COHN

Business Context and Reporting Period

Company: Cohen & Company Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Cohen & Company is an investment firm specializing in credit-related fixed income investments, organized into three segments: Capital Markets (sales and trading), Asset Management (managing funds and CDOs), and Principal Investing (seed capital investments).
Key Event: On December 16, 2009, the Company completed a reverse merger with Alesco Financial Inc. (AFN). For accounting purposes, Cohen Brothers was deemed the acquirer, and the financial statements reflect the historical operations of Cohen Brothers through December 16, 2009, and the combined operations thereafter.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Composition Shift: While total revenue remained relatively flat, the mix changed significantly. Net trading revenue increased 142% to $44.2 million (driven by a 83% increase in riskless trading), while Asset Management revenue declined 51% to $31.1 million due to defaults and liquidations in CDOs and reduced AUM.
• Operating Expenses: Total operating expenses increased 18% to $95.2 million. This was primarily driven by a $17.4 million increase in compensation and benefits, which included a $12.4 million retention bonus plan to secure key employees through the merger.
• Non-Operating Items: The Company recorded a $7.7 million gain on the sale of CLO management contracts (Emporia business line) in 2009. Conversely, losses from equity method affiliates increased to $3.5 million in 2009 from income of $0.3 million in 2008, largely due to the liquidation of Dekania Corp. (DEKU).
• Debt Restructuring: The Company repaid its former revolving credit facility ($67 million) in June 2009 and entered into a new $30 million credit facility with TD Bank. As of year-end, $10.0 million was drawn under the new facility.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Capital Markets Growth: Management expects the Capital Markets segment to continue growing, leveraging the merger to expand leverage and trading capabilities. The firm has hired significantly more sales and trading professionals (58 as of year-end vs. 26 in 2008).
• Asset Management Challenges: The firm anticipates continued pressure on asset management fees due to the credit crisis, defaults in underlying assets, and the cessation of new securitization activity. AUM has declined significantly since 2007.
• Dividend Policy: The Company ceased to qualify as a REIT effective January 1, 2010, and does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for growth.

Risks and Contingencies

• Legal Proceedings: The Company's broker-dealer subsidiary is involved in litigation with the Liquidation Trustee of Sentinel Management Group regarding the suitability of CDO sales. Additionally, the Company is subject to an SEC investigation regarding CDO structuring and sales practices.
• Debt Covenants: The Company is subject to strict financial covenants under its 2009 Credit Facility, including minimum net worth and cash flow coverage ratios. Failure to comply could result in acceleration of debt.
• Investment Risks: Significant exposure to illiquid credit markets, CDOs, and structured products. Several permanent capital vehicles (e.g., Star Asia) face margin call risks and potential going-concern issues.
• Tax Assets: The Company holds significant Net Operating Loss (NOL) and Net Capital Loss (NCL) carryovers. The merger may trigger an "ownership change" under Section 382 of the Internal Revenue Code, potentially limiting the annual use of these tax assets to approximately $1.6 million.

Investor Verification Checklist

• Merger Accounting: Verify the impact of the reverse acquisition accounting treatment on the comparability of financial data between 2009 and prior years.
• CDO Performance: Review the specific default rates and liquidation status of the Company's sponsored Collateralized Debt Obligations (CDOs), particularly in the ABS and TruPS sectors, to understand the trajectory of asset management fee revenue.
• Debt Covenants: Confirm compliance with the financial covenants of the 2009 Credit Facility and assess the risk of default given the current economic environment.
• Legal Exposure: Monitor the status of the Sentinel Management Group litigation and the SEC investigation into CDO sales practices for potential contingent liabilities.
• Tax Asset Limitations: Determine the final outcome of the Section 382 ownership change analysis to assess the realizable value of the $99.6 million NOL and $68.8 million NCL carryovers.