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 |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM |
Commission File Number: 001-32236
COHEN & STEERS, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 14-1904657 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
280 Park Avenue New York, NY | ||
(Address of principal executive offices) | ||
( | ||
(212) 832-3232
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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. Yesx No S No£¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of COHEN & STEERS, INC. AND SUBSIDIARIES Form 10-Q Index Item 1. Condensed Consolidated Statements of Financial Condition as of 3 4 Condensed Consolidated Statement of Changes in Stockholders’ Equity 5 6 Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Item 4. Item 1. Item 1A. Item 2. Item 6. Forward-Looking Statements This report and other documents filed by us contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative versions of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2 Part (in thousands, except share data) Cash and cash equivalents Marketable securities available-for-sale Accounts receivable Property and equipment—net Intangible asset—net Deferred commissions—net Equity investment Deferred income tax asset—net Other assets Total assets Liabilities: Accrued compensation Dividends payable Deferred rent Other liabilities and accrued expenses Stockholders’ equity: Common stock, $0.01 par value; 500,000,000 shares authorized; 36,402,494 and 35,426,202 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively Additional paid-in capital Accumulated deficit Accumulated other comprehensive income, net of tax Less: Treasury stock, at cost, 292,143 and 1,043 shares at March 31, 2006 and December 31, 2005, respectively Unearned compensation Total stockholders’ equity Total liabilities and stockholders’ equity See notes to condensed consolidated financial 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Revenue: Investment advisory and administration fees Distribution and service fees Portfolio consulting and other Investment banking fees Total revenue Expenses: Employee compensation and benefits Distribution and service fees General and administrative Depreciation and amortization Amortization, deferred commissions Total expenses Operating income Non-operating income (expense): Interest and dividend income Gain from sale of marketable securities Foreign currency transaction loss Interest expense Net non-operating income Income before provision for income taxes and equity in earnings of affiliate Provision for income taxes Equity in earnings of affiliate Net income Earnings per share: Basic Diluted Weighted average shares outstanding: Basic Diluted See notes to condensed consolidated financial 4
Yes £¨ NoxSNovember 9, 2005May 8, 2006 was 35,407,029.36,402,494. PagePage Part I. Financial Information Financial Information 3 September 30,2005March 31, 2006 (Unaudited) and December 31, 20042005 2 and Nine Months Ended September 30, 2005 and 2004 3(Unaudited) For The NineThree Months Ended September 30, 2005March 31, 2006 4 Months Ended September 30, 2005 and 2004 5 67 Item 2. 14 26Item 4.Controls and Procedures27Part II.Other InformationItem 1.Legal Proceedings28Item 4.Submission of Matters to a Vote of Security Holders28Item 6.Exhibits29Signature3021 22 Part II. Other Information 23 23 23 23 25 2004,2005, which is accessible on the Securities and Exchange Commission’s Web site athttp://www.sec.gov and on our Web site atcohenandsteers.comwww.cohenandsteers.com. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.I – I—Financial InformationCOHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(in thousands, except share data) September 30,
2005 December 31,
2004 (Unaudited) Current assets: Cash and cash equivalents $ 27,731 $ 30,164 Marketable securities available-for-sale 90,629 69,935 Accounts receivable: Company-sponsored mutual funds 10,405 8,498 Other 6,366 4,654 Due from company-sponsored mutual funds 309 386 Income tax refunds receivable 170 380 Prepaid expenses and other current assets 5,273 2,119 Total current assets 140,883 116,136 Property and equipment-net 4,621 2,638 Intangible asset-net 10,362 13,693 Other assets: Deferred commissions-net 4,740 5,716 Investments, company-sponsored mutual funds — 100 Equity investment 4,276 3,961 Deferred income tax asset 21,455 18,003 Deposits 1,990 43 Total other assets 32,461 27,823 Total assets $ 188,327 $ 160,290 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accrued expenses and compensation $ 20,982 $ 7,328 Dividends payable 4,385 3,983 Current portion of long-term debt — 115 Current portion of obligations under capital leases 56 20 Deferred income tax liability 1,795 1,301 Other current liabilities 121 254 Total current liabilities 27,339 13,001 Long-term liabilities: Long-term debt — 1,558 Deferred rent less current maturities 1,230 66 Obligations under capital leases less current maturities 70 30 Total long-term liabilities 1,300 1,654 Stockholders’ equity: Common stock, $0.01 par value; 500,000,000 shares authorized;
35,407,029 shares issued and outstanding at September 30, 2005
and 35,388,736 shares issued and outstanding at December 31, 2004 354 354 Additional paid-in capital 183,538 178,594 Accumulated deficit (10,336 ) (21,557 ) Unearned compensation (14,711 ) (13,546 ) Accumulated other comprehensive income, net of tax 843 1,790 Total stockholders’ equity 159,688 145,635 Total liabilities and stockholders’ equity $ 188,327 $ 160,290 See notes to condensed consolidated financial statements2COHEN & STEERS, INC. AND SUBSIDIARIESCOHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)(in thousands, except per share data) Three Months Ended Nine Months Ended September 30,
2005 September 30,
2004 September 30,
2005 September 30,
2004 Revenue Investment advisory and administration fees $ 31,402 $ 24,174 $ 87,732 $ 66,077 Distribution and service fee revenue 3,122 2,554 8,941 7,246 Portfolio consulting and other 720 512 2,515 2,136 Investment banking fees 1,187 1,881 9,618 6,599 Total revenue 36,431 29,121 108,806 82,058 Expenses Employee compensation and benefits 10,154 55,183 27,963 71,006 Distribution and service fee expenses 7,838 7,072 21,861 16,202 General and administrative 5,195 2,789 16,400 8,916 Depreciation and amortization 1,380 889 4,144 1,454 Amortization, deferred commissions 826 1,005 2,625 3,295 Total expenses 25,393 66,938 72,993 100,873 Operating income (loss) 11,038 (37,817 ) 35,813 (18,815 ) Non-operating income (expense) Interest and dividend income 877 302 2,232 515 Gain from sale of marketable securities 827 — 1,976 — Gain from sale of property and equipment 289 — 289 — Foreign currency transaction loss (33 ) — (64 ) — Interest expense (54 ) (30 ) (102 ) (111 ) Total non-operating income 1,906 272 4,331 404 Income (loss) before provision for income
taxes and equity in earnings of affiliate 12,944 (37,545 ) 40,144 (18,411 ) Provision for income taxes 5,226 (16,956 ) 17,250 (15,753 ) Equity in earnings of affiliate 285 — 683 — Net income (loss) $ 8,003 $ (20,589 ) $ 23,577 $ (2,658 ) Earnings (loss) per share Basic $ 0.20 $ (0.60 ) $ 0.59 $ (0.09 ) Diluted $ 0.20 $ (0.60 ) $ 0.58 $ (0.09 ) Weighted average shares outstanding Basic 39,980 34,068 39,999 29,156 Diluted 40,371 34,138 40,303 29,226 March 31,
2006 December 31,
2005 (Unaudited) ASSETS $ 34,431 $ 39,092 83,340 87,276 21,095 19,044 10,017 8,936 8,142 9,252 4,885 4,471 4,856 4,427 18,252 21,604 7,747 4,446 $ 192,765 $ 198,548 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,600 $ 15,681 4,361 4,385 1,651 1,673 12,017 12,114 21,629 33,853 361 354 200,485 183,860 (2,195 ) (6,377 ) 1,292 354 (6,003 ) (20 ) (22,804 ) (13,476 ) 171,136 164,695 $ 192,765 $ 198,548 statementsstatements.COHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)(in thousands) Nine Months Ended September 30, 2005 Common
Stock Additional
Paid-In
Capital Accumulated
Deficit Unearned
Compensation Accumulated Other
Comprehensive
Income, Net Total Beginning balance, January 1, 2005 $ 354 $ 178,594 $ (21,557 ) $ (13,546 ) $ 1,790 $ 145,635 Dividends — — (12,356 ) — — (12,356 ) Issuance of common stock — 319 — — — 319 Tax benefit from issuance of dividends on restricted stock units — 941 — — — 941 Issuance of restricted stock units — 5,101 — (4,950 ) — 151 Amortization of unearned compensation — — — 3,437 — 3,437 Forfeitures of restricted stock awards — (1,417 ) — 348 — (1,069 ) Net income — — 23,577 — — 23,577 Other comprehensive loss, net of taxes — — — — (947 ) (947 ) Ending balance, September 30, 2005 $ 354 $ 183,538 $ (10,336 ) $ (14,711 ) $ 843 $ 159,688 Three Months Ended March 31,
2006 March 31,
2005 $ 33,006 $ 27,320 3,201 2,869 934 1,029 705 2,889 37,846 34,107 10,597 8,659 7,676 6,660 5,696 5,403 1,551 1,375 749 989 26,269 23,086 11,577 11,021 1,058 551 659 507 (16 ) (21 ) — (22 ) 1,701 1,015 13,278 12,036 4,909 5,123 348 152 $ 8,717 $ 7,065 $ 0.22 $ 0.18 $ 0.22 $ 0.18 39,803 40,022 40,327 40,235 statementsstatements.
COHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(in thousands) Nine Months Ended September 30, 2005 2004 Cash flows from operating activities: Net income (loss) $ 23,577 $ (2,658 ) Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 4,020 46,330 Stock appreciation right plan expense — 869 Amortization, deferred commissions 2,625 3,295 Depreciation and amortization 4,144 1,454 Amortization, bond discount - net (131 ) — Deferred rent 1,164 (23 ) Gain from sale of marketable securities (1,976 ) — Equity in earnings of affiliate 683 — Deferred income taxes (2,958 ) (17,103 ) Foreign currency transaction loss 64 — Gain from sale of property and equipment (289 ) — Tax benefit from issuance of dividends on restricted stock units 941 — Changes in operating assets and liabilities: Accounts receivable, company-sponsored mutual funds (1,907 ) (2,152 ) Accounts receivable, others (1,776 ) 169 Due from company-sponsored mutual funds 77 230 Deferred initial public offering costs — 139 Income tax refunds receivable 210 46 Prepaid expenses and other current assets (3,154 ) (1,566 ) Deferred commissions (1,649 ) (2,524 ) Deposits (1,947 ) — Accrued expenses and compensation 12,323 13,617 Income taxes payable — (99 ) Other current liabilities (133 ) — Net cash provided by operating activities 33,908 40,024 Cash flows from investing activities: Purchases of marketable securities available-for-sale (52,450 ) (56,763 ) Proceeds from maturities of marketable securities available-for-sale 24,747 — Proceeds from sale of marketable securities available-for-sale 8,199 — Purchases of property and equipment (2,981 ) (333 ) Net cash used in investing activities (22,485 ) (57,096 ) Cash flows from financing activities: Distributions to S-corporation shareholders — (37,741 ) Dividends to stockholders (11,954 ) — Repayment of bank line of credit — (4,713 ) Payment of capital lease obligations (76 ) — Principal payments on long-term debt (1,673 ) (89 ) Offering costs — (4,837 ) Issuance of common stock 215 104,276 Net cash (used in) provided by financing activities (13,488 ) 56,896 Net increase (decrease) in cash and cash equivalents (2,065 ) 39,824 Effect of foreign currency translation (368 ) — Cash and cash equivalents, beginning of period 30,164 7,526 Cash and cash equivalents, end of period $ 27,731 $ 47,350 Supplementary disclosure of cash flow information: Cash paid for interest $ 107 $ 117 Cash paid for taxes, net $ 21,217 $ 530
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Three Months Ended March 31, 2006
(in thousands)
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income, Net | Treasury Stock | Unearned Compensation | Total | ||||||||||||||||||||
Beginning balance, January 1, 2006 | $ | 354 | $ | 183,860 | $ | (6,377 | ) | $ | 354 | $ | (20 | ) | $ | (13,476 | ) | $ | 164,695 | |||||||||
Dividends | — | — | (4,535 | ) | — | — | — | (4,535 | ) | |||||||||||||||||
Issuance of common stock | 7 | 765 | — | — | — | — | 772 | |||||||||||||||||||
Acquisition of treasury stock | — | — | — | — | (5,983 | ) | — | (5,983 | ) | |||||||||||||||||
Tax benefits associated with restricted stock units | — | 2,753 | — | — | — | — | 2,753 | |||||||||||||||||||
Issuance of restricted stock units | — | 13,248 | — | — | — | (11,117 | ) | 2,131 | ||||||||||||||||||
Amortization of unearned compensation | — | — | — | — | — | 1,668 | 1,668 | |||||||||||||||||||
Forfeitures of restricted stock awards | — | (141 | ) | — | — | — | 121 | (20 | ) | |||||||||||||||||
Net income | — | — | 8,717 | — | — | — | 8,717 | |||||||||||||||||||
Other comprehensive income, net | — | — | — | 938 | — | — | 938 | |||||||||||||||||||
Ending balance, March 31, 2006 | $ | 361 | $ | 200,485 | $ | (2,195 | ) | $ | 1,292 | $ | (6,003 | ) | $ | (22,804 | ) | $ | 171,136 | |||||||||
See notes to condensed consolidated financial statementsstatements.
5
COHEN & STEERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense Amortization, deferred commissions Depreciation and amortization Amortization, bond discount—net Deferred rent Gain from sale of marketable securities Equity in earnings of affiliate Deferred income taxes Foreign currency transaction loss Tax benefits associated with restricted stock units Changes in operating assets and liabilities: Accounts receivable Deferred commissions Other assets Equity investment Accrued compensation Other liabilities and accrued expenses Net cash provided by operating activities Cash flows from investing activities: Purchases of marketable securities available-for-sale Proceeds from maturities of marketable securities available-for-sale Proceeds from sale of marketable securities available-for-sale Purchases of property and equipment Increase in investment in affiliate Net cash (used in) provided by investing activities Cash flows from financing activities: Dividends to stockholders Acquisition of treasury stock Payment of capital lease obligations Principal payments on long-term debt Issuance of common stock Net cash used in financing activities Effect of foreign currency translation Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of the period Cash and cash equivalents, end of the period Supplementary disclosure of cash flow information: Cash paid for interest Cash paid for taxes, net Non-cash transactions—acquisition of property and equipment under capital leases Non-cash transactions—issuance of restricted stock unit dividend equivalents See notes to condensed consolidated financial statements. 6 Three Months Ended March 31,
2006 March 31,
2005 $ 8,717 $ 7,065 1,764 1,600 749 989 1,551 1,375 (28 ) (43 ) 22 158 (659 ) (507 ) (348 ) (152 ) 3,509 (1,904 ) 16 21 2,753 — (2,067 ) (503 ) (1,163 ) (573 ) (3,782 ) 5,127 (81 ) 39 (10,168 ) (210 ) (144 ) 4,413 641 16,895 (18,871 ) (27,036 ) 6,001 9,970 18,686 1,522 (1,433 ) (258 ) — (91 ) 4,383 (15,893 ) (4,385 ) (3,976 ) (5,983 ) — (42 ) (5 ) — (34 ) 656 — (9,754 ) (4,015 ) 69 (39 ) (4,661 ) (3,052 ) 39,092 30,164 $ 34,431 $ 27,112 $ — $ 28 $ 2,492 $ 465 $ 89 $ 110 $ 175 $ —
COHEN & STEERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business
Cohen & Steers, Inc. (“CNS”) completedwas organized as a Delaware corporation on March 17, 2004. CNS was formed to be the initial public offering of its common stock on August 18, 2004. On August 17, 2004, prior to the completion of the initial public offering and pursuant to a reorganization into a holding company structure, CNS became the parent holding company offor Cohen & Steers Capital Management, Inc. (“CSCM”). CNS, through its direct, a New York corporation, and indirect subsidiaries, succeededto allow for the issuance of common stock to the business conducted by CSCM and its subsidiaries. The reorganization is described in greater detail in the Registration Statement on Form S-1 (File No. 333-114027) (the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”) in connection with the initial public offering. On August 16, 2004, the Company terminated its status as an S-corporation under Subchapter S of the Internal Revenue Code and converted to a C-corporation. The results for the three and nine months ended September 30, 2004 include operations as a private company and are not necessarily comparable with the results of operations as a public company in the three and nine months ended September 30, 2005.public.
The unaudited condensed consolidated financial statements set forth herein include the accounts of CNS and its direct and indirect subsidiaries. CNS’s significant wholly-owned subsidiaries which includeare CSCM, Cohen & Steers Securities, LLC (“Securities, LLC”Securities”), and Cohen & Steers Capital Advisors, LLC (“Advisors, LLC”Advisors” and collectively, the “Company”). On September 9, 2005, CNS terminated Cohen & Steers Holdings, LLC (“Holdings, LLC”). Holdings, LLC was organized to retain fractional ownership interests in two aircraft. During the quarter ended September 30, 2005, these interests were transferred to CSCM. MaterialAll material intercompany transactionsbalances and balancestransactions have been eliminated in consolidation.
The Company provides investment management services to individual and institutional investors through a wide range of open-end mutual funds, closed-end mutual funds and institutional separate accounts. The Company manages high-income equity portfolios, specializing in U.S. REITs, international real estate securities, preferred securities, utilities and large cap value stocks. Its clients include Company-sponsored open-end and closed-end mutual funds and domestic corporate and public pension plans, foreign pension plans, endowment funds and individuals. Through its registered broker-dealers,broker/dealers, Securities LLC and Advisors, LLC, the Company provides distribution services for certain of its funds as well as investment banking services to companies in real estate and real estate intensive businesses. On January 27, 2005, the National Association of Securities Dealers (the “NASD”) approved the expansion of Advisors, LLC’s underwriting business to include firm commitment underwriting.
2. Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC.Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the interim results have been made. The preparation of the unaudited condensed consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes the estimates used in preparing the unaudited condensed consolidated financial statements are reasonable and prudent. Actual results could differ from those estimates.
The Company’s unaudited condensed consolidated financial statements and the related notes should be read together with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and the unaudited condensed
6
Cash and Cash Equivalents—Cash equivalents consist of short-term, highly liquid investments, which are readily convertible into cash and have original maturities of three months or less. Investments—The management of the Company determines the appropriate classification of its investments at the time of purchase and re-evaluates such determination at each statement of financial condition date. Marketable securities classified as available-for-sale 7consolidated financial statements and the related notes included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005. Certain prior period amounts have been reclassified to conform to the three and nine months ended September 30, 2005March 31, 2006 presentation.consistare primarily comprised of investments in Company-sponsored open-end and closed-end mutual funds as well as highly rated debt and preferred instruments. These investments are carried at fair value based on quoted market prices, with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income. The Company reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other than temporary. If the Company believes
COHEN & STEERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
an impairment on a security position is other than temporary, the loss will be recognized in operations. Minor impairments that arise from changes in interest rates and not credit quality are generally considered temporary.
Goodwill and Intangible AssetAssets—Intangible assets are amortized over their useful life. Goodwill represents the excess of the cost of the Company’s investment in the net assets of an acquired company over the fair value of the underlying identifiable net assets at the date of acquisition. Goodwill is not amortized but is tested at least annually for impairment by comparing the fair value to carrying amount, including goodwill. See NoteNotes 3 and 4 for further discussion about the Company’s goodwill and intangible assets.asset.
Deferred Commissions—Deferred commissions consist of commissions paid in advance to broker-dealers in connection with the sale of certain shares of Company-sponsored open-end load mutual funds and are capitalized and amortized over a period not to exceed six years.
Investment Advisory and Administration Fees—The Company earns the majority of its revenue by providing asset management services to Company-sponsored open-end and closed-end mutual funds and to institutional separate accounts. This revenue is earned pursuant to the terms of the underlying advisory contract, and is based on a contractual investment advisory fee applied to the assets in the respective portfolios.client’s portfolio. The Company also earns revenue from administration fees paid by certain Company-sponsored open-end and closed-end mutual funds, based on the average daily net assets of such funds. This revenue is recognized as such fees are earned.
Distribution and Service Fee RevenueFees—Distribution and service fee revenue is earned as the services are performed, generally based on contractually-predetermined percentages of the average daily net assets of the open-end load mutual funds. Distribution and service fee revenue is recorded gross of any third-party distribution and service arrangements; thearrangements. The expenses associated with these third-party distribution and service arrangements are recorded as incurred in distribution and service fee expenses.fees.
Portfolio Consulting FeesIncome Taxes—The Company earns revenueaccounts for various portfolio consulting services provided to clients, as well as for providing a license to use its name. This revenue is recognized pursuant to the termsincome taxes in accordance with Statement of individual agreements and is based on the net assets of the clients’ funds.
New Accounting Pronouncements—In March 2005, a Financial Accounting Standards Board (“FASB”SFAS”) Staff Position was issued addressingNo. 109, “Accounting For Income Taxes” (“SFAS 109”). The Company recognizes the applicationcurrent and deferred tax consequences of Emerging Issues Task Forceall transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years. Deferred tax liabilities are recognized for temporary differences that will result in taxable income in future years.
Stock-based Compensation—The Company accounts for stock-based compensation awards in accordance with SFAS No. 123(R), “Share-Based Payment” (“EITF”) Issue No. 85-24 (“FSP EITF 85-24-1”SFAS 123(R)”), “Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” when cashwhich requires public companies to recognize expense for the rightgrant-date fair value of awards of equity instruments granted to future distribution fees for shares previously soldemployees. This expense is received from third parties. FSP EITF 85-24-1 did not materially impactrecognized over the Company’s unaudited condensed consolidated financial position or resultsperiod during which employees are required to provide service. SFAS 123(R) also requires the Company to estimate forfeitures at the date of operations.grant instead of recognizing them as incurred.
7
3. Intangible Asset The Company’s intangible asset, which expires in January 2008, reflects the independently determined value of the non-competition agreements that the Company received from certain employees who received fully vested restricted stock units (“RSUs”) at the time of Gross carrying amount Accumulated amortization Intangible asset, net 8 the Company’s initial public offering in exchange for terminated stock appreciation rights granted to such holders prior to the Company’s initial public offering. The intangible asset, with an original value of $15,400,000, is being amortized on a straight-line basis over the life of these agreements. The following table details the gross carrying amounts and accumulated amortization for the intangible asset at September 30, 2005March 31, 2006 and December 31, 20042005 (in thousands): September 30,
2005 December 31,
2004 Gross carrying amount $ 15,400 $ 15,400 Accumulated amortization (5,038 ) (1,707 ) Intangible asset, net $ 10,362 $ 13,693 March 31, 2006 December 31, 2005 $ 15,400 $ 15,400 (7,258 ) (6,148 ) $ 8,142 $ 9,252
COHEN & STEERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Amortization expense related to the intangible asset was approximately $1,110,000 and $3,331,000 infor the three and nine months ended September 30,March 31, 2006 and 2005, respectively. Estimated amortization expense from OctoberApril 1, 20052006 through January 31, 2008, the date of expiration, is as follows (in thousands):
| Years Ending December 31, | Estimated Amortization Expense | ||||||||
| 2005 | $ | 1,110 | |||||||
| 2006 | 4,441 | ||||||||
| 2007 | 4,441 | ||||||||
| 2008 | 370 | ||||||||
Periods Ending December 31, | Estimated Amortization Expense | ||
2006 | $ | 3,331 | |
2007 | 4,441 | ||
2008 | 370 | ||
4. Investments
Marketable Securities
The following is a summary of the cost and fair value of investments in marketable securities at September 30, 2005March 31, 2006 and December 31, 20042005 (in thousands):
| September 30, 2005 Gross Unrealized | December 31, 2004 Gross Unrealized | ||||||||||||||||||||||||
| Cost | Gains | Losses | Market Value | Cost | Gains | Losses | Market Value | ||||||||||||||||||
| Debt securities (1): | |||||||||||||||||||||||||
| Maturity Less than 1 year | 23,953 | — | (120 | ) | 23,833 | 27,451 | — | (65 | ) | 27,386 | |||||||||||||||
| Maturity Between 1yr - 5 yrs | 34,880 | — | (250 | ) | 34,630 | 19,990 | — | (150 | ) | 19,840 | |||||||||||||||
| Preferred securities | 17,689 | 117 | — | 17,806 | 13,000 | 72 | — | 13,072 | |||||||||||||||||
| Company sponsored mutual funds | 12,033 | 2,327 | — | 14,360 | 6,403 | 3,235 | (1 | ) | 9,637 | ||||||||||||||||
| Total marketable securities, available for sale | 88,555 | 2,444 | (370 | ) | 90,629 | 66,844 | 3,307 | (216 | ) | 69,935 | |||||||||||||||
(1) Debt securities consist of U.S. Treasury and U.S. Government agency securities.
In
| March 31, 2006 | December 31, 2005 | |||||||||||||||||||||||||
| Gross Unrealized | Gross Unrealized | |||||||||||||||||||||||||
| Cost | Gains | Losses | Market Value | Cost | Gains | Losses | Market Value | |||||||||||||||||||
Debt securities (1): | ||||||||||||||||||||||||||
Maturity less than 1 year | $ | 31,954 | $ | — | $ | (253 | ) | $ | 31,701 | $ | 36,938 | $ | — | $ | (243 | ) | $ | 36,695 | ||||||||
Maturity between 1yr - 5 yrs | 4,968 | — | (49 | ) | 4,919 | 14,940 | — | (119 | ) | 14,821 | ||||||||||||||||
Preferred securities | 25,878 | 290 | — | 26,168 | 18,710 | 223 | — | 18,933 | ||||||||||||||||||
Equities | 6,068 | 868 | — | 6,936 | 3,852 | 123 | — | 3,975 | ||||||||||||||||||
Company sponsored mutual funds | 11,623 | 1,993 | — | 13,616 | 11,180 | 1,672 | — | 12,852 | ||||||||||||||||||
Total marketable securities | $ | 80,491 | $ | 3,151 | $ | (302 | ) | $ | 83,340 | $ | 85,620 | $ | 2,018 | $ | (362 | ) | $ | 87,276 | ||||||||
| (1) | Debt securities consist of U.S. Treasury and U.S. Government agency securities. |
For the three months ended September 30,March 31, 2006 and March 31, 2005, sales proceeds and gross realized gains from Company-sponsored mutual funds were approximately $1,797,000$3,222,000 and $775,000, respectively. In the nine months ended September 30, 2005, sales proceeds$1,522,000, respectively, and gross realized gains from Company-sponsored mutual
8
Unrealized losses on investments in marketable securities as of March 31, 2006 were generally due to interest rate increases. The Company has the ability and Equity Investment At 9funds were approximately $4,970,000$638,000 and $1,924,000,$507,000, respectively. There was no sales activity in the three and nine months ended September 30, 2004. Dividend income from Company-sponsored mutual funds was approximately $85,000$73,000 and $138,000, in$44,000, for the three months ended September 30,March 31, 2006 and 2005, respectively.2004, respectivelyintent to hold these investments until a recovery of fair value, which may mean until maturity, and approximately $288,000 and $315,000 in the nine months ended September 30, 2005 and 2004, respectively.to collect all contractual cash flows. Accordingly, impairment of these investments is considered temporary.September 30,March 31, 2006 and December 31, 2005, the Company had a non-controlling 50% investment of approximately $4,276,000,$4,856,000 and $4,427,000, respectively, which includesincluded approximately $2,721,000$2,728,000 and $2,676,000 of goodwill, respectively, in Houlihan Rovers S.A. (“Houlihan Rovers”), the Company’s
COHEN & STEERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Brussels-based investment advisor affiliate. The Company accounts for its investment in Houlihan Rovers using the equity method of accounting. Under such accounting method, the investor recognizes its respective share of the investee’s net income for the period. InFor the three and nine months ended September 30,March 31, 2006 and 2005, the Company recognized income of approximately $285,000$348,000 and $683,000, respectively, of income from Houlihan Rovers.$152,000, respectively.
5. Property and Equipment
On September 30, 2005, the Company sold its fractional ownership interest in an aircraft for approximately $485,000, net of commissions. The aircraft had a net book value of approximately $196,000 at September 30, 2005. Pursuant to this transaction, the Company recognized a gain on sale of approximately $289,000.
6. Earnings Per Share
Basic earnings per share are calculated by dividing net income by the weighted average shares outstanding. Diluted earnings per share are calculated by dividing net income by the total weighted average shares of common stock outstanding and common stock equivalents. Common stock equivalents are comprised of dilutive potential shares from restricted stock unit awards. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. Diluted earnings per share are computed using the treasury stock method. There were no anti-dilutive common stock equivalents excluded from the computation for the three months ended March 31, 2006 and 2005.
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations infor the three and nine months ended September 30,March 31, 2006 and 2005 and 2004 (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| Net income (loss) | $ | 8,003 | $ | (20,589 | ) | $ | 23,577 | $ | (2,658 | ) | ||||
| Basic weighted average shares outstanding | 39,980 | 34,068 | 39,999 | 29,156 | ||||||||||
| Dilutive potential shares from restricted stock awards | 391 | 70 | 304 | 70 | ||||||||||
| Dilutive weighted average shares outstanding | 40,371 | 34,138 | 40,303 | 29,226 | ||||||||||
| Basic earnings (loss) per share | $ | 0.20 | $ | (0.60 | ) | $ | 0.59 | $ | (0.09 | ) | ||||
| Diluted earnings (loss) per share | $ | 0.20 | $ | (0.60 | ) | $ | 0.58 | $ | (0.09 | ) | ||||
9
Net income Basic weighted average shares outstanding Dilutive potential shares from restricted stock awards Diluted weighted average shares outstanding Basic earnings per share Diluted earnings per share Deferred income taxes represent the tax effects of the temporary differences between book and tax bases and are measured using The Company’s deferred tax asset is primarily attributable to future income tax deductions derived from vested restricted stock units granted at the time of the Company’s initial public offering. The Company records a valuation allowance, when necessary, to reduce deferred tax assets to an amount that more likely than not will be realized. 10 Three Months Ended March 31, 2006 2005 $ 8,717 $ 7,065 39,803 40,022 524 213 40,327 40,235 $ 0.22 $ 0.18 $ 0.22 $ 0.18 7.6. Income Taxes On August 16, 2004, the Company terminated its status as an S-corporation and converted to a C-corporation. For all periods prior to such date, the Company operated as an S-corporation and was not subject to U.S. Federal and certain state income taxes. The Company’s historical income tax expense consisted of New York State and New York City income taxes. As a C-corporation, the Company is liable for U.S. Federal and certain state and local income taxes to which it had not been previously subject. The Company accounts for taxes in accordance with the guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting For Income Taxes.” In accordance with SFAS No. 109, recognition of tax benefits or expenses is required for temporary differences between the book and tax bases of assets and liabilities.theenacted tax rates expected during the periodsthat will be in which the differenceseffect when such items are expected to reverse. The provision for income taxes for the three months ended September 30, 2005, reflects U.S. federal, state and local income taxes at an effective tax rate equal to 39.5%. Under Accounting Principles Board Opinion 23 –Accounting for income taxes-special areas(“APB 23”), the Company has not provided for U.S. taxes for the undistributed earnings of Houlihan Rovers, which reduced the Company’s effective tax rate for the three months ended September 30, 2005. The provision for income taxes for the nine months ended September 30, 2005,March 31, 2006 includes U.S. federal, state and local income taxes at ana 37% effective tax rate, equalwhich represents management’s best estimate of the rate expected to 42.3%. Includedbe applied to the full fiscal year of 2006. In estimating the full year’s effective tax rate, the Company has anticipated the effect of a $72 million expense that will be recorded in the second quarter of 2006 related to the termination of certain agreements entered into in connection with the common share offerings of seven Company-sponsored closed-end mutual funds (see Note 12). The expense, which is anticipated to create a tax provisionloss for the nine months ended September 30, 2005 isfull fiscal year 2006, will be applied to periods in which the Company expects to have lower tax rates. Management’s estimate of the full year’s effective tax rate also includes an adjustment to the net deferred tax asset resulting from a recent change in the New York Statelower state and local tax law. rates.
COHEN & STEERS, INC. AND SUBSIDIARIES
8. Long-Term DebtNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
During the three months ended September 30, 2005, the Company prepaid its long-term debt, which included two loans with original principal of approximately $1,440,000 and $620,000, respectively. These loans were collateralized by fractional ownership interests in certain aircraft. Amounts paid pursuant to these loan pre-payments as of September 30, 2005, were approximately $1,135,000 million and $493,000 respectively. No gains or losses were recognized on such pre-payments.
9.7. Contingencies
As previously disclosed, on October 11, 2004, the Company’s Compensation Committee canceled fully vested RSUs previously granted to an employee who resigned from the Company due to such employee’s violation of the non-competition covenants relating to the RSUs. On October 29, 2004, this former employee filed a lawsuit against the Company challenging the forfeiture of these RSUs. On November 18, 2004, the Company filed a motion to dismiss this action and on April 1, 2005, the court granted the Company’s motion to dismiss. On November 7, 2005, this former employee appealed the Supreme Court’s decision to dismiss the matter to the Appellate Division of the Supreme Court, First Department. Based on information currently available and advice of counsel, the Company believes that the eventual outcome of the action against it will not have a material adverse effect on its unaudited condensed consolidated financial position, results of operations or liquidity.
10
Total comprehensive income includes net income and other comprehensive income, net of tax. The components of comprehensive income Net income Foreign currency translation gain (loss) adjustment Net unrealized gain (loss) on available-for-sale securities, net of tax Total comprehensive income Securities The Securities The Company is an investment advisor to, and has administrative agreements with, affiliated open-end and closed-end mutual funds for which certain employees are officers and/or directors. 1110.8. Comprehensive Incomeinfor the three months ended March 31, 2006 and nine months ended September 30, 2005 and 2004 are as follows (in thousands):Three Months Ended September 30, Nine Months Ended September 30, 2005 2004 2005 2004 Net income (loss) $ 8,003 $ (20,589 ) $ 23,577 $ (2,658 ) Foreign currency translation adjustment (330 ) — (368 ) — Net unrealized gain (loss) on available-for-sale securities, net of tax (509 ) (307 ) (1,744 ) (204 ) Reclassification of realized gain on available-for-sale securities, net of tax 488 — 1,165 — Total comprehensive income (loss) $ 7,652 $ (20,896 ) $ 22,630 $ (2,862 ) Three Months
Ended March 31, 2006 2005 $ 8,717 $ 7,065 69 (39 ) 869 (743 ) $ 9,655 $ 6,283 11.9. Regulatory Requirements LLC and Advisors, LLC, as registered broker-dealersbroker/dealers and member firms of the NASD,National Association of Securities Dealers, are subject to the SEC’s Uniform Net Capital Rule 15c3-1 (the “Net Capital Rule”“Rule”), which requires that broker-dealersbroker/dealers maintain a minimum level of net capital, as defined. At September 30, 2005,As of March 31, 2006, Securities LLC and Advisors LLC had net capital of approximately $2,325,000$4,201,000 and $7,143,000,$7,082,000, respectively, which exceeded their requirements by approximately $2,097,000$3,891,000 and $6,827,000,$6,897,000, respectively. Net Capital Rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital of a broker-dealerbroker/dealer is less than the amount required under the Net Capital Rule. LLC and Advisors LLC do not carry customer accounts and are exempt from the SEC’s Rule 15c3-3 pursuant to provisions (k)(2)(i)(1) and (k)(2)(ii)(i) of such rule.rule, respectively.12.10. Related Party TransactionsInFor the three months ended September 30,March 31, 2006 and 2005, and 2004, the Company earned advisory and administrative fee revenue of approximately $27,269,000$28,109,000 and $21,126,000,$23,800,000, respectively, from these affiliated funds. In the nine months ended September 30, 2005 and 2004, the Company earned advisory and administrative fee revenue of approximately $76,248,000 and $57,539,000, respectively, from these affiliated funds. InFor the three months ended September 30,March 31, 2006 and 2005, and 2004, distribution and service fee revenue from such funds aggregatedtotaled approximately $3,091,000$3,201,000 and $2,561,000, respectively. In the nine months ended September 30, 2005 and 2004, distribution and service fee revenue from such funds aggregated approximately $8,941,000 and $7,246,000,$2,869,000, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
For the three months ended March 31, 2006 and 2005, the Company had investment advisory agreements with certain affiliated closed-end mutual funds, pursuant to which the Company contractually waived approximately $4,828,000 and $4,200,000, respectively, of advisory fees it was otherwise entitled to receive. These investment advisory agreements contractually require the Company to waive a portion of the advisory fees the Company otherwise would charge for up to ten years from the respective fund’s inception date. The board of directors of these mutual funds must approve the renewal of the advisory agreements each year, including any reduction in advisory fee waiver scheduled to take effect during that year. As of January 1, 2006, the first such scheduled reduction in advisory fee waiver became effective for one fund.
The Company incurs expenses associated with the launch of its open and closed-end mutual funds. These organizational costs, which are included in general and administrative expenses, totaled approximately $242,000$39,000 and $100,000 in$1,800,000 for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively, and $2,411,000 and $600,000 in the nine months ended September 30, 2005 and 2004, respectively.
The Company has an agreement with an affiliated open-end mutual fund that contractually requires the Company to pay expenses of the fund so that its total annual operating expenses do not exceed 0.75% of average daily net assets. This commitment will remain in place for the fund’s life. In the three months ended September 30, 2005 and 2004, expenses of approximately $270,000 and $200,000, respectively, were incurred by the Company pursuant to this agreement and are included in general and administrative expenses. In the nine months ended September 30, 2005 and 2004, expenses of approximately $770,000 and $600,000, respectively, were incurred.
The Company has agreements with five othersix affiliated open-end mutual funds to waive and/or reimburse certain fund expenses. These commitments will remain in place through December 31, 2005. InFor the three months ended September 30,March 31, 2006 and 2005, and 2004, expenses of approximately $167,000$506,000 and $54,000,$400,000 respectively, were incurred by the Company pursuant to these agreements and are included in general and administrative expenses. In the nine months ended September 30, 2005 and 2004, expenses of approximately $567,000 and $154,000, respectively, were incurred.
General and administrative expenses include $227,000 and $344,000$624,000 of sub-advisory fees paid to Houlihan Rovers infor the three and nine months ended September 30,March 31, 2006.
Included in accounts receivable at March 31, 2006 and December 31, 2005 are receivables due from Company-sponsored mutual funds of approximately $11,378,000 and $10,344,000, respectively. Included in other assets at March 31, 2005 and December 31, 2005 are amounts due from Company-sponsored mutual funds of approximately $69,000 and $77,000, respectively.
See Note 4 relating to additional investments in Company-sponsored mutual funds.
13.11. Segment Reporting
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes disclosure requirements relating to operating segments in financial statements. The Company operates in two business segments: Asset Management and Investment Banking. The Company’s reporting segments are strategic divisions that offer different services and are managed separately, as each division requires different resources and marketing strategies.
The Company does not record revenue between segments (referred to as inter-segment revenue).
The Company evaluates performance of its segments based on profit or loss from operations before taxes. Information on the unaudited condensed consolidated statement of financial condition data by segment is not disclosed because it is not used in evaluating segment performance and deciding how to allocate resources to segments.
12
COHEN & STEERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Summarized financial information for the Company’s reportable segments is presented in the following tables (in thousands):
12
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Asset Management | ||||||||
Total revenue, including equity in earnings of affiliate | $ | 37,489 | $ | 31,370 | ||||
Total expenses | (24,517 | ) | (20,855 | ) | ||||
Net non-operating income | 1,571 | 991 | ||||||
Income before provision for income taxes | $ | 14,543 | $ | 11,506 | ||||
Investment Banking | ||||||||
Total revenue | $ | 705 | $ | 2,889 | ||||
Total expenses | (1,751 | ) | (2,231 | ) | ||||
Net non-operating income | 129 | 24 | ||||||
Income (loss) before provision for income taxes | $ | (917 | ) | $ | 682 | |||
Total | ||||||||
Total revenue, including equity in earnings of affiliate | $ | 38,194 | $ | 34,259 | ||||
Total expenses | (26,268 | ) | (23,086 | ) | ||||
Net non-operating income | 1,700 | 1,015 | ||||||
Income before provision for income taxes | $ | 13,626 | $ | 12,188 | ||||
Three Months Ended September 30,
2005 September 30,
2004 Asset Management Total revenue $ 35,244 $ 27,240 Total expenses (23,693 ) (62,420 ) Net non-operating income, including equity in earnings of affiliate 2,123 257 Income (loss) before provision for income taxes $ 13,674 $ (34,923 ) Investment Banking Total revenue $ 1,187 $ 1,881 Total expenses (1,700 ) (4,518 ) Net non-operating income 68 15 Loss before provision for income taxes $ (445 ) $ (2,622 ) Total Total revenue $ 36,431 $ 29,121 Total expenses (25,393 ) (66,938 ) Net non-operating income, including equity in earnings of affiliate 2,191 272 Income (loss) before provision for income taxes $ 13,229 $ (37,545 ) Nine Months Ended September 30,
2005 September 30,
2004 Asset Management Total revenue $ 99,188 $ 75,459 Total expenses (65,982 ) (92,618 ) Net non-operating income, including equity in earnings of affiliate 4,865 374 Income (loss) before provision for income taxes $ 38,071 $ (16,785 ) Investment Banking Total revenue $ 9,618 $ 6,599 Total expenses (7,011 ) (8,255 ) Net non-operating income 149 30 Income (loss) before provision for income taxes $ 2,756 $ (1,626 ) Total Total revenue $ 108,806 $ 82,058 Total expenses (72,993 ) (100,873 ) Net non-operating income, including equity in earnings of affiliate 5,014 404 Income (loss) before provision for income taxes $ 40,827 $ (18,411 )
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Income before provision for income taxes | $ | 13,626 | $ | 12,188 | ||||
Less: Equity in earnings of affiliate | (348 | ) | (152 | ) | ||||
Income before provision for income taxes and equity in earnings of affiliate | $ | 13,278 | $ | 12,036 | ||||
14.12. Subsequent Events
On October 18, 2005,April 10, 2006, the Company paidagreed to terminate additional compensation agreements entered into in connection with the common share offerings of seven Cohen & Steers closed-end mutual funds. In exchange for the termination of these agreements, the Company made a lump sum payment of $72 million that will be recorded as an expense in the second quarter of 2006.
On May 2, 2006, CNS declared a quarterly cash dividend on its common stock in the amount of $0.11 per share to the Company’s stockholders of record at the close of business on September 29, 2005.
On November 9, 2005, the Company’s Board of Directors declared a cash dividend of $0.11 per share to the Company’s stockholders.share. The dividend will be payable on January 18,July 19, 2006 to stockholders of record at the close of business on DecemberJune 29, 2005.2006.
13
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Set forth on the following pages is management’s discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2005March 31, 2006 and September 30, 2004.March 31, 2005. Such information should be read in conjunction with our unaudited condensed consolidated financial statements together with the notes to the unaudited condensed consolidated financial statements. When we use the terms “Cohen & Steers,” the “Company,” “we,” “us,” and “our,” we mean Cohen & Steers, Inc., a Delaware corporation, and its consolidated subsidiaries.
Overview
Cohen & Steers, Inc., together with its wholly-owned subsidiaries, is a manager of high-income equity portfolios, specializing in U.S. REITs, international real estate securities, preferred securities, utilities and large cap value stocks. We serve individual and institutional investors through a wide range of open-end mutual funds, closed-end mutual funds and institutional separate accounts. As a complement to our asset management business, we also provide investment banking services to companies in real estate and real estate intensive businesses.businesses, including healthcare.
Assets Under Management
We manage three types of accounts: closed-end mutual funds, open-end load and no-load mutual funds and institutional separate accounts.
The following table sets forth information regarding the net flows and appreciation/(depreciation) of assets under management for the periods presented (in millions):
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Closed-End Mutual Funds | ||||||||
Assets under management, beginning of period | $ | 9,674 | $ | 8,984 | ||||
Inflows | 54 | 605 | ||||||
Market appreciation (depreciation) | 534 | (463 | ) | |||||
Total increase | 588 | 142 | ||||||
Assets under management, end of period | $ | 10,262 | $ | 9,126 | ||||
Open-End Mutual Funds | ||||||||
Assets under management, beginning of period | $ | 5,591 | $ | 5,199 | ||||
Inflows | 719 | 418 | ||||||
Outflows | (500 | ) | (423 | ) | ||||
Net inflows (outflows) | 219 | (5 | ) | |||||
Market appreciation (depreciation) | 767 | (370 | ) | |||||
Total increase (decrease) | 986 | (375 | ) | |||||
Assets under management, end of period | $ | 6,577 | $ | 4,824 | ||||
14
Institutional Separate Accounts Assets under management, beginning of period Inflows Outflows Net inflows (outflows) Market appreciation (depreciation) Total increase (decrease) Assets under management, end of period Total Assets under management, beginning of period Inflows Outflows Net inflows Market appreciation (depreciation) Total increase (decrease) Assets under management, end of period (1) Assets under management were Closed-end mutual funds Closed-end mutual fund assets under management increased Open-end mutual funds Open-end mutual fund assets under management increased Net inflows for open-end mutual funds were 15 $719 million in the three months ended Market appreciation Institutional separate accounts Institutional separate account assets under management increased Institutional separate accounts had net Market appreciation was Results of Operations Three Months Ended The following table of selected financial data presents our business segments in a manner consistent with the way that we manage our businesses (in thousands): Asset Management Total revenue, including equity in earnings of affiliate Total expenses Net non-operating income Income before provision for income taxes Investment Banking Total revenue Total expenses Net non-operating income Income (loss) before provision for income taxes Total Total revenue, including equity in earnings of affiliate Total expenses Net non-operating income Income before provision for income taxes 16 Revenue Total revenue, including equity in earnings of affiliate, increased Asset Management Revenue, including equity in earnings of affiliate, increased In the three months ended In the three months ended In the three months ended ended Investment Banking Revenue decreased 76% to $0.7 million in the three months ended March 31, 2006 from $2.9 million in the three months ended March 31, 2005. First quarter 2006 revenue was primarily attributable to fees generated in connection with merger advisory assignments and capital raising transactions. Revenue from investment banking activity is dependent on the completion of transactions, Expenses Total operating expenses Employee compensation and benefits expense 17 Distribution and service fee expenses increased General and administrative expenses increased Depreciation and amortization increased Amortization of deferred commissions decreased 24% to $0.7 million in the three months ended March 31, 2006 from $1.0 million in the three months ended March 31, 2005. The decrease was primarily attributable to Non-operating Income Non-operating income, As previously discussed, in exchange for the termination of certain additional compensation agreements related to the offerings of seven Cohen & Steers closed-end mutual funds, we made a lump sum payment of $72 million. This payment will reduce cash and Income Taxes 18 Liquidity and Capital Resources Our investment advisory business does not require us to maintain significant capital balances. Our current financial condition is highly liquid, with the majority of our assets comprised of cash and cash equivalents and marketable securities. Our cash flows Cash, cash equivalents, accounts receivable and marketable securities were 72% and Cash and cash equivalents decreased by $4.7 million 2006. Net cash from operating activities was Cash and cash equivalents decreased by $3.1 million in the three months ended March 31, 2005. Net cash from operating activities was $16.9 million in the three months ended March 31, 2005. Cash of It is our policy to continuously monitor and evaluate the adequacy of our capital. We have consistently maintained net capital in excess of the regulatory requirements for our Contractual Obligations We have contractual obligations to make future payments in connection with our non-cancelable operating lease agreements for office space and capital leases for office equipment. The following summarizes our contractual obligations as of Operating leases Capital lease obligations, net Total contractual obligations 19 Off-Balance Sheet Arrangements We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any leasing activities that expose us to any liability that is not reflected in our unaudited condensed consolidated financial statements. Critical Accounting Policies and Estimates The preparation of our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. A thorough understanding of our accounting policies is essential when reviewing our reported results of operations and our financial position. Our management considers the following accounting policies critical to an informed review of our consolidated financial statements. For a summary of these and additional accounting policies, see the notes to the annual audited consolidated financial statements Investments Management determines the appropriate classification of its investments at the time of purchase and re-evaluates such determination at each statement of financial condition date. Marketable securities classified as available-for-sale Investment Advisory and Administration Fees We earn the majority of our revenue by providing asset management services to our sponsored open-end and closed-end mutual funds and to institutional separate accounts. This revenue is earned pursuant to the terms of the underlying advisory contract and is based on a contractual investment advisory fee applied to the assets in the portfolio. We 20 Stock-based Compensation We account for stock-based compensation awards in accordance with SFAS No. 123(R), “Share-Based Payment” (“ Forward-Looking Statements This report and other documents filed by us contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative versions of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those described in the “Risk Factors” section of ITEM 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of our business, we are exposed to the risk of interest rate, securities market and general economic fluctuations which may have an adverse impact on the value of our marketable securities. In addition, a significant majority of our revenue—approximately 21 In addition, market conditions may preclude us from increasing the assets we manage in The returns for REIT common stocks have demonstrated ITEM 4. Controls and Procedures Based on their evaluation as of a date as of the end of the period covered by this Quarterly Report on Form 10-Q, our co-chief executive officers and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There has been no change in our internal control over financial reporting that occurred during the 22 Part As previously disclosed, on October 11, 2004, our Compensation Committee canceled 404,971 fully vested RSUs previously granted to an employee who resigned from Cohen & Steers, due to such employee’s violation of the non-competition covenants relating to the RSUs. On October 29, 2004, this former employee filed a lawsuit in the Supreme Court of the State of New York against Cohen & Steers, Inc. and its wholly owned subsidiary, Cohen & Steers Capital Management, Inc., challenging the forfeiture of these RSUs. On November 18, 2004, we filed a motion to dismiss this action and on April 1, 2005, the court granted our motion to dismiss. On ITEM ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2006, the Company made the following purchases of its equity securities that are Period January 1 through January 31, 2006 February 1 through February 28, 2006 March 1 through March 31, 2006 Total Description 23 Description (1) 24 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: Cohen & Steers, Inc. /s/ Matthew S. Stadler Name: Matthew S. Stadler Title: Executive Vice President & Chief Financial Officer 25 Three Months Ended Nine Months Ended September 30,
2005 September 30,
2004 September 30,
2005 September 30,
2004 Closed-End Mutual Funds Assets under management, beginning of period $ 10,007 $ 7,671 $ 8,984 $ 4,791 Inflows — — 755 2,931 Market appreciation 78 334 346 283 Total increase 78 334 1,101 3,214 Assets under management, end of period $ 10,085 $ 8,005 $ 10,085 $ 8,005 Open-End Mutual Funds Assets under management, beginning of period $ 5,428 $ 4,029 $ 5,199 $ 3,897 Inflows 448 315 1,287 998 Outflows (399 ) (215 ) (1,345 ) (963 ) Net inflows (outflows) 49 100 (58 ) 35 Market appreciation 119 336 455 533 Total increase 168 436 397 568 Assets under management, end of period (1) $ 5,596 $ 4,465 $ 5,596 $ 4,465 Institutional Separate Accounts Assets under management, beginning of period $ 4,428 $ 3,280 $ 4,118 $ 2,992 Inflows 83 75 351 360 Outflows (197 ) (82 ) (461 ) (287 ) Net inflows (outflows) (114 ) (7 ) (110 ) 73 Market appreciation 165 324 471 532 Total increase 51 317 361 605 Assets under management, end of period $ 4,479 $ 3,597 $ 4,479 $ 3,597 Total Assets under management, beginning of period $ 19,863 $ 14,980 $ 18,301 $ 11,680 Inflows 531 390 2,393 4,289 Outflows (596 ) (297 ) (1,806 ) (1,250 ) Net inflows (outflows) (65 ) 93 587 3,039 Market appreciation 362 994 1,272 1,348 Total increase 297 1,087 1,859 4,387 Assets under management, end of period (1) $ 20,160 $ 16,067 $ 20,160 $ 16,067 (1) As of September 30, 2005, assets under management included $387 million of assetssub-advised by Houlihan Rovers.15 Three Months Ended March 31,
2006 March 31,
2005 $ 5,226 $ 4,118 405 86 (226 ) (112 ) 179 (26 ) 719 (264 ) 898 (290 ) $ 6,124 $ 3,828 $ 20,491 $ 18,301 1,178 1,109 (726 ) (535 ) 452 574 2,020 (1,097 ) 2,472 (523 ) $ 22,963 $ 17,778 (1) As of March 31, 2006 and 2005, assets under management included $1.3 billion and $148 million, respectively, of assets managed by Houlihan Rovers through sub-advisory and similar arrangements. $20.2$23.0 billion at September 30, 2005,March 31, 2006, a 25%29% increase from $16.1$17.8 billion at September 30, 2004.March 31, 2005.26%12% to $10.1$10.3 billion at September 30, 2005,March 31, 2006, compared with $8.0$9.1 billion at September 30, 2004.March 31, 2005. The increase in assets under management was attributable to market appreciation and the offerings of common shares for new funds and preferred shares for new and existing funds as well as market appreciation.funds. There were no closed-endClosed-end mutual fund net inflows in the three months ended September 30, 2005 or 2004 as no new common or preferred shares were offered during these periods. Market appreciation was $78$54 million in the three months ended September 30, 2005,March 31, 2006, compared with market appreciation of $334$605 million in the three months ended September 30, 2004.March 31, 2005. In the three months ended March 31, 2006, Cohen & Steers REIT and Utility Income Fund issued $54 million of variable preferred shares for the purpose of maintaining the target leverage ratio. The assets raised in the first quarter of 2005 were primarily the result of the common share offerings for two closed-end mutual funds. Closed-end mutual fund inflows were $755Market appreciation was $534 million in the ninethree months ended September 30, 2005,March 31, 2006, compared with $2.9 billion in the nine months ended September 30, 2004. In January 2005, we launched Cohen & Steers Dividend Majors Fund, our first diversified portfoliomarket depreciation of high dividend-paying common stocks. This fund raised $244 million, net of underwriting fees. In March 2005, we launched Cohen & Steers Worldwide Realty Income Fund, a closed-end fund that invests primarily in a portfolio of global real estate equity securities, which raised $287 million, net of underwriting fees. In May 2005, Cohen & Steers Worldwide Realty Income Fund issued $150 million in variable rate preferred shares bringing the total raised for this fund to $437 million. Also, one of our existing closed-end funds raised $74 million of variable rate preferred shares during the nine months ended September 30, 2005. Market appreciation was $346$463 million in the ninethree months ended September 30, 2005, compared with market appreciation of $283 million in the nine months ended September 30, 2004.March 31, 2005.25%36% to $5.6$6.6 billion at September 30, 2005March 31, 2006 from $4.5$4.8 billion at September 30, 2004.March 31, 2005. The increase in assets under management was primarily attributabledue to market appreciation.$49$219 million in the three months ended September 30, 2005,March 31, 2006, compared with net inflowsoutflows of $100$5 million in the three months ended September 30, 2004.March 31, 2005. Gross inflows increased to $448September 30, 2005March 31, 2006 from $315$418 million in the three months ended September 30, 2004.March 31, 2005. Gross outflows totaled $399$500 million in the three months ended September 30, 2005,March 31, 2006, compared with $215$423 million in the three months ended September 30, 2004.March 31, 2005.across all of our open-end mutual funds was $119$767 million in the three months ended September 30, 2005,March 31, 2006, compared with market appreciationdepreciation of $336$370 million in the three months ended September 30, 2004.16 Net outflows for open-end mutual funds were $58 million in the nine months ended September 30, 2005, compared with net inflows of $35 million in the nine months ended September 30, 2004. Gross inflows increased to $1.3 billion in the nine months ended September 30, 2005 from $998 million in the nine months ended September 30, 2004. Gross outflows totaled $1.3 billion in the nine months ended September 30, 2005, compared with $963 million in the nine months ended September 30, 2004. Included in our open-end mutual fund gross outflows for the nine months ended September 30, 2005 was a client transfer of $100 million into our institutional separate accounts. Market appreciation across all of our open-end mutual funds was $455 million in the nine months ended September 30, 2005, compared with market appreciation of $533 million in the nine months ended September 30, 2004.March 31, 2005.25%60% to $4.5$6.1 billion at September 30, 2005March 31, 2006 from $3.6$3.8 billion at September 30, 2004.March 31, 2005. The majority of the increase in assets under management during this period was due to market appreciation.appreciation and net inflows.outflowsinflows of $114$179 million in the three months ended September 30, 2005,March 31, 2006, compared with net outflows of $7$26 million in the three months ended September 30, 2004.March 31, 2005. Gross inflows increased to $83$405 million in the three months ended September 30, 2005March 31, 2006 from $75$86 million in the three months ended September 30, 2004.March 31, 2005. Gross outflows were $197totaled $226 million in the three months ended September 30, 2005,March 31, 2006, compared with $82$112 million in the three months ended September 30, 2004.March 31, 2005.$165$719 million in the three months ended September 30, 2005,March 31, 2006, compared with market appreciationdepreciation of $324$264 million in the three months ended September 30, 2004.March 31, 2005. Institutional separate accounts had net outflows of $110 million in the nine months ended September 30, 2005, compared with net inflows of $73 million in the nine months ended September 30, 2004. Gross inflows were $351 million in the nine months ended September 30, 2005, compared with $360 million in the nine months ended September 30, 2004. Included in our institutional separate account inflows for the nine months ended September 30, 2005 was a client transfer in the amount of $100 million from one of our open-end mutual funds. Gross outflows were $461 million in the nine months ended September 30, 2005, compared with $287 million in the nine months ended September 30, 2004. Market appreciation was $471 million in the nine months ended September 30, 2005, compared with market appreciation of $532 million in the nine months ended September 30, 2004.17September 30, 2005March 31, 2006 compared with Three Months Ended September 30, 2004March 31, 2005Three Months Ended September 30,
2005September 30,
2004Asset Management Total revenue $ 35,244 $ 27,240 Total expenses (23,693 ) (62,420 ) Net non-operating income, including equity in earnings of affiliate 2,123 257 Income (loss) before provision for income taxes $ 13,674 $ (34,923 ) Investment Banking Total revenue $ 1,187 $ 1,881 Total expenses (1,700 ) (4,518 ) Net non-operating income 68 15 Loss before provision for income taxes $ (445 ) $ (2,622 ) Total Total revenue $ 36,431 $ 29,121 Total expenses (25,393 ) (66,938 ) Net non-operating income, including equity in earnings of affiliate 2,191 272 Income (loss) before provision for income taxes $ 13,229 $ (37,545 ) Three Months Ended March 31,
2006 March 31,
2005 $ 37,489 $ 31,370 (24,517 ) (20,855 ) 1,571 991 $ 14,543 $ 11,506 $ 705 $ 2,889 (1,751 ) (2,231 ) 129 24 $ (917 ) $ 682 $ 38,194 $ 34,259 (26,268 ) (23,086 ) 1,700 1,015 $ 13,626 $ 12,188 25%11% to $36.4$38.2 million in the three months ended September 30, 2005March 31, 2006 from $29.1$34.3 million in the three months ended September 30, 2004.March 31, 2005. This increase was primarily due tothe result of an increase in investment advisory and administration fees attributable to higher assets under management.management, partially offset by a decrease in investment banking fees.29%20% to $35.2$37.5 million in the three months ended September 30, 2005March 31, 2006 from $27.2 million in the three months ended September 30, 2004. Investment advisory and administration fees increased 30% to $31.4 million in the three months ended September 30, 2005, compared with $24.2March 31, 2005. Investment advisory and administration fees increased 21% to $33.0 million in the three months ended September 30, 2004.March 31, 2006, compared with $27.3 million in the three months ended March 31, 2005.September 30, 2005,March 31, 2006, total investment advisory and administration revenue from closed-end mutual funds increased 28%13% to $16.2$15.9 million from $12.6$14.1 million in the three months ended September 30, 2004.March 31, 2005. The thirdfirst quarter of 20052006 included a full quarter of revenue from the completion of two new fund offerings during the first quarter of 2005. The remaining increase in closed-end mutual fund revenue was due to higher levels of average daily net assets resulting primarily from market appreciation and additional auction market preferred share offerings for certain funds during the fourth quarter of 2004 and the first half of 2005.appreciation.September 30, 2005,March 31, 2006, total investment advisory and administration revenue from open-end mutual funds increased 31%26% to $11.2$12.2 million from $8.5$9.7 million in the three months ended September 30, 2004.March 31, 2005. The increase was attributable to increasedhigher levels of average daily net assets under management across all of our newresulting from market appreciation and existing open-end mutual funds. Distribution and service fee revenue increased 22% to $3.1 million innet inflows during the three months ended September 30, 2005 from $2.6 million in the three months ended September 30, 2004. This increase in distribution and service fee revenue was primarily due to increased assets in two open-end mutual funds.September 30, 2005,March 31, 2006, total investment advisory and administration revenue from institutional separate accounts increased 34%37% to $4.1$4.9 million from $3.1$3.5 million in the three months18September 30 2004. ThisMarch 31, 2005. The increase was attributable to higher levels of assets under management resulting from market appreciation despiteand net outflowsinflows during the period.Investment Banking Revenue decreased 37%Distribution and service fee revenue increased 12% to $1.2$3.2 million in the three months ended September 30, 2005March 31, 2006 from $1.9$2.9 million in the three months ended September 30, 2004. ThirdMarch 31, 2005. The first quarter 2005of 2006 included a full quarter of revenue from the completion of a fund offering in the first quarter of 2005.including the final settlementtiming of two co-managed underwritten public offerings.which cannot be predicted.decreased 62%increased 14% to $25.4$26.3 million in the three months ended September 30, 2005March 31, 2006 from $66.9$23.1 million in the three months ended September 30, 2004,March 31, 2005, primarily due to a decreaseincreases in employee compensation and benefits expense.and distribution and service fees.decreased 82%increased 22% to $10.2$10.6 million in the three months ended September 30, 2005,March 31, 2006, from $55.2$8.7 million in the three months ended September 30, 2004. This wasMarch 31, 2005, primarily due to a third quarter 2004 one-time non-cashincreased salary, incentive compensation chargeand amortization of $46.0 million and an associated Medicare tax expense of $1.0 million related to the termination of a stock appreciation rights plan for the predecessor company and the simultaneous grant of fully-vested restricted stock unitbased compensation awards (“RSUs”) to certain employees coincident with the initial public offering of Cohen & Steers, Inc. common stock, partially offset by increases in base and incentive compensation for new employees hired during 2005 and amortization of unearned compensation related to RSUs and deferred compensation plans. As a result of the new hires that occurred during the thirdfirst quarter of 2005, we expect employee compensation and benefits to be higher in the fourth quarter.2006.11%15% to $7.8$7.7 million in the three months ended September 30, 2005March 31, 2006 from $7.1$6.7 million in the three months ended September 30, 2004.March 31, 2005. This increase was primarily due to higher levels of average daily net assets resulting from market appreciation and the launcha full quarter of newexpense for two closed-end mutual funds launched in the three months ended March 31, 2005. On April 10, 2006, we agreed to terminate additional compensation agreements entered into in connection with the common share offerings of seven Cohen & Steers closed-end mutual funds. In exchange for the termination of these agreements, we made a lump sum payment of $72 million, thereby reducing the distribution and service fee expenses related to these closed-end mutual funds, beginning April 1, 2006. Prior to the termination of these additional compensation agreements, in the three months ended March 31, 2006 we incurred approximately $3 million in such distribution and service fee expenses.86%5% to $5.2$5.7 million in the three months ended September 30, 2005March 31, 2006 from $2.8$5.4 million in the three months ended September 30, 2004. The majority of theMarch 31, 2005. This increase was primarily attributable to higher professional fees resulting from costs related to compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), sub-advisory fees paid to Houlihan Rovers, higher recruiting fees and higher accounting, tax and auditing fees associated with the requirements of being a public company. Occupancyincreased occupancy costs were primarily higher due to the recognition of a full quarter’s rentquarter of expense for our new corporate headquarters, to which we will relocate in November 2005. In connection with our relocation, we will record a charge of approximately $1.8 million comprised primarily of movingincreased IT infrastructure costs and remaining lease payments,increased travel and entertainment as a result of an expanded sales effort. These increases in costs were partially offset by sublease income for our current location.a decrease in printing and certain professional fees related to the launch of four funds during the three months ended March 31, 2005.55%13% to $1.6 million in the three months ended March 31, 2006 from $1.4 million in the three months ended September 30, 2005 from $0.9 million in the three months ended September 30, 2004. Included in depreciation and amortization expense in the third quarter of 2005March 31, 2005. This increase was primarily attributable to a full quarter of non-cash expense of $1.1 million relating todepreciation and amortization of the intangible asset recorded in connection with the grant of fully vested RSUs at the initial public offering of Cohen & Steers, Inc. common stock. The intangible asset, which expires in192008, reflects the independently determined value of the non-competition agreements we have received from each of the employees that received fully vested RSUs at our initial public offering. Asfor leasehold improvements and new assets acquired as a result of our relocation to our new corporate headquarters in November, we will record a chargethe fourth quarter of approximately2005.the abandonmenta higher proportion of certain furniture and fixtures and leasehold improvements.inflows into front-end load, class A shares, which are not amortized.includingexcluding our share of the net income of Houlihan Rovers, was $2.2S.A., increased 68% to $1.7 million in the three months ended September 30, 2005,March 31, 2006, compared with $0.3$1.0 million in the three months ended September 30, 2004. The third quarter 2005 non-operatingMarch 31, 2005. Non-operating income was primarily attributable to $0.9 million of interest and dividend income, $0.8 million of realized gains from the sale of investments in our Company-sponsored mutual funds and a $0.3 million gain from the sale of our fractional interest in an aircraft.Income TaxesHistorical income tax expense consisted solely of New York state and local income taxes; prior to the initial public offering of Cohen & Steers, Inc. common stock, we were exempt from federal income taxes due to our status as an S-corporation. However, upon our conversion from an S-corporation to C-corporation status on August 16, 2004, we became subject to U.S. federal and certain state and local income taxes. We recorded an income tax expense of $5.2 million in the three months ended September 30, 2005, compared with an income tax benefit of $17.0 million in the three months ended September 30, 2004. The provision for income taxes for the three months ended September 30, 2005, reflects U.S. federal, state and local income taxes at an effective tax rate equal to 39.5%. Under Accounting Principles Board Opinion 23 –Accounting for income taxes-special areas(“APB 23”), we have not provided for U.S. taxes for the undistributed earnings of Houlihan Rovers, which reduced our effective tax rate for the three months ended September 30, 2005. The income tax benefit in the third quarter of 2004 was due primarily to a benefit derived from vested restricted stock units granted at the time of the initial public offering of Cohen & Steers, Inc. common stock. We expect our effective tax rate to be approximately 40% for the fourth quarter of 2005.Nine Months Ended September 30, 2005 compared with Nine Months Ended September 30, 2004 The following table of selected financial data presents our business segments in a manner consistent with the way that we manage our businesses (in thousands):20 Nine Months Ended September 30,
2005 September 30,
2004 Asset Management Total revenue $ 99,188 $ 75,459 Total expenses (65,982 ) (92,618 ) Net non-operating income, including equity in earnings of affiliate 4,865 374 Income (loss) before provision for income taxes $ 38,071 $ (16,785 ) Investment Banking Total revenue $ 9,618 $ 6,599 Total expenses (7,011 ) (8,255 ) Net non-operating income 149 30 Income (loss) before provision for income taxes $ 2,756 $ (1,626 ) Total Total revenue $ 108,806 $ 82,058 Total expenses (72,993 ) (100,873 ) Net non-operating income, including equity in earnings of affiliate 5,014 404 Income (loss) before provision for income taxes $ 40,827 $ (18,411 ) Revenue Total revenue increased 33% to $108.8 million in the nine months ended September 30, 2005, from $82.1 million in the nine months ended September 30, 2004. This increase was primarily the result of an increase in investment advisory and administration fees attributable to higher assets under management and an increase in investment banking fees.Asset Management Revenue increased 31% to $99.2 million in the nine months ended September 30, 2005, from $75.5 million in the nine months ended September 30, 2004. Investment advisory and administration fees increased 33% to $87.7 million in the nine months ended September 30, 2005, compared with $66.1 million in the nine months ended September 30, 2004. In the nine months ended September 30, 2005, total investment advisory and administration revenue from closed-end mutual funds increased 38% to $45.3 million from $33.0 million in the nine months ended September 30, 2004. The nine months ended September 30, 2005 included revenue from the completion of two new closed-end fund offerings during the first half of 2005. The remaining increase in closed-end mutual fund revenue was due to higher levels of average daily net assets from market appreciation and common and additional auction market preferred share offerings for certain funds during the fourth quarter of 2004 and the first half of 2005. In the nine months ended September 30, 2005, total investment advisory and administration revenue from open-end mutual funds increased 26% to $30.9 million from $24.6 million in the nine months ended September 30, 2004. The increase was attributable to increased assets under management across all of our open-end mutual funds. In the nine months ended September 30, 2005, total investment advisory and administration revenue from institutional separate accounts increased 35% to $11.5 million from $8.5 million in the nine months ended September 30 2004. This increase was attributable to higher levels of assets resulting from market appreciation, despite net outflows during the period. Distribution and service fee revenue increased 23% to $8.9 million in the nine months ended September 30, 2005 from $7.2 million in the nine months ended September 30, 2004. This increase in distribution and service fee revenue was primarily due to increased assets in two open-end mutual funds.21 Investment Banking Revenue increased 46% to $9.6 million in the nine months ended September 30, 2005 from $6.6 million in the nine months ended September 30, 2004. This increased revenueMarch 31, 2006 was primarily attributable to a mix of merger advisory, restructuring and capital raising assignments.Expenses Total operating expenses decreased 28% to $73.0 million in the nine months ended September 30, 2005 from $100.9 million in the nine months ended September 30, 2004, primarily due to a decrease in employee compensation and benefits expense, partially offset by decreases in general and administrative expenses and distribution and service fee expenses. Employee compensation and benefits expense decreased 61% to $28.0 million in the nine months ended September 30, 2005 from $71.0 million in the nine months ended September 30, 2004. This was due to a third quarter 2004 one-time non-cash compensation charge of $46.0 million and an associated Medicare tax expense of $1.0 million related to the termination of a stock appreciation rights plan for the predecessor company and the simultaneous grant of fully-vested RSUs to certain employees coincident with the initial public offering of Cohen & Steers, Inc. common stock, partially offset by increases in base and incentive compensation for new employees and amortization of unearned compensation related to RSUs and deferred compensation plans. As a result of the new hires that occurred during the third quarter of 2005, we expect employee compensation and benefits to be higher in the fourth quarter. Distribution and service fee expenses increased 35% to $21.9 million in the nine months ended September 30, 2005 from $16.2 million in the nine months ended September 30, 2004. This increase was primarily due to higher levels of average daily net assets resulting from market appreciation and the launch of new closed-end mutual funds in 2005. General and administrative expenses increased 84% to $16.4 million in the nine months ended September 30, 2005, from $8.9 million in the nine months ended September 30, 2004. The majority of the increase was attributable to higher professional fees resulting from costs related to compliance with Sarbanes-Oxley, sub-advisory fees paid to Houlihan Rovers, increased recruiting fees, higher accounting, tax and auditing fees associated with the requirements of being a public company and additional organizational expenses incurred as part of the launch of four new mutual funds during the nine months ended September 30, 2005. Occupancy costs were primarily higher due to the recognition of two full quarter’s rent expense for our new corporate headquarters. In connection with our relocation, we will record a charge of approximately $1.8 million comprised primarily of moving costs remaining lease payments, partially offset by sublease income for our current location.Depreciation and amortization increased to $4.1 million in the nine months ended September 30, 2005 from $1.5 million in the nine months ended September 30, 2004. Included in depreciation and amortization expense for the nine months ended September 30, 2005 was a non-cash expense of $3.3 million relating to amortization of the intangible asset recorded in connection with the grant of fully vested RSUs at the initial public offering of Cohen & Steers, Inc. common stock. The intangible asset, which expires in 2008, reflects the independently determined value of the non-competition agreements we have received from each of the22employees that received fully vested RSUs at the initial public offering. As a result of our relocation to our new corporate headquarters in November, we will record a charge of approximately $0.7 million attributable to the abandonment of certain furniture and fixtures and leasehold improvements.Non-operating Income Non-operating income, including our share of the net income of Houlihan Rovers, was $5.0 million in the nine months ended September 30, 2005, compared with $0.4 million in the nine months ended September 30, 2004. Non-operating income for the 2005 period was primarily attributable to $2.2$1.1 million of interest and dividend income on our investments $2.0 millionand approximately $638,000 of realized gains from the sale of investments in our sponsored mutual funds.a $0.3 million gain from the sale of our fractional interest in an aircraft.cash equivalents and marketable securities, thereby reducing non-operating income. Historical income tax expense consisted solely of New York state and local income taxes; prior to the initial public offering of Cohen & Steers, Inc. common stock, we were exempt from federal income taxes due to our status as an S-corporation. However, upon our conversion from an S-corporation to C-corporation status on August 16, 2004, we became subject to U.S. federal and certain state and local income taxes. We recorded an income tax expense of $17.3$4.9 million in the ninethree months ended September 30, 2005,March 31, 2006, compared with an income tax benefitexpense of $15.8$5.1 million in the ninethree months ended September 30, 2004.March 31, 2005. The provision for income taxes forin the ninethree months ended September 30, 2005,March 31, 2006 includes U.S. federal, state and local income taxes at an37% effective tax rate, equalwhich represents management’s best estimate of the rate expected to 42.3%. Includedbe applied to the full fiscal year of 2006. In estimating the full year’s effective tax rate, we have anticipated the effect of a $72 million expense that will be recorded in the second quarter of 2006 related to the termination of certain agreements entered into in connection with the common share offerings of seven Company-sponsored closed-end mutual funds. The expense, which is anticipated to create a tax provisionloss for the nine months ended September 30, 2005 isfull fiscal year 2006, will be applied to periods in which the Company expects to have lower tax rates. Management’s estimate of the full year’s effective tax rate also includes an adjustment to the net deferred tax asset resulting from a recent change in the New York Statelower state and local tax law. The deferred tax asset is primarily attributable to future income tax deductions derived from vested restricted stock units granted at the time of our initial public offering. The income tax benefit in the nine months ended September 30, 2004 was due primarily to a benefit derived from vested restricted stock units granted at the time of our initial public offering. We expect our effective tax rate to be approximately 40% for the fourth quarter of 2005.rates.are generally created as a result offrom the operating activities of our business segments, with investment advisory and administrative fees a significant contributor.71%73% of total assets as of September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively. Working capital was $113.5at September 30, 2005, compared with $103.1 million at Decemberin the three months ended March 31, 2004.$33.9$0.6 million in the ninethree months ended September 30,March 31, 2006. Cash of $4.4 million was provided by investing activities, primarily from the proceeds from sales and maturities of marketable securities in the amount of $24.7 million, partially offset by the purchase of $18.9 million of marketable securities. Cash of $9.8 million was used in financing activities, primarily for common stock repurchases to satisfy employee withholding tax obligations on the delivery of restricted stock units and for dividends paid to stockholders.$22.5$15.9 million was used in investing activities, primarily for the purchase of $52.5$27.0 million of marketable securities, partially offset by proceeds from sales and maturities of marketable securities in the amount of $32.9$11.5 million. Cash of $13.5$4.0 million was used in financing activities, primarily for dividends paid to stockholders. NetAs previously discussed, in exchange for the termination of certain additional compensation agreements related to the offerings of seven Cohen & Steers closed-end mutual funds, we made a lump sum payment of $72 million, which was funded from our working capital. Following the $72 million payment, we expect our remaining cash and cash equivalents and marketable securities coupled with cash generated from operating activities was $40.0 million in the nine months ended September 30, 2004. Cashto provide a sufficient level of $57.1 million was used in investing activities, primarily for the purchase of marketable securities. Cash of $56.9 million was provided by financing activities, primarily related to proceeds from our initial public offering of Cohen & Steers, Inc. common stock net of related offering costs partially offset by S-corporation cash distributionsworking capital.23made to shareholders.broker-dealers,broker/dealers, as prescribed by the Securities and Exchange Commission (“SEC”). At September 30, 2005,March 31, 2006, our regulatory net capital exceeded the minimum requirement by $8.9$10.8 million. The SEC’s Uniform Net Capital Rule 15c3-1 imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. We believe that our cash flows from operations will be more than adequate to meet our anticipated capital requirements and other obligations as they become due.September 30, 2005March 31, 2006 (in thousands): Contractual Obligations 2005 2006 2007 2008 2009 2010
and
after Total Operating leases $ 534 $ 3,516 $ 3,516 $ 2,167 $ 2,071 $ 9,164 $ 20,968 Capital lease obligations, net 14 57 46 9 — — 126 Total contractual obligations $ 548 $ 3,573 $ 3,562 $ 2,176 $ 2,071 $ 9,164 21,094 2006 2007 2008 2009 2010 2011
and
after Total $ 2,989 $ 4,033 $ 2,688 $ 2,596 $ 2,717 $ 8,362 $ 23,385 48 66 30 12 3 — 159 $ 3,037 $ 4,099 $ 2,718 $ 2,608 $ 2,720 $ 8,362 $ 23,544 24onin our Annual Report on Form 10-K for the year ended December 31, 2004.2005.consistare primarily comprised of investments in our sponsored open-end and closed-end mutual funds as well as highly rated debt and preferred instruments. These investments are carried at fair value based on quoted market prices, with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income. We review each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other than temporary. If we believe an impairment on a security position is other than temporary, the loss will be recognized in our unaudited condensed consolidated statement of operations. Minor impairments that arise from changes in interest rates and not credit quality are generally considered temporary.Deferred CommissionsGoodwill and Intangible Assets Deferred commissions consistIntangible assets are amortized over their useful lives. Goodwill represents the excess of commissions paid in advance to broker-dealers in connection with the sale of certain sharescost of our sponsored open-end load mutual funds and are capitalized andinvestment in the net assets of an acquired company over the fair value of the underlying identifiable net assets at the date of acquisition. Goodwill is not amortized over a period notbut is tested at least annually for impairment by comparing the fair value to exceed six years.the carrying amount, including goodwill.also earn revenue from administration fees paid by certain sponsored open-end and closed-end mutual funds, based on the average daily net assets of such funds. We recognize thisThis revenue is recognized as such fees are earned.Distribution and Service Fee RevenueIncome Taxes Distribution and service fee revenue is recognized as the services are performed, generally based on contractually-predetermined percentagesWe account for income taxes in accordance with Statement of the average daily net assets of the open-end load mutual funds. Distribution and service fee revenue is recorded gross of any third-party distribution and service arrangements; the expenses associated with these third-party distribution and service arrangements are recorded in distribution and service fee expenses.Portfolio Consulting Fees We earn revenue for various portfolio consulting services provided to clients, as well as for providing a license to use our name. This revenue is recognized pursuant to the terms of individual agreements and is based on the net assets of the clients’ funds.New Accounting Pronouncements In March 2005, a Financial Accounting Standards Board (“FASB”SFAS”) Staff Position was issued addressingNo. 109, “Accounting For Income Taxes.” We recognize the applicationcurrent and deferred tax consequences of Emerging Issue Task Forceall transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years. Deferred tax liabilities are recognized for temporary differences that will result in taxable income in future years. Our effective tax rate in interim periods represents our best estimate of the rate expected to be applied to the full fiscal year.EITF”) Issue No. 85-24 (“FSP EITF 85-24-1”SFAS 123(R)”), “Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” when cashwhich requires public companies to recognize expense in the income statement for the rightgrant-date fair value of awards of equity instruments granted to future distribution fees for shares previously soldemployees. Expense is received from third parties. FSP EITF 85-24-1 did not materially impact our unaudited condensed consolidated financial position or resultsrecognized over the period during which employees are required to provide service. SFAS 123(R) also requires us to estimate forfeitures at the date of operations.grant instead of recognizing them as incurred.25the Company’sour Annual Report on Form 10-K for the year ended December 31, 2004,2005, which is accessible on the Securities and Exchange Commission’s Web site at http://www.sec.gov and on Cohen & Steers’ Web site at cohenandsteers.com.www.cohenandsteers.com. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.As of September 30, 2005, our marketable securities totaled $90.6At March 31, 2006, approximately $13.6 million and consisted of investmentswas invested in our sponsored open-endequity funds. We had approximately $36.6 million invested in U.S. Treasury and closed-end mutual fundsU.S. Government agency securities, $26.2 million invested in preferred securities and $6.9 million invested in foreign and domestic equities as well as investment grade debt and preferred instruments. of March 31, 2006.86%87% and 83% in80% for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively—respectively,—is derived from investment advisory and administrative agreements with our clients. Under these agreements, the investment advisory and administration feesfee we receive areis typically based on the market value of the assets we manage. Accordingly, a decline in the prices of securities generally, and real estate securities in particular, may cause our revenue and income to decline by:Ÿcausing the value of the assets we manage to decrease, which would result in lower investment advisory and administration fees; orŸcausing our clients to withdraw funds in favor of investments that they perceive as offering greater opportunity or lower risk, which would also result in lower investment advisory and administration fees. closed-end mutual funds. A significant portion of our recent growth in the assets we manage has resulted from public offerings of the shares of closed-end mutual funds. The market conditions for these offerings may not be as favorable in the future, which could adversely impact our ability to grow the assets we manage and realize higher fee revenue associated with such growth.26a relatively lowlittle correlation with interest rates over longer periods of time. However, an increase in interest rates could have a negative impact on the valuation of REITs and other securities in our clients’ portfolios, which could reduce our revenue. In addition, an increase in interest rates could negatively impact our ability to increase open-end mutual fund assets and to offer new mutual funds.ninethree months ended September 30, 2005March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.27II – II—Other InformationNovember 7,April 21, 2005, thisthe former employee appealedfiled a Notice of Appeal appealing the Supreme Court’s decision to dismiss the matter to the Appellate Division of the Supreme Court, First Department. Although the Company cannot predict with certainty the outcomeBased on information currently available and advice of this action at this time, the Company believes that the Complaint is without merit and will defend this matter vigorously. In addition, the Company believescounsel, we believe that the eventual outcome of the action against itus will not have a material adverse effect on itsour unaudited condensed consolidated financial position, results of operations or liquidity.4. Submission of Matters to a Vote of Security Holders1A. Risk Factors The annual meeting of stockholders of Cohen & Steers was held on May 9, 2005, for the purpose of considering and acting upon the following:(1)Election of Directors. Six directors were elected and the votes cast for or against/withheld were as follows: Aggregate Votes For Withheld Nominees Martin Cohen 35,050,502 8,763 Robert H. Steers 35,050,502 8,763 Richard E. Bruce 34,408,974 650,291 Peter L. Rhein 34,409,709 649,456 Richard P. Simon 34,409,709 649,556 Edmond D. Villani 34,409,709 649,556 (2)Ratification of Independent Registered Public Accounting Firm. The appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm was ratified and the votes cast for or against and the abstentions were as follows: Aggregate Votes For Against Abstained Ratification of the appointment of Deloitte
& Touche LLP as the Company’s
independent registered public accounting
firm 32,600,962 2,455,402 2,900 28 There were no broker non-votes. With respect to the preceding matters, holdersFor a discussion of the Company’s common stockpotential risks and uncertainties, please see Part 1, Item 1A of our 2005 Annual Report on Form 10-K filed with the SEC. There have been no material changes to the risk factors disclosed in Part 1, Item 1A of our 2005 Annual Report on Form 10-K.entitledregistered pursuant to one vote per share.Section 12(b) of the Securities Exchange Act of 1934. Total Number of
Shares purchased Average Price
Paid Per Share Total Number of
Shares Purchases
as part of Publicly
Announced Plans
or Programs Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs 291,1001 $ 20.56 N/A N/A 0 N/A N/A N/A 0 N/A N/A N/A 291,100 $ 20.56 N/A N/A 1. Purchases made by the Company primarily to satisfy income tax withholding obligations of certain employees. Exhibit No. 3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant (1) 3.2 Form of Amended and Restated Bylaws of the Registrant (1) 4.1 Specimen Common Stock Certificate (1) 4.2 Form of Registration Rights Agreement among the Registrant, Martin Cohen, Robert H. Steers, The Martin Cohen 1998 Family Trust and Robert H. Steers Family Trust (1) 10.1 Additional Compensation Termination Agreement, dated as of April 10, 2006, between Merrill Lynch, Pierce, Fenner & Smith Incorporated and Cohen & Steers Capital Management, Inc. 31.1 Certification of the co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Exhibit No. 31.2 Certification of the co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.3 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of the co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.2 Certification of the co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.3 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). Incorporated by Reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-114027), as amended, originally filed with the Securities and Exchange Commission on March 30, 2004. 29November 10, 2005May 9, 2006 30