CNS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, for Cohen & Steers, Inc. (CNS). The company operates in two primary segments: Asset Management (managing portfolios of income-oriented securities, primarily real estate) and Investment Banking (financial advisory services). The financial statements reflect the company's operations prior to its reorganization into a holding company and its Initial Public Offering (IPO), which closed on August 18, 2004. At the time of the report, the company was taxed as an S corporation.

Key Financial Metrics

Segment Performance (Six Months 2004):

• Asset Management: Revenue of $48.2 million; Net Income of $17.0 million.
• Investment Banking: Revenue of $4.7 million; Net Income of $0.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 85% year-over-year, driven primarily by a 109% increase in Asset Management revenue. This growth was fueled by a 72% increase in Assets Under Management (AUM) to $15.0 billion, largely due to two new closed-end fund offerings and market appreciation.
• Profitability Surge: Net income increased 1,091% to $17.9 million. Operating income jumped from $1.4 million to $19.0 million.
• Expense Dynamics: While total operating expenses rose 25% to $33.9 million (driven by a 175% increase in distribution/service fees and 70% increase in G&A), employee compensation and benefits expenses decreased 14%. This reduction was due to the absence of accrued bonuses for co-CEOs in the current period, contrasting with a $4.0 million accrual in the prior year.
• Investment Banking Volatility: Investment Banking revenue declined 15% for the six-month period and 94% for the quarter ended June 30, reflecting the cyclical nature of transaction-based fees.

Outlook, Risks, and Unusual Items

• Corporate Restructuring: The company terminated its S corporation status on August 16, 2004, becoming a C corporation subject to federal income taxes. This will result in higher future tax expenses.
• IPO and Compensation: Following the August 2004 IPO, the company expects to record a significant non-cash compensation expense of approximately $46.0 million in the third quarter of 2004 related to restricted stock unit grants. Additionally, the company expects to incur approximately $3.0 million in annual public company expenses (e.g., D&O insurance, SEC reporting).
• Dividends: The Board declared a cash dividend of $0.10 per share, payable in October 2004. An additional distribution of approximately $22.0 million was planned for S corporation stockholders regarding accumulated taxed earnings.
• Acquisition: The company signed a letter of intent to acquire a 50% equity interest in Houlihan Rovers S.A. for approximately $3.35 million, expected to close by year-end 2004.
• Market Risk: AUM decreased slightly in the second quarter of 2004 due to market volatility and a 5.8% decline in real estate stock prices amid interest rate concerns.

Investor Verification Checklist

• Q3 2004 Earnings Impact: Verify the timing and magnitude of the $46.0 million non-cash compensation charge related to the IPO stock grants.
• Tax Rate Transition: Confirm the effective tax rate for the full year 2004 given the mid-year switch from S corporation to C corporation status.
• Investment Banking Pipeline: Assess the sustainability of Investment Banking revenue given the 94% quarterly decline and reliance on transaction completion.
• AUM Flows: Monitor net flows in open-end funds, which experienced net redemptions in the second quarter despite overall AUM growth.
• Debt Repayment: Note that the $4.3 million bank line of credit outstanding at June 30 was repaid in full in August 2004.