UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
(Mark One)
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR
| OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO _________ |
Commission File Number: 001-32236
COHEN & STEERS, INC.
(Exact name of Registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 14-1904657 (I.R.S. Employer Identification No.) |
| 757 Third Avenue New York, NY (Address of principal executive offices) | 10017 (Zip Code) | |
(212) 832-3232
(Registrant’s telephone number, including area code)
| (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 S Noo£
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) COHEN & STEERS, INC. AND SUBSIDIARIES 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 Part I – Financial Information 2 March 31, December 31, (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 27,112 $ 30,164 Marketable securities available-for-sale 84,845 69,935 Accounts receivable: Company-sponsored mutual funds 8,555 8,498 Other 4,932 4,654 Due from company-sponsored mutual funds 320 386 Income tax refunds receivable 199 380 Prepaid expenses and other current assets 1,185 2,119 Total current assets 127,148 116,136 Property and equipment-net 2,841 2,638 Intangible asset-net 12,583 13,693 Other assets: Deferred commissions-net 5,320 5,716 Investments, company-sponsored mutual funds – 100 Equity investment 4,075 3,961 Deferred income tax asset 19,907 18,003 Deposits 1,596 43 Total other assets 30,898 27,823 Total assets $ 173,470 $ 160,290 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accrued expenses and compensation $ 11,598 $ 7,328 Dividends payable 3,990 3,983 Current portion of long-term debt 103 115 Current portion of obligations under capital leases 56 20 Deferred income tax liability 760 1,301 Income taxes payable 5,560 – Other current liabilities 43 254 Total current liabilities 22,110 13,001 Long-term liabilities: Long-term debt 1,536 1,558 Deferred rent less current maturities 222 66 Obligations under capital leases less current maturities 99 30 Total long-term liabilities 1,857 1,654 Stockholders’ equity: Common stock, $0.01 par value; 500,000,000 shares authorized; 354 354 Additional paid-in capital 179,120 178,594 Accumulated deficit (18,482 ) (21,557 ) Unearned compensation (12,497 ) (13,546 ) Accumulated other comprehensive income, net of tax 1,008 1,790 Total stockholders’ equity 149,503 145,635 Total liabilities and stockholders’ equity $ 173,470 $ 160,290 See notes to condensed consolidated financial statements 3 Three Months Ended March 31, 2005 2004 Revenue: Investment advisory and administration fees: Closed-end mutual funds $ 14,066 $ 8,801 Open-end mutual funds 9,689 8,282 Institutional separate accounts 3,565 2,646 Total investment advisory and administration fees 27,320 19,729 Distribution and service fee revenue 2,869 2,408 Portfolio consulting and other 1,029 709 Investment banking fees 2,889 4,463 Total revenue 34,107 27,309 Expenses: Employee compensation and benefits 8,659 8,980 General and administrative 5,403 2,757 Distribution and service fee expenses 6,660 4,195 Amortization, deferred commissions 989 1,057 Depreciation and amortization 1,375 281 Total expenses 23,086 17,270 Operating income 11,021 10,039 Non-operating income (expense): Interest and dividend income 551 101 Gain from sale of marketable securities 507 – Foreign currency transaction loss (21 ) – Interest expense (22 ) (42 ) Total non-operating income 1,015 59 Income before income taxes and equity in earnings of affiliate 12,036 10,098 Income tax expense (5,059 ) (767 ) Equity in earnings of affiliate, net of tax 88 – Net income $ 7,065 $ 9,331 Earnings per share: Basic $ 0.18 $ 0.35 Fully Diluted $ 0.18 $ 0.35 Weighted average shares outstanding: Basic 40,022,054 26,700,000 Fully Diluted 40,234,923 26,700,000 See notes to condensed consolidated financial statements 4 Three Months Ended March 31, 2005 Common Additional Accumulated Unearned Accumulated Other Total Beginning balance, January 1, 2005 $ 354 $ 178,594 $ (21,557 ) $ (13,546 ) $ 1,790 $ 145,635 Dividends – – (3,990 ) – – (3,990 ) Issuance of restricted stock units – 649 – – – 649 Amortization of unearned compensation – – – 1,102 – 1,102 Forfeitures of restricted stock unit awards – (123 ) – (53 ) – (176 ) Net income – – 7,065 – – 7,065 Other comprehensive loss, net of taxes – – – – (782 ) (782 ) Ending balance, March 31, 2005 $ 354 $ 179,120 $ (18,482 ) $ (12,497 ) $ 1,008 $ 149,503 See notes to condensed consolidated financial statements 5 COHEN & STEERS, INC. AND SUBSIDIARIES Three Months Ended March 31, 2005 2004 Cash flows from operating activities: Net income $ 7,065 $ 9,331 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of unearned compensation 1,600 – Amortization, deferred commissions 989 1,057 Depreciation and amortization 1,375 281 Amortization, bond discount - net (43 ) – Deferred rent 158 (8 ) Gain on sale of marketable securities (507 ) – Equity in earnings of affiliate (88 ) – Deferred income taxes (1,904 ) (260 ) Foreign currency transaction loss 21 – Changes in operating assets and liabilities: Accounts receivable, company-sponsored mutual funds (57 ) (1,458 ) Accounts receivable, others (299 ) (511 ) Due from company-sponsored mutual funds (147 ) (607 ) Income tax refunds receivable 181 43 Prepaid expenses and other current assets 93 157 Deferred commissions (573 ) (1,256 ) Deposits (1,553 ) – Accrued expenses 4,210 6,482 Income taxes payable 6,381 873 Net cash provided by operating activities 16,902 14,124 Cash flows from investing activities: Purchases of marketable securities available-for-sale (27,036 ) (289 ) Proceeds from maturities of marketable securities available-for-sale 9,970 – Proceeds from sale of marketable securities available-for-sale 1,522 – Increase in investment in affiliate (91 ) – Purchases of property and equipment (258 ) (109 ) Net cash used in investing activities (15,893 ) (398 ) Cash flows from financing activities: Distributions to S-corporation shareholders – (11,500 ) Dividends to stockholders (3,983 ) – Repayment of bank line of credit – (129 ) Payment of capital lease obligations (5 ) (4 ) Principal payments on long-term debt (34 ) (33 ) Offering costs – (1,012 ) Cash used in financing activities (4,022 ) (12,678 ) Net increase (decrease) in cash and cash equivalents (3,013 ) 1,048 Effect of foreign currency translation (39 ) – Cash and cash equivalents, beginning of period 30,164 7,526 Cash and cash equivalents, end of period $ 27,112 $ 8,574 Cash paid for interest $ 28 $ 49 Cash paid for taxes, net $ 465 $ 110 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Cohen & Steers, Inc. (“CNS”) completed 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 of Cohen & Steers Capital Management, Inc. (“CSCM”). CNS, The unaudited condensed consolidated financial statements include the accounts of CNS and its direct and indirect subsidiaries, which include CSCM, Cohen & Steers Securities, LLC (“Securities, LLC”), and Cohen & Steers Capital Advisors, LLC (“Advisors, LLC” and collectively, the “Company”) The Company 2. Basis of Presentation and Significant Accounting Policies The unaudited consolidated financial statements and the reported amounts of 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, 6 consolidated 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 Cash 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 Goodwill and Intangible Asset—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 Note 3 for further discussion about the Company’s goodwill and intangible assets. 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 Distribution and Service Fee Revenue—Distribution and service fee revenue is Portfolio Consulting Fees—The Company earns revenue 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 terms of individual agreements and is based on the net assets of the clients’ funds. New Accounting Pronouncements—In 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 March 31, December 31, (in thousands) Gross carrying amount $ 15,400 $ 15,400 Accumulated amortization (2,817 ) (1,707 ) Intangible asset, net $ 12,583 $ 13,693 Amortization expense Years ended December 31, Estimated Amortization Expense 2005 $ 3,331 2006 4,441 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 March 31, 2005 December 31, 2004 Cost Gains Losses Market Value Cost Gains Losses Market Value (in thousands) Debt securities (1): Less than 1 year $ 26,442 $ – $ (144 ) $ 26,298 $ 27,451 $ – $ (65 ) $ 27,386 Between 1yr - 5 yrs 32,864 – (235 ) 32,629 19,990 – (150 ) 19,840 Preferred securities 18,000 51 – 18,051 13,000 72 – 13,072 Company sponsored mutual funds 5,732 2,135 – 7,867 6,403 3,235 (1 ) 9,637 Total investments, available for sale $ 83,038 $ 2,186 $ (379 ) $ 84,845 $ 66,844 $ 3,307 $ (216 ) $ 69,935 (1) Debt securities consist of U.S. Treasury and U.S. Government agency securities. In the three months ended 8 funds were approximately $4,970,000 and $1,924,000, respectively. There Equity Investment At 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. The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations 9 Three Months Ended March 31, 2005 2004 (in thousands, except share Net income $ 7,065 $ 9,331 Basic weighted average shares outstanding 40,022,054 26,700,000 Dilutive potential shares from restricted stock awards 212,869 – Dilutive weighted average shares outstanding 40,234,923 26,700,000 Basic earnings per share $ 0.18 $ 0.35 Diluted earnings per share $ 0.18 $ 0.35 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 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. Deferred income taxes represent the tax effects of the temporary differences between book and tax bases and are measured using the tax rates expected during the periods in which the differences are expected to reverse. 8. Long-Term Debt 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. Contingencies As previously disclosed, on October 11, 2004, the 10 Total comprehensive income includes net income and other comprehensive income, net of tax. The components of comprehensive income in the three months and nine months ended Three Months Ended March 31, 2005 2004 (in thousands) Net income $ 7,065 $ 9,331 Foreign currency translation adjustment (39 ) – Net unrealized gain (loss) on available-for-sale securities, net of tax (1,037 ) 579 Reclassification of realized gain on available-for-sale securities, net of tax 294 – Total comprehensive income $ 6,283 $ 9,910 Securities, LLC and Advisors, LLC, as registered broker-dealers and member firms of the NASD, are subject to the SEC’s Uniform Net Capital Rule 15c3-1 (the “Net Capital Rule”), which requires that broker-dealers maintain a minimum level of net capital, as defined. At The Net Capital Rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital of a broker-dealer is less than the amount required under the Net Capital Rule. Securities, 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) and (k)(2)(ii) of such rule. 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. In the three months ended 11 The Company incurs expenses associated with the launch of its open and closed-end funds. These organizational costs, which are included in general and administrative expenses, totaled approximately $242,000 and $100,000 in the three months ended The Company has an agreement with an affiliated open-end mutual fund The Company has agreements with General and administrative expenses See Note 4 relating to additional investments in Company-sponsored mutual funds. The Company does not record 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. Summarized financial information for the Company’s reportable segments is presented in the following 12 Three Months Ended March 31, 2005 2004 (in thousands) Asset Management Total revenue $ 31,218 $ 22,846 Expenses 20,855 14,278 Operating income 10,363 8,568 Non-operating income 1,143 53 Income before taxes 11,506 8,621 Investment Banking Total revenue $ 2,889 $ 4,463 Expenses 2,231 2,992 Operating income 658 1,471 Non-operating income 24 6 Income before taxes 682 1,477 Total Total revenue $ 34,107 $ 27,309 Expenses 23,086 17,270 Operating income 11,021 10,039 Non-operating income 1,167 59 Income before taxes 12,188 10,098 On On 13 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 Overview Cohen & Steers 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 14 Three Months Ended 2005 2004 Total Accounts: Beginning AUM $ 18,300.7 $ 11,680.1 Net flows 574.1 2,639.1 Net appreciation/(depreciation) (1,097.4 ) 1,220.1 Ending AUM 17,777.4 15,539.3 Total net flows/beginning AUM (%) 3.1 % 22.6 % Change in AUM (%) -2.9 % 33.0 % Closed-end mutual funds Beginning closed-end mutual funds AUM $ 8,984.4 $ 4,790.6 Net flows 604.5 2,472.0 Net appreciation/(depreciation) (463.2 ) 401.9 Ending closed-end mutual funds AUM 9,125.7 7,664.5 Open-end mutual funds Beginning open-end mutual funds AUM $ 5,198.6 $ 3,897.1 Subscriptions 418.2 416.1 Redemptions (422.9 ) (249.3 ) Net subscriptions/(redemptions) (4.7 ) 166.8 Net appreciation/(depreciation) (370.1 ) 450.1 Ending open-end mutual funds AUM 4,823.8 4,514.0 Institutional separate accounts Beginning institutional separate accounts AUM $ 4,117.7 $ 2,992.4 Inflows 86.5 110.6 Outflows (112.2 ) (110.3 ) Net flows (25.7 ) 0.3 Net appreciation/(depreciation) (264.1 ) 368.1 Ending institutional separate accounts AUM 3,827.9 3,360.8 Houlihan Rovers Beginning AUM $ 569.0 $ 358.5 Inflows - institutional separate accounts AUM 78.6 75.4 Inflows - Cohen & Steers sub-advised AUM (1) 147.8 0.0 Net flows 226.4 75.4 Net appreciation 0.9 38.4 Ending AUM $ 796.3 $ 472.3 Total net flows/beginning AUM (%) 39.8% 21.0% Change in AUM (%) 39.9% 31.7% (1) March 31, % of December 31, % of March 31, % of Security Type Real Estate Common Stocks $ 12,596.9 71 % $ 13,542.5 74 % $ 11,605.5 75 % Utility Common Stocks 1,997.7 11 % 1,913.8 10 % 959.4 6 % Other U.S. Common Stocks 137.4 1 % 0.0 0 % 0.0 0 % Foreign Common Stocks 20.7 0 % 0.0 0 % 0.0 0 % Real Estate Preferred Stocks 1,439.0 8 % 1,377.1 8 % 996.9 6 % Corporate Preferred Stocks 963.7 5 % 955.7 5 % 786.6 5 % Fixed Income (1) 119.1 1 % 153.2 1 % 97.4 1 % Cash and Short-Term Investments 502.9 3 % 358.4 2 % 1,093.5 7 % Total AUM $ 17,777.4 100 % $ 18,300.7 100 % $ 15,539.3 100 % Houlihan Rovers Institutional Separate Accounts $ 648.5 81 % $ 569.0 100 % $ 472.3 100 % Cohen & Steers Sub-Advised Mutual Funds (2) 147.8 19 % 0.0 0 % 0.0 0 % Total AUM $ 796.3 100 % $ 569.0 100 % $ 472.3 100 % Assets under management were Closed-end mutual funds Closed-end mutual fund assets under management increased There were no closed-end mutual fund Closed-end mutual fund inflows were $755 million in the nine months ended September 30, 2005, 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 portfolio of high dividend-paying common stocks. This fund raised Market Open-end mutual funds March 31, % of December 31, % of March 31, % of Load fund - Class A $ 674.0 14.0 % $ 670.2 12.9 % $ 495.3 11.0 % Load fund - Class B 251.0 5.2 % 288.5 5.6 % 281.4 6.2 % Load fund - Class C 666.4 13.8 % 734.2 14.1 % 649.5 14.4 % Load fund - Class I 233.1 4.8 % 234.9 4.5 % 125.9 2.8 % No load funds 2,999.3 62.2 % 3,270.8 62.9 % 2,961.9 65.6 % $ 4,823.8 100.0 % $ 5,198.6 100.0 % $ 4,514.0 100.0 % Open-end mutual fund assets under management increased Net Market Net outflows for open-end mutual funds Market appreciation across all of our open-end mutual funds was $455 million in the nine months ended September 30, 2005, compared with Institutional separate accounts Institutional separate account assets under management increased Institutional separate accounts had net outflows of Market appreciation was $165 million in the three months ended September 30, 2005, compared with market appreciation of $324 million in the three months ended September 30, 2004. Institutional separate accounts had net outflows of $110 million in the nine months ended September 30, 2005, compared with net inflows of Market 17 Results of Operations Three Months Ended September 30, 2005 compared with Three 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 Revenue Three Months Ended March 31, 2005 2004 (in thousands) Asset Management Total revenue $ 31,218 $ 22,846 Total expenses 20,855 14,278 Operating income 10,363 8,568 Non-operating income, net 1,143 53 Income before taxes 11,506 8,621 Investment Banking Total revenue $ 2,889 $ 4,463 Total expenses 2,231 2,992 Operating income 658 1,471 Non-operating income, net 24 6 Income before taxes 682 1,477 Total Total revenue $ 34,107 $ 27,309 Total expenses 23,086 17,270 Operating income 11,021 10,039 Non-operating income, net 1,167 59 Income before taxes 12,188 10,098 Total revenue increased 25% to Asset Management Revenue increased In the three months ended In the three months ended In the three months ended September 30, 2005, total investment advisory and 18 ended Investment Banking Revenue decreased Expenses Total operating expenses Employee compensation and benefits expense decreased Distribution and service fee expenses increased 11% to $7.8 million in the three months ended September 30, 2005 from $7.1 million in the three 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 General and administrative expenses increased Depreciation and amortization increased 19 2008, 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 Non-operating Income Non-operating income, Income Taxes Historical income tax expense consisted solely of New York state and local income taxes; prior to 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 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 revenue 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 the 22 employees 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 million of interest and dividend income on our investments, $2.0 million of realized gains from the sale of investments in our sponsored mutual funds and a $0.3 million gain from the sale of our fractional interest in an aircraft. Income Taxes 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 million in the nine months ended September 30, 2005, compared with an income tax benefit of $15.8 million in the nine months ended September 30, 2004. The provision for income taxes for the nine months ended September 30, 2005, includes U.S. federal, state and local income taxes at an effective tax rate equal to 42.3%. Included in the tax provision for the nine months ended September 30, 2005 is an adjustment to the net deferred tax asset resulting from a recent change in the New York State 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. 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 are generally created as a result of the operating activities of our business segments, with investment advisory and administrative fees a significant contributor. Cash, cash equivalents, accounts receivable and marketable securities 23 made to shareholders. 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 broker-dealers, as prescribed by the Contractual Obligations We have contractual obligations to make future payments in connection with our non-cancelable operating lease agreements for office space leases for office equipment. The following summarizes our contractual obligations as of Contractual Obligations 2005 2006 2007 2008 2009 2010 and after Total (in thousands) Operating leases $ 1,120 $ 3,340 $ 3,340 $ 2,071 $ 2,071 $ 9,165 $ 21,107 Long-term debt 78 1,121 440 – – – 1,639 Capital lease obligations, net 42 58 46 9 – – 155 Total Contractual Obligations $ 1,240 $ 4,519 $ 3,826 $ 2,080 $ 2,071 $ 9,165 $ 22,901 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 24 additional accounting policies, see the notes to the annual audited consolidated financial statements on our Annual Report on Form 10-K for the year ended December 31, 2004. 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 Deferred Commissions Deferred commissions consist of commissions paid in advance to broker-dealers in connection with the sale of certain shares of our sponsored open-end load mutual funds Investment Advisory and Administration Fees We earn the majority of our revenue Distribution and Service Fee Revenue Distribution and service fee revenue is recognized 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; 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 New Accounting Pronouncements In 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 the 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. instruments. In addition, a significant majority of our revenue—approximately In addition, market conditions may preclude us from increasing the assets we manage in 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. 26 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 27 As previously disclosed, on October 11, 2004, our Compensation Committee canceled (1)Election of Directors. Six directors were elected and the votes cast for or against/withheld were as follows: (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: 28 There were no broker non-votes. With respect to the preceding matters, holders of the Exhibit 3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant (1) 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) 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). 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). 29 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. Name: 30
Yeso £ NoxS
The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of May 13,November 9, 2005 was 35,388,736.35,407,029.
Form 10-Q
IndexIndexthe company’sour Annual Report on Form 10-K for the year ended December 31, 2004, which is accessible on the Securities and Exchange Commission’s websiteWeb site athttp://www.sec.gov and on Cohen & Steers’ websiteour Web site atcohenandsteers.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.
Item 1. Financial StatementsCOHEN & STEERS, INC. AND SUBSIDIARIES
CONDENSED 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 statements COHEN & STEERS, INC. AND SUBSIDIARIES
CONDENSED 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 COHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(in thousands, except share data)
2005
2004
35,388,736 shares issued and outstanding at March 31, 2005
and December 31, 2004COHEN & STEERS, INC. AND SUBSIDIARIES
CONDENSED 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 COHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)(in thousands, except share and per share data)COHEN & STEERS, INC. AND SUBSIDIARIES
CONDENSED 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 COHEN & STEERS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)(in thousands)
Stock
Paid-In
Capital
Deficit
Compensation
Comprehensive
Income, NetCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(in thousands)See notes to condensed consolidated financial statementsCOHEN & STEERS, INC. AND SUBSIDIARIES
(UNAUDITED)(UNAUDITED)together withthrough its direct and indirect subsidiaries, succeeded 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 March 31,September 30, 2004 representinclude operations as a private company and include results that are not necessarily comparable with the results of operations as a public company in the three and nine months ended March 31,September 30, 2005. and. On September 9, 2005, CNS terminated Cohen & Steers Holdings, LLC (collectively,(“Holdings, LLC”). Holdings, LLC was organized to retain fractional ownership interests in two aircraft. During the “Company”).quarter ended September 30, 2005, these interests were transferred to CSCM. Material intercompany transactions and balances have been eliminated in consolidation.is a registered investment advisor providingprovides 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. As a registered investment advisor, theThe Company manages high-income equity portfolios, specializing in real estate investment trusts, globalU.S. REITs, international real estate securities, preferred securities, utilities and other high-income commonlarge cap value stocks. Through its registered 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 (“NASD”(the “NASD”) approved the expansion of Advisors, LLC’s underwriting business to include firm commitment underwriting. interim 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. 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 condensedrevenuesrevenue and expenses during the reporting periods. Actual results could differ from those estimates.2004.2004 and the unaudited condensedMarch 31,September 30, 2005 presentation.Equivalents—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.have historically consistedconsist of investments in Company-sponsored open-end and closed-end mutual funds. Subsequent to CNS’s initial public offering, the Company has also invested infunds as well as highly rated debt and preferred instruments and has classified these investments as marketable securities available-for-sale.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.client’s portfolio.respective portfolios. 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 at various intervals throughout the year as such fees are earned.recognizedearned 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; the expenses associated with these third-party distribution and service arrangements are recorded in distribution and service fee expenses.December 2004, the FASB issued the revised Statement ofMarch 2005, a Financial Accounting Standards Board (“FASB”) Staff Position was issued addressing the application of Emerging Issues Task Force (“EITF”) Issue No. 123,85-24 (“SFAS No. 123”FSP EITF 85-24-1”), which requires public companies“Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” when cash for the right to recognize the cost resultingfuture distribution fees for shares previously sold is received from all share-based transactions in their financial statements. SFAS No. 123 eliminates the ability to account for share-based compensation usingthe intrinsic value method under Accounting Principles Board Opinion (“APB”) 25. The adoption of the revised SFAS No. 123third parties. FSP EITF 85-24-1 did not materially impact the Company’s unaudited condensed consolidated financial position or results of operations.In September 2004, The Emerging Issues Task Force (“EITF”) reached a consensus on Issue 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.” This EITF requires that individual operating segments that do not meet the quantitative thresholds set forth in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” for separate reporting may be aggregated only if the segments meet certain requirements. These requirements are applicable for fiscal years ending after October 13, 2004. The adoption of EITF 04-10 did not materially impact the Company’s identified segments.7CNS’sthe Company’s initial public offering in exchange for terminated stock appreciation rights granted to such holders prior to CNS’sthe 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 March 31,September 30, 2005 and December 31, 2004:2004 (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
2005
2004ofrelated to the intangible asset was approximately $1,110,000 and $3,331,000 in the three and nine months ended March 31, 2005.September 30, 2005, respectively. Estimated amortization expense from AprilOctober 1, 2005 through January 31, 2008, the date of expiration, is as follows:follows (in thousands): Years Ending December 31, Estimated Amortization Expense 2005 $ 1,110 2006 4,441 2007 4,441 2008 370
(in thousands)Marketable securities classified as available-for-sale consist of investments in Company-sponsored open-end and closed-end mutual funds and debt and preferred securities. Dividend income from Company-sponsored mutual funds was approximately $44,000 and $100,000, respectively, in the three months ended March 31, 2005 and 2004.March 31,September 30, 2005 and December 31, 2004.2004 (in thousands):
Gross Unrealized
Gross Unrealized September 30, 2005
Gross Unrealized December 31, 2004
Gross Unrealized Cost Gains Losses Market Value Cost Gains Losses Market Value 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 17,689 117 — 17,806 13,000 72 — 13,072 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 March 31,September 30, 2005, sales proceeds and gross realized gains from Company-sponsored mutual funds were approximately $1,522,000$1,797,000 and $507,000,$775,000, respectively. In the nine months ended September 30, 2005, sales proceeds and gross realized gains from Company-sponsored mutualwerewas no sales activity in the three and nine months ended March 31,September 30, 2004. Dividend income from Company-sponsored mutual funds was approximately $85,000 and $138,000, in the three months ended September 30, 2005 and 2004, respectively and approximately $288,000 and $315,000 in the nine months ended September 30, 2005 and 2004, respectively.March 31,September 30, 2005, the Company had a non-controlling 50% investment of approximately $4,100,000$4,276,000, which includes approximately $2,721,000 of goodwill, in Houlihan Rovers, S.A., the Company’s 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. In the first quarter ofthree and nine months ended September 30, 2005, the Company recognized approximately $152,000$285,000 and $683,000, respectively, of income from Houlihan Rovers.forin the three and nine months ended March 31,September 30, 2005 and 2004:2004 (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 )
and per share data)6.7. Income TaxesfederalU.S. Federal and certain state and local income taxes to which it had not been previously subject.In connectionThe 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, includes U.S. federal, state and local income taxes at an effective tax rate equal to 42.3%. Included in the tax provision for the nine months ended September 30, 2005 is an adjustment to the net deferred tax asset resulting from a recent change in the New York State 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 the Company’s initial public offering.non-cash compensation charge associated with the grant ofCompany’s Compensation Committee canceled fully vested RSUs previously granted to certain employees in Augustan 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 generatedfiled a deferred income tax asset of approximately $17,700,000 that it expectsmotion to realize in 2006, 2007dismiss this action and 2008 based on April 1, 2005, the delivery schedulecourt 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 RSUs.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.7.10. Comprehensive IncomeMarch 31,September 30, 2005 and 2004 are as follows: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 ) 8.11. Regulatory RequirementsMarch 31,September 30, 2005, Securities, LLC and Advisors, LLC had net capital of approximately $2,200,000$2,325,000 and $5,500,000,$7,143,000, respectively, which exceeded their requirements by approximately $2,100,000$2,097,000 and $5,400,000,$6,827,000, respectively. Accordingly, at March 31, 2005, the payments of dividends and advances by Securities, LLC and Advisors, LLC are limited to approximately $2,032,000 and $5,377,000, respectively, under the most restrictive of these requirements.9.12. Related Party TransactionsMarch 31,September 30, 2005 and 2004, the Company earned advisory and administrative fee revenue of approximately $22,800,000$27,269,000 and $16,500,000,$21,126,000, respectively, from these affiliated funds. In the nine months ended September 30, 2005 and administration2004, the Company earned advisory and administrative fee revenue of approximately $1,000,000$76,248,000 and $600,000,$57,539,000, respectively, from these affiliated funds. In the three months ended March 31,September 30, 2005 and 2004, distribution and service fee revenue from such funds aggregated approximately $2,900,000$3,091,000 and $2,400,000,$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, respectively.InMarch 31,September 30, 2005 and 2004, respectively, and $2,411,000 and $600,000 in the Company had investment advisory agreements with certain affiliated closed-end mutual funds, pursuant to which the Company contractually waived approximately $4,200,000 and $2,600,000, 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 it is otherwise entitled to receive for up to ten years from the respective funds’ inception dates. These fee waivers are scheduled to decrease each year for certain funds beginning in 2006. The Company does not include these fee waivers in revenues.In the threenine months ended March 31,September 30, 2005 the Company incurred organizational costs of approximately $1,300,000 on behalf of two closed-end mutual funds and organizational costs of approximately $500,000 on behalf of two open-end mutual funds. There were no such expenses incurred by the Company in the first three months of 2004.2004, respectively.Cohen & Steers Institutional Realty Shares, Inc., whichthat 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 each of the three months ended March 31,September 30, 2005 and 2004, expenses of approximately $300,000 of expenses$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.fourfive other affiliated open-end mutual funds to waive and/or reimburse certain fund expenses. The agreements with Cohen & Steers Utility Fund, Inc., Cohen & Steers Realty Focus Fund, Inc., Cohen and Steers VIF Realty Fund, Inc. and Cohen & Steers International Realty Fund, Inc. contractually require the Company to waive and/or reimburse expenses of the respective funds. These commitments will remain in place through December 31, 2005. In the three months ended March 31,September 30, 2005 and 2004, expenses of approximately $100,000 of expenses$167,000 and $54,000, respectively, were incurred by the Company pursuant to these agreements and are included in general and administrative expenses. ThereIn the nine months ended September 30, 2005 and 2004, expenses of approximately $567,000 and $154,000, respectively, were no suchincurred.incurred by the Companyinclude $227,000 and $344,000 of sub-advisory fees paid to Houlihan Rovers in the first three and nine months of 2004.ended September 30, 2005, respectively.10.13. Segment ReportingStatement of Financial Accounting Standards (“SFAS”) SFAS No. 131, Disclosures“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.revenuesrevenue between segments (referred to as inter-segment revenues)revenue).table:tables (in thousands): 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 ) Statement of Income Segment Data 11.14. Subsequent EventsApril 15,October 18, 2005, the Company paid a cash dividend of $0.10$0.11 per share to the Company’s stockholders of record at the close of business on MarchSeptember 29, 2005.MayNovember 9, 2005, the Company’s Board of Directors declared a cash dividend of $0.10$0.11 per share to the Company’s stockholders. The dividend will be payable on January 18, 2006 to stockholders of record at the close of business on JuneDecember 29, 2005, payable on July 18, 2005.Item 2. the Company’sour financial condition and results of operations for the three and nine months ended March 31,September 30, 2005 and March 31,September 30, 2004. Such information should be read in conjunction with our Condensed Consolidated Financial Statementsunaudited condensed consolidated financial statements together with the Notesnotes to the Condensed Consolidated Financial Statements.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. Inc. is a manager of high-income equity portfolios, specializing in U.S. REITs, globalinternational real estate securities, preferred securities, utilities, and other high-dividend paying commonlarge 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.presented.presented (in millions):Changes in Assets Under Management (AUM)(in millions)
March 31, 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 Included in Cohen & Steers Assets Under ManagementThe following table sets forth the breakdownAs of the totalSeptember 30, 2005, assets under management included $387 million of assets
sub-advised by security type as of the dates shown.Houlihan Rovers.Assets Under Management (AUM)15(in millions)
2005
assets
2004
assets
2004
assets(1) Includes corporate bonds(2) Included in Cohen & Steers Asset Under Management$17.8$20.2 billion at March 31,September 30, 2005, a 14%25% increase from $15.5$16.1 billion at March 31,September 30, 2004. Assets under management increased in every asset category and every account type in the twelve months ended March 31, 2005. By product type, at March 31, 2005:51% of assets under management were held in closed-end mutual funds, compared with 49% at March 31, 2004;27% were held in open-end mutual funds, compared with 29% at March 31, 2004; and22% were held in institutional separate accounts, compared with 22% at March 31, 2004.Real estate common stocks represented 71% of assets under management at March 31, 2005, compared with 75% at March 31, 2004. Utility stocks, foreign and other U.S. common stocks represented 12% of assets under management at March 31, 2005, compared with 6% at March 31, 2004, as we continued to expand and broaden our investment platform. Real estate preferred and corporate preferred stocks comprised 13% of assets under management at March 31, 2005, compared with 11% at March 31, 2004. The remaining assets under management were held in fixed income securities and cash and short-term investments.Sequentially, assets under management at March 31, 2005 decreased 3%, or $523.3 million, compared with $18.3 billion at December 31, 2004, with net flows of $574.1 million being offset by market depreciation. In the three months ended March 31, 2005, closed-end mutual fund flows were $604.5 million; open-end mutual funds had net redemptions of $4.7 million; and institutional separate accounts had net outflows of $25.7 million.Assets under management for Houlihan Rovers, Cohen & Steers Brussels-based affiliate, increased 69% to $796.3 million at March 31, 2005, compared with $472.3 million at March 31, 2004. Sequentially, assets under management increased 40%, or $227.3 million, compared with $569.0 million at December 31, 2004. The majority of the increase in assets under management in the first quarter for Houlihan Rovers was attributable to $226.4 million in net flows. This increase included $147.8 million that Houlihan Rovers subadvises for two Cohen & Steers mutual funds. Houlihan Rovers assets under management that are not subadvised for Cohen & Steers ($648.5 million at March 31, 2005) are not included in Cohen & Steers assets under management.19%26% to $9.1$10.1 billion at March 31,September 30, 2005, compared with $7.7$8.0 billion at March 31,September 30, 2004. The increase in assets under management was primarily attributable to offerings of both common stockshares for new funds and preferred stockshares for new and existing funds. Sequentially,funds as well as market appreciation.assets under management increased $141.3 million from $9.0 billion at December 31, 2004.Closed-end mutual fund flowsnet inflows in the three months ended September 30, 2005 or 2004 as no new common or preferred shares were $604.5offered during these periods. Market appreciation was $78 million in the three months ended March 31,September 30, 2005, compared with $2.5 billionmarket appreciation of $334 million in the three months ended March 31,September 30, 2004.$244.1$244 million, net of underwriting fees. In March 2005, we raised $286.6 million, net of underwriting fees, in our first global real estate securities portfolio,launched Cohen & Steers Worldwide Realty Income Fund. Houlihan Rovers will serve asFund, a sub-advisorclosed-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 coordinating the European and Asian stock selection process. In May 2005, we expect the fund to offer approximately $150 million in Auction Market Preferred Securities (“AMPS”) for the purpose$437 million. Also, one of creating the level of investment leverage specified by the fund’s prospectus. In the first quarter of 2005, we also raised $73.9 million in AMPS for anour existing fund for purpose of maintaining the level of investment leverage specified by the fund’s prospectus. The assets raised in the first quarter of 2004 were the result of two new closed-end funds andraised $74 million of variable rate preferred shares during the associated AMPS with one of these funds.nine months ended September 30, 2005.depreciationappreciation was $463.2$346 million in the threenine months ended March 31,September 30, 2005, compared with market appreciation of $401.9$283 million in the threenine months ended March 31,September 30, 2004.We do not anticipate offering any new closed-end funds in the second quarter of 2005.The following table provides information regarding the composition of our open-end mutual fund assets under management.Composition of Open-End Mutual Fund Assets Under Management(in millions)
2005
assets
2004
assets
2004
assets7%25% to $4.8$5.6 billion at March 31,September 30, 2005 from $4.5 billion at March 31,September 30, 2004. The increase was primarily attributable to market appreciation in 2004. In the first quarter of 2005, we launched two new open-end funds: Cohen & Steers International Realty Fund, an international real estate securities portfolio, and Cohen & Steers VIF Realty Income Fund, which invests in U.S. real estate securities and is designed for the variable annuity market. These funds commenced operations in March 2005 and had no material impact on our assets under management as of March 31, 2005. Sequentially, open-end mutual fund assets under management decreased $374.8 million from $5.2 billion at December 31, 2004.appreciation.redemptionsinflows for open-end mutual funds were $4.7$49 million in the three months ended March 31,September 30, 2005, compared with net subscriptionsinflows of $166.8$100 million in the three months ended March 31,September 30, 2004. Gross subscriptionsinflows increased to $418.2$448 million in the three months ended March 31,September 30, 2005 from $416.1$315 million in the three months ended March 31,September 30, 2004. However, redemptionsGross outflows totaled $422.9$399 million in the three months ended March 31,September 30, 2005, a significant increase from $249.3compared with $215 million in the three months ended March 31,September 30, 2004. Cohen & Steers Utility Fund, which was launched in the second quarter of 2004, had the largest amount of net subscriptions among all of our open-end mutual funds, with $64 million of net subscriptions. Four out of our six open-end mutual funds had net subscriptions in the first quarter of 2005.depreciationappreciation across all of our open-end mutual funds was $370.1$119 million in the three months ended March 31,September 30, 2005, compared with market appreciation of $450.1$336 million in the three months ended March 31,September 30, 2004.Load16represented 38%were $58 million in the nine months ended September 30, 2005, compared with net inflows of total$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 assets at March 31,gross outflows for the nine months ended September 30, 2005 was a client transfer of $100 million into our institutional separate accounts.34% at March 31, 2004. At March 31, 2005:37%market appreciation of the load open-end funds’ net assets were represented by Class C shares, compared with 42% at March 31, 2004;37% by Class A shares, compared with 32% at March 31, 2004;14% by Class B shares, compared with 18% at March 31, 2004; and13% by Class I shares, compared with 8% at March 31, 2004.Subscriptions for our load funds were $194.7$533 million in the threenine months ended March 31, 2005, compared with $193.0 million in the three months ended March 31, 2004. The increase in Class A shares as a percentage of load open-end mutual fund assets was due to an increase in sales of Class A shares and a decrease in sales of Class B and C shares as a total percentage of all new load open-end mutual fund subscriptions. The increase in Class I shares was primarily due to the conversion of Cohen & Steers Realty Focus Fund from a no load open-end mutual fund to a multiple-class load fund inSeptember 30, 2004.14%25% to $3.8$4.5 billion at March 31,September 30, 2005 from $3.4$3.6 billion at March 31,September 30, 2004. The majority of the increase in assets under management during this period was due to market appreciation in 2004.appreciation.$25.7$114 million in the three months ended March 31,September 30, 2005, compared with net outflows of $7 million in the three months ended September 30, 2004. Gross inflows increased to $83 million in the three months ended September 30, 2005 from $75 million in the three months ended September 30, 2004. Gross outflows were $197 million in the three months ended September 30, 2005, compared with $82 million in the three months ended September 30, 2004.$0.3$73 million in the threenine months ended March 31,September 30, 2004. InflowsGross inflows were $86.5$351 million in the threenine months ended March 31,September 30, 2005, compared with $110.6$360 million in the threenine months ended March 31,September 30, 2004. OutflowsIncluded 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 $112.2$461 million in the threenine months ended March 31,September 30, 2005, compared with $110.3$287 million in the threenine months ended March 31,September 30, 2004.Unlike the fourth quarter of 2004, a large majority of the institutional separate account outflows in the first quarter of 2005 were the result of increased redemptions in the accounts for which we serve as a sub-advisor. These accounts are commingled accounts that are not Cohen & Steers sponsored products. As of March 31, 2005, we provided investment advisory services to seven such accounts with $1.2 billion in assets. These assets are included in institutional separate accounts. Our other institutional separate accounts had significantly less redemptions due to rebalancing during the most recent quarter. We gained one new institutional separate account in the first quarter of 2005. As of March 31, 2005 we managed 40 institutional separate accounts, which compared with 39 institutional separate accounts at March 31, 2004. Sequentially, institutional separate account assets under management decreased $289.8 million from $4.1 billion at December 31, 2004.depreciationappreciation was $264.1$471 million in the threenine months ended March 31,September 30, 2005, compared with market appreciation of $368.1$532 million in the threenine months ended March 31,September 30, 2004.businesses.businesses (in thousands):Three 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, 2005 Compared with Three Months Ended March 31, 2004Revenue$34.1$36.4 million in the three months ended March 31,September 30, 2005 from $27.3$29.1 million in the three months ended March 31,September 30, 2004. This increase was primarily the result ofdue to an increase in investment advisory and administration fees attributable to the increase inhigher assets under management driven by net appreciation in every asset category coupled with inflows into our closed-end funds in the twelve months ended March 31, 2005, partially offset by investment banking fees.management.37%29% to $31.2$35.2 million in the three months ended March 31,September 30, 2005 from $22.8$27.2 million in the three months ended March 31,September 30, 2004. Investment advisory and administration fees increased 38%30% to $27.3$31.4 million in the three months ended March 31,September 30, 2005, compared with $19.7$24.2 million in the three months ended March 31,September 30, 2004.March 31,September 30, 2005, total investment advisory and administration revenue from closed-end mutual funds was $14.1increased 28% to $16.2 million compared with $8.8from $12.6 million in the three months ended March 31,September 30, 2004. The firstthird quarter of 2005 included a full quarter of revenue in the amount of $5.7 million from the completion of two new fund offerings during 2004, compared with $1.4 million of revenue generated from these two funds during the first quarter of 2004. This increase of $4.3 million represented 82% of the $5.3 million increase in closed-end mutual fund revenue in the first quarter of 2005. The remaining increase in closed-end mutual fund revenue was due to increasedhigher levels of average daily net assets under managementresulting from market appreciation during 2004 and additional auction market preferred share offerings for existingcertain funds induring the fourth quarter of 2004 and the first quarterhalf of 2005. We launched two new closed-end mutual funds in the first quarter of 2005, Cohen & Steers Dividend Majors Fund, which contributed two months of revenue and Cohen & Steers Worldwide Realty Income Fund, which had no impact on our revenue during the period.March 31,September 30, 2005, total investment advisory and administration revenue from open-end mutual funds was $9.7increased 31% to $11.2 million compared with $8.3from $8.5 million in the three months ended March 31,September 30, 2004. The increase in investment advisory and administration revenue was attributable to increased assets under management across all of our new and existing open-end mutual funds. Distribution and service fee revenue totaled $2.9increased 22% to $3.1 million in the three months ended March 31,September 30, 2005 compared with $2.4from $2.6 million in the three months ended March 31,September 30, 2004. This increase in distribution and service fee revenue was primarily due to increased assets in Cohen & Steers Realty Income Fundtwo open-end mutual funds.Cohen & Steers Utility Fund. Specifically, distribution feeadministration revenue and shareholder service fee revenue were $2.1from institutional separate accounts increased 34% to $4.1 million and $0.8from $3.1 million respectively, in the three monthsMarch 31, 2005, compared with $1.8 million and $0.6 million, respectively, inSeptember 30 2004. This increase was attributable to higher levels of assets resulting from market appreciation, despite net outflows during the three months ended March 31, 2004.period.35%37% to $2.9$1.2 million in the three months ended March 31,September 30, 2005 from $4.5$1.9 million in the three months ended March 31, 2004September 30, 2004. Third quarter 2005 revenue was primarily as a resultattributable to fees generated in connection with merger advisory assignments and capital raising transactions, including the final settlement of a decrease in transaction volume. Average revenue per revenue generating client remained relatively constant at $0.7 million. Investment Banking generated revenue from four clients in the three months ended March 31, 2005, compared with six clients in the three months ended March 31, 2004. All of the revenue in the three months ended March 31, 2005 was generated from existing clients. In the three months ended March 31, 2005 and 2004, three clients represented 93% and 96% of revenue, respectively.two co-managed underwritten public offerings.Expensesincreased 34%decreased 62% to $23.1$25.4 million in the three months ended March 31,September 30, 2005 from $17.3$66.9 million in the three months ended March 31,September 30, 2004, primarily due to a significant increasedecrease in generalemployee compensation and administrative expenses, distribution and service fee expenses and depreciation and amortization expenses.benefits expense.4%82% to $8.7$10.2 million in the three months ended March 31,September 30, 2005, from $9.0$55.2 million in the three months ended March 31,September 30, 2004. This was primarilydue 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 restricted stock unit 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 and amortization of unearned compensation related to RSUs and deferred compensation plans. As a result of a decreasethe new hires that occurred during the third quarter of 2005, we expect employee compensation and benefits to be higher in incentive compensation, which included anthe fourth quarter.deferred compensation attributable to our mandatory deferred compensation plan, partially offset by an increase associated with the addition of personnel.2005.96%86% to $5.4$5.2 million in the three months ended March 31,September 30, 2005 from $2.8 million in the three months ended March 31,September 30, 2004. Included in general and administrative expenses in the first quarter of 2005 were $1.8 million of expenses associated with the launch of four mutual funds during the first quarter of 2005. General and administrative expenses also increased as a result of approximately $0.8 million of public company operating expenses incurred since the initial public offering. In addition, we incurred $0.2 million of non-cash rent expense associated with the commencement of a sublease agreement for our new headquarters at 280 Park Avenue.Distribution and service fee expenses increased 59% to $6.7 million in the three months ended March 31, 2005 from $4.2 million in the three months ended March 31, 2004 primarily as a result of the launch of new closed-end and open-end mutual funds, inflows into our open-end mutual funds and market appreciation of assets in the open and closed-end mutual funds during 2004.Distribution expenses for closed-end mutual funds were $2.9 million in the three months ended March 31, 2005, compared with $1.7 million in the three months ended March 31, 2004, and contributed the most to the increase in distribution and service fee expenses. Of the $1.2 million increase in distribution expenses from closed-end mutual funds, 97%The majority of the increase was attributable to new closed-end mutual funds launched in 2004 andhigher professional fees resulting from costs related to compliance with the first quarterSarbanes-Oxley Act of 2005. Distribution2002 (“Sarbanes-Oxley”), sub-advisory fees shareholder servicepaid to Houlihan Rovers, higher recruiting fees and other distribution expenseshigher accounting, tax and auditing fees associated with the requirements of being a public company. Occupancy costs were primarily higher due to the recognition of a full quarter’s rent expense for open-end mutual funds were $3.5our 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 in the three months ended March 31, 2005, compared with $2.5 million in the three months ended March 31, 2004. Sales commission expensescomprised primarily of moving costs and remaining lease payments, partially offset by sublease income for the sale of Class A shares of our open-end load mutual funds were $0.3 million in the three months ended March 31, 2005, compared with $23 thousand in the three months ended March 31, 2004.current location.389%55% to $1.4 million in the three months ended March 31,September 30, 2005 from $0.3$0.9 million in the three months ended March 31,September 30, 2004. Included in depreciation and amortization expense in the firstthird quarter of 2005 was a full quarter of non-cash expense of $1.1 million relating to amortization of anthe intangible asset recorded in connection with the grant of fully vested RSUs at ourthe initial public offering.offering of Cohen & Steers, Inc. common stock. The intangible asset, which expires inoffering and is allocatedoffering. As a result of our relocation to our two business segments.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.which includesincluding our share of the net income of Houlihan Rovers, which was $1.2$2.2 million in the three months ended March 31,September 30, 2005, compared with $0.1$0.3 million in the three months ended March 31,September 30, 2004. The increase inthird quarter 2005 non-operating income was primarily reflectsattributable to $0.9 million of interest and dividend income, earned on cash raised$0.8 million of realized gains from our initial public offering. We also recognized a gain on the sale of marketable securitiesinvestments in our Company-sponsored mutual funds and a $0.3 million gain from the sale of $0.5 millionour fractional interest in the three months ended March 31, 2005.an aircraft.ourthe 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. Federalfederal and certain state and local income taxes. We recorded an income tax expense of $5.1$5.2 million in the three months ended March 31,September 30, 2005, compared with an income tax expensebenefit of $0.8$17.0 million in the three months ended March 31,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 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 ) available-for-sale were 72% and 71% of total assets as of March 31,September 30, 2005 and December 31, 2004, respectively. Working capital was $105.0$113.5 million at March 31,September 30, 2005, compared with $103.1 million at December 31, 2004.Cash and Net cash equivalents decreased by $3.1from operating activities was $33.9 million in the first threenine months of 2005, with $16.9 million provided by operating activities.ended September 30, 2005. Cash of $15.9$22.5 million was used in investing activities, primarily for the purchase of $27.0$52.5 million of marketable securities, $0.2 million of which were in mutual funds sponsored by us, partially offset by proceeds from sales and maturities of marketable securities.securities in the amount of $32.9 million. Cash of $4.0$13.5 million was used in financing activities, primarily for dividends paid to stockholders.Cash and Net cash equivalents increased by $1.0from operating activities was $40.0 million in the first threenine months of 2004, with $14.1 million provided by operating activities.ended September 30, 2004. Cash of $0.4$57.1 million was used in investing activities, primarily for the purchase of marketable securities. Cash of $12.7$56.9 million was used inprovided by financing activities, primarily related to S-corporation cash distributions made to shareholders and offering costs paid pursuant toproceeds from our initial public offering.offering of Cohen & Steers, Inc. common stock net of related offering costs partially offset by S-corporation cash distributionsSEC.Securities and Exchange Commission (“SEC”). At March 31,September 30, 2005, our regulatory net capital exceeded the minimum requirement by $7.5$8.9 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 debt and other obligations as they become due.long-term debt on aircraft, and capitalMarch 31, 2005:September 30, 2005 (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 Recent DevelopmentWe have established an office in Hong Kong, which will support our global real estate securities investment management activities as well as those of our affiliate, Houlihan Rovers, S.A. In 2005, we expect to incur approximately $0.7 million of expenses associated with this office.have historically consistedconsist of openinvestments in our sponsored open-end and closed-end mutual funds sponsored by us. Subsequent to our initial public offering, we also invested inas well as highly rated debt and preferred instruments and have classified these investments as marketable securities available-for-sale.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. sponsored by us and are capitalized and amortized over a period not to exceed six years.fromby providing asset management services provided to our proprietarysponsored open-end and closed-end mutual funds and to institutional separate accounts. This revenue is based on the net assets of each client’s portfolio and is earned pursuant to the terms of the underlying advisory contract and is charged in arrearsbased on a monthly or quarterly basis.contractual investment advisory fee applied to the assets in the portfolio. We 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 this revenue as we earn such fees.fees are earned.itsour name. This revenue is recognized pursuant to the terms of individual agreements and is based on the net assets of the clients’ funds.December 2004, the FASB issued the revised Statement ofMarch 2005, a Financial Accounting Standards Board (“FASB”) Staff Position was issued addressing the application of Emerging Issue Task Force (“EITF”) Issue No. 12385-24 (“SFAS No. 123”FSP EITF 85-24-1”), which requires public companies“Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” when cash for the right to recognize the cost resultingfuture distribution fees for shares previously sold is received from all share-based transactions in their financial statements. SFAS No. 123 eliminates the ability to account for share-based compensation using the intrinsic value method under Accounting Principles Board Opinion (“APB”) 25. The adoption of the revised SFAS No. 123third parties. FSP EITF 85-24-1 did not materially impact our unaudited condensed consolidated statement of financial position or results of operations.In September 2004, The Emerging Issues Task Force (“EITF”) reached a consensus on Issue 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.” This EITF requires that individual operating segments that do not meet the quantitative thresholds set forth in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” for separate reporting may be aggregated only if the segments meet certain requirements. These requirements are applicable for fiscal years ending after October 13, 2004. The adoption of EITF 04-10 did not materially impact our identified segments.25company’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2004, which is accessible on the Securities and Exchange Commission’s websiteWeb site at http://www.sec.gov and on Cohen & Steers’ websiteWeb site at cohenandsteers.com.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.We had invested approximately $77.3As of September 30, 2005, our marketable securities totaled $90.6 million and consisted of the net proceeds received frominvestments in our initial public offering insponsored open-end and closed-end mutual funds as well as investment grade debt and preferred instruments as of March 31, 2005. We had a total cost basis of approximately $5.7 million and $6.4 million invested in our sponsored equity funds as of March 31, 2005 and December 31, 2004, respectively.80%86% and 72%83% in the three months ended March 31,September 30, 2005 and 2004, respectively—is derived from investment advisory and administrative agreements with our clients. Under these agreements, the investment advisory and administration fees we receive are 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:Ÿ causing the value of the assets we manage to decrease, which would result in lower investment advisory and administration fees; or Ÿ causing 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. causing the value of the assets we manage to decrease, which would result in lower investment advisory and administration fees; orcausing 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.littlea relatively low 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.threenine months ended March 31,September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.PART II-OTHER INFORMATIONPart II – Other Information 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 April 21,November 7, 2005, thethis former employee filed a Notice of Appeal appealingappealed 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 outcome 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 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.Item 5ITEM 4. Submission of Matters to a Vote of Security Holders. Other InformationCompensation The annual meeting of DirectorsOnstockholders of Cohen & Steers was held on May 9, 2005, for the Nominatingpurpose of considering and Corporate Governance Committeeacting upon the following: 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 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 Board of Directors of the Company revised the compensation paid to outside directors of the Company. Each outside director now receives an annual retainer of $70,000, forty percent of which is payable quarterly in cash and sixty percent of which is payable quarterly in restricted stock units, and $1,500 for each Board or committee meeting attended by such director. The restricted stock units are granted under the Cohen & Steers, Inc. 2004 Stock Incentive Plan and are 100% vested on the date of grant. In general, the shares ofCompany’s common stock underlying the restricted stock units grantedare entitled to a director will be delivered to the director on the third anniversary of the date of grant. Dividends on these restricted stock units are accrued and will be paid in cash on the delivery date of the shares of common stock underlying such restricted stock units. In addition, the chair of the Audit Committee receives an additional annual retainer of $12,500, the chair of the Compensation Committee receives an additional annual retainer of $7,500 and the chair of the Nominating and Corporate Governance Committee receives an additional annual retainer of $5,000. Outside directors receive no compensation from Cohen & Steers other than compensation as directors of the Company.one vote per share.NoNo..DescriptionDescription3.1Form of Amended and Restated Certificate of Incorporation of the Registrant (1)3.2 (1)(1) 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. May 16,November 10, 2005/s/ Martin Cohen
/s/ Matthew S. StadlerMartin CohenMatthew S. Stadler
Title: Co-Chief Executive Vice President & Chief
Financial OfficerDate: May 16, 2005Cohen & Steers, Inc./s/ Victor M. GomezName: Victor M. GomezTitle: Chief Accounting Officer29