending Balance
$
(390,458
)
 
$
(3,559,259
)
 
$
(390,458
)
 
$
(3,559,259
)
Shareholders’ Deficit Attributable to Class A Shareholders
$
(289,543
)
 
$
(430,672
)
 
$
(289,543
)
 
$
(430,672
)


6

SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) — UNAUDITED — (continued)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Shareholders’ Equity Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Beginning balance
$
453,892

 
$
419,886

 
$
419,431

 
$
357,902

Impact of adoption of ASU 2014-09
—

 
—

 
—

 
75,062

Capital contributions
958

 
24

 
1,576

 
902

Capital distributions
(264
)
 
(5,611
)
 
(891
)
 
(30,094
)
Equity-based compensation, net of taxes
2,769

 
12,510

 
34,377

 
35,527

Impact of changes in Sculptor Operating Group ownership
—

 
205

 
124

 
520

Reallocation of equity and income tax effects of Recapitalization
—

 
—

 
(39,086
)
 
—

Change in redemption value of Preferred Units
—

 
—

 
57,042

 
—

Comprehensive net loss, excluding amounts attributable to redeemable noncontrolling interests
(11,435
)
 
(21,140
)
 
(26,653
)
 
(33,945
)
Ending Balance
$
445,920

 
$
405,874

 
$
445,920

 
$
405,874

Total Shareholders’ Equity (Deficit)
$
156,377

 
$
(24,798
)
 
$
156,377

 
$
(24,798
)
 
 
 
 
 
 
 
 
Cash dividends paid on Class A Shares
$
0.32

 
$
0.20

 
$
0.92

 
$
1.10


See notes to consolidated financial statements.


7

SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED




 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net loss
$
(58,954
)
 
$
(55,921
)
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
106,270

 
67,848

Depreciation, amortization and net gains and losses on fixed assets
6,941

 
7,709

Net losses on early retirement of debt
6,271

 
14,303

Deferred income taxes
6,525

 
(3,341
)
Operating and finance lease assets amortization
8,007

 
—

Operating and finance lease liabilities accretion
7,904

 
—

Net (gains) losses on investments, net of dividends
(823
)
 
4,238

Operating cash flows due to changes in:
 
 
 
Income and fees receivable
48,031

 
343,769

Due from related parties
(961
)
 
(4,141
)
Other assets, net
8,756

 
35,489

Compensation payable
(43,143
)
 
(145,612
)
Unearned incentive income
1,994

 
23,697

Due to related parties
(4,140
)
 
442

Operating lease liabilities
(13,485
)
 
—

Other liabilities
798

 
8

Consolidated funds related items:
 
 
 
Net gains of consolidated funds
(3,768
)
 
(756
)
Purchases of investments
(128,917
)
 
(333,657
)
Proceeds from sale of investments
263,505

 
194,802

Other assets of consolidated funds
(31,815
)
 
(26,888
)
Other liabilities of consolidated funds
8,038

 
25,792

Net Cash Provided by Operating Activities
187,034

 
147,781

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(1,587
)
 
(3,596
)
Purchases of United States government obligations
(260,445
)
 
(293,183
)
Maturities of United States government obligations
181,278

 
20,500

Investments in funds
(84,906
)
 
(152,272
)
Return of investments in funds
56,947

 
172,950

Net Cash Used in Investing Activities
(108,713
)
 
(255,601
)
 
 
 
 


8

SCULPTOR CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED — (continued)


 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
 
(dollars in thousands)
Cash Flows from Financing Activities
 
 
 
Contributions from noncontrolling and redeemable noncontrolling interests
5,323

 
150,074

Distributions to noncontrolling and redeemable noncontrolling interests
(103,983
)
 
(41,005
)
Dividends on Class A Shares
(18,955
)
 
(21,006
)
Proceeds from debt obligations, net of issuance costs
—

 
301,681

Repayment of debt obligations, including prepayment costs
(187,790
)
 
(595,431
)
Proceeds from securities sold under agreements to repurchase, net of issuance costs
36,134

 
42,348

Other, net
(1,166
)
 
(3,313
)
Net Cash Used in Financing Activities
(270,437
)
 
(166,652
)
Net Change in Cash and Cash Equivalents and Restricted Cash
(192,116
)
 
(274,472
)
Cash and Cash Equivalents and Restricted Cash, Beginning of Period
323,884

 
469,513

Cash and Cash Equivalents and Restricted Cash, End of Period
$
131,768

 
$
195,041

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
9,810

 
$
25,245

Income taxes
$
4,199

 
$
2,061

 
 
 
 
Non-cash transactions:
 
 
 
Increase in paid-in capital as a result of tax receivable agreement amendment (Note 19)
$
50,318

 
$
—

Assets related to funds deconsolidated (See Note 6)
$
92,946

 
$
—

Liabilities related to funds deconsolidated (See Note 6)
$
49,588

 
$
—

 
 
 
 
Reconciliation of cash and cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
126,814

 
$
195,041

Restricted cash
4,954

 
—

Total Cash and Cash Equivalents and Restricted Cash
$
131,768

 
$
195,041


See notes to consolidated financial statements.


9

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019



1. OVERVIEW
Sculptor Capital Management, Inc. (the “Registrant”), formerly Och-Ziff Capital Management Group Inc., a Delaware corporation, together with its consolidated subsidiaries (collectively, the “Company” or “Sculptor Capital”), is a leading global alternative asset management firm providing investment products in a range of areas, including multi-strategy, credit and real estate. With offices in New York, London, Hong Kong and Shanghai, the Company serves global clients through commingled funds, separate accounts and specialized products (collectively, the “funds”). Sculptor Capital’s distinct investment process seeks to generate attractive and consistent risk-adjusted returns across market cycles through a combination of fundamental bottom-up research, a high degree of flexibility, a collaborative team and integrated risk management. The Company’s capabilities span all major geographies, in strategies including fundamental equities, corporate credit, real estate debt and equity, merger arbitrage, structured credit and private investments.
The Company manages multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds and other alternative investment vehicles. Through Institutional Credit Strategies, the Company’s asset management platform that invests in performing credits, the Company manages collateralized loan obligations (“CLOs”) and other customized solutions for clients.
The Company’s primary sources of revenues are management fees, which are based on the amount of the Company’s assets under management, and incentive income, which is based on the investment performance of its funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the funds.
The Company currently has two operating segments: Sculptor Funds and Real Estate. The Sculptor Funds segment provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles. The Real Estate segment provides asset management services to the Company’s real estate funds. The Company generates substantially all of its revenues in the United States.
The Company conducts its operations through Sculptor Capital LP, Sculptor Capital Advisors LP and Sculptor Capital Advisors II LP (collectively, the “Sculptor Operating Partnerships” and collectively with their consolidated subsidiaries, the “Sculptor Operating Group”). The Registrant holds its interests in the Sculptor Operating Group indirectly through Sculptor Capital Holding Corporation (“Sculptor Corp”), a wholly owned subsidiary of the Registrant.
References to the Company’s “executive managing directors” include the current executive managing directors of the Company, and, except where the context requires otherwise, also include certain executive managing directors who are no longer active in the Company’s business. References to the Company’s “active executive managing directors” refer to executive managing directors who remain active in the Company’s business.
The Registrant, certain of its subsidiaries and the Company’s founder, Daniel S. Och, entered into a letter agreement dated December 5, 2018, providing for the implementation of certain transactions (the letter agreement together with the term sheet attached thereto, as amended, collectively, the “Letter Agreement”). The Letter Agreement provided for, among other things, the preparation and execution of further agreements (the “Implementing Agreements”) and other actions to implement the transactions contemplated by the Letter Agreement (collectively, the “Recapitalization”). In February 2019, the Company completed the Recapitalization. See Note 3 for additional details.


10

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


Company Structure
As of September 30, 2019, the Registrant is a holding company that, through Sculptor Corp, holds equity ownership interests in the Sculptor Operating Group. The Registrant had issued and outstanding the following share classes:
•
Class A Shares—Class A Shares are publicly traded and entitle the holders thereof to one vote per share on matters submitted to a vote of shareholders. The holders of Class A Shares are entitled to any distributions declared by the Registrant’s Board of Directors (the “Board”).
•
Class B Shares—Class B Shares are held by executive managing directors, as further discussed below. These shares are not publicly traded but rather entitle the executive managing directors to one vote per share on matters submitted to a vote of shareholders. These shares do not participate in the earnings of the Registrant, as the executive managing directors participate in the related economics of the Sculptor Operating Group through their direct ownership in the Sculptor Operating Group, subject to the Distribution Holiday discussed below.
The Company conducts its operations through the Sculptor Operating Group. The following is a list of the outstanding units of the Sculptor Operating Partnerships as of September 30, 2019:
•
Group A Units—Group A Units are limited partner interests issued to certain executive managing directors. Beginning on the final day of the Distribution Holiday (as defined in Note 3), each executive managing director may exchange his or her vested and booked-up (as defined below) Group A Units for an equal number of Class A Shares (or the cash equivalent thereof) over a period of two years in three equal installments commencing upon the final day of the Distribution Holiday and on each of the first and second anniversary thereof (or, for units that become vested and booked-up Group A Units after the final day of the Distribution Holiday, from the later of the date on which they would have been exchangeable in accordance with the foregoing and the date on which they become vested and booked-up Group A Units) (and thereafter such units will remain exchangeable), in each case, subject to certain restrictions. A “book-up” is achieved when sufficient appreciation has occurred to meet a prescribed capital account book-up target under the terms of the Sculptor Operating Partnership limited partnership agreements.
In connection with the Recapitalization, each Group A Unit outstanding on the Recapitalization date was recapitalized into 0.65 Group A Units and 0.35 Group A-1 Units. Holders of Group A Units do not receive distributions during the Distribution Holiday. Group A Unit grants are accounted for as equity-based compensation. See Note 14 for additional information.
•
Group A-1 Units—Group A-1 Units are limited partner interests into which 0.35 of each Group A Unit was recapitalized in connection with the reallocation that was effectuated by the Recapitalization. The Group A-1 Units will be canceled at such time and to the extent that the Group E Units granted in connection with the Recapitalization vest and achieve a book-up. Group A-1 Units are not eligible to receive distributions at any time and do not participate in the net income (loss) of the Sculptor Operating Group. However, the holders of Group A-1 Units shall participate in any sale, change of control or other liquidity event. In the Recapitalization, the holders of the 2016 Preferred Units (as defined below) forfeited an additional 749,813 Group A Units, which were recapitalized into Group A-1 Units.
•
Group B Units—Sculptor Corp holds a general partner interest and Group B Units in each Sculptor Operating Partnership. Sculptor Corp owns all of the Group B Units, which represent equity interest in the Sculptor Operating Partnerships. Except during the Distribution Holiday as described above, the Group B Units are economically identical to the Group A Units held by executive managing directors but are not exchangeable for Class A Shares and are not subject to vesting, forfeiture or minimum retained ownership requirements.
•
Group E Units—Group E Units are limited partner interests issued to certain executive managing directors that are only entitled to future profits and gains. Each Group E Unit converts into a Group A Unit and becomes exchangeable for one Class A Share (or the cash equivalent thereof) to the extent there has been a sufficient amount of appreciation for a Group E Unit to achieve a book-up target and, subject to other conditions contained in the limited partnership agreements of the Sculptor Operating Partnerships, the Distribution Holiday has ended (or an


11

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


earlier exchange date is established by the Exchange Committee). The Group E Units are entitled to share in residual assets upon liquidation, dissolution or winding up and become eligible to participate in any tag along right, in a change of control transaction or other liquidity event only to the extent of their relative positive capital accounts (if any). In connection with the Recapitalization, all outstanding Group D Units, which were non-equity profits interests, converted into Group E Units on a one-for-one basis. Holders of Group E Units do not receive distributions during the Distribution Holiday. See Note 3 for additional information. Group E Unit grants are accounted for as equity-based compensation. See Note 14 for additional information.
•
Group P Units—Group P Units are limited partner interests issued to certain executive managing directors that are only entitled to future profits and gains. Each Group P Unit becomes exchangeable for one Class A Share (or the cash equivalent thereof), in each case upon satisfaction of certain service and performance conditions at such time and, with respect to exchanges, to the extent there has been sufficient appreciation for a Group P Unit to achieve a book-up target and, subject to other conditions contained in the limited partnership agreements of the Sculptor Operating Partnerships, the Distribution Holiday has ended (or an earlier exchange date is established by the Exchange Committee). The Group P Units are entitled to share in residual assets upon liquidation, dissolution or winding up and become eligible to participate in any tag along right, in a change of control transaction or other liquidity event only to the extent that certain performance conditions are met and to the extent of their relative positive capital accounts (if any). The terms of the Group P Units may be varied for certain executive managing directors. Group P Unit grants are accounted for as equity-based compensation. See Note 14 for additional information.
•
Preferred Units— The Preferred Units are non-voting preferred equity interests in the Sculptor Operating Partnerships. Preferred Units issued in 2016 and 2017 are collectively referred to as the “2016 Preferred Units.” The Preferred Units issued in 2019 are referred to as the “2019 Preferred Units.” See Note 10 for additional information.
Executive managing directors hold a number of Class B Shares equal to the number of Group A Units, Group A-1 Units and Group P Units held. Upon the exchange of a Group A Unit or a Group P Unit for a Class A Share, the corresponding Class B Share is canceled and a Group B Unit is issued to Sculptor Corp. One Class B Share will be issued to each holder of Group E Units upon the vesting of each such holder’s Group E Unit, at which time a corresponding number of Class B Shares held by holders of Group A-1 Units will be canceled.
The following table presents the number of shares and units (excluding Preferred Units) of the Registrant and the Sculptor Operating Partnerships, respectively, that were outstanding as of September 30, 2019:
 
As of September 30, 2019
Sculptor Capital Management, Inc.
 
Class A Shares
20,749,306
Class B Shares
29,208,952
 
 
Sculptor Operating Partnerships
 
Group A Units
16,019,506
Group A-1 Units
9,779,446
Group B Units
20,749,306
Group E Units
13,450,821
Group P Units
3,410,000

In addition, the Company grants Class A restricted share units (“RSUs”) and performance-based RSUs (“PSUs”) to its employees and executive managing directors as a form of compensation. RSU and PSU grants are accounted for as equity-based compensation. See Note 14 for additional information.


12

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


Reverse Share Split
At the close of trading on January 3, 2019, the Company effectuated a 1-for-10 reverse share split (the “Reverse Share Split”) of the Class A Shares. As a result of the Reverse Share Split, every ten issued and outstanding Class A Shares were combined into one Class A Share. In addition, corresponding adjustments were made to the Class B Shares, Sculptor Operating Group Units, RSUs and PSUs. All prior period share, unit, per share and per unit amounts have been restated to give retroactive effect to the Reverse Share Split.
Corporate Conversion
The Company changed its tax classification from a partnership to a corporation effective April 1, 2019 (the “Corporate Classification Change”), and subsequently converted from a Delaware limited liability company into a Delaware corporation effective May 9, 2019. Upon the Corporate Classification Change, the Company reclassified the negative equity balance as of such date to accumulated deficit.
Name Change
Effective September 12, 2019, the Company changed its name to Sculptor Capital Management, Inc. The Company’s Class A Shares now trade on the New York Stock Exchange under the symbol “SCU.” Also effective September 12, 2019, Och-Ziff Holding Corporation changed its name to Sculptor Capital Holding Corporation, and in its capacity as the general partner of the Sculptor Operating Partnerships, changed the names of OZ Management LP, OZ Advisors LP and OZ Advisors II LP to Sculptor Capital LP, Sculptor Capital Advisors LP and Sculptor Capital Advisors II LP, respectively.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited, interim, consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s unaudited, interim, consolidated financial statements have been included and are of a normal and recurring nature. All significant intercompany transactions and balances have been eliminated in consolidation.
The results of operations presented for the interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. For example, incentive income for the majority of the Company’s multi-strategy assets under management is recognized in the fourth quarter each year, based on full year investment performance.
Leases
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as amended, as of January 1, 2019 (“ASC 842”). The Company applied ASC 842 to lease arrangements outstanding as of the date of adoption. The Company did not restate prior periods and there were no adjustments to retained earnings upon adoption of ASC 842. The Company applied the package of practical expedients permitted under the transition guidance within the new standard, including carrying forward the historical lease classification and not reassessing whether certain costs capitalized under the prior guidance are eligible for capitalization under ASC 842. Adoption of ASC 842 resulted in the recognition of $126.0 million and $135.9 million of operating lease assets and liabilities, respectively, with the net of these amounts offsetting the deferred rent credit liability in existence immediately prior to adoption.
The Company determines if an arrangement is a lease at inception. Right-of-use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Right-of-use lease assets represent the Company’s right to use a leased asset for the lease term and lease liabilities represent the Company’s obligation to


13

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


make lease payments arising from the lease. The Company does not recognize right-of-use lease assets and lease liabilities for leases with an initial term of one year or less.
As the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. The Company gave consideration to its recently issued term loan, as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.
The operating lease assets include any lease payments made and excludes lease incentives. Lease terms include options to extend or terminate when it is reasonably certain that the Company will exercise that option. In addition, the Company separates lease and non-lease components embedded within lease agreements, except for data center leases.
Right-of-use assets and liabilities related to operating leases are included within operating lease assets and operating lease liabilities, respectively, in the Company’s consolidated balance sheets. Right-of-use assets and liabilities related to finance leases are included within other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.
Lease expense for operating lease payments, which is comprised of amortization of right-of-use assets and interest accretion on lease liabilities, is generally recognized on a straight-line basis over the lease term and included within general, administrative and other expenses in the consolidated statements of comprehensive income. Amortization of right-of-use lease assets related to finance leases is included within general, administrative and other expenses and interest accretion on lease liabilities related to finance leases is included within interest expense.
Subrental income is recognized on a straight-line basis over the lease term and is included within other revenues in the consolidated statements of comprehensive income. Where the Company has entered into a sublease arrangement, the Company will evaluate the lease arrangement for impairment. To the extent an impairment of the right-of-use lease asset is recognized, the Company will amortize the remaining lease asset on a straight-line basis over the remaining lease term.
Recently Adopted Accounting Pronouncements
Other than the adoption of ASC 842 discussed above, none of the other changes to GAAP that went into effect in the nine months ended September 30, 2019 had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
No changes to GAAP that are not yet effective are expected to have a material effect on the Company’s consolidated financial statements.
3. RECAPITALIZATION
On February 7, 2019, the Company completed the Recapitalization, which included a series of transactions that involved the reallocation of certain ownership interests in the Sculptor Operating Partnerships to existing members of senior management, a “Distribution Holiday” on interests held by active and former executive managing directors, an amendment to the tax receivable agreement, a “Cash Sweep” to pay down the 2018 Term Loan (as defined in Note 8) and 2019 Preferred Units, and various other related transactions. In addition, (i) $200.0 million of the 2016 Preferred Units was restructured into the Debt Securities (as defined in Note 8) and (ii) $200.0 million of the 2016 Preferred Units was restructured into the 2019 Preferred Units.
Reallocation of Equity
In connection with the Recapitalization, holders of Group A Units collectively reallocated 35% of their Group A Units to existing members of senior management and for potential grants to new hires. The reallocation was effected by (i) recapitalizing such Group A Units into Group A-1 Units and (ii) creating and making grants to existing members of senior


14

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


management (and reserving for future grants to active managing directors and new hires) of Group E Units. An equivalent number of Group A-1 Units will be canceled at such time and to the extent that Group E Units vest and achieve a book-up. Upon vesting, holders of Group E Units will be entitled to vote a corresponding number of Class B Shares previously allocated to Group A-1 Units. Until such time as the relevant Group E Units become vested, the Class B Shares corresponding to the Group A-1 Units will be voted pro rata in accordance with the vote of the Class A Shares held by non-affiliates. In connection with the Recapitalization, the holders of the 2016 Preferred Units forfeited an additional 749,813 Group A Units (which were recapitalized into Group A-1 Units).
Distribution Holiday
The Sculptor Operating Partnerships initiated a distribution holiday (the “Distribution Holiday”) on the Group A Units, Group D Units, Group E Units and Group P Units and on certain RSUs that will terminate on the earlier of (x) 45 days after the last day of the first calendar quarter as of which the achievement of $600.0 million of Distribution Holiday Economic Income (as defined in the Sculptor Operating Partnerships’ limited partnership agreements) is realized and (y) April 1, 2026.
 During the Distribution Holiday, (i) the Sculptor Operating Partnerships shall only make distributions with respect to Group B Units, (ii) the performance thresholds of Group P Units and PSUs shall be adjusted to take into account performance and distributions during such period, and (iii) RSUs will continue to receive dividend equivalents in respect of dividends or distributions paid on the Class A Shares. For executive managing directors that have received Group E Units, distributions on Group P Units, RSUs and PSUs is limited to an aggregate amount not to exceed $4.00 per Group P Unit, PSU or RSU, as applicable, cumulatively during the Distribution Holiday. Following the termination of the Distribution Holiday, Group A Units and Group E Units (whether vested or unvested) shall receive distributions even if such units have not been booked-up.
The Distribution Holiday was effective retroactively to October 1, 2018. As a result, the Company recorded an adjustment to additional paid-in capital and noncontrolling interests to reallocate a portion of pre-Recapitalization earnings and related income tax effects from noncontrolling interests to the Company’s additional paid-in capital. Such adjustment is recorded within Recapitalization adjustment in the consolidated statement of shareholders’ equity (deficit).
Liquidity Redemption
In connection with his transition from the Company, the Company’s founder, Mr. Daniel S. Och submitted redemption notices for all liquid balances of Mr. Och and his related parties (other than their liquid balances in the Sculptor Credit Opportunities Master Fund) — half of which was redeemed effective as of December 31, 2018 and the remainder effective March 31, 2019. The receipt by Mr. Och and his related parties of redemption proceeds associated with these redemptions is referred to as the “Liquidity Redemption.” Redemptions are generally paid in the month following the effective date of the redemption. The Liquidity Redemption was completed as of April 29, 2019. Mr. Och and his related parties have also redeemed their liquid balances in the Sculptor Credit Opportunities Master Fund effective September 30, 2019 (the “Credit Fund Balance Redemption”).
Cash Sweep
As part of the Recapitalization, the Company instituted a “Cash Sweep” with regards to the paydowns of the 2018 Term Loan and the 2019 Preferred Units. During the Distribution Holiday, on a quarterly basis, for each of the first three quarters of the year 100% of all Economic Income (subject to certain adjustments described in the 2019 Preferred Unit Designations as defined in Note 10) will be applied to repay the 2018 Term Loan and then to redeem the 2019 Preferred Units, in each case, together with accrued interest. The Cash Sweep will not apply to the extent that it would result in the Sculptor Operating Group having a minimum “Free Cash Balance” (as defined in the 2019 Preferred Unit Designations) of less than $200.0 million except in certain specified circumstances. In the fourth quarter of each year, an amount equal to the excess of the Free Cash Balance over the minimum Free Cash Balance of $200.0 million, will be used to repay the 2018 Term Loan and redeem the 2019 Preferred Units. In addition, without duplication of the Cash Sweep, (i) certain of the proceeds resulting from the realization of incentive income from certain longer term assets under management described in the 2019 Preferred Units Designations (“Designated


15

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


Accrued Unrecognized Incentive”) and (ii) 85% of the net cash proceeds from any Asset Sales (as defined in the 2019 Preferred Units Designations), will be used to repay the 2018 Term Loan and redeem the 2019 Preferred Units.
As long as the Cash Sweep is in effect, the Sculptor Operating Group may only use funds from a cumulative discretionary one-time basket of up to $50.0 million in the aggregate, or reserve up to $17.0 million in the aggregate annually (the “Discretionary Basket”), to engage in certain “Restricted Activities” (as defined below) or any other activities related to the strategic expansion of the Sculptor Operating Group, and may not use any other funds of the Sculptor Operating Group to fund such activities, subject to certain exceptions. The Discretionary Basket will not be subject to the Distribution Holiday or the Cash Sweep and, subject to certain exceptions, may only be used to fund new firm investments or new firm products or to fund share buybacks (including RSU cash settlements in excess of permitted amounts) in an aggregate amount not to exceed $25.0 million (the “Restricted Activities”). The Discretionary Basket may not be used to fund employee compensation payments.
4. NONCONTROLLING INTERESTS
Noncontrolling interests represent ownership interests in the Company’s subsidiaries held by parties other than the Company, and primarily relate to the Group A Units held by executive managing directors.
Prior to the Recapitalization, the attribution of net income (loss) of each Sculptor Operating Partnership was based on the relative ownership percentages of the Group A Units (noncontrolling interests) and the Group B Units (indirectly held by the Registrant). In applying the substantive profit-sharing arrangements in the Sculptor Operating Partnerships limited partnership agreements to the Company’s consolidated financial statements, for periods subsequent to the Recapitalization and for the duration of the Distribution Holiday, the Company will allocate net income of each Sculptor Operating Partnership in any fiscal year solely to the Group B Units and any net loss on a pro rata basis based on the relative ownership percentages of the Group A Units and Group B Units. To the extent a Sculptor Operating Partnership incurs a net loss in an interim period, any net income recognized in a subsequent interim period in the same fiscal year is allocated on a pro rata basis to the extent of previously allocated net loss. Conversely, to the extent a Sculptor Operating Partnership recognizes net income in an interim period, any net loss incurred in a subsequent interim period in the same fiscal year is allocated solely to the Group B Units to the extent of previously allocated net income.
The table below sets forth the calculation of noncontrolling interests related to the Group A Units for each Sculptor Operating Partnership (rounding differences may occur). The blended participation percentages presented below take into account ownership changes throughout the periods presented. In addition, the blended participation percentages in 2019 take into account the difference in methodology described above for the period prior to the Recapitalization Date compared to the period following the Recapitalization Date. For example, Sculptor Capital Advisors LP had net income in the period prior to the Recapitalization Date, and as a result, allocates a portion of its net income for the nine months ended September 30, 2019 to the Group A Units.


16

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
Sculptor Capital LP
 
 
 
 
 
 
 
Net loss
$
(23,983
)
 
$
(15,497
)
 
$
(74,801
)
 
$
(43,993
)
Blended participation percentage
43
%
 
57
%
 
44
%
 
58
%
Net Loss Attributable to Group A Units
$
(10,377
)
 
$
(8,892
)
 
$
(32,589
)
 
$
(25,350
)
 
 
 
 
 
 
 
 
Sculptor Capital Advisors LP
 
 
 
 
 
 
 
Net loss
$
(10,838
)
 
$
(11,966
)
 
$
(2,864
)
 
$
(14,395
)
Blended participation percentage
12
%
 
57
%
 
n/m

 
57
%
Net (Loss) Income Attributable to Group A Units
$
(1,248
)
 
$
(6,866
)
 
$
5,447

 
$
(8,266
)
 
 
 
 
 
 
 
 
Sculptor Capital Advisors II LP
 
 
 
 
 
 
 
Net (loss) income
$
(4,562
)
 
$
(10,528
)
 
$
12,041

 
$
(3,058
)
Blended participation percentage
0
%
 
57
%
 
0
%
 
57
%
Net (Loss) Income Attributable to Group A Units
$
—

 
$
(6,040
)
 
$
—

 
$
(1,727
)
 
 
 
 
 
 
 
 
Total Sculptor Operating Group
 
 
 
 
 
 
 
Net loss
$
(39,383
)
 
$
(37,991
)
 
$
(65,624
)
 
$
(61,446
)
Blended participation percentage
30
%
 
57
%
 
41
%
 
58
%
Net Loss Attributable to Group A Units
$
(11,625
)
 
$
(21,798
)
 
$
(27,142
)
 
$
(35,343
)
_______________
n/m not meaningful
The following table presents the components of the net loss attributable to noncontrolling interests:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Group A Units
$
(11,625
)
 
$
(21,798
)
 
$
(27,142
)
 
$
(35,343
)
Other
190

 
658

 
489

 
1,398

 
$
(11,435
)
 
$
(21,140
)
 
$
(26,653
)
 
$
(33,945
)

The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(dollars in thousands)
Group A Units
$
441,235

 
$
415,928

Other
4,685

 
3,503

 
$
445,920

 
$
419,431




17

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


The Preferred Units and fund investors’ interests in certain consolidated funds are redeemable outside of the Company’s control. These interests are classified within redeemable noncontrolling interests in the consolidated balance sheets. The following tables present the activity in redeemable noncontrolling interests:
 
Three Months Ended September 30,
 
2019
 
2018
 
Funds
 
Preferred Units
 
Total
 
Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
97,229

 
$
150,000

 
$
247,229

 
$
53,507

 
$
420,000

 
$
473,507

Capital contributions
102

 
—

 
102

 
111,887

 
—

 
111,887

Capital distributions
(54,532
)
 
—

 
(54,532
)
 
(562
)
 
—

 
(562
)
Funds deconsolidation (See Note 6)
(43,373
)
 
—

 
(43,373
)
 
—

 
—

 
—

Comprehensive income
574

 
—

 
574

 
374

 
—

 
374

Ending Balance
$
—

 
$
150,000

 
$
150,000

 
$
165,206

 
$
420,000

 
$
585,206

 
Nine Months Ended September 30,
 
2019
 
2018
 
Funds
 
Preferred Units
 
Total
 
Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
157,660

 
$
420,000

 
$
577,660

 
$
25,617

 
$
420,000

 
$
445,617

Fair value of Debt Securities exchanged for 2016 Preferred Units
—

 
(167,799
)
 
(167,799
)
 
—

 
—

 
—

Fair value of 2019 Preferred Units exchanged for 2016 Preferred Units
—

 
(137,759
)
 
(137,759
)
 
—

 
—

 
—

Issuance of 2019 Preferred Units, net of issuance costs
—

 
136,964

 
136,964

 
—

 
—

 
—

Change in redemption value of Preferred Units
—

 
(101,406
)
 
(101,406
)
 
—

 
—

 
—

Capital contributions
3,747

 
—

 
3,747

 
149,172

 
—

 
149,172

Capital distributions
(126,779
)
 
—

 
(126,779
)
 
(10,910
)
 
—

 
(10,910
)
Funds deconsolidation (See Note 6)
(43,373
)
 
—

 
(43,373
)
 
—

 
—

 
—

Comprehensive income
8,745

 
—

 
8,745

 
1,327

 
—

 
1,327

Ending Balance
$
—

 
$
150,000

 
$
150,000

 
$
165,206

 
$
420,000

 
$
585,206




18

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


5. INVESTMENTS AND FAIR VALUE DISCLOSURES
The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:
 
September 30, 2019
 
December 31, 2018
 
(dollars in thousands)
United States government obligations, at fair value
$
261,981

 
$
179,510

CLOs, at fair value
176,739

 
181,868

Other investments, equity method
58,828

 
28,519

Total Investments
$
497,548

 
$
389,897


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


19

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


value measurement. The assessment of the significance of an input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Fair Value Measurements Categorized within the Fair Value Hierarchy
The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of September 30, 2019:
 
As of September 30, 2019
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
261,981

 
$
—

 
$
—

 
$
261,981

CLOs(1)
$
—

 
$
—

 
$
176,739

 
$
176,739

_______________
(1) As of September 30, 2019, investments in CLOs had contractual principal amounts of $164.3 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.
The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2018:
 
As of December 31, 2018
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
58,054

 
$
—

 
$
—

 
$
58,054

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
179,510

 
$
—

 
$
—

 
$
179,510

CLOs(1)
$
—

 
$
—

 
$
181,868

 
$
181,868

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$
—

 
$
91,345

 
$
75,613

 
$
166,958

Corporate bonds
$
—

 
$
4,537

 
$
—

 
$
4,537

Total Investments of Consolidated Funds
$
—

 
$
95,882

 
$
75,613

 
$
171,495

_______________
(1) As of December 31, 2018, investments in CLOs had contractual principal amounts of $171.5 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.
Reconciliation of Fair Value Measurements Categorized within Level III
Gains and losses, excluding those of the consolidated funds are recorded within net (losses) gains on investments in the consolidated statements of comprehensive income (loss), and gains and losses of the consolidated funds are recorded within net (losses) gains of consolidated funds. Amounts related to the funds deconsolidated in the third quarter of 2019 are included within investment sales. Amortization of premium, accretion of discount and foreign exchange gains and losses on non-U.S. Dollar investments are also included within gains and losses in the tables below.


20

SCULPTOR CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2019


The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended September 30, 2019:
 
June 30, 2019
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Gains / Losses
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
181,547

 
$
—

 
$
—

 
$
1,709

 
$
(28
)
 
$
(6,489
)
 
$
176,739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
36,130

 
$
5,326

 
$
(17,427
)
 
$
9,231

 
$
(33,283
)
 
$
23

 
$
—


The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended September 30, 2018:
 
June 30, 2018
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
148,127

 
$
—

 
$
—

 
$
24,655

 
$
(5,483
)
 
$
(1,504
)
 
$
165,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
32,515

 
$
6,094

 
$
(13,795
)
 
$
55,761

 
$
(19,356
)
 
$
379

 
$
61,598


The following tables summarize the changes in the Company’s Level III assets and liabilities for the nine months ended September 30, 2019:
 
December 31, 2018
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Gains / Losses
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(dollars in thousands)