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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2010 |
||
or |
||
o |
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: 001-34516
Cowen Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
27-0423711 (I.R.S. Employer Identification No.) |
|
599 Lexington Avenue New York, New York (Address of Principal Executive Offices) |
10022 (Zip Code) |
(212) 845-7900
(Registrant's telephone number, including area code)
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. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 12, 2010 there were 74,656,513 shares of the registrant's common stock outstanding.
2
Special Note Regarding Forward-Looking Statements
We have made statements in this Quarterly Report on Form 10-Q (including in "Management's Discussion and Analysis of Financial Condition and Results of Operations") that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking terms such as "may," "might," "will," "would," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "possible," "potential," "intend," "seek" or "continue," the negative of these terms and other comparable terminology or similar expressions. In addition, our management may make forward-looking statements to analysts, representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the risks contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.
Unaudited Condensed Consolidated Financial Statements are presented for the three months ended March 31, 2010 and 2009. The Consolidated Financial Statements as of December 31, 2009 were audited.
3
Item 1. Unaudited Condensed Consolidated Financial Statements
Cowen Group, Inc.
Condensed Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
(unaudited)
|
As of March 31, 2010 |
As of December 31, 2009 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||
Cash and cash equivalents |
$ | 12,855 | $ | 147,367 | ||||||
Cash collateral pledged |
501 | 7,246 | ||||||||
Securities owned, at fair value |
141,960 | 54,153 | ||||||||
Other investments |
25,376 | 28,490 | ||||||||
Receivable from brokers |
62,377 | 32,525 | ||||||||
Fees receivable |
16,029 | 22,446 | ||||||||
Due from related parties (see Note 16) |
10,568 | 14,860 | ||||||||
Fixed assets, net of accumulated depreciation and amortization of $18,033 and $16,449, respectively |
30,822 | 32,603 | ||||||||
Goodwill |
27,179 | 27,179 | ||||||||
Intangible assets, net of accumulated amortization of $5,416 and $4,506, respectively |
15,484 | 16,394 | ||||||||
Other assets |
25,674 | 24,199 | ||||||||
Consolidated Funds |
||||||||||
Cash and cash equivalents |
1,031 | 625 | ||||||||
Securities owned, at fair value |
8,628 | | ||||||||
Other investments, at fair value |
515,195 | 550,407 | ||||||||
Other assets |
1,431 | 947 | ||||||||
Total Assets |
$ | 895,110 | $ | 959,441 | ||||||
Liabilities and Stockholders' Equity |
||||||||||
Securities sold, not yet purchased, at fair value |
$ | 58,298 | $ | 14,812 | ||||||
Payable to brokers |
28,523 | 3,817 | ||||||||
Compensation payable |
25,078 | 80,923 | ||||||||
Note payable and short-term borrowings |
18,000 | 49,746 | ||||||||
Fees payable (see Note 16) |
3,417 | 5,387 | ||||||||
Due to related parties (see Note 16) |
7,924 | 8,103 | ||||||||
Accounts payable, accrued expenses and other liabilities |
49,986 | 65,599 | ||||||||
Consolidated Funds |
||||||||||
Capital withdrawals payable |
23,531 | 26,312 | ||||||||
Accounts payable, accrued expenses and other liabilities |
348 | 392 | ||||||||
Total Liabilities |
215,105 | 255,091 | ||||||||
Commitments and Contingencies (see Note 11) |
||||||||||
Redeemable non-controlling interests |
215,400 | 230,825 | ||||||||
Stockholders' equity |
||||||||||
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized, no shares issued and outstanding |
| | ||||||||
Class A common stock, par value $0.01 per share: 250,000,000 shares authorized, 74,743,163 shares issued and outstanding as of March 31, 2010 and December 31, 2009 (including 2,298,204 and 2,323,116 restricted shares, respectively) |
726 | 726 | ||||||||
Class B common stock, par value $0.01 per share: 250,000,000 authorized, no shares issued and outstanding |
| | ||||||||
Additional paid-in capital |
488,082 | 483,872 | ||||||||
Accumulated deficit |
(23,529 | ) | (10,553 | ) | ||||||
Accumulated other comprehensive loss |
(674 | ) | (520 | ) | ||||||
Total stockholders' equity |
464,605 | 473,525 | ||||||||
Total Liabilities and Stockholders' Equity |
$ | 895,110 | $ | 959,441 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Cowen Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
|
Three Months Ended March 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||||
Revenues |
|||||||||||
Investment banking |
$ | 6,005 | $ | | |||||||
Brokerage |
29,575 | | |||||||||
Management fees |
9,270 | 11,511 | |||||||||
Incentive income |
2,093 | | |||||||||
Interest and dividends |
804 | 91 | |||||||||
Reimbursement from affiliates |
1,742 | 3,394 | |||||||||
Other |
622 | 1,019 | |||||||||
Consolidated Funds |
|||||||||||
Interest and dividends |
5,781 | 4,626 | |||||||||
Other |
366 | 84 | |||||||||
Total revenues |
56,258 | 20,725 | |||||||||
Expenses |
|||||||||||
Employee compensation and benefits |
43,433 | 14,907 | |||||||||
Floor brokerage and trade execution |
5,028 | | |||||||||
Interest and dividends |
446 | 349 | |||||||||
Professional, advisory and other fees |
2,388 | 1,402 | |||||||||
Service fees |
3,812 | 606 | |||||||||
Communications |
3,302 | 274 | |||||||||
Occupancy and equipment |
5,629 | 2,531 | |||||||||
Depreciation and amortization |
2,494 | 1,236 | |||||||||
Client services and business development |
4,164 | 1,485 | |||||||||
Other |
7,386 | 2,739 | |||||||||
Consolidated Funds |
|||||||||||
Interest and dividends |
1,568 | 2,410 | |||||||||
Professional, advisory and other fees |
678 | 840 | |||||||||
Floor brokerage and trade execution |
709 | | |||||||||
Other |
204 | 127 | |||||||||
Total expenses |
81,241 | 28,906 | |||||||||
Other income (loss) |
|||||||||||
Net gains (losses) on securities, derivatives and other investments |
1,524 | 259 | |||||||||
Consolidated Funds: |
|||||||||||
Net realized and unrealized gains (losses) on investments and other transactions |
19,218 | 12,667 | |||||||||
Net realized and unrealized gains (losses) on derivatives |
(220 | ) | (17,355 | ) | |||||||
Net gains (losses) on foreign currency transactions |
(725 | ) | 1,341 | ||||||||
Total other income (loss) |
19,797 | (3,088 | ) | ||||||||
Income (loss) before income taxes |
(5,186 | ) | (11,269 | ) | |||||||
Income tax expense (benefit) |
(266 | ) | (66 | ) | |||||||
Net income (loss) |
(4,920 | ) | (11,203 | ) | |||||||
Net (income) loss attributable to non-controlling interests in consolidated subsidiaries |
(8,056 | ) | 2,404 | ||||||||
Net income (loss) attributable to Cowen Group, Inc. stockholders |
$ | (12,976 | ) | $ | (8,799 | ) | |||||
Weighted average common shares outstanding: |
|||||||||||
Basic |
72,509 | 37,537 | |||||||||
Diluted |
72,509 | 37,537 | |||||||||
Earnings (loss) per share: |
|||||||||||
Basic |
$ | (0.18 | ) | $ | (0.23 | ) | |||||
Diluted |
$ | (0.18 | ) | $ | (0.23 | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Cowen Group, Inc.
Condensed Consolidated Statements of Changes in Equity
(in thousands, except share data)
(unaudited)
|
Common Shares Outstanding |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings/ Accumulated deficit |
Total Stockholders' Equity |
Redeemable Noncontrolling Interest |
Total Comprehensive Income (Loss) |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2009 |
74,743,163 | $ | 726 | $ | 483,872 | $ | (520 | ) | $ | (10,553 | ) | $ | 473,525 | $ | 230,825 | |||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||
Net income (loss) |
| | | | (12,976 | ) | (12,976 | ) | 8,056 | (4,920 | ) | |||||||||||||||
Defined Benefit Plans |
| | | 87 | | 87 | | 87 | ||||||||||||||||||
Foreign currency translation |
| | | (241 | ) | | (241 | ) | | (241 | ) | |||||||||||||||
Total comprehensive income |
| | | (154 | ) | (12,976 | ) | (13,130 | ) | 8,056 | (5,074 | ) | ||||||||||||||
Capital contributions |
| | | | | | 1,902 | |||||||||||||||||||
Capital distributions |
| | | | | | (23,671 | ) | ||||||||||||||||||
Deconsolidation of CHRP GP (see Note 2b) |
| | | | | | (1,712 | ) | ||||||||||||||||||
Amortization of share based compensation |
| | 4,210 | | | 4,210 | | |||||||||||||||||||
Balance, March 31, 2010 |
74,743,163 | $ | 726 | $ | 488,082 | $ | (674 | ) | $ | (23,529 | ) | $ | 464,605 | $ | 215,400 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Cowen Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
Three Months Ended March 31, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||||||
Cash flows from operating activities: |
|||||||||||||
Net income (loss) |
$ | (4,920 | ) | $ | (11,203 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash (used in) / provided by operating activities: |
|||||||||||||
Depreciation and amortization |
2,494 | 1,236 | |||||||||||
Share-based compensation |
4,210 | | |||||||||||
Net loss on disposal of fixed assets |
264 | | |||||||||||
Purchases of securities owned, at fair value |
(123,057 | ) | (56,709 | ) | |||||||||
Proceeds from sales of securities owned, at fair value |
72,719 | 60,049 | |||||||||||
Proceeds from the sale of short investments |
36,626 | | |||||||||||
Payments to cover short investments |
(17,641 | ) | | ||||||||||
Net (gains) losses on securities, derivatives and other investments |
(1,297 | ) | (586 | ) | |||||||||
Consolidated Funds: |
|||||||||||||
Purchases of securities owned, at fair value |
(52,535 | ) | | ||||||||||
Proceeds from sales of securities owned, at fair value |
43,904 | | |||||||||||
Purchases of other investments |
(13,039 | ) | (1,015 | ) | |||||||||
Proceeds from sales of other investments |
69,481 | 35,824 | |||||||||||
Net realized and unrealized (gains) losses on securities and other investments and other transactions |
(21,227 | ) | 1,875 | ||||||||||
(Increase) decrease in operating assets: |
|||||||||||||
Securities owned, at fair value, held at broker dealer |
(37,710 | ) | | ||||||||||
Receivable from brokers |
(29,852 | ) | 14,287 | ||||||||||
Fees receivable |
6,417 | 5,012 | |||||||||||
Due from related parties |
4,292 | 6,325 | |||||||||||
Other assets |
(1,475 | ) | (714 | ) | |||||||||
Consolidated Funds: |
|||||||||||||
Cash and cash equivalents |
(406 | ) | (39 | ) | |||||||||
Other assets |
(725 | ) | 153 | ||||||||||
Increase (decrease) in operating liabilities: |
|||||||||||||
Securities sold, but not yet purchased, at fair value, held at broker dealer |
24,629 | | |||||||||||
Payable to brokers |
24,706 | | |||||||||||
Compensation payable |
(55,527 | ) | (27,772 | ) | |||||||||
Fees payable |
(1,970 | ) | (5,146 | ) | |||||||||
Due to related parties |
(179 | ) | 1,662 | ||||||||||
Accounts payable, accrued expenses and other liabilites |
(15,613 | ) | (3,854 | ) | |||||||||
Consolidated Funds: |
|||||||||||||
Due to related parties |
| (136 | ) | ||||||||||
Accounts payable, accrued expenses and other liabilities |
(44 | ) | (63 | ) | |||||||||
Net cash (used in) / provided by operating activities |
(87,475 | ) | 19,186 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Cowen Group, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)
|
Three Months Ended March 31, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||||||
(continued) |
|||||||||||||
Cash flows from investing activities: |
|||||||||||||
Purchases of other investments |
(958 | ) | | ||||||||||
Proceeds from sales of other investments |
3,539 | 4,233 | |||||||||||
Purchase of fixed assets |
(67 | ) | (195 | ) | |||||||||
Net cash provided by investing activities |
2,514 | 4,038 | |||||||||||
Cash flows from financing activities: |
|||||||||||||
Securities repurchased under agreement to sell |
| (1,425 | ) | ||||||||||
Repayments on the line of credit |
(25,001 | ) | | ||||||||||
Capital withdrawals to members |
| (12,664 | ) | ||||||||||
Consolidated Funds: |
|||||||||||||
Repayments on the line of credit |
| (10,208 | ) | ||||||||||
Capital contributions by non-controlling interests in Consolidated Funds |
1,902 | | |||||||||||
Capital withdrawals to non-controlling interests in Consolidated Funds |
(26,452 | ) | (21,991 | ) | |||||||||
Net cash used in financing activities |
(49,551 | ) | (46,288 | ) | |||||||||
Change in cash and cash equivalents |
(134,512 | ) | (23,064 | ) | |||||||||
Cash and cash equivalents at beginning of period |
147,367 | 46,677 | |||||||||||
Cash and cash equivalents at end of period |
$ | 12,855 | $ | 23,613 | |||||||||
Supplemental information |
|||||||||||||
Cash paid during the period for interest |
$ | 580 | $ | 18 | |||||||||
Cash paid during the period for taxes |
$ | 138 | $ | 230 | |||||||||
Supplemental non-cash information: |
|||||||||||||
Deconsolidation of CHRP GP (See Note 2b) |
$ | 1,712 | $ | | |||||||||
Net settlement of cash collateral pledged with repayments on the line of credit |
$ | 6,745 | $ | | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Business
Cowen Group, Inc., a Delaware corporation, was formed on June 1, 2009 in connection with the Transaction Agreement and Agreement and Plan of Merger ("Transaction Agreement"), dated as of June 3, 2009, by and among Cowen Holdings, Inc., ("Cowen Holdings," formerly Cowen Group, Inc.), Lexington Merger Corp., Ramius LLC ("Ramius," formerly Park Exchange LLC) and RCG Holdings LLC ("RCG," formerly Ramius LLC). For more information related to the acquisition, see Note 3.
Cowen Group, Inc. is a diversified financial services firm and, together with its consolidated subsidiaries (collectively, "Cowen Group" or the "Company") provides alternative investment management, investment banking, research, and sales and trading services through its two business segments: alternative investment management and broker-dealer. The alternative investment management segment includes hedge funds, fund of funds, real estate, healthcare royalty funds and cash management services, offered primarily under the Ramius name. The broker-dealer segment offers industry focused investment banking services for growth-oriented companies, domain knowledge-driven research and a sales and trading platform for institutional investors, primarily under the Cowen name.
2. Significant Accounting Policies
These consolidated financial statements include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in these consolidated financial statements, as further discussed below, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting.
In the opinion of management these unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") related to interim financial statements. Results for interim periods should not be considered indicative of results for any other interim period or for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007, included in the Form 10-K of Cowen Group as filed with the SEC on March 25, 2010. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are necessary for a fair presentation of the results for the interim periods.
The business combination between Ramius and Cowen Holdings was accounted for as an acquisition by Ramius of Cowen Holdings. As a result, the historical financial statements of Ramius have become the historical financial statements of the Company.
The assets and liabilities of Cowen Holdings were recorded at their respective fair values, as of November 2, 2009, and combined with those of Ramius. The financial statements of the Company that include periods after November 2, 2009 reflect such fair values and were not restated retroactively to reflect the historical financial position or results of operations of Cowen Holdings. For periods after November 2, 2009, the results of operations of Cowen Holdings are included in the results of
9
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Significant Accounting Policies (Continued)
operations of the Company. Stockholders' equity has been retroactively restated to include the 37,536,826 shares of Class A common stock issued to RCG at the consummation of the Transactions (as defined in Note 3) as the issued capital for all periods prior to the Transactions.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to US GAAP as described below (the "Consolidated Funds"). Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as non-controlling interests in consolidated subsidiaries in the accompanying consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity ("VOE") or a variable interest entity ("VIE") under US GAAP.
Voting Interest Entities ("VOEs") are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance. VOEs are consolidated in accordance with Financial Accounting Standards Board ("FASB") accounting standards. In accordance with these standards, the Company presently consolidates five funds deemed to be VOEs for which it acts as the general partner. RTS Global 3x Fund LP ("RTS 3x") was first consolidated in the first quarter of 2010, when it commenced operations.
VIEs are entities that lack one or more of the characteristics of a VOE. Any enterprise having a controlling financial interest in a VIE is considered that VIE's primary beneficiary. In accordance with FASB accounting standards, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Prior to the adoption of the revised accounting guidance for VIEs (as discussed in note 2d) the primary beneficiary of a VIE is defined as the enterprise that has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. Subsequent to the adoption of the revised accounting guidance for VIEs the primary beneficiary of a VIE is the enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and which has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company determines whether it is the primary beneficiary of a VIE by performing a qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, terms of any contracts between the Company and the VIE, which interests create or absorb variability, related party relationships and the design of the VIE.
10
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Significant Accounting Policies (Continued)
The Company has determined that it no longer exercises control over Cowen Healthcare Royalty GP, LLC (the "CHRP GP") as it no longer acts as managing member of this entity, and beginning with the first quarter of 2010, no longer consolidates this entity. The Company now accounts for its investment in the CHRP GP under the equity method of accounting.
The Financial Accounting Standards Board's ("FASB") accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 | Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; | |
Level 2 |
Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and |
|
Level 3 |
Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little, if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this category requires significant management judgment or estimation. |
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Company. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk of that instrument.
The Company and its operating company subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investments is generally estimated based on proprietary models developed by the Company, which include discounted cash flow analyses, public market comparables, and other techniques and may be based, at least in part, on independently sourced market information. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized
11
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Significant Accounting Policies (Continued)
with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.
The Company primarily uses the "market approach" valuation technique to value its financial instruments measured at fair value. In determining an instrument's placement within the hierarchy, the Company separates the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.
SecuritiesSecurities whose values are based on quoted market prices in active markets for identical assets, and are therefore classified in level 1 of the fair value hierarchy, include active listed equities, certain U.S. government and sovereign obligations, and certain money market securities. The Company does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Certain positions for which there is a limited market, consisting primarily of convertible debt, corporate debt and loans, are stated at fair value. The estimated fair values assigned by management are determined in good faith and are based on available information considering, among other things, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. Such positions that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources which are supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contractsDerivative contracts can be exchange-traded or privately negotiated over-the-counter ("OTC"). Exchange-traded derivatives, such as futures contracts and exchange traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Derivative contracts are included within other assets on the consolidated statements of financial condition.
Other investmentsOther investments measured at fair value consist primarily of portfolio funds and real estate investments, which are valued as follows:
12
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Significant Accounting Policies (Continued)
its equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either are investment companies as defined by the AICPA Audit and Accounting Guide, Investment Companies, or have attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment.
The Company categorizes its investments in Portfolio Funds within the fair value hierarchy dependent on the ability to redeem the investment. If the Company has the ability to redeem its investment at NAV at the measurement date or within the near term, the Portfolio Fund is categorized as a Level 2 fair value measurement. If the Company does not know when it will have the ability to redeem its investment or cannot do so in the near term, the Portfolio Fund is categorized as a Level 3 fair value measurement. See Note 4 for further details of the Company's investments in Portfolio Funds.
The Company also reflects its real estate equity investments net of investment level financing. Valuation adjustments attributable to underlying financing arrangements are considered in the real estate equity valuation based on amounts at which the financing liabilities could be transferred to market participants at the measurement date.
Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the Company invests in real estate and real estate related investments for which no liquid market exists. The market prices for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.
13
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Significant Accounting Policies (Continued)
The Company's real estate investments are typically categorized as Level 3 within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value.
See Note 4 for further information regarding the Company's investments and fair value measurements.
In June 2009, the FASB issued a new accounting standard which revises the accounting for VIEs by introducing a new consolidation model. This new standard changes the approach to determining the primary beneficiary of a VIE and requires companies to more frequently assess whether they must consolidate VIEs. The new model identifies two primary characteristics of a controlling financial interest: (1) the power to direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or provide rights to receive benefits from the VIE that are potentially significant to the VIE. In February 2010, the FASB finalized an Accounting Standards Update ("ASU") which defers the requirements of this standard for certain interests in investment funds and certain similar entities. Therefore the adoption of this new standard on January 1, 2010 did not have a material impact on the Company's financial position, results of operations or cash flows, as substantially all of the entities in which it holds variable interests qualify for the scope deferral under the ASU.
In June 2009, the FASB issued amended guidance on accounting for transfers of financial assets. The amendments were issued to improve the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial statements, and a transferor's continuing involvement, if any, in transferred financial assets. The amendments eliminate the concept of qualifying special purpose entities from US GAAP. These entities will now be evaluated for consolidation in accordance with the applicable consolidation criteria. The amendments are effective for reporting periods beginning on or after November 15, 2009. The adoption of this new standard on January 1, 2010 did not have a material impact on the Company's financial position, results of operations or cash flows.
In January 2010, the FASB issued a new accounting standard that provides amended disclosure requirements related to fair value measurements. This standard is effective for financial statements issued for reporting periods beginning after December 15, 2009 for certain disclosures and for reporting periods beginning after December 15, 2010 for other disclosures. Since these amended principles require only additional disclosures concerning fair value measurements, adoption will and has not affected the Company's financial condition, results of operations or cash flows.
As of March 31, 2010, none of the changes to the Codification issued by the FASB that are not yet effective are expected to have an impact on the Company's financial position or results of operations.
3. Acquisition
On November 2, 2009, the transactions contemplated by the Transaction Agreement (the "Transactions"), were consummated including (1) the merger of Lexington Merger Corp. with and into
14
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
3. Acquisition (Continued)
Cowen Holdings, pursuant to which each outstanding share of common stock of Cowen Holdings was converted into one share of Class A common stock of the Company and (2) the transfer by RCG (which prior to the consummation of the Transactions operated the Ramius business) of substantially all of its assets and liabilities to Park Exchange LLC in exchange for the Company's issuance to RCG of 37,536,826 shares of Class A common stock of the Company. Following the consummation of the Transactions, each of Park Exchange LLC and Cowen Holdings became wholly owned subsidiaries of the Company, and Park Exchange LLC was renamed Ramius LLC.
The Transactions were accounted for under the acquisition method in accordance with US GAAP. Accordingly, the Transactions were accounted for as an acquisition by Ramius of Cowen Holdings. As such, results of operations for Cowen Holdings are included in the accompanying consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their fair value as at the acquisition date.
Included in the accompanying consolidated statements of operations for the three months ended March 31, 2010 are revenues of $38.1 million and a net loss of $15.2 million related to Cowen Holdings. The following table provides unaudited supplemental pro forma financial information for the three months ended March 31, 2009 as if the Transactions had occurred as of the beginning of that period:
|
Three Months Ended March 31, 2009 |
||||
---|---|---|---|---|---|
|
(in thousands, except per share data) |
||||
|
(unaudited) |
||||
Pro forma total revenues |
$ | 64,458 | |||
Pro forma net loss |
(20,394 | ) | |||
Pro forma net loss attributable to Cowen Group, Inc. stockholders |
(18,410 | ) | |||
Pro forma net loss per share: |
|||||
Basic |
$ | (0.33 | ) | ||
Diluted |
$ | (0.33 | ) |
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds
Securities owned, at fair value
Securities owned are held by the Company and considered held for trading and carried at fair value. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations.
15
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
As of March 31, 2010 and December 31, 2009, securities owned consisted of the following, at fair value:
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
U.S. Government securities* |
$ | 14,003 | $ | | |||
Common stocks |
51,206 | 11,439 | |||||
Restricted common stock |
5,058 | | |||||
Corporate bonds* |
64,489 | 38,327 | |||||
Options |
5,300 | 1,312 | |||||
Warrants and rights |
587 | 1,356 | |||||
Mutual Funds |
1,317 | 1,719 | |||||
|
$ | 141,960 | $ | 54,153 | |||
Other investments
As of March 31, 2010 and December 31, 2009, other investments consisted of the following:
Other investments
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
(1) Portfolio Funds, at fair value |
$ | 17,022 | $ | 20,683 | |||
(2) Real estate investments, at fair value |
1,108 | 1,077 | |||||
(3) Equity method investments |
6,933 | 6,521 | |||||
(4) Lehman claims, at fair value |
313 | 209 | |||||
|
$ | 25,376 | $ | 28,490 | |||
16
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
(1) Portfolio Funds, at fair value
The Portfolio Funds as of March 31, 2010 and December 31, 2009, included the following:
Portfolio Funds
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
Tapestry Investment Co PCC Ltd |
$ | 1,505 | $ | 2,669 | |||
Cowen Healthcare Royalty Partners, L.P. |
14,144 | 17,009 | |||||
Ramius Global Credit Fund LP |
801 | | |||||
Ramius Value and Opportunity Fund LP |
298 | 639 | |||||
RCG Special Opportunities Fund, Ltd |
165 | 321 | |||||
Other affiliated funds |
109 | 45 | |||||
|
$ | 17,022 | $ | 20,683 | |||
(2) Real estate investments, at fair value
Real estate investments at March 31, 2010 and December 31, 2009 are carried at fair value and include real estate equity investments held by RCG RE Manager, LLC ("RE Manager"), a real estate operating subsidiary of the Company, of $0.3 million and $0.2 million, respectively, and real estate debt investments held by the Company of $0.8 million and $0.9 million, respectively.
17
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
(3) Equity method investments
Equity method investments include investments held by the Company in several operating companies whose responsibilities primarily include the day to day management of a number of real estate funds, including the portfolio management and administrative services related to the acquisition, disposition, and active monitoring of the real estate fund's underlying debt and equity investments. The Company's ownership interests in these equity method investments range from 30% to 55%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in three of these entities: RCG Longview Debt Fund IV Management, LLC, RCG Longview Debt Fund IV Partners, LLC and RCG Longview Partners II, LLC. The operating agreements that govern the management of day to day operations and affairs of each of these three entities stipulate that certain decisions require support and approval from other members in addition to the support and approval of the Company. As a result, all operating decisions made in these three entities require the support of both the Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company. As the Company does not possess unilateral control over any of these entities, the presumption of consolidation has been overcome pursuant to current accounting standards and the Company accounts for these investments under the equity method of accounting. Also included in equity method investments is the investment in CHRP GP (see note 2b). The following table summarizes equity method investments held by the Company:
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
RCG Longview Debt Fund IV Management, LLC |
$ | 1,944 | $ | 1,651 | |||
Cowen Healthcare Royalty GP, LLC* |
1,153 | | |||||
RCG Longview Partners, LLC |
1,365 | 1,565 | |||||
RCG Urban American, LLC |
675 | 605 | |||||
Urban American Real Estate Fund II, L.P. |
490 | 409 | |||||
RCG Longview Louisiana Manager, LLC |
341 | 400 | |||||
RCG Longview Equity Management, LLC |
298 | 1,360 | |||||
RCG Kennedy House, LLC |
258 | 222 | |||||
Other |
409 | 309 | |||||
|
$ | 6,933 | $ | 6,521 | |||
As of March 31, 2010, the Company's share of losses in its equity method investment in RCG Longview Partners II, LLC has exceeded the carrying amount recorded in this investee. RCG Longview Partners II, LLC, as general partner to a real estate fund, has reversed previously recorded incentive income allocations and has recorded a current clawback obligation to the limited partners in the fund. This obligation is due to a change in unrealized value of the fund on which there have previously been distributed carried interest realizations; however, the settlement of a potential obligation is not due until the end of the life of the respective fund. As the Company is obligated to return previous distributions it received from RCG Longview Partners II, LLC, it has continued to record its share of
18
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
losses in the investee including reflecting its share of the clawback obligation in the amount of $6.2 million. All such amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.
The Company's income (loss) from equity method investments was $0.4 million and $0.6 million for the three months ended March 31, 2010 and 2009, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations.
(4) Lehman Claims, at fair value
Lehman Brothers International (Europe) ("LBIE"), through certain affiliates, was a prime broker to the Company, and the Company held cash and cash equivalent balances with LBIE. On September 15, 2008, LBIE was placed into administration (the "Administration") in the United Kingdom and, as a result, the assets held by the Company in its LBIE accounts were frozen at LBIE. The status and ultimate resolution of the assets under LBIE's Administration proceedings is uncertain. The assets of the Company at LBIE at the time of Administration (the "Total Net Equity Claim") consist of $1.0 million. There can be no assurance that the Total Net Equity Claim value, as determined by the Company, will be accepted by the Administrators, nor does the Company know the manner and timing in which such claim will be satisfied and the ultimate value that will be received.
Given the great degree of uncertainty as to the status of the assets held at LBIE and the process and prospects of the return of those assets, the Company has decided to fair value the Total Net Equity Claim at an approximately 80% discount at December 31, 2009 and a 70% discount at March 31, 2010, which represents management's best estimate at the respective dates of value that ultimately may be recovered with respect to the Total Net Equity Claim (the "Estimated Recoverable Lehman Claim"). The Estimated Recoverable Lehman Claim was recorded at estimated fair value considering a number of factors including the status of the assets under U.K. insolvency laws and the trading levels of Lehman unsecured debt. In determining the estimated value of the Total Net Equity Claim, the Company was required to use considerable judgment and is based on the facts currently available. As additional information on the LBIE proceeding becomes available, the Company may need to adjust the valuation of the Estimated Recoverable Lehman Claim. The actual loss that may ultimately be incurred by the Company with respect to the pending LBIE claim is not known and could be materially different from the estimated value assigned by the Company.
Securities sold, not yet purchased, at fair value
Securities sold, not yet purchased, represent obligations of the Company to deliver a specified security at a contracted price and, thereby, create a liability to purchase that security in the market at prevailing prices. The Company's liability for securities to be delivered is measured at their fair value as of the date of the financial statements. However, these transactions result in off-balance sheet risk, as the Company's ultimate cost to satisfy the delivery of securities sold, not yet purchased, may exceed the amount reflected in the condensed consolidated statements of financial condition. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations. Securities sold, not yet
19
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
purchased, at fair value, were $58.3 million and $14.8 at March 31, 2010 and December 31, 2009, respectively.
Securities owned, at fair value
Securities owned held by the Consolidated Funds are comprised of:
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
U.S. Government securities* |
$ | 7,438 | $ | | |||
Corporate bonds* |
1,190 | | |||||
|
$ | 8,628 | $ | | |||
Other investments, at fair value
Other investments held by the Consolidated Funds are comprised of:
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
(1) Portfolio Funds |
$ | 501,229 | $ | 546,526 | |||
(2) Lehman Claims |
13,966 | 3,881 | |||||
|
$ | 515,195 | $ | 550,407 | |||
(1) Investments in Portfolio Funds, at fair value
At March 31, 2010 and December 31, 2009, investments in Portfolio Funds, at fair value, included the following:
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
Investments of Enterprise LP |
$ | 412,294 | $ | 449,160 | |||
Investments of consolidated fund of funds investment companies |
88,935 | 97,366 | |||||
|
$ | 501,229 | $ | 546,526 | |||
20
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
Consolidated investments of Enterprise LP
Ramius Enterprise LP ("Enterprise LP") operated under a "masterfeeder" structure with Ramius Enterprise Master Fund Ltd ("Enterprise Master"), whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate, LP. The consolidated investments in Portfolio Funds recorded in other investments on the condensed consolidated statements of financial condition includes Enterprise LP's investment of $412.3 million and $449.2 million in Enterprise Master as of March 31, 2010 and December 31, 2009, respectively. Enterprise LP can redeem from or contribute to its investment in Enterprise Master on a monthly basis at the decision of the Company with no prior notice as cash is needed at Enterprise LP. There are no unfunded commitments at Enterprise LP. See Note 11 for unfunded commitments of Enterprise Master. Enterprise Master utilizes certain strategies including merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capital structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages, structured credit investments, investments in mortgage-backed securities and other structured finance products, investments in real estate and real property interests, structured private placements and other relative value strategies. Enterprise Master has broad investment powers and maximum flexibility in seeking to achieve its investment objective. It may invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. See Note 5 for further information on the underlying investments of Enterprise Master.
Investments of consolidated fund of funds investment companies
The investments of consolidated fund of funds investment companies of $88.9 million and $97.4 million at March 31, 2010 and December 31, 2009, respectively, include the investments of Ramius Levered Multi-Strategy FOF LP ("Levered FOF"), Ramius Multi-Strategy FOF LP ("Multi-Strat FOF") and Ramius Vintage Multi-Strategy FOF LP ("Vintage FOF"), all of which are investment companies managed by Ramius Alternative Solutions LLC and RTS 3x which is managed by Ramius Trading Strategies LLC. Levered FOF's and Multi-Strat FOF's investment objectives are to invest discrete pools of their capital on a leveraged basis among portfolio managers that invest through Portfolio Funds, forming a multi-strategy, diversified investment portfolio designed to achieve returns with low to moderate volatility. Vintage FOF's investment objective is to allocate its capital among portfolio managers that invest through investment pools or managed accounts thereby forming concentrated investments in high conviction managers designed to achieve attractive risk adjusted returns with moderate relative volatility. RTS 3x's investment objective is to achieve attractive investment returns on a risk-adjusted basis that are non-correlated with the traditional equity and bond markets by investing substantially all of its capital pursuant to managed futures and global macro-based investment strategies. RTS 3x seeks to achieve its objective through a multi-advisor investment approach by allocating its capital among third-party Trading Advisors that are unaffiliated with RTS 3x.
21
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
The following is a summary of the investments held by the four consolidated fund of funds, at fair value, as of March 31, 2010 and December 31, 2009:
|
|
March 31, 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Ramius Levered Multi-Strategy FOF LP |
Ramius Multi-Strategy FOF LP |
Ramius Vintage Multi-Strategy FOF LP |
RTS Global 3x Fund LP |
Total | ||||||||||||
|
Strategy | Fair Value | Fair Value | Fair Value | Fair Value | Fair Value | ||||||||||||
|
|
|
(dollars in thousands) |
|
|
|||||||||||||
Ramius Multi-Strategy Master FOF LP* |
Multi-Strategy | $ | | $ | 34,536 | $ | | $ | | $ | 34,536 | (a) | ||||||
Ramius Vintage Multi-Strategy Master FOF LP* |
Multi-Strategy | | | 40,255 | | 40,255 | (a) | |||||||||||
Tapestry Pooled Account V LLC* |
Credit-Based | 726 | | | | 726 | (b) | |||||||||||
Externally Managed Portfolio Funds |
Credit-Based | 639 | | | | 639 | (b) | |||||||||||
Externally Managed Portfolio Funds |
Futures & Global Macro | | | | 9,354 | 9,354 | (c) | |||||||||||
Externally Managed Portfolio Funds |
Event Driven | 2,815 | | | | 2,815 | (d) | |||||||||||
Externally Managed Portfolio Funds |
Hedged Equity | 29 | | | | 29 | (e) | |||||||||||
Externally Managed Portfolio Funds |
Multi-Strategy | 528 | | | | 528 | (f) | |||||||||||
Externally Managed Portfolio Funds |
Fixed Income Arbitrage | 53 | | | | 53 | (g) | |||||||||||
Externally Managed Portfolio Funds |
Other | | | | | | ||||||||||||
|
$ | 4,790 | $ | 34,536 | $ | 40,255 | $ | 9,354 | $ | 88,935 | ||||||||
22
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
|
|
December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Ramius Levered Multi-Strategy FOF LP |
Ramius Multi-Strategy FOF LP |
Ramius Vintage Multi-Strategy FOF LP |
Total | ||||||||||
|
Strategy | Fair Value | Fair Value | Fair Value | Fair Value | ||||||||||
|
|
|
(dollars in thousands) |
|
|||||||||||
Ramius Multi-Strategy Master FOF LP* |
Multi-Strategy | $ | | $ | 43,939 | $ | | $ | 43,939 | (a) | |||||
Ramius Vintage Multi-Strategy Master FOF LP* |
Multi-Strategy | | | 47,371 | 47,371 | (a) | |||||||||
Tapestry Pooled Account V LLC* |
Credit-Based | 783 | | | 783 | (b) | |||||||||
Externally Managed Portfolio Funds |
Credit-Based | 1,894 | | | 1,894 | (b) | |||||||||
Externally Managed Portfolio Funds |
Event Driven | 2,787 | | | 2,787 | (d) | |||||||||
Externally Managed Portfolio Funds |
Hedged Equity | 28 | | | 28 | (e) | |||||||||
Externally Managed Portfolio Funds |
Multi-Strategy | 497 | | | 497 | (f) | |||||||||
Externally Managed Portfolio Funds |
Fixed Income Arbitrage | 56 | | | 56 | (g) | |||||||||
Externally Managed Portfolio Funds |
Other | 11 | | | 11 | ||||||||||
|
$ | 6,056 | $ | 43,939 | $ | 47,371 | $ | 97,366 | |||||||
23
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
(2) Lehman Claims, at fair value
With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master consists of $24.3 million. As a result of Enterprise Master and certain of the funds managed by the Company having assets they held at LBIE frozen in their LBIE prime brokerage account and the degree of uncertainty as to the status of those assets and the process and prospects of the return of those assets, Enterprise Master and the funds managed by the Company decided that only the investors who were invested at the time of the Administration should participate in any profit or loss relating to the Estimated Recoverable Lehman Claim. As a result, Enterprise Master and certain of the funds managed by the Company with assets held at LBIE granted a 100% participation in the Estimated Recoverable Lehman Claims to Special Purpose Vehicles (the "SPVs" or "Lehman Segregated Funds") incorporated under the laws of the Cayman Islands on September 29, 2008, whose shares were distributed to each of their investor funds. Fully redeeming investors of Enterprise LP will not be paid out on the balance invested in the SPV until the claim with LBIE is settled and assets are returned by LBIE.
24
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
In addition, Lehman Brothers, Inc. ("LBI") was a prime broker to Enterprise Master and it holds cash balances of $5.3 million. On September 19, 2008, LBI was placed in a Securities Investor Protection Corporation ("SIPC") liquidation proceeding after the filing for bankruptcy of its parent Lehman Brothers Holdings, Inc. The status of the assets under LBI's bankruptcy proceedings has not been determined. The amount that will ultimately be recovered from LBI will depend on the amount of assets available in the fund of customer property to be established by the trustee appointed under the Securities Investor Protection Act (the "SIPA Trustee") as approved by the bankruptcy court as well as the total amount of customer claims that seek recovery from the fund of customer property. Based on recent court filings by the SIPA Trustee, the total amount of customer claims exceeds the assets that are likely to be in the fund of customer property. In addition, the court filings also indicate that Barclays plc has submitted a substantial claim against LBI relating to an asset purchase agreement entered into by Barclays plc with LBIE near the time of the SIPC liquidation proceeding that could affect the amount of assets that are included in the fund of customer property. As a result of these uncertainties and the timing of any distributions from LBI in respect of the Company's customer claims, management has estimated recovery with respect to the Company's LBI exposure at 47%, which represents the present value of the mid point between what management believes are reasonable estimates of the low side and high side potential recovery rates with respect to the Company's LBI exposure. The estimated recoverable amount by the Company may differ from the actual recoverable amount of the pending LBI claim, and the differences may be material.
Indirect Concentration of the Underlying Investments Held by Consolidated Funds
From time to time, through its investments in the Consolidated Funds, the Company may indirectly maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Consolidated Funds' net assets (on an aggregated basis). Based on information that is available to the Company at March 31, 2010 and December 31, 2009, the Company identified Consolidated Funds that had interests in an issuer of investments, for which the Company's pro-rata share exceeds 5% of the Consolidated Funds' net assets (on an aggregated basis). The following table presents such interests which represent the aggregate of (i) the gross amount of exposure that Consolidated Funds have through their investments held directly and (ii) the gross amount of exposure held indirectly through their investments in any unconsolidated master funds:
|
As of March 31, 2010 | ||||||
---|---|---|---|---|---|---|---|
|
Shares/ Principal Amount |
Fair Value | |||||
|
(amounts in thousands) |
||||||
U.S. Treasury notes, 0.87% - 8.75%, |
$ | 77,342 | $ | 81,354 | |||
U.S. Treasury notes, 1.00% - 3.625%, |
111,710 | (111,342 | ) |
25
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
|
As of December 31, 2009 | ||||||
---|---|---|---|---|---|---|---|
|
Shares/ Principal Amount |
Fair Value | |||||
|
(amounts in thousands) |
||||||
Harvest Energy Trust 7.875% October 2011 |
$ | 3,415 | $ | 3,441 | |||
Harvest Energy Trust 6.40% - 7.5% October 2012 - May 2015 |
C$ | 29,202 | $ | 28,169 | |||
Burlington Northern Sante Fe (common stock shares) |
358 | $ | 35,314 | ||||
U.S. Treasury notes, 0.75% - 8.75%, due September 2011 - August 2020, including futures |
$ | 181,230 | $ | 185,220 | |||
U.S. Treasury notes, 1.375% - 3.625%, due April 2012 - November 2019, including futures |
$ | 83,090 | $ | (82,034 | ) |
Fair value measurements
The following table presents the financial instruments recorded at fair value on the condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of March 31, 2010 and December 31, 2009:
Operating Entities
|
Assets at Fair Value as of March 31, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
(dollars in thousands) |
|||||||||||||
Securities owned |
||||||||||||||
US Government securities |
$ | 14,003 | $ | | $ | | $ | 14,003 | ||||||
Common stocks |
50,866 | 6 | 334 | 51,206 | ||||||||||
Restricted common stock |
| | 5,058 | 5,058 | ||||||||||
Corporate bonds |
| 64,489 | | 64,489 | ||||||||||
Options |
5,300 | | | 5,300 | ||||||||||
Warrants and rights |
| | 587 | 587 | ||||||||||
Mutual Funds |
1,317 | | | 1,317 | ||||||||||
Other investments |
||||||||||||||
Portfolio Funds(a) |
1,504 | 1,111 | 14,407 | 17,022 | ||||||||||
Real estate investments |
| | 1,108 | 1,108 | ||||||||||
Lehman claim |
| | 313 | 313 | ||||||||||
Other assets |
||||||||||||||
Derivative contracts |
87 | | | 87 | ||||||||||
|
$ | 73,077 | $ | 65,606 | $ | 21,807 | $ | 160,490 | ||||||
26
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
|
Liabilities at Fair Value as of March 31, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
(dollars in thousands) |
|||||||||||||
Securities sold, not yet purchased |
||||||||||||||
Common stocks |
$ | 55,930 | $ | | $ | | $ | 55,930 | ||||||
Options |
2,368 | | | 2,368 | ||||||||||
|
$ | 58,298 | $ | | $ | | $ | 58,298 | ||||||
|
Assets at Fair Value as of December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
(dollars in thousands) |
|||||||||||||
Securities owned |
||||||||||||||
Common stocks |
$ | 11,081 | $ | 24 | $ | 334 | $ | 11,439 | ||||||
Corporate bonds |
| 38,327 | | 38,327 | ||||||||||
Options |
1,312 | | | 1,312 | ||||||||||
Warrants and rights |
| 1,356 | | 1,356 | ||||||||||
Mutual funds |
1,719 | | | 1,719 | ||||||||||
Other investments |
||||||||||||||
Portfolio Funds(a) |
2,669 | 644 | 17,370 | 20,683 | ||||||||||
Real estate investments |
| | 1,077 | 1,077 | ||||||||||
Lehman claim |
| | 209 | 209 | ||||||||||
|
$ | 16,781 | $ | 40,351 | $ | 18,990 | $ | 76,122 | ||||||
|
Liabilities at Fair Value as of December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
(dollars in thousands) |
|||||||||||||
Securities sold, not yet purchased |
||||||||||||||
Common stocks |
$ | 14,307 | $ | | $ | | $ | 14,307 | ||||||
Options |
505 | | | 505 | ||||||||||
|
$ | 14,812 | $ | | $ | | $ | 14,812 | ||||||
27
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
Consolidated Funds' investments
|
Assets at Fair Value as of March 31, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
|
(dollars in thousands) |
|
|||||||||||
Securities owned |
||||||||||||||
Corporate Bonds |
$ | 1,190 | $ | | $ | | $ | 1,190 | ||||||
US Government securities |
7,438 | | | 7,438 | ||||||||||
Other investments |
||||||||||||||
Portfolio Funds(a) |
| 412,294 | 88,935 | 501,229 | ||||||||||
Lehman claims |
| | 13,966 | 13,966 | ||||||||||
|
$ | 8,628 | $ | 412,294 | $ | 102,901 | $ | 523,823 | ||||||
|
Assets at Fair Value as of December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||
|
|
(dollars in thousands) |
|
|||||||||||
Other investments |
||||||||||||||
Portfolio Funds(a) |
$ | | $ | 449,160 | $ | 97,366 | $ | 546,526 | ||||||
Lehman claims |
| | 3,881 | 3,881 | ||||||||||
|
$ | | $ | 449,160 | $ | 101,247 | $ | 550,407 | ||||||
The following table includes a rollforward of the amounts for the three months ended March 31, 2010 and December 31, 2009, for financial instruments classified within level 3. The classification of a
28
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
4. Investments and Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)
financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.
|
Operating Entities | Consolidated Funds | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common stock |
Restricted common stock |
Warrants and Rights |
Portfolio Funds |
Real estate |
Lehman claim |
Portfolio Funds |
Lehman claim |
|||||||||||||||||
Balance at December 31, 2009 |
$ | 334 | $ | | $ | | $ | 17,370 | $ | 1,077 | $ | 209 | $ | 97,366 | $ | 3,881 | |||||||||
Transfers in (out) |
| | 1,356 | (2,866 | ) | | | | | ||||||||||||||||
Purchases |
| 5,000 | | 134 | 44 | | 13,039 | | |||||||||||||||||
Sales |
| | (402 | ) | (803 | ) | (53 | ) | | (24,205 | ) | | |||||||||||||
Realized gains (losses) |
| | | 104 | 2,398 | | |||||||||||||||||||
Unrealized gains (losses) |
| 58 | (367 | ) | 572 | 40 | | 337 | 10,085 | ||||||||||||||||
Balance at March 31, 2010 |
$ | 334 | $ | 5,058 | $ | 587 | $ | 14,407 | $ | 1,108 | $ | 313 | $ | 88,935 | $ | 13,966 | |||||||||
Balance at December 31, 2008 |
$ |
|
$ |
|
$ |
|
$ |
1,970 |
$ |
1,605 |
$ |
209 |
$ |
157,513 |
$ |
3,881 |
|||||||||
Transfers in (out) |
| | | | | | | | |||||||||||||||||
Purchases |
| | | | | | 1,015 | | |||||||||||||||||
Sales |
| | | | | | (34,929 | ) | | ||||||||||||||||
Realized gains (losses) |
| | | (220 | ) | | | 602 | | ||||||||||||||||
Unrealized gains (losses) |
| | | 2 | (103 | ) | | (933 | ) | | |||||||||||||||
Balance at March 31, 2009 |
$ | | $ | | $ | | $ | 1,752 | $ | 1,502 | $ | 209 | $ | 123,268 | $ | 3,881 | |||||||||
All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying condensed consolidated statements of operations.
There were no significant transfers between Level 1 and Level 2 assets and liabilities for the three months ended March 31, 2010.
29
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds
Enterprise Master
As discussed in Note 4, Enterprise LP's investment in Enterprise Master is equal to Enterprise LP's proportional share of Enterprise Master's net assets; as a result, the investment balances of Enterprise Master reflected below may exceed the net investment which Enterprise LP has recorded. The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master at March 31, 2010 and December 31, 2009:
Securities owned and securities sold, but not yet purchased by Enterprise Master, at fair value
|
March 31, 2010 | December 31, 2009 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Securities owned |
Securities sold, but not yet purchased |
Securities owned |
Securities sold, but not yet purchased |
|||||||||
|
(dollars in thousands) |
||||||||||||
Bank debt |
$ | 1,948 | $ | | $ | 1,646 | $ | | |||||
Commercial mortgage backed securities |
| | 2,723 | | |||||||||
Common stock |
194,251 | (73,917 | ) | 182,447 | (47,151 | ) | |||||||
Convertible debt |
119,207 | (3,290 | ) | 123,060 | | ||||||||
Corporate bonds |
124,713 | (1,515 | ) | 181,402 | (1,541 | ) | |||||||
Exchange traded funds |
1,772 | (11,349 | ) | | (5,549 | ) | |||||||
Foreign government debt |
5,794 | (5,833 | ) | 10,374 | (10,660 | ) | |||||||
Loans |
878 | | 812 | | |||||||||
Optionsput |
2,246 | (1,284 | ) | 6,052 | (84 | ) | |||||||
Optionscall |
3,406 | (2,441 | ) | 2,335 | (3,048 | ) | |||||||
OTC fx call option |
1 | | 5 | (1 | ) | ||||||||
Preferred stock |
2,898 | (622 | ) | 4,558 | (198 | ) | |||||||
Private equity |
132 | | 107 | | |||||||||
Restricted stock |
8,127 | | 6,172 | | |||||||||
Rights |
1,832 | | 1,950 | | |||||||||
Trade claims |
128 | | 128 | | |||||||||
US Treasury Notes |
123,168 | (153,132 | ) | 185,118 | (82,004 | ) | |||||||
Warrants |
10,040 | | 6,831 | | |||||||||
|
$ | 600,541 | $ | (253,383 | ) | $ | 715,720 | $ | (150,236 | ) | |||
30
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)
Derivative contracts, at fair value, owned by Enterprise Master, net
Description
|
As of March 31, 2010 |
As of December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||
Asset swaps |
$ | 152 | $ | 295 | |||
Credit default swapsprotection purchased |
(429 | ) | (574 | ) | |||
Credit default swapsprotection sold |
424 | 432 | |||||
Currency forwards |
(225 | ) | 691 | ||||
Equity swapslong exposure |
21 | (1,001 | ) | ||||
Futures |
(115 | ) | (822 | ) | |||
Interest rate call swaptionlong exposure |
13 | 105 | |||||
Interest rate call swaptionshort exposure |
| (127 | ) | ||||
Interest rate swapslong exposure |
| 40 | |||||
Total return swap |
903 | 2,123 | |||||
|
$ | 744 | $ | 1,162 | |||
Portfolio Funds, owned by Enterprise Master, at fair value
|
|
March 31, 2010 | December 31, 2009 | ||||||
---|---|---|---|---|---|---|---|---|---|
|
Strategy | Fair Value | |||||||
|
|
(dollars in thousands) |
|||||||
624 Art Holdings, LLC* |
Artwork | $ | 926 | $ | 2,091 | ||||
QREX, LLC* |
Life Settlements | | 1,278 | ||||||
Q Capital Strategies, LLC* |
Life Settlements | 667 | 779 | ||||||
RCG Longview Equity Fund, LP* |
Real Estate | 9,240 | 9,036 | ||||||
RCG Longview II, LP* |
Real Estate | 2,238 | 2,261 | ||||||
RCG Longview Debt Fund IV, LP* |
Real Estate | 6,777 | 6,807 | ||||||
RCG Longview, LP* |
Real Estate | 237 | 272 | ||||||
RCG Soundview, LLC* |
Real Estate | 3,294 | 3,859 | ||||||
RCG Urban American Real Estate Fund, L.P.* |
Real Estate | 2,961 | 2,961 | ||||||
RCG International Sarl* |
Multi-Strategy | 6,718 | 7,096 | ||||||
Portside Growth & Opportunity Fund* |
Multi-Strategy | 8,373 | 9,753 | ||||||
RCG Special Opportunities Fund, Ltd* |
Multi-Strategy | 106,420 | 110,279 | ||||||
Ramius Credit Opportunities Fund Ltd* |
Distressed | 341 | 717 | ||||||
RCG Endeavour, LLC* |
Multi-Strategy | 99 | 149 | ||||||
RCG Energy, LLC* |
Energy | 22,101 | 23,063 | ||||||
RCG Renergys, LLC* |
Energy | 3 | 3 | ||||||
Other Private Investments |
Various | 14,786 | 16,059 | ||||||
Real Estate Investments |
Real Estate | 20,839 | 21,364 | ||||||
|
$ | 206,020 | $ | 217,827 | |||||
31
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)
Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP
As discussed in Note 4, Multi-Strat FOF and Vintage FOF's investments in their respective master funds are equal to their proportional share of their master fund's net assets; as a result, the investments in Portfolio Funds of the master funds reflected below exceed the net investment which Multi-Strat FOF and Vintage FOF have recorded. The following table presents summarized investment information for the underlying Portfolio Funds held by Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP, at fair value, as of March 31, 2010 and December 31, 2009:
|
|
March 31, 2010 | December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Strategy | Ramius Multi-Strategy Master FOF LP |
Ramius Vintage Multi-Strategy Master FOF LP |
Ramius Multi-Strategy Master FOF LP |
Ramius Vintage Multi-Strategy Master FOF LP |
||||||||||
|
|
(dollars in thousands) |
|||||||||||||
Ramius Hedged Equity FOF LP* |
Hedged Equity | $ | 1,471 | $ | | $ | 6,725 | $ | | ||||||
Ramius Vintage Multi-Strategy Master FOF LP* |
Multi Strategy | 2,444 | | 5,394 | | ||||||||||
Tapestry Pooled Account II, LLC* |
Hedged Equity | | 4,405 | | 5,643 | ||||||||||
Tapestry Pooled Account V, LLC* |
Credit-Based | 1,495 | 1,596 | 1,612 | 1,721 | ||||||||||
Externally Managed Funds |
Credit-Based | 6,270 | 984 | 4,084 | 1,158 | ||||||||||
Externally Managed Funds |
Event Driven | 8,705 | 9,770 | 9,117 | 13,912 | ||||||||||
Externally Managed Funds |
Fixed Income Arbitrage | 76 | | 81 | | ||||||||||
Externally Managed Funds |
Hedged Equity | 6,838 | 4,749 | 5,461 | 5,453 | ||||||||||
Externally Managed Funds |
Multi Strategy | 7,779 | 7,988 | 11,564 | 14,647 | ||||||||||
Externally Managed Funds |
Other | | | 47 | | ||||||||||
Externally Managed Funds |
Global Macro | 3,008 | 3,231 | 2,081 | 5,321 | ||||||||||
Externally Managed Funds |
Opportunistic Equity | | 2,967 | | 2,825 | ||||||||||
Externally Managed Funds |
Managed Futures | 2,332 | 1,236 | 2,256 | 1,276 | ||||||||||
|
$ | 40,418 | $ | 36,926 | $ | 48,422 | $ | 51,956 | |||||||
RTS Global 3x Fund LP's Portfolio Fund investments
RTS Global 3X, which commenced operations in March 2010, invests over half of its equity in six externally managed portfolio funds (See Note 4) which primarily concentrate around futures and global
32
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)
macro strategies. The following table presents summarized investment information for the underlying Portfolio Funds held by RTS Global 3X, at fair value, as of March 31, 2010:
|
As of March 31, 2010 | |||
---|---|---|---|---|
|
(dollars in thousands) |
|||
Bond Futures |
$ | 5 | ||
Commodity Forward |
169 | |||
Commodity Future |
837 | |||
Currency Forward |
270 | |||
Currency Future |
296 | |||
Energy Future |
6 | |||
Index Future |
261 | |||
Interest Rate Future |
25 | |||
|
$ | 1,869 | ||
6. Goodwill
Goodwill is reviewed for possible impairment at least annually or more frequently if events or circumstances indicate a possible impairment. There were no additions to goodwill and no impairment losses during three months ended March 31, 2010.
33
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
7. Redeemable non-controlling interests in consolidated subsidiaries
Non-controlling interests in consolidated subsidiaries and the related net income (loss) attributable to non-controlling interests in consolidated subsidiaries are comprised as follows:
|
As of March 31, | As of December 31, | |||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
|
(dollars in thousands) |
||||||
Non-controlling interests in consolidated subsidiaries |
|||||||
Operating Companies(a) |
$ | | $ | 1,713 | |||
Consolidated Funds |
215,400 | 229,112 | |||||
|
$ | 215,400 | $ | 230,825 | |||
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
|
(dollars in thousands) |
||||||
Net (income) loss attributable to non-controlling interests in consolidated subsitiaries |
|||||||
Operating Companies |
$ | | $ | 421 | |||
Consolidated Funds |
(8,056 | ) | 1,983 | ||||
|
$ | (8,056 | ) | $ | 2,404 | ||
8. Share-Based Compensation and Employee Ownership Plans
Share-based compensation plans in place after the Transactions
The Company issues share-based compensation under Cowen Holdings's previously established 2006 Equity and Incentive Plan and 2007 Equity and Incentive Plan (collectively, the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units and other equity based awards to the Company's employees, consultants and directors for up to 10,225,000 shares of common stock. Stock options granted generally vest over two to five year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two to five year period. As of March 31, 2010, there were approximately 0.1 million shares available for future issuance under the Equity Plans.
In addition to the Equity Plans, certain employees of the Company were issued RCG membership interests by RCG, a related party of the Company, in connection with the Transactions (the "RCG Grants"). The RCG Grants are subject to a service condition and vest to each employee over a period of approximately three years. Any RCG Grants forfeited are redistributed to the remaining stakeholders in RCG, which includes both employees and non-employees. The RCG Grants represent awards to employees of the Company by a related party, as compensation for services provided to the Company. As such, the expense related to these grants is included in the compensation expense of the Company.
34
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
8. Share-Based Compensation and Employee Ownership Plans (Continued)
The Company measures compensation cost for share-based awards according to the fair value method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share-based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity Plans and the RCG grants, the Company recognized expense of $2.7 million and $1.5 million, respectively, for the three months ended March 31, 2010. The income tax effect recognized for the Equity Plans and the RCG Grants was a benefit of $1.1 million and $0.6 million, respectively, for the three months ended March 31, 2010.
Stock Options
There were no stock options granted or exercised during the three months ended March 31, 2010 and 2009. The following table summarizes the Company's stock option activity for the three months ended March 31, 2010:
|
Shares Subject to Option |
Weighted Average Exercise Price/Share |
Weighted Average Remaining Term |
Aggregate Intrinsic Value(1) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
(in years) |
(in thousands) |
|||||||||
Balance outstanding at December 31, 2009 |
892,782 | $ | 15.06 | ||||||||||
Options granted |
| | |||||||||||
Options acquired |
| | |||||||||||
Options exercised |
| | |||||||||||
Options forfeited |
| | |||||||||||
Options expired |
(21,879 | ) | 16.00 | ||||||||||
Balance outstanding at March 31, 2010 |
870,903 | $ | 15.04 | 3.60 | $ | | |||||||
Options exercisable at March 31, 2010 |
809,570 | $ | 14.97 | 3.60 | $ | | |||||||
As of March 31, 2010, the unrecognized compensation expense related to the Company's grant of stock options was immaterial.
Restricted Shares and Restricted Stock Units Granted to Employees
The following table summarizes the Company's restricted shares and restricted stock units granted to employees activity for the three months ended March 31, 2010:
|
Nonvested Restricted Shares and Stock Units |
Weighted-Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Balance outstanding at December 31, 2009 |
2,554,182 | $ | 6.90 | ||||
Granted |
3,848,499 | 4.89 | |||||
Vested |
(24,912 | ) | 7.55 | ||||
Forfeited |
(39,268 | ) | 4.89 | ||||
Balance outstanding at March 31, 2010 |
6,338,501 | $ | 5.69 | ||||
35
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
8. Share-Based Compensation and Employee Ownership Plans (Continued)
The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.
As of March 31, 2010, there was $23.9 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted share units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted share units granted to employees is expected to be recognized over a weighted-average period of 2.0 years.
RCG Grants
The following table summarizes the Company's RCG Grants activity for the three months ended March 31, 2010:
|
Nonvested RCG Grants |
Weighted-Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Balance outstanding at December 31, 2009 |
2,859,426 | $ | 7.30 | ||||
Granted |
1,515 | 5.55 | |||||
Vested |
| | |||||
Forfeited |
(20,016 | ) | 7.30 | ||||
Balance outstanding at March 31, 2010 |
2,840,925 | $ | 7.30 | ||||
The fair value of the RCG Grants was determined based on the number of the Company's shares underlying the RCG membership interest and the quoted price of the Company's common stock on the date of the Transactions.
As of March 31, 2010 there was $15.7 million of unrecognized compensation expense related to the Company's RCG Grants. Unrecognized compensation expense related to RCG Grants is expected to be recognized over a weighted-average period of 2.58 years.
Restricted Shares and Restricted Stock Units Granted to Non-employee Board Members
As of March 31, 2010, there were 129,135 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors. During the three months ended March 31, 2010, the Company awarded 101,259 restricted stock units to its non-employee Board members, which were immediately vested and expensed upon grant.
9. Defined Benefit Plans
The following amounts relate to the defined benefit plans in aggregate for the three months ended March 31, 2010 and 2009.
36
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
9. Defined Benefit Plans (Continued)
Components of net periodic benefit cost included in employee compensation and benefits
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
|
(dollars in thousands) |
||||||
Service cost |
$ | | $ | | |||
Interest cost |
79 | 84 | |||||
Expected return on plan assets |
(73 | ) | (80 | ) | |||
Amortization of (loss) / gain |
| 1 | |||||
Amortization of prior service cost |
5 | 5 | |||||
Net periodic benefit cost |
$ | 11 | $ | 10 | |||
During the three months ended March 31, 2010, the Company made no contributions to its defined benefit plans. The amount to be contributed to these plans in 2010 will be determined in the second quarter.
10. Income Taxes
The taxable results of the Company's U.S. operations are included in the consolidated income tax returns of Cowen Group, Inc. as well as stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries are the United Kingdom, Germany, Japan, Hong Kong, and China. The Company's effective income tax rate was 5.13% and 0.58% for the three months ended March 31, 2010 and 2009, respectively. The Company used the discrete method in calculating its effective tax for the first quarter of 2010. A reliable estimate of an annual effective tax rate could not be calculated due to the variability in the estimated annual effective tax rates that would result across a range of likely scenarios of income before tax and of permanent differences. The Company will reexamine its methodology in the second quarter of 2010, and use the annual method if reliable estimates can be calculated.
For the period March 31, 2010, the effective tax rate differs from the statutory rate of 35% primarily due to an increase in the Company's valuation allowance.
For the period March 31, 2009, the effective tax rate differed from the statutory rate of 35% primarily because the Company was taxed as a partnership that was only subject to New York City Unincorporated Business Tax.
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are
37
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
10. Income Taxes (Continued)
actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2010, the Company recorded a valuation allowance against substantially all of its net deferred tax assets.
The Company is subject to examination by the United States Internal Revenue Service, the United Kingdom Inland Revenue Service and state and local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York. There are no ongoing income tax audits by any taxing authority, except an enterprise tax audit (based on profits) by the Chinese Tax Authority. This audit covers tax years 2005-2008, and the Company recorded a tax provision against the anticipated assessment from the audit as of March 31, 2010, which was not material. The Company believes the audit will be completed in the second quarter of 2010 and does not expect that the final assessment by the Chinese tax authorities will be materially different than the amount already accrued.
11. Commitments and Contingencies
The Company has entered into non-cancellable leases for office space and equipment. These leases contain escalation clauses for operating expenses and real estate taxes. The Company records rent expense on a straight-line basis over the lease term, including any rent holiday periods. Rent expense for the three months ended March 31, 2010 and 2009, was $3.9 million and $2.2 million, respectively. At March 31, 2010, future minimum annual lease payments for the Company was as follows:
|
Minimum Lease Payments | ||||||
---|---|---|---|---|---|---|---|
|
Equipment Leases | Facility Leases | |||||
|
(in thousands) |
||||||
Remainder of 2010 |
$ | 8,097 | $ | 13,653 | |||
2011 |
6,140 | 17,222 | |||||
2012 |
3,506 | 16,426 | |||||
2013 |
1,760 | 14,921 | |||||
2014 |
146 | 10,667 | |||||
Thereafter |
| 59,998 | |||||
|
$ | 19,649 | $ | 132,887 | |||
The Company entered into agreements to sublease certain of the premises for which the lease commitments are included in the above table. These subleases expire in May 2010. During the three months ended March 31, 2010 and 2009, the Company recorded sublease income related to these leases of $0.5 million and $0.5 million, respectively.
The Company serves as the general partner/managing member and/or investment manager to various affiliated and sponsored funds. As such, the Company is contingently liable for obligations for those entities. These amounts are not included above as the Company believes that the assets in these funds are sufficient to discharge any liabilities.
As of March 31, 2010, the Company had unfunded commitments of $8.3 million pertaining to capital commitments in three real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time, subject to advance notice. In addition, the Company has committed to invest $42.0 million to the funds managed by Cowen Healthcare Royalty Partners (the "CHRP Funds") as a limited partner of the CHRP Funds and also as a member of Cowen Healthcare Royalty GP, LLC, the general partner of the CHRP Funds. This commitment is expected to be called over a two to three year period. The Company will make its
38
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
11. Commitments and Contingencies (Continued)
pro-rata investment in the CHRP Funds along with the other limited partners. Through March 31, 2010, the Company has funded $15.5 million towards these commitments.
Litigation
In connection with Cowen Holdings's previous IPO and separation from Société Générale ("SG") in 2006, Cowen Holdings entered into an indemnification agreement with SG under which (1) SG will indemnify, and will defend and hold harmless Cowen Holdings and each of the Cowen Holdings's subsidiaries from and against certain liabilities assumed or retained by SG; and (2) SG will indemnify Cowen Holdings for known, pending and threatened litigation (including the costs of such litigation) and certain known regulatory matters, in each case, that existed prior to the date of the Cowen Holdings's IPO to the extent the cost of such litigation results in payments in excess of the amount placed in escrow to fund such matters.
The Company is involved in a number of legal and regulatory matters that arise from time to time in connection with the conduct of its businesses. The Company estimates potential losses that may arise out of these matters and records a reserve and takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in accordance with FASB accounting standards. To the extent that the Company is indemnified by SG, indemnified legal expenses and liabilities will be paid out of escrow pursuant to an escrow agreement with SG. Although there can be no assurances as to the ultimate outcome, the Company has established reserves for litigation and regulatory matters that it believes are adequate as of March 31, 2010. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters.
Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses will not have a material adverse effect on the Company's consolidated financial condition or cash flows. However, losses may be material to the Company's operating results in a future period, depending in part, on the operating results for such period and the extent to which Cowen Holdings is indemnified by SG.
Various claims against the Company may exist in the ordinary course of business. Management of the Company does not believe that any such matter will have a material adverse effect on the Company's consolidated statements of financial condition, condensed consolidated statements of operations or condensed consolidated statements of cash flows.
39
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
12. Note Payable and Short-Term Borrowings
On June 3, 2009, the Company entered into a collateralized revolving credit agreement with HVB AG, as lender, administrative agent and issuing bank, providing for a revolving credit facility with a $50.0 million aggregate loan commitment amount available, with a $7.0 million letter of credit sub-limit. The first borrowing under this line occurred on June 30, 2009. As of March 31, 2010 and December 31, 2009, the Company had borrowings of $18 million and $43.0 million, respectively, under the line of credit portion and $6.7 million at December 31, 2009 under the letter of credit portion. At the Company's election and discretion, borrowings under this collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (a) 0.5% plus the greater of (1) the lender's prime rate, (2) the overnight federal funds rate plus 0.5% and (3) the LIBOR rate plus 1.0% or (b) the LIBOR rate plus 2.75%. Due to the variable interest rate on these borrowings, their carrying values approximate fair value. The Company is required to pay a quarterly commitment fee on the undrawn portion of the revolving credit facility equal to 1.0% per annum of the undrawn amount. For letters of credit, the Company will pay a fee on the stated amount of the letter of credit at a rate equal to 2.75%. The 2009 collateralized revolving credit agreement was to mature on November 2, 2009 but was extended; $25 million was extended through January 4, 2010 and $25 million was extended through September 29, 2011. All terms of the extended collateralized revolving credit agreement remain the same except the following: at the Company's election and discretion, borrowings under the extended 2009 collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (1) the lender's prime rate plus 1.5% or (2) the 1, 2 or 3 month LIBOR rate plus 3.5%. For letters of credit, the Company will pay a fee on the stated amount of the letter of credit at a rate equal to 3.5%. The 2009 collateralized revolving credit agreement contained financial and other restrictive covenants that limited the Company's ability to incur additional debt and engage in other activities. As of March 31, 2010 and during the period from June 3, 2009 to March 31, 2010, the Company was in compliance with these covenants.
On January 4, 2010, in accordance with the terms of the collateralized revolving credit agreement, the Company remitted $25 million to HVB AG, reducing its revolving line of credit balance.
Interest incurred on the Company's lines of credit (in combination with all previous lines of credit) for the three months ended March 31, 2010 and 2009 were $0.1 million and $0.3 million, respectively.
Cash collateral pledged at December 31, 2009, on the condensed consolidated statements of financial condition, represents collateral that was required to be posted for obligations or potential obligations under the letter of credit discussed above pursuant to the lease agreement for the Company's premises in New York City. This collateral was released with the terms of the extended collateralized revolving credit agreement. The Company's investment in Enterprise Master through Enterprise LP has been pledged as collateral under the line of credit portion of the revolving credit agreement discussed above.
The Company also has two additional irrevocable letters of credit, the first of which is for $100,000, which expires on July 26, 2010, supporting workers' compensation insurance with Safety National Casualty Corporation, and the second of which is for $57,000, which expires on November 14, 2010, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease. To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. Each of these letters of credit provides for automatic annual renewals, at the Company's option, on their
40
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
12. Note Payable and Short-Term Borrowings (Continued)
expiration dates. As of March 31, 2010 and December 31, 2009, there were no amounts due related to these letters of credit.
13. Earnings Per Share
The Company calculates its basic and diluted earnings per share in accordance with FASB accounting standards. Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. As of March 31, 2010, there were 74,743,163 shares outstanding, of which 2,298,204 are restricted. To the extent that outstanding restricted shares are unvested, they are excluded from the calculation of basic earnings per share. The Company has included 129,135 fully vested, unissued restricted stock units in its calculation of basic earnings per share.
Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive nonvested restricted stock and stock options. The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted shares and unexercised stock options. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares are assumed to have been delivered, and options are assumed to have been exercised, on the grant date. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the sum of (a) the amount of compensation cost attributed to future services and not yet recognized and (b) the amount of tax benefit that was credited to additional paid-in capital assuming vesting and delivery of the restricted shares. The tax benefit is the amount resulting from a tax deduction for compensation in excess of compensation expense recognized for financial statement reporting purposes. Stock options, restricted shares, and restricted share units outstanding were not included in the computation of diluted net loss per common share for the three months ended March 31, 2010, as their inclusion would have been anti-dilutive. There were no restricted shares, restricted share units, or stock options outstanding during the three months ended March 31, 2009.
In calculating earnings per share for the periods prior to the November 2, 2009 transaction date, the net earnings (loss) amounts represent the results for the former Ramius, and the shares outstanding
41
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
13. Earnings Per Share (Continued)
represents the number of shares received by the former Ramius in the Transactions. The computation of earnings per share is as follows:
|
For the Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||
|
(in thousands, except per share data) |
|||||||
Net (loss) income attributable to Cowen Group, Inc. stockholders |
$ | (12,976 | ) | $ | (8,799 | ) | ||
Shares for basic and diluted calculations: |
||||||||
Average shares used in basic computation |
72,509 | 37,537 | ||||||
Stock options |
| | ||||||
Restricted shares |
| | ||||||
Average shares used in diluted computation |
72,509 | 37,537 | ||||||
Earnings (loss) per share: |
||||||||
Basic |
$ | (0.18 | ) | $ | (0.23 | ) | ||
Diluted |
$ | (0.18 | ) | $ | (0.23 | ) |
14. Segment Reporting
The Company conducts its operations through two segments: the alternative investment management segment and the broker-dealer segment (subsequent to the Transactions). These activities are conducted primarily in the United States and substantially all of its revenues are generated domestically. The performance measure for these segments is Economic Income, which management uses to evaluate the financial performance of and make operating decisions for the segment including determining appropriate compensation levels.
The chief operating decision maker uses Economic Income to assess the performance of the segments and make operating decisions for the segments. Economic Income is a pre-tax measure that (i) presents the segments' results of operations without the impact resulting from the consolidation of any of the Consolidated Funds and (ii) excludes goodwill impairment, and (iii) excludes the reorganization expenses for the Transactions and one-time equity awards made in connection with the Transactions.
As further stated below, one major difference between Economic Income and US GAAP net income is that Economic Income presents the segments' results of operations without the impact resulting from the full consolidation of any of the Consolidated Funds. Consolidation of these funds results in including in income the pro rata share of the income or loss attributable to other owners of such entities. This pro rata share has no effect on the overall financial performance for the Alternative Investment Management segment, as ultimately, this income or loss is not income or loss for the Alternative Investment Management segment itself. Included in Economic Income is the actual pro rata share of the income or loss attributable to the Company as an investor in such entities, which is relevant in management making operating decisions and evaluating financial performance.
42
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
14. Segment Reporting (Continued)
The following tables set forth operating results for the Company's alternative investment management and broker-dealer segments and related adjustments necessary to reconcile the Company's Economic Income measure to arrive at the Company's consolidated net income (loss):
|
Three Months Ended March 31, 2010 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Adjustments | |
||||||||||||||||
|
Alternative Investment Management |
Broker-Dealer | Total Income |
Funds Consolidation |
Other Adjustments |
US GAAP | |||||||||||||||
|
|
|
(dollars in thousands) |
||||||||||||||||||
Revenues |
|||||||||||||||||||||
Investment banking |
$ | | $ | 6,005 | $ | 6,005 | $ | | $ | | $ | 6,005 | |||||||||
Brokerage |
| 29,575 | 29,575 | | | 29,575 | |||||||||||||||
Management fees |
12,587 | 28 | 12,615 | (895 | ) | (2,450 | ) | 9,270 | |||||||||||||
Incentive income |
1,982 | | 1,982 | | 111 | 2,093 | |||||||||||||||
Investment Income |
11,192 | 229 | 11,421 | | (11,421 | ) | | ||||||||||||||
Interest and dividends |
| | | | 804 | 804 | |||||||||||||||
Reimbursement from affiliates |
| | | (145 | ) | 1,887 | 1,742 | ||||||||||||||
Other Revenue |
(51 | ) | 124 | 73 | | 549 | 622 | ||||||||||||||
Consolidated Funds |
| | | 6,147 | | 6,147 | |||||||||||||||
Total revenues |
25,710 | 35,961 | 61,671 | 5,107 | (10,520 | ) | 56,258 | ||||||||||||||
Expenses |
|||||||||||||||||||||
Employee compensation and benefits |
16,184 | 25,136 | 41,320 | | 2,113 | 43,433 | |||||||||||||||
Interest and dividends |
116 | | 116 | | 330 | 446 | |||||||||||||||
Non-compensation expenses |
8,783 | 24,468 | 33,251 | | 952 | 34,203 | |||||||||||||||
Reimbursement from affiliates |
(1,887 | ) | | (1,887 | ) | | 1,887 | | |||||||||||||
Consolidated Funds |
| | | 3,159 | | 3,159 | |||||||||||||||
Total expenses |
23,196 | 49,604 | 72,800 | 3,159 | 5,282 | 81,241 | |||||||||||||||
Other income (loss) |
|||||||||||||||||||||
Net gain (loss) on securities, derivatives and other investments |
| | | | 1,524 | 1,524 | |||||||||||||||
Consolidated Funds |
| | | 6,108 | 12,165 | 18,273 | |||||||||||||||
Total other income (loss) |
| | | 6,108 | 13,689 | 19,797 | |||||||||||||||
Income (loss) before income taxes and non-controlling interests |
2,514 |
(13,643 |
) |
(11,129 |
) |
8,056 |
(2,113 |
) |
(5,186 |
) |
|||||||||||
Income taxes |
| | | (266 | ) | (266 | ) | ||||||||||||||
Economic Income (Loss) / Net income (loss) before non-controlling interests |
2,514 | (13,643 | ) | (11,129 | ) | 8,056 | (1,847 | ) | (4,920 | ) | |||||||||||
(Income) loss attributable to non-controlling interests |
|
|
|
(8,056 |
) |
|
(8,056 |
) |
|||||||||||||
Economic Income (Loss) / Net Income (loss) available to all Members |
$ |
2,514 |
$ |
(13,643 |
) |
$ |
(11,129 |
) |
$ |
|
$ |
(1,847 |
) |
$ |
(12,976 |
) |
|||||
43
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
14. Segment Reporting (Continued)
|
Three Months Ended March 31, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Adjustments | |
||||||||||||
|
Alternative Investment Management |
Funds Consolidation |
Other Adjustments |
US GAAP | |||||||||||
|
(dollars in thousands) |
||||||||||||||
Revenues |
|||||||||||||||
Investment banking |
$ | | $ | | $ | | $ | | |||||||
Brokerage |
| | | | |||||||||||
Management fees |
14,596 | (1,010 | ) | (2,075 | ) | 11,511 | |||||||||
Incentive income |
(2,122 | ) | | 2,122 | | ||||||||||
Investment Income |
(620 | ) | 1,061 | (441 | ) | | |||||||||
Interest and dividends |
| | 91 | 91 | |||||||||||
Reimbursement from affiliates |
| 3,394 | | 3,394 | |||||||||||
Other Revenue |
359 | | 660 | 1,019 | |||||||||||
Consolidated Funds |
| 4,710 | | 4,710 | |||||||||||
Total revenues |
12,213 | 8,155 | 357 | 20,725 | |||||||||||
Expenses |
|||||||||||||||
Employee compensation and benefits |
14,907 | | | 14,907 | |||||||||||
Interest and dividends |
342 | | 7 | 349 | |||||||||||
Non-compensation expenses |
9,664 | | 609 | 10,273 | |||||||||||
Reimbursement from affiliates |
(3,414 | ) | 3,414 | | | ||||||||||
Consolidated Funds |
| 3,377 | | 3,377 | |||||||||||
Total expenses |
21,499 | 6,791 | 616 | 28,906 | |||||||||||
Other income (loss) |
|||||||||||||||
Net gain (loss) on securities, derivatives and other investments |
| | 259 | 259 | |||||||||||
Consolidated Funds |
| (3,347 | ) | | (3,347 | ) | |||||||||
Total other income (loss) |
| (3,347 | ) | 259 | (3,088 | ) | |||||||||
Income (loss) before income taxes and non-controlling interests |
(9,286 |
) |
(1,983 |
) |
|
(11,269 |
) |
||||||||
Income taxes |
| | (66 | ) | (66 | ) | |||||||||
Economic Income (Loss) / Net income (loss) before non-controlling interests |
(9,286 | ) | (1,983 | ) | 66 | (11,203 | ) | ||||||||
(Income) loss attributable to non-controlling interests |
421 |
1,983 |
|
2,404 |
|||||||||||
Less: Special allocation to the Managing Member |
|
|
|
|
|||||||||||
Economic Income (Loss) / Net Income (loss) available to all Members |
$ |
(8,865 |
) |
$ |
|
$ |
66 |
$ |
(8,799 |
) |
|||||
44
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
14. Segment Reporting (Continued)
The following is a summary of the adjustments made to US GAAP net income (loss) for the segment to arrive at Economic Income:
Funds Consolidation: The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income. Adjustments include elimination of incentive income and management fees earned from the Consolidated Funds and addition of fund expenses excluding management fees paid, fund revenues and investment income (loss).
Other Adjustments:
Substantially all of the Company's revenues are earned from the sponsored funds which the Company manages. For the three months ended March 31, 2010 and 2009, there was no one fund or other customer which represented more than 10% of the Company's total revenues.
15. Regulatory Requirements
Ramius Securities LLC is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of minimum net capital. Ramius Securities LLC has elected to use the alternative method, permitted by the Rule, which requires that Ramius Securities LLC maintain net capital in an amount not less than $250,000. As of March 31, 2010, Ramius Securities LLC had net capital of $1.4 million, which was approximately $1.2 million in excess of its required minimum net capital requirement.
In connection with the November 2, 2009 acquisition and subsequent firm-wide initiative to find efficiencies, the firm decided to consolidate the operations of its two wholly-owned registered broker/dealers, Ramius Securities LLC and Cowen and Company, LLC. During the first quarter 2010, many of the processes performed by Ramius Securities LLC were transferred to Cowen and Company, LLC. On April 8, 2010, Ramius Securities LLC filed Form BDW Uniform Request for Withdrawal From Broker-Dealer Registration.
As a registered broker-dealer, Cowen and Company, LLC is also subject to the Rule. Under the alternative method permitted by the Rule, Cowen's minimum net capital requirement, as defined, is $1.0 million. The Company is not permitted to withdraw equity if certain minimum net capital
45
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
15. Regulatory Requirements (Continued)
requirements are not met. As of March 31, 2010, Cowen and Company, LLC had total net capital of approximately $34.2 million, which was approximately $33.2 million in excess of its minimum net capital requirement of $1.0 million.
Ramius Securities LLC and Cowen and Company, LLC are exempt from the provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 as their activities are limited to those set forth in the conditions for exemption appearing in paragraph (k)(2)(ii) of the Rule.
Proprietary accounts of introducing brokers ("PAIB") held at the clearing broker are considered allowable assets for net capital purposes, pursuant to agreements between Cowen and Company, LLC and the clearing broker, which require, among other things, that the clearing broker performs computations for PAIB and segregates certain balances on behalf of Cowen and Company, LLC, if applicable.
Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the Financial Services Authority ("FSA") of the UK. Financial Resources, as defined, must exceed the total Financial Resources requirement of the FSA. At March 31, 2010, Ramius UK's Financial Resources of $1.6 million exceeded its minimum requirement of $0.4 million by $1.2 million. At March 31, 2010, CIL's Financial Resources of $4.7 million exceeded its minimum requirement of $2.5 million by $2.2 million.
Cowen Latitude Advisors Limited ("CLAL") is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources, as defined, must exceed the Total Financial Resources requirement of the SFC. At March 31, 2010, CLAL's Financial Resources of $0.3 million exceeded the minimum requirement of $0.02 million by $0.3 million.
16. Related Party Transactions
The Company acts as managing member, general partner and/or investment manager to the Ramius managed funds, Cowen Healthcare Royalty Management, LLC ("CHRP Management"), and the CHRP Funds, and certain managed accounts. Management fees and incentive income are primarily earned from affiliated entities. Fees receivable from related parties represents the management fees and incentive income owed to the Company from these related funds and certain affiliated managed accounts.
The Company may, at its discretion, waive certain of the fees charged to the funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated investment fund. For the three months ended March 31, 2010 and 2009, the Company reimbursed the funds that it manages $0.8 million and $1.4 million, respectively, which were recorded net in management fees and incentive income in the condensed consolidated statements of operations. At March 31, 2010 and December 31, 2009, related amounts still payable were $3.1 million and $2.7 million, respectively, and were reflected in fees payable in the condensed consolidated statements of financial condition.
Certain affiliated funds incurred a loss related to a trading error for which the Company determined, consistent with its internal policies, to bear the cost of correcting such error. This resulted in a loss of approximately $2.7 million for the Company. This amount is included in other expenses in
46
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
16. Related Party Transactions (Continued)
the accompanying condensed consolidated statement of operations for the three months ended March 31, 2010.
Pursuant to the operating agreement for its subsidiary Ramius Alternative Solutions LLC, the Company is required to pay certain distribution fees on assets raised by third party distributors. Such distribution fees are reported as client services and business development in the condensed consolidated statements of operations and for the three months ended March 31, 2010 and 2009, equaled $0.3 million and $0.5 million, respectively. At March 31, 2010 and December 31, 2009, related amounts still payable were $0.3 million and $0.5 million, respectively, and were reflected in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.
As a result of a business combination in 2004, Ramius Alternative Solutions LLC acquired receivables of $9.6 million and assumed liabilities of a corresponding amount relating to various agreements with investors. Such amounts have been recorded in fees receivable and due to related parties, respectively, in the condensed consolidated statements of financial condition. The remaining balance yet to be paid was $2.3 million and $2.6 million as of March 31, 2010 and December 31, 2009, respectively. Of such amounts outstanding at March 31, 2010, $0.6 million will be paid in the remainder of 2010.
The Company may, on occasion, also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates and are included in receivable from affiliates in the condensed consolidated statement of financial condition. As of March 31, 2010 and December 31, 2009, loans to employees of $2.2 million and $1.9 million, respectively, were included in due from related parties on the condensed consolidated statements of financial condition. For the three months ended March 31, 2010 and 2009, interest charged for these loans and advances was immaterial. The remaining balance included in due from related parties primarily relates to amounts due to the Company from affiliated funds and real estate entities due to expenses paid on their behalf.
Included in due to related parties is approximately $5.1 million and $5.0 million at March 31, 2010 and December 31, 2009, respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a hypothetical liquidation of the real estate funds as of the balance sheet date.
17. Guarantees
FASB accounting standards require the Company to disclose information about its obligations under certain guarantee arrangements. Those standards define guarantees as contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying security (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or nonoccurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Those standards also define guarantees as contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an agreement as well as indirect guarantees of the indebtedness of others.
47
Cowen Group, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
17. Guarantees (Continued)
In the normal course of its operations, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.
The Company indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates. The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make significant payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
The Company is a member of various securities exchanges. Under the standard membership agreements, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, management believes that the potential for the Company to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is recorded in the consolidated statements of financial condition for these arrangements.
The Company also provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
18. Subsequent Events
On May 12, 2010, the Company announced its intention to close two of the funds it manages. In addition, redemptions in one of its funds triggered certain contractual rights of certain investors, which would have allowed them to withdraw their assets held in that fund upon 30 days notice. The investors have instead agreed to extend the time period pursuant to which the Company must return the bulk of its assets in the funds to the end of 2010. As of April 1, 2010, the investors had approximately $668 million invested in the Company's funds.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements, which involve numerous risks and uncertainties, including, but not limited to, those described in the section titled "Risk Factors" in Item 1A of our Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes of Cowen Group, Inc. included elsewhere in this quarterly report. Actual results may differ materially from those contained in any forward-looking statements.
Overview
Cowen Group Inc. is a diversified financial services firm and, together with its consolidated subsidiaries (collectively, "Cowen Group" or the "Company"), provides alternative investment management, investment banking, research, and sales and trading services through its two business segments: Ramius LLC, its alternative investment management segment, and Cowen and Company, LLC its broker-dealer segment. Prior to the consummation of the transactions ("Transactions") on November 2, 2009, the Company conducted its operations through one reportable segment, the alternative investment management segment.
Our alternative investment management business had approximately $7.9 billion of assets under management as of April 1, 2010. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the Investment Advisers Act since 1997. Our alternative investment management products and services include hedge funds, fund of funds, real estate, health care royalty funds and cash management services. Our institutional investors include pension funds, insurance companies, banks, foundations and endowments, wealth management organizations and family offices.
Our hedge fund and fund of funds platforms have historically sought to deliver consistent, risk-adjusted returns throughout a market cycle (which we generally view as approximately three to five years). In these platforms, we seek positive performance with minimal correlation to directional market indices. Risk-adjusted returns refer to positive returns with lower volatility as compared to traditional asset classes such as equities.
In February 2010, we announced plans to integrate senior management and certain aspects of the infrastructure of our hedge fund and fund of funds businesses to improve institutional efficiency and service. On March 1, 2010, we announced the formation of the Ramius Trading Strategies managed account platform.
Our broker-dealer businesses include research, brokerage and investment banking services to companies and institutional investor clients primarily in the healthcare, technology, media and telecommunications, consumer, aerospace & defense, financial institutions, REITs and alternative energy sectors. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade equity and equity-linked securities, principally in our target sectors. We focus our investment banking efforts, principally equity and equity-linked capital raising and strategic advisory services, on small to mid-capitalization public companies as well as private companies.
Success in our business is highly dependent on human capital; accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to provide the highest quality of service and guidance to our clients.
49
Certain Factors Impacting Our Business
Our alternative investment management business and results of operations are impacted by the following factors:
External Factors Impacting our Business
Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor confidence. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation, interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities or other geopolitical instability, corporate, political or other scandals that reduce investor confidence in the capital markets, or a combination of these or other factors. Our
50
businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following:
Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory actions that impact our business and financial results.
Recent Developments
The Company has taken proactive steps to restructure aspects of its alternative investment management business towards clearly defined liquid strategies and longer term investments and to close certain products that have limited growth potential. Given the potential impact of currently known and expected redemptions on remaining clients that may negatively impact both portfolio liquidity and, potentially, performance going forward, management has decided that the Ramius Multi-Strategy and Ramius Enterprise funds will be closed. Investors will be presented with a variety of options in regards to the liquid portion of their investment in each fund, taking into consideration that not all investors have elected to redeem.
Since over 50% of the current assets under management in Ramius Enterprise LP represents the Company's balance sheet, capital will be retained in the same securities or assets and actively managed by the existing investment professionals in substantially similar investment strategies.
Additionally, redemptions in Ramius Multi-Strategy Fund triggered certain contractual rights held by affiliates of UniCredit S.p.A ("UniCredit"), which would have allowed them to withdraw their assets
51
held in that Fund upon 30 days notice. Such affiliates of UniCredit have instead agreed, pursuant to the terms of a Modification Agreement, to extend the time period pursuant to which the Company must return the bulk of its investments in our funds, including a fund of funds managed account, to the end of 2010. In addition, the remaining 50% of UniCredit's Cowen Group shares that were not released from lock-up at the beginning of May will be released from the existing lock-up agreement. The Modification Agreement is described more detail below under "Item 5.01 Other Information."
Due to the retention of both core trading positions and investment professionals as noted above, as well as the more liquid nature of the assets involved, we believe the process of returning capital to investors in the two existing multi-strategy funds should not have a negative effect on other investment products that we manage.
The Company's institutional and private clients will continue to have access to a premier suite of products and solutions that encompass both liquid strategies like Ramius Value and Opportunity, our Global Credit Fund, our replication platform, and our new Ramius Trading Strategies managed account platform, as well as our longer term investment funds like our Real Estate funds and funds managed by Cowen Healthcare Royalty Partners.
Basis of presentation
The unaudited condensed consolidated financial statements of the Company appearing elsewhere in this Form 10-Q include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in the consolidated financial statements, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to generally accepted accounting principles as described below (the "Consolidated Funds"). Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as non-controlling interests in consolidated subsidiaries in the consolidated financial statements appearing elsewhere in this Form 10-Q. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
The business combination between Ramius and Cowen Holdings was accounted for as an "acquisition" by Ramius of Cowen Holdings, as that term is used under accounting principles generally accepted in the United States of America ("GAAP") for accounting and financial reporting purposes. As a result, the historical financial statements of Ramius (the business of which was operated by RCG Holdings LLC, the Company's accounting predecessor, prior to the consummation of the Transactions) have become the historical financial statements of the Company. As a result, the Company's results for the first quarter of 2010 reflect three months of combined operations, while the first quarter of 2009 GAAP results include three months of legacy Ramius operations only.
Revenue recognition
The Company's principal sources of revenue are derived from two segments: an alternative investment management segment and a broker-dealer segment as more fully described below.
Our alternative investment management segment generates revenue through three principal sources: management fees, incentive income and investment income from our own capital.
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Our broker-dealer segment generates revenue through two principal sources: investment banking and brokerage.
Management fees
The Company earns management fees from affiliated funds and certain managed accounts that it serves as the investment manager based on assets under management. The actual management fees received vary depending on distribution fees or fee splits paid to third parties either in connection with raising the assets or structuring the investment.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for capital inflows and redemptions. While some investors may have separately negotiated fees pursuant to side letter arrangements, in general the management fees are as follows:
53
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management agreements) of the Company's funds and certain managed accounts, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have carried forward from prior years. Incentive income earned is typically between 10% and 20% for hedge funds and 10% for fund of funds, in each case, of the net profits earned for the full year that are attributable to each fee-paying investor. Incentive income on real estate investments is earned in the year of a sale or realization of a private investment. Incentive income in the CHRP Funds is earned only after investors receive a full return of their capital plus a preferred return.
In periods following a period of a net loss attributable to an investor, the Company does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a "high-water mark." The Company has elected to record incentive income revenue in accordance with "Method 2" of the Financial Accounting Standards Board ("FASB") accounting standards. Under Method 2, the incentive income from consolidated funds and managed accounts for any period is based upon the net profits of those consolidated funds and managed accounts at the reporting date. Any incentive income recognized in a quarter's consolidated statement of operations may be subject to reversal in a subsequent quarter as a result of subsequent negative investment performance prior to the conclusion of the fiscal year, when all contingencies have been resolved. As a result of negative investment performance in 2008, and in the case of certain real estate funds, in 2009, the Company entered 2010 with high-water marks in many funds that the Company manages. These high-water marks require the funds to recover cumulative losses before the Company can begin to earn incentive income in 2010 and beyond.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's target sectors of healthcare, technology, media and telecommunications, consumer, aerospace & defense, financial institutions, REITs and alternative energy.
When the Company is not the lead manager for a registered equity underwriting transaction, management must estimate the Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.
54
fairness opinions. The Company records strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Brokerage
Brokerage revenue consists of commissions, principal transactions and equity research fees.
Interest and dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends primarily from its Consolidated Funds and its brokerage balances from invested capital. Interest is recognized on an accrual basis and interest income is recognized on the debt of those issuers who are currently paying. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Reimbursement from affiliates
The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund, fund of funds and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, marketing, risk and technology
55
expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.
Other revenues
The Company receives other revenues which are unrelated to its principal sources of revenue and which may vary from year to year. Historical sources of such other revenues primarily include certain placement fee income and rebate income earned from stock lending activities of the Company.
Expenses
The Company's expenses consist of compensation and benefits, interest expense and general, administrative and other expenses.
Income Taxes
Prior to November 2009, Ramius, the accounting predecessor of the Company, operated as a limited liability company that was treated as a partnership and was not subject to U.S. federal or state income taxes. However, as a partnership, Ramius was subject to New York City unincorporated business tax, on its business and investment activities conducted in New York City. In 2010 and in the future, the Company will be subject to U.S. federal, state and city taxation as a corporation. The Company is also subject to foreign taxation on income it generates in certain countries.
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2010, the Company recorded a valuation allowance against substantially all of its net deferred tax assets.
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As of March 31, 2010, the Company recorded tax receivables resulting from refund claims stemming from the carry back of net operating losses to the Company's 2006 and 2008 tax returns.
Non-controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.
Assets Under Management and Fund Performance
Assets Under Management
As of April 1, 2010, the Company had assets under management of $7,865 million, a 0.22% increase as compared to assets under management of $7,848 million as of January 1, 2010. The $17 million increase in assets under management during this period resulted from $71 million in net redemptions (including redemptions effective on April 1, 2010), that was more than offset by a $88 million performance-related increase in assets.
57
The following table is a breakout of total assets under management by platform as of April 1, 2010.
Platform
|
Total Assets under Management |
Primary Strategies | |||
---|---|---|---|---|---|
|
(dollars in millions) |
|
|||
Hedge Funds |
$ | 1,703 | (1) | Multi-Strategy | |
|
Single Strategy | ||||
Fund of Funds |
1,777 |
(2) |
Multi-Strategy |
||
|
Single Strategy | ||||
|
Customized Solutions | ||||
|
Hedging Strategies | ||||
|
555 | Advisory | |||
Real Estate(3) |
1,628 |
(4) |
Debt |
||
|
Equity | ||||
Ramius Trading Strategies |
18 |
RTS Global 3X Fund LP |
|||
|
6 | RTS Global Fund LP | |||
Cowen Healthcare Royalty Partners(5) |
903 |
(4) |
Royalty Interests |
||
Other(6) |
1,275 |
Cash Management |
|||
|
Mortgage Advisory | ||||
Total |
$ | 7,865 | |||
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The following table presents total assets under management by period:
|
Year ended December 31, | |
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 1, 2010 |
Three months ended April 1, 2010 |
||||||||||||||
|
2007 | 2008 | 2009 | |||||||||||||
Beginning Assets under Management |
$ | 9,592,135 | $ | 12,900,355 | $ | 9,765,230 | $ | 8,313,638 | $ | 7,847,712 | ||||||
Net Subscriptions (Redemptions) |
2,601,939 | (1,066,714 | ) | (1,780,117 | )(2) | (465,926 | ) | (70,511 | ) | |||||||
Net Performance(1) |
706,281 | (2,068,411 | ) | 328,525 | | 87,949 | ||||||||||
Ending Assets under Management |
$ | 12,900,355 | $ | 9,765,230 | $ | 8,313,638 | $ | 7,847,712 | $ | 7,865,150 | ||||||
Fund Performance
The aggressive pursuit of risk assets by directional investors in the first quarter of 2010 stands in stark contrast to the beginning of 2009, when markets conditions were still unstable and investor liquidity issues not yet resolved. Building on recovery events of 2009, both real economic data and market sentiment were supportive of higher asset prices. Aided by the continuation of low interest rates and strong corporate earnings, both credit and equity markets turned in positive performance, with directional investments faring better than hedged strategies. Similarly, more aggressive sectors of the market offered the best performance, such as high yield, small cap stocks and emerging markets. Event-driven strategies also did well. The Company experienced positive results in all of its major investment products. Nonetheless, we believe in the value of holding appropriate hedging positions and are mindful of the amount of credit spread compression and equity appreciation that has already occurred. Managers are also mindful of developments in Europe, especially in Greece, that may have destabilizing effects on markets in the future.
The table below sets forth performance information as of March 31, 2010, for the Company's funds with assets greater than $200 million as well as information with respect to the firm's largest single-strategy hedge fund and Ramius Trading Strategies funds. The performance reflected below is representative of the net return of the most recently issued full fee paying class of fund interests offered for the respective fund. The net returns are net of all management and incentive fees, and are calculated monthly based on the change in an investor's current month ending equity as a percentage of their prior month's ending equity, adjusted for the current month's subscriptions and redemptions. Such returns are compounded monthly in calculating the final net year to date return. Performance information for the CHRP Funds are not presented due to existing confidentiality provisions.
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The following table presents fund performance for the three months ended March 31, 2010 and 2009:
|
|
|
Performance for three months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Platform
|
Strategy | Largest Fund(1) | 2010(2) | 2009 | |||||||
Hedge Funds |
Multi-Strategy | Ramius Multi-Strategy Fund Ltd | 2.25 | % | (0.70 | )% | |||||
|
(Inception Jan. 1, 1996) | ||||||||||
|
Ramius Enterprise LP |
1.93 |
% |
(0.87 |
)% |
||||||
|
(Inception Jan. 1, 2008) | ||||||||||
|
Single Strategy |
Ramius Value and Opportunity |
|||||||||
|
Overseas Fund Ltd. | 7.80 | % | 0.93 | % | ||||||
|
(Inception Mar. 1, 2006) | ||||||||||
Fund of Funds |
Managed Accounts |
Activist Portfolio with Hedging Overlay |
2.94 |
% |
0.40 |
% |
|||||
|
(Inception Sept. 1, 2007) | ||||||||||
|
Low Volatility Multi-Strategy Fund |
1.55 |
% |
0.24 |
% |
||||||
|
(Inception Aug. 1, 2005) | ||||||||||
Real Estate |
Debt |
RCG Longview Debt Fund IV, L.P. |
2.93 |
%(3) |
(4.96 |
)%(3) |
|||||
|
(Inception Nov. 12, 2007) | ||||||||||
|
Equity |
RCG Longview Equity Fund, L.P. |
8.01 |
%(3) |
(2.29 |
)%(3) |
|||||
|
(Inception Nov. 22, 2006) | ||||||||||
Ramius Trading Strategies |
Commodity Advisory |
RTS Global 3X Fund LP |
5.99 |
% |
n/a |
||||||
|
(Inception Mar 1, 2010) | ||||||||||
|
RTS Global Fund LP |
1.95 |
% |
n/a |
|||||||
|
(Inception Mar 1, 2010) | ||||||||||
Other |
Cash Management |
0.67 |
% |
0.00 |
% |
The hedge funds and fund of funds listed above have perpetual high-water marks. These high-water marks require the funds to recover cumulative losses before the Company can begin to earn
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incentive income in 2010 and beyond on the assets that suffered losses in 2008. In order for the Company to earn an incentive fee from an investor who had participated fully in the 2008 loss, 2009 full year and 2010 first quarter gain, for each of the following hedge funds: Ramius Multi-Strategy Fund Ltd. and Ramius Enterprise LP, the funds would have to increase their respective net asset values by 23.07% and 29.08%, respectively, net of management fees. In order for the Company to earn an incentive fee from an investor who had participated fully in the 2008 loss, 2009 full year and 2010 first quarter gain, for the Low Volatility Multi-Strategy Fund, the fund would have to increase its respective net asset value by 12.26%, net of management fees. Since December 2009, the Activist Portfolio with Hedging Overlay fund has achieved returns in excess of its high-water mark threshold for an investor who had participated fully in the 2008 loss and the 2009 gain.
Results of Operations
To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income of our alternative investment management and broker-dealer segments follows the discussion of our total consolidated GAAP results. Economic Income reflects, on a consistent basis for all periods presented in the Company's financial statements, income earned from the Company's funds and managed accounts and from its own invested capital. Economic Income excludes certain adjustments required under GAAP. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations of the CompanySegment Analysis and Economic Income," and Note 14 to the Company's condensed consolidated financial statements, appearing elsewhere in this Form 10-Q, for a reconciliation of Economic Income to total Company net income (loss).
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Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009
The Company's first quarter of 2010 results reflect three months of combined operations while the first quarter of 2009 results reflect three months of legacy Ramius operations only.
Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009
Consolidated Statements of Operations
(unaudited)
|
Three Months Ended March 31, |
Period to Period | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | $ Change | % Change | ||||||||||||
|
(dollars in thousands) |
|||||||||||||||
Revenues |
||||||||||||||||
Investment banking |
$ | 6,005 | $ | | $ | 6,005 | NM | |||||||||
Brokerage |
29,575 | | 29,575 | NM | ||||||||||||
Management fees |
9,270 | 11,511 | (2,241 | ) | (19.5 | )% | ||||||||||
Incentive income |
2,093 | | 2,093 | NM | ||||||||||||
Interest and dividends |
804 | 91 | 713 | 783.5 | % | |||||||||||
Reimbursement from affiliates |
1,742 | 3,394 | (1,652 | ) | (48.7 | )% | ||||||||||
Other Revenue |
622 | 1,019 | (397 | ) | (39.0 | )% | ||||||||||
Consolidated Funds revenues |
6,147 | 4,710 | 1,437 | 30.5 | % | |||||||||||
Total revenues |
56,258 | 20,725 | 35,533 | 171.4 | % | |||||||||||
Expenses |
||||||||||||||||
Employee compensation and benefits |
43,433 | 14,907 | 28,526 | 191.4 | % | |||||||||||
Interest and dividends |
446 | 349 | 97 | 27.8 | % | |||||||||||
General, administrative and other expenses |
34,203 | 10,273 | 23,930 | 232.9 | % | |||||||||||
Consolidated Funds expenses |
3,159 | 3,377 | (218 | ) | (6.5 | )% | ||||||||||
Total expenses |
81,241 | 28,906 | 52,335 | 181.1 | % | |||||||||||
Other income (loss) |
||||||||||||||||
Net gain (loss) on securities, derivatives and other investments |
1,524 | 259 | 1,265 | 488.4 | % | |||||||||||
Consolidated Funds net gains (losses) |
18,273 | (3,347 | ) | 21,620 | NM | |||||||||||
Total other income (loss) |
19,797 | (3,088 | ) | 22,885 | (741.1 | )% | ||||||||||
Income (loss) before income taxes |
(5,186 | ) | (11,269 | ) | 6,083 | (54.0 | )% | |||||||||
Income taxes |
(266 | ) | (66 | ) | (200 | ) | 303.0 | % | ||||||||
Net loss |
(4,920 | ) | (11,203 | ) | 6,283 | (56.1 | )% | |||||||||
(Income) loss attributable to non-controlling interests |
(8,056 | ) | 2,404 | (10,460 | ) | NM | ||||||||||
Net loss attributable to Cowen Group, Inc. stockholders |
$ | (12,976 | ) | $ | (8,799 | ) | $ | (4,177 | ) | 47.5 | % | |||||
Revenues
Investment Banking
Investment banking revenues were $6.0 million for the three months ended March 31, 2010, representing the investment banking activity of Cowen Holdings for the quarter. There were no investment banking revenues for the three months ended March 31, 2009, as the historic results of operations only reflect the legacy Ramius business.
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Brokerage
Brokerage revenues were $29.6 million for the three months ended March 31, 2010, representing the brokerage activity of Cowen Holdings for the quarter. There were no brokerage revenues for the three months ended March 31, 2009, as the historic results of operations only reflect the legacy Ramius business.
Management Fees
Management fees decreased $2.2 million, or 20%, to $9.3 million for the three months ended March 31, 2010 compared with $11.5 million in the prior year quarter. The decrease was primarily due to the lower level of assets under management in the first quarter of 2010 relative to the same period last year as well as the impact of certain management fee reductions for certain affiliates of UniCredit which became effective in conjunction with the closing of the Transactions.
Incentive Income.
Incentive income was $2.1 million for the three months ended March 31, 2010, compared to no incentive income for the prior year quarter. Incentive income earned in 2010 relates primarily to fees earned on one of our fund of funds products that surpassed its high water mark in December 2009 as well as fees earned on a portion of our Value and Opportunity fund. However, due to losses in 2008, many of our funds still have high-water marks such that Ramius will not earn incentive income with respect to the assets of the fund investors who suffered such losses in 2008 until these investors recover their losses.
Interest and Dividends
Interest and dividends increased $0.7 million, or 784%, to $0.8 million for the three months ended March 31, 2010, compared with $0.1 million in the prior year quarter. The increase was primarily attributable to an increase in interest income resulting from an increase in investments in interest bearing assets in the first quarter of 2010 relative to the same period last year.
Reimbursements from Affiliates
Reimbursements from affiliates decreased $1.7 million, or 49%, to $1.7 million for the three months ended March 31, 2010 compared with $3.4 million for the prior year quarter. The decrease was attributable to lower assets under management in the first quarter of 2010 compared to the same period last year as the Company generally limits such allocations based on a percentage of assets under management.
Other Revenue
Other revenue decreased $0.4 million, or 39%, to $0.6 million for the three months ended March 31, 2010 compared with $1.0 million in the prior year quarter. The decrease was primarily due to a reduction in retail commissions earned in the first quarter of 2010 compared to the same period last year.
Consolidated Funds Revenues
Consolidated Funds revenues increased $1.4 million, or 30.5%, to $6.1 million for the three months ended March 31, 2010 compared with $4.7 million in the prior year quarter. The increase was primarily attributable to fees earned in the first quarter of 2010 in the Enterprise Fund for waiving anti-dilution rights on specific warrants held that did not occur in the same period last year.
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Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased $28.5 million, or 191%, to $43.4 million for the three months ended March 31, 2010 compared with $14.9 million in the prior year quarter. The increase was due to the impact of including three months of compensation and benefits expense associated with the legacy Cowen Holdings business, partially offset by lower accruals for incentive compensation and lower base salaries and benefit expense associated with a reduction in head count in 2010 compared to 2009 for the legacy Ramius business.
Interest and Dividends
Interest and dividend expense remained substantially unchanged at $0.4 million for the three months ended March 31, 2010 compared to $0.3 million for the prior year quarter. Interest and dividends expense relates primarily to interest on our credit facility.
General, Administrative and Other Expenses
General, administrative and other expenses increased $23.9 million, or 233%, to $34.2 million for the three months ended March 31, 2010 compared with $10.3 million in the prior year quarter. The increase was due to the impact of including three months of general, administrative and other expense associated with the legacy Cowen Holdings business.
Consolidated Funds Expenses
Consolidated Funds expenses decreased $0.2 million, or 5.9%, to $3.2 million for the three months ended March 31, 2010 compared with $3.4 million in the prior year quarter. The decrease was attributable to a decrease in interest expense recognized by the Enterprise Fund due to a decrease in short holdings of interest bearing securities.
Other Income (Loss)
Other income (loss) increased $22.9 million to income of $19.8 million for the three months ended March 31, 2010 compared to a loss of $3.1 million in the prior year quarter. The increase is a result of positive fund performance in the current year period versus negative performance in the prior year period as a result of the general unprecedented levels of market volatility, and liquidity constraints that persisted in the first quarter of 2009 and affected almost every asset class globally. As previously described, the Company invests its own capital primarily in the Enterprise Fund with any gains or losses from the Company's investment in the Enterprise Fund shown under Consolidated Funds for that period. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such funds, and the portion of those gains or losses that are attributable to other investors is allocated to a non-controlling interest.
Income Taxes
Income tax benefit increased $0.2 million to $0.3 million for the three months ended March 31, 2010 from $0.1 million in the prior year quarter. The increase was caused by the recognition of state and local tax benefits related to prior years.
Income (Loss) Attributable to Non-controlling Interests
Income attributable to non-controlling interests was $8.1 million for the three months ended March 31, 2010 compared with a loss of $2.4 million in the prior year quarter. The period over period change was the result of improved performance in certain of the Consolidated Funds.
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Segment Analysis and Economic Income (Loss)
Segments
Prior to the consummation of the Transactions, the Company conducted its operations through one reportable segment, the alternative investment management segment, which provides management services to its hedge funds, fund of funds, real estate and other investment platforms. Following the combination of Ramius and Cowen Holdings, the Company conducts its operations through two segments: an alternative investment management segment and a broker-dealer segment. The Company's alternative investment management segment currently includes its hedge funds, fund of funds, real estate and other investment platforms businesses, as well as CHRP, which was a legacy Cowen operating business prior to the Transactions. The Company's broker-dealer segment currently includes its investment banking, brokerage and equity research businesses.
Economic Income (Loss)
The performance measure used by the Company for each segment is Economic Income, which management uses to evaluate the financial performance of and make operating decisions for the firm as a whole and each segment. Accordingly, management assesses its business by analyzing the performance of each segment and believes that investors should review the same performance measure that it uses to analyze its segment and business performance. In addition, management believes that Economic Income is helpful to gain an understanding of its segment results of operations because it reflects such results on a consistent basis for all periods presented.
Our Economic Income may not be comparable to similarly titled measures used by other companies. We use Economic Income as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. As a result of the adjustments made to arrive at Economic Income, Economic Income has limitations in that it does not take into account certain items included or excluded under GAAP, including our Consolidated Funds. Economic Income is considered by management as a supplemental measure to the GAAP results to provide a more complete understanding of each segment's performance as measured by management. For a reconciliation of Economic Income to GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 14 to the Company's condensed consolidated financial statements included in this Form 10-Q.
In general, Economic Income (loss) is a pre-tax measure that (i) presents the Company's results of operations without the impact resulting from the consolidation of any of the Company's funds (in both periods presented), (ii) excludes goodwill impairment (there were no goodwill impairment charges in either period presented), (iii) excludes allocations to the managing member, as there will be no such allocations in the future (there were no allocations made to the managing member in either period presented), and (iv) excludes the reorganization expenses for the Transactions (there were no reorganization expenses in either period presented) and one-time equity awards made in connection with the Transactions (in the 2010 period only). In addition, Economic Income revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For GAAP purposes, these items are included in each of their respective line items. Economic Income revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities. For GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income expenses are reduced by reimbursement from affiliates, which for GAAP purposes is presented gross as part of revenue.
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Economic Income Revenues
The Company's principal sources of Economic Income revenues are derived from activities in the following business segments:
Our alternative investment management segment generates Economic Income revenues through three principal sources: management fees, incentive income and investment income from our own capital. Management fees are directly impacted by any increase or decrease in assets under management, while incentive income is impacted by our funds' performance and any increase or decrease in assets under management. Investment income from the Company's own capital is impacted by the performance of the funds in which our capital is invested, which is principally the Enterprise Fund. The Company periodically receives other Economic Income revenue which is unrelated to our own invested capital or our activities on behalf of the Company's funds, such as certain placement fee income received by a non-wholly owned subsidiary that engaged in the distribution of interests in the real estate funds.
Our broker-dealer segment generates Economic Income revenues through two principal sources: investment banking and brokerage. The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's target sectors of healthcare, technology, media and telecommunications, consumer, aerospace & defense, financial institutions, REITs and alternative energy. The Company's brokerage revenues consist of commissions, principal transactions and fees paid for equity research. Management reviews brokerage revenue on a combined basis as the vast majority of the revenue is derived from the same group of clients. The Company derives its brokerage revenue primarily from trading equity and equity-linked securities on behalf of institutional investors. The majority of the Company's trading gains and losses are a result of activities that support the facilitation of client orders in both listed and over-the-counter securities, although all trading gains and losses are recorded in brokerage.
Economic Income Expenses
The Company's Economic Income expenses consist of compensation and benefits and non-compensation expenses, less reimbursement from affiliates.
Non-controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. Non-wholly-owned entities included Ramius Alternative Solutions LLC, in the 2009 period only, as subsequent to the Transactions that entity became a wholly-owned subsidiary of the Company.
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Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009
For the three months ended March 31, 2010, the Company's alternative investment management segment includes three months of its hedge funds, fund of funds, real estate and other investment platforms operating results. In addition, the alternative investment management segment includes three months of CHRP's operating results for the three months ended March 31, 2010, as a result of the Transactions. For the three months ended March 31, 2009, the Company's alternative investment management segment reflects three months of its hedge funds, fund of funds, real estate and other investment platforms operating results, but does not include any of CHRP's operating results.
For the three months ended March 31, 2010, the Company's broker-dealer segment includes three months of its investment banking and brokerage businesses' operating results. There were no investment banking or brokerage operating results for the three months ended March 31, 2009 as the historic results of operations reflect the legacy Ramius business only.
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Three Months Ended March 31, | Total Period-to-Period |
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