Exhibit 99.2

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined balance sheet as of December 31, 2014 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 are based on the historical financial statements of ZAIS Group Parent, LLC (“ZGP”) and ZAIS Group Holdings, Inc. (“ZGH”) (formerly known as HF2 Financial Management, Inc. (“HF2”)) after giving effect to the Business Combination.

 

The Business Combination will be accounted for as a reorganization and recapitalization in accordance with accounting principles generally accepted in the United States (“GAAP”) for accounting and financial reporting purposes. The accounting for the reorganization and recapitalization follows the rules for a reverse acquisition as enumerated in the Accounting Standards Codification, Section 805. In a reverse acquisition, the buyer for accounting purposes is the target for legal purposes (in this case, ZGP) and the target for accounting purposes is the buyer for legal purposes (in this case, HF2). The accounting buyer in a reverse acquisition measures the consideration transferred using the hypothetical amount of equity interests it would have had to issue to keep the accounting target’s owners in the same ownership position they are in after the reverse acquisition. The accounting buyer adjusts the amount of legal capital in the consolidated financial statements to reflect the legal capital of the accounting target and measures the non-controlling interest using the pre-combination carrying amounts of the accounting buyer’s net assets and the non-controlling interest’s proportionate share in those pre-combination carrying amounts. No goodwill or other intangible will be recorded in the post-closing consolidated financial statements.

 

The unaudited pro forma condensed combined balance sheet as of December 31, 2014 assumes that the Business Combination had occurred on December 31, 2014. The unaudited pro forma condensed combined balance sheet information as of December 31, 2014 was derived from ZGP’s audited consolidated balance sheet as of December 31, 2014 and HF2’s audited balance sheet as of December 31, 2014.

 

The unaudited pro forma condensed combined statement of operations information for the year ended December 31, 2014 gives the pro forma effect to the Business Combination as if it had occurred on January 1, 2014. The unaudited pro forma condensed combined statement of operations information for the year ended December 31, 2014 was derived from ZGP’s audited consolidated statement of operations for the year ended December 31, 2014 and HF2’s audited statement of income for the year ended December 31, 2014.

 

The pro forma adjustments are based on the information currently available, as described in the accompanying footnotes. The unaudited pro forma condensed combined statement of operations is not necessarily indicative of what the actual results of operations would have been had the Business Combination taken place on the dates indicated, nor is it indicative of the future consolidated results of operations or financial condition of the post-combination company. In addition, the allocation of the proceeds from the Business Combination shown in the pro forma adjustments is preliminary and will be subject to a final determination, which may result in materially different allocations that may have a material effect on the actual results of operations and financial condition of the combined company. The unaudited pro forma condensed combined financial information below should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ZGH’s Current Report on Form 8-K and the consolidated financial statements and notes thereto of ZGP.

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2014
(in thousands)

 

		ZAIS Group Parent, LLC and Subsidiaries				ZAIS Group Holdings,  Inc. (fka HF2 Financial Management, Inc.)				Pro Forma Adjustments				Footnote Reference				Pro Forma Combined
Assets
Cash and cash equivalents		$	7,664			$	73			$	78,166				1			$	85,903
Cash and cash equivalents, held in trust							184,754				(184,754	)			1				—
Income and fees receivable			4,283																4,283
Investments in affiliated funds, at fair value			104																104
Due from related parties			648																648
Prepaid expenses and other current assets			1,543				29												1,572
Fixed assets, net			1,091																1,091
Other assets			3,310																3,310
Assets of Consolidated Funds
Cash and cash equivalents			94,212																94,212
Restricted cash			30,265																30,265
Investments, at fair value			1,126,737																1,126,737
Investments in affiliated securities, at fair value			31,457																31,457
Derivative assets, at fair value			6,648																6,648
Other Assets			11,577																11,577
Total Assets		$	1,319,539			$	184,856			$	(106,588	)						$	1,397,807
Liabilities, Redeemable Non-controlling Interests and Equity
Notes payable		$	-			$	400			$	(400	)			1			$	1,250
											1,250				2
Accrued compensation and benefits			6,094																6,094
Due to Related Parties			32																32
Other liabilities			3,050				250				(250	)			1				3,050
Deferred commissions			-				101				(101	)			1				—
Liabilities of Consolidated Funds
Notes payable of Consolidated CDOs, at fair value			749,719																749,719
Derivative liabilities, at fair value			5,785																5,785
Securities sold, not yet purchased			19,308																19,308
Due to Broker			21,047																21,047
Other liabilities			32,863																32,863
Total Liabilities			837,898				751				499								839,148
Commitments and Contingencies
Redeemable Non-Controlling Interests			452,925																452,925
Common stock subject to conversion							172,067				(102,283	)			1				—
											(69,784	)			3
Equity
Preferred stock							-												-
Class A common stock							1												1
Class B common stock							0.020												0.020
Additional paid-in capital							13,718				(3,554	)			1				63,398
											(1,250	)			2
											69,784				3
											(1,681	)			4
											(13,619	)			6
Retained Earnings/(Deficit)							(1,681	)			1,681				4				—
Total Stockholders' Equity of ZAIS Group Holdings, Inc.							12,038				51,361								63,399
Non-controlling interests held by ZGP Founder Members											18,376				5				31,995
											13,619				6
Members' equity			18,376								(18,376	)			5				—
Equity attributable to non-controlling interests of Consolidated Funds			10,340																10,340
Total Equity			28,716				12,038				64,980								105,734
Total Liabilities, Redeemable Non-controlling Interests and Equity		$	1,319,539			$	184,856			$	(106,588	)						$	1,397,807

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

DECEMBER 31, 2014
(amounts in thousands except for shares and per share data) 

 

		ZAIS Group Parent, LLC and Subsidiaries				ZAIS Group Holdings, Inc. (fka HF2 Financial Management, Inc.)				Pro Forma Adjustments				Footnote Reference				Pro Forma Combined
Revenues
Management fee income		$	18,561			$				$								$	18,561
Incentive income			65,889																65,889
Other revenues			481																481
Income of Consolidated Funds			131,940																131,940
Total Revenues			216,871				—				—								216,871
Expenses
Employee compensation and benefits			61,779								6,640				7				68,419
General, administrative and other			17,726				1,220				(5,094	)			8				13,852
Depreciation and amortization			460																460
Expenses of Consolidated Funds			111,900																111,900
Total Expenses			191,865				1,220				1,546								194,631
Other Income (Loss)
Net gain on investments			40																40
Other income			256				58				(34	)			9				280
Net Gains of Consolidated Funds' investments			49,530																49,530
Total Other Income			49,826				58				(34	)							49,850
Income from continuing operations before income taxes			74,832				(1,162	)			(1,580	)							72,090
Income tax expense			381								7,756				10				8,137
Income from continuing operations			74,451				(1,162	)			(9,336	)							63,953
Consolidated Net Income		$	74,451			$	(1,162	)		$	(9,336	)						$	63,953
Other Comprehensive Income, Net of Tax
Foreign currency translation adjustment			(622	)			—												(622	)
Total Comprehensive Income			73,829				(1,162	)			(9,336	)							63,331
Allocation of Consolidated Net Income (Loss)
Redeemable Non-controlling interests			41,040																41,040
Non-controlling interests of Consolidated Funds			2,101																2,101
ZAIS Group Parent, LLC Members			31,310								(31,310	)			11				9,581
											9,581				12
Stockholders of ZAIS Group Holdings, Inc.							(1,162	)			1,162				11				11,231
											18,987				12
											(7,756	)			13
			74,451				(1,162	)			(9,336	)							63,953
Allocation of Total Comprehensive Income (Loss)
Redeemable Non-controlling interests			41,014																41,014
Non-controlling interests of Consolidated Funds			2,101																2,101
ZAIS Group Parent, LLC Members			30,714								(30,714	)			11				9,381
											9,581				12
											(200	)			14
Stockholders of ZAIS Group Holdings, Inc.							(1,162	)			1,162				11				10,835
											18,987				12
											(7,756	)			13
											(396	)			14
		$	73,829			$	(1,162	)		$	(9,336	)						$	63,331
Weighted Average Number of Shares Outstanding - Basic							23,592,150								15				13,870,917
Weighted Average Number of Shares Outstanding - Diluted							23,592,150								16				21,555,476
Comprehensive Income/(Loss) per Share - Basic						$	(0.05	)							15			$	0.78
Comprehensive Income/(Loss) per Share - Diluted						$	(0.05	)							16			$	0.76

 

 

Footnotes

(amounts in thousands except for units, shares and per share data)

 

1 To record the cash payments as a result of the consummation of the Business Combination:

 

Cash and cash equivalents, held in trust		$	184,754
Repayment of 9,741,193 shares at $10.50/sh			(102,283	)
Repayment of HF2 Note payable			(400	)
Payment of deferred commissions			(101	)
Repayment of HF2 other liabilities			(250	)
Payment of deal related expenses			(3,554	)
Net cash proceeds to ZGP		$	78,166

 

2

Issuance of Notes payable to underwriters pursuant to the Investment Agreement

 

3

Reclassify remaining Common stock subject to possible conversion to equity.

 

4

Reclassify HF2's Retained Earnings to Additional Paid In Capital.

 

5

Reclassify ZGP Member's Equity to non-controlling interests held by ZGP Founder Members.

 

6

Adjust non-controlling interests held by ZGP Founder Members to reflect their 33.54% ownership of the combined entity’s total equity of $95,394. The net total equity of $95,394 consists of total gross equity of $105,734 minus the portion of equity attributable to non-controlling interests in Consolidated Funds of $10,340. The ownership percentage of 33.54% does not include the 1,369,119 B-0 Units issued to employees of ZAIS Group, LLC (“ZAIS”), a wholly owned subsidiary of ZGP, upon the closing of the transaction on March 17, 2015 (the “Closing”), or the Additional Founder Units and Additional Employee Units that may be issued during the first five years after the Closing. The B-0 Units are not eligible to participate in the economics of ZGP until after certain vesting hurdles (as explained further in Note 7 to the Unaudited Pro Forma Condensed Combined Statement of Operations) are achieved.

 

7

Record Compensation Expense related to the 1,369,119 B-0 Units granted to key employees of ZAIS following the Closing. A total of 1,600,000 B-0 Units were authorized for issuance to key employees of ZAIS under the terms of the Investment Agreement. The B-0 Units will be issued and outstanding effective March 17, 2015 pursuant to key employees executing the Restricted Unit Agreements, but the units will not have any material rights or economic participation in ZGP until they have vested and they will be subject to cliff vesting on the later of the grant date and two years after the Closing if the recipient remains employed by ZAIS on the vesting date.

 

Under GAAP, the value of these units must be expensed over the vesting period, using the best estimate of the value of a unit when granted. The expense is calculated using $9.70 per unit for this analysis based on the public trading price of Class A Common Stock of ZAIS Group Holdings, Inc. on March 17, 2015.

 

However, as the issuance of the remaining 230,881 B-0 Units is not contractually required, the expense relating to those units has not been recorded in this unaudited pro forma condensed combined statement of operations. The expense is calculated using $9.70 per unit for this analysis based on the public trading price of Class A Common Stock of ZAIS Group Holdings, Inc. on March 17, 2015. Had this expense been recorded in this unaudited pro forma condensed combined statement of operations, the estimated amount for this period would have been $1,120 with offsetting increases to non-controlling interests held by ZGP Founder Members of $376 and Additional Paid in Capital of $744.

 

Under the terms of the Investment Agreement, ZGP may issue up to an additional 5,200,000 B Units (the Additional Employee Units) in four separate tranches to key employees of ZAIS after the Closing. Each tranche has its own hurdle based on total value per share of Class A Common Stock of ZAIS Group Holdings, Inc. (the “Hurdle”) for purposes of determining vesting dates. The Hurdle for each respective Unit is as follows:

 

 

$12.50 for B-1 Units

$15.00 for B-2 Units

$18.00 for B-3 Units

$21.50 for B-4 Units

These Additional Employee Units will not have any material rights or economic participation in ZGP until they have vested. Each grant shall vest one-third when ZGH has achieved the Hurdle associated with each respective unit and one-third on each of the first and second anniversaries of achieving the respective Hurdle.

 

However, as the issuance of the Additional Employee Units is not contractually required, the expense relating to those units has not been recorded in this unaudited pro forma condensed combined statement of operations. The expense is calculated using a statistical simulation that takes into account a number of factors, including the number of units in each tranche, the expected time the award will vest, the expected stock price and volatility and the level of dividends. The actual vesting of these awards will vary from these estimates. Had this expense been recorded in this unaudited pro forma condensed combined statement of operations, the estimated amount for this period would have been $8,526 with offsetting increases to Members’ Interest in ZGP held by non-controlling members of $2,860 and Additional Paid in Capital of $5,666.

 

8

Reflects the pro forma adjustment to reduce total expenses by the transaction costs incurred by ZGP in connection with the transaction since these costs are non-recurring in nature and are not expected to have a continuing impact on the condensed combined statement of operations.

 

9

Record reduction in interest income due to the payment of redeemed shares, HF2 payables, and transaction expenses of $106,588. Since there is less cash to invest, interest income is reduced.

 

10

Record combined Federal, state, and foreign income tax expense/(benefit) of $8,137 on Income from continuing operations before income tax of $72,090, at an effective income tax rate of 42.86% as follows:

 

Statutory U.S. Federal Income Tax Rate			35.00	%
State and Foreign Income Taxes			7.86	%
Effective Income Tax Rate			42.86	%

 

The effective income tax rate is computed by dividing income tax expense for the period by the sum of Income from continuing operations before income tax, less income allocated to (i) Redeemable Non-controlling interests, (ii) Non-controlling interests of Consolidated Funds and (iii) ZGP Founder Members.

  

11

Reverse HF2's and ZGP's respective historical Net Income.

 

12

Apply percentage ownership of ZGP held by the ZGP Founder Members (33.54%) and ZGH (66.46%) to the Adjusted consolidated pre-tax income of $28,568 to derive the ZGP and ZGH adjustments of $9,581 and $18,987 respectively. Adjusted consolidated pre-tax income of $28,568 consists of the pre-tax historical incomes/losses for ZGP and HF2 of $31,310 and $(1,162) respectively, and the pre-tax pro-forma adjustments of $(1,580).

 

These ownership percentages do not reflect the anticipated dilution resulting from the 1,600,000 B-0 units expected to be granted to Key Employees of ZAIS after the Closing because the B-0 units will not participate in the income or loss of ZGP until they are vested, which will not happen for at least two years after the Closing.

 

13

Allocate ZGH's combined Federal and state income tax expense/(benefit) of $7,756 as calculated in Footnote 10, to ZGH's portion of Consolidated Net Income and Total Comprehensive Income.

 

14

Reclassify a portion of the foreign currency translation adjustment between the ZGP Founder Members and Stockholders of ZGH based on their respective ownership percentages as detailed in Footnote 12.

 

 

15

Pro forma basic earnings per share is calculated as follows:

 

Allocation of Total Comprehensive Income to ZGH		$	10,835
ZGH weighted average shares outstanding			13,870,917
Pro Forma basic earnings per share		$	0.78

 

16

Pro forma diluted earnings per share is calculated as follows:

 

Allocation of Total Comprehensive Income to ZGH and ZGP Founder Members(1)		$	16,302
Diluted Class A Common Stock Outstanding(2)			21,555,476
Pro Forma basic earnings per share		$	0.76

 

(1)

Allocation of Total Comprehensive Income is calculated as follows:

 

Adjusted consolidated pre-tax income (See Note 12)		$	28,568
Less: Consolidated income tax (40.85% combined Federal and State rates)			(11,670	)
Less: Other miscellaneous adjustments			(596	)
Consolidated Income for Diluted earnings per share calculation		$	16,302

 

(2)

Diluted weighted average shares outstanding is calculated as follows:

 

ZGH weighted average shares outstanding			13,870,917
Add: ZGP Founder Members units issued at Closing			7,000,000
Add: B-0 units outstanding (Calculated per ASC 260-10-45-28B and 29):			684,559
Diluted weighted average shares outstanding			21,555,476