The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management's expectations. See "Special Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K. OverviewCowen Inc. , aDelaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing and commission management services and investment management through its two business segments: theOperating Company ("Op Co") and theAsset Company ("Asset Co"). Operating Company The Op Co segment consists of four divisions: theCowen Investment Management ("CIM") division, the Investment Banking division, the Markets division and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment banking businesses. Op Co's CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment banking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination and domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing and commission management services and also a comprehensive suite of prime brokerage services. The CIM division is the Company's investment management business, which operates primarily under theCowen Investment Management name. CIM offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been registered with theSEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1997. The Company's investment management business offers investors access to a number of strategies to meet their specific needs including private healthcare investing, private sustainable investing, healthcare royalties, activism and merger arbitrage. A portion of the Company's capital is invested alongside the Company's investment management clients. The Company has also invested some of its capital in its reinsurance businesses. Op Co's investment banking businesses include investment banking, research, sales and trading, prime brokerage, global clearing and commission management services provided primarily to companies and institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, information and technology services, and energy. We provide research and brokerage services to over 6,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our sectors. The investment banking businesses also offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.Asset Company The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment. Certain Factors Impacting Our Business Our Company's businesses and results of operations are impacted by the following factors: •Underwriting, private placement and strategic/financial advisory fees. Our revenues from investment banking are directly linked to the underwriting fees we earn in equity and debt securities offerings in which the Company acts as an underwriter, private placement fees earned in non-underwritten transactions, sales commissions earned in at-the-market offerings and success fees earned in connection with advising both buyers and sellers, principally in mergers and acquisitions. As a result, the future performance of our investment banking business will depend on, among other things, our ability to secure lead manager and co-manager roles in clients' capital raising transactions as well as our ability to secure mandates as a client's strategic financial advisor. 31 -------------------------------------------------------------------------------- Table of Contents •Liquidity. As a clearing broker-dealer in theU.S. , we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to our total liquid assets. •Equity research fees. Equity research fees are paid to the Company for providing access to equity research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity research depends on the quality of our research and its relevance to our institutional customers and other clients. •Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities and net trading gains and losses on inventory and other Company positions. Commissions associated with these transactions are also included herein. In certain cases, the Company provides liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. •Commissions. Our commission revenues depend for the most part on our customer trading volumes and on the notional value of the non-U.S. securities traded by our customers. •Investment performance. Our revenues from incentive income are linked to the performance of the investment funds and accounts that we manage. Performance also affects assets under management because it influences investors' decisions to invest assets in, or withdraw assets from, the investment funds and accounts managed by us. •Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a percentage of contributed and invested capital. Our incentive income revenues are linked to the incentive allocation rates we charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to "high-water marks," whereby incentive income is generally earned by us only to the extent that the net asset value of an investment fund at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles. Additionally, our revenues from management fees are directly linked to assets under management. Positive performance in our legacy funds increases assets under management which results in higher management fees. •Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues. Investment income in the investment bank business includes gains and losses generated by the capital the Company invests in private capital raising transactions of its investment banking clients. Our revenues from investment income are linked to the performance of the underlying investments. External Factors Impacting Our Business Our financial performance is highly dependent on the environment in which our businesses operate. We believe 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 or 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 or 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 businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following: •Our investment bank business has been, and may continue to be, adversely affected by market conditions. Increased competition continues to affect our investment banking and capital markets businesses. The same factors also affect trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period. •Our investment management business can be adversely affected by unanticipated levels of requested redemptions. We experienced significant levels of requested redemptions during the 2008 financial crisis and, while the environment for investing in investment management products has since improved, it is possible that we could intermittently experience redemptions above historical levels, regardless of investment fund performance. •Our investment bank business focuses primarily on small to mid-capitalization and private companies in specific industry sectors. These sectors may experience growth or downturns independent of general economic and market conditions, or may face market conditions that are disproportionately better or worse than those impacting the economy and markets generally. In addition, increased government regulation has had, and may continue to have, a 32 -------------------------------------------------------------------------------- Table of Contents disproportionate effect on capital formation by smaller companies. Therefore, our investment bank business could be affected differently than overall market trends. 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 OnFebruary 11 , the Board of Directors declared a quarterly cash dividend payable on its common stock of$1.25 million , or$0.04 per common share, payable onMarch 16, 2020 , to stockholders of record onMarch 2, 2020 . Basis of presentation The Company's consolidated financial statements are prepared in accordance with US GAAP as promulgated by theFinancial Accounting Standards Board ("FASB") through Accounting Standards Codification as the source of authoritative accounting principles in the preparation of financial statements of the Company appearing in Part IV of this Form 10-K and 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 managing member/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 the Consolidated Funds on a gross basis. The ownership interests in the Consolidated Funds which are not owned by the Company are reflected as redeemable or nonredeemable non-controlling interests, depending on the non-controlling interest holder's redemption rights, in consolidated subsidiaries in the consolidated financial statements appearing elsewhere in this Form 10-K. The management fees and incentive income earned by the Company from the Consolidated Funds are eliminated in consolidation. Acquisition OnJanuary 2, 2019 , the Company, together with its indirect wholly owned subsidiaries,Cowen International Ltd andCowen QN Acquisition LLC , completed its previously announced acquisition ofQuarton International AG through the acquisition of all of the outstanding equity interest ofQuarton International AG's affiliated combining companies,Quarton Management AG ,Quarton International Europe AG ,Quarton Partners, LLC andQuarton Securities GP, LLC (which owns aU.S. Securities Exchange Commission ("SEC") registered broker-dealer that was subsequently renamed toCowen Securities LP ), comprising theU.S. and European operations of the acquired combining companies (collectively "Quarton"). Quarton is a group of leading global financial advisory companies serving the middle market. Expenses The Company's expenses consist of compensation and benefits, reinsurance costs, general, administrative and other, and Consolidated Funds expenses. •Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses. •Reinsurance claims, commissions and amortization of deferred acquisition costs. Reinsurance related expenses reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations. •Operating, General and Administrative. General, administrative and other expenses are primarily related to professional services, occupancy and equipment, business development expenses, communications, expenses associated with our reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and non-cash expenses. •Consolidated Funds Expenses. The Company's consolidated financial statements reflect the expenses of the Consolidated Funds and the portion attributable to other investors is allocated to a non-controlling interest. 33 -------------------------------------------------------------------------------- Table of Contents Income Taxes The taxable results of the Company'sU.S. operations are subject toU.S. federal, state and local 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. Deferred tax liabilities that cannot be realized in a similar future time period and thus that cannot offset the Company's deferred tax assets are not taken into account when calculating the Company's net deferred tax assets. The Company continues to monitor the financial statement impact of the Tax Cuts and Jobs Act ("TCJ Act") enacted in 2017 as regulations and formal guidance continue to be issued. 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. When non-controlling interest holders have redemption features that can be exercised at the option of the holder currently or contingent upon the occurrence of future events, their ownership has been classified as temporary equity. The remaining non-controlling interests have been classified in permanent equity as the non-controlling interests are either not redeemable at the option of the holder or the holder does not have the unilateral right to redeem their ownership interests. Investment Fund Performance and Assets Under Management For the quarter endedDecember 31, 2019 , the Company's activist and merger arbitrage investment strategies (including the merger arbitrage focused UCITS fund) had, in the aggregate, positive results. The Company's healthcare royalty strategy's third investment fund is now fully committed and allocations are now being made to the strategy's fourth fund. Our private healthcare strategy continues to deploy capital, having made sixteen investments in its second fund by the end of the quarter endedDecember 31, 2019 and with a pipeline of opportunities ahead. The liquidation of certain multi-strategy hedge funds advised by the Company also continues. As ofDecember 31, 2019 , the Company had assets under management of$11.4 billion . Private Healthcare Capability Investments Healthcare Royalties Activism Merger Arbitrage Sustainability Other (a) (dollars in millions) AUM$681 $3,261 $5,958 $590 $211 $709 Team Private Equity ü ü ü Hedge Fund ü ü Managed Account ü ü ü UCITS ü Other ü (a) Other capabilities include private equity funds, legacy funds, and other trading strategies. The Company'sInvested Capital The Company invests a significant portion of its capital base to help drive results and facilitate the growth of the Op Co and Asset Co business segments. Within Op Co, management allocates capital to three primary investment categories: (i) broker-dealer capital and related trading strategies; (ii) liquid alternative trading strategies; and (iii) public and private health care strategies. Broker-dealer capital and related trading strategies include capital investments in the Company's broker-dealers as well as securities finance and special purpose acquisition company trading strategies to grow liquidity and returns within operating businesses. Much of the Company's public and private healthcare strategies and liquid alternative trading strategies portfolios are invested alongside the Company's investment management clients. The Company's liquid alternative trading strategies include merger arbitrage and activist fund strategies. In addition, from time to time, the Company makes investments in private capital raising transactions of its investment banking clients. 34 -------------------------------------------------------------------------------- Table of Contents The Company allocates capital to Asset Co's private investments. Asset Co's private investments include the Company's investment in Italian wireless broadband provider Linkem, private equity funds Formation8 and Eclipse and legacy real estate investments. As ofDecember 31, 2019 , the Company's invested capital amounted to a net value of$717.6 million (supporting a long market value of$724.8 million ), representing approximately 89% of Cowen's stockholders' equity presented in accordance with US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen's stockholders' equity as ofDecember 31, 2019 . The total net values presented in the table below do not tie to Cowen's consolidated statement of financial condition as ofDecember 31, 2019 because they represent only some of the line items in the accompanying consolidated statement of financial condition. Strategy Net Value % of Stockholders' Equity (dollars in millions)
Op Co
Broker-dealer capital and related trading $ 436.1 61% Public and Private Healthcare 65.4 9% Liquid Alternative Trading 79.1 11%Asset Co Private Investments 126.5 18% Private Real Estate 10.5 2% Total 717.6 89% Cowen Inc. Stockholders' Equity $ 809.9 100% The allocations shown in the table above will change over time. Results of Operations To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income (Loss) (which is a non-GAAP measure) of our Op Co and Asset Co segments follows the discussion of our total consolidated US GAAP results. Economic Income (Loss) reflects, on a consistent basis for all periods presented in the Company's consolidated financial statements, income earned from the Company's investment funds and managed accounts and from its own invested capital. Economic Income (Loss) excludes certain adjustments required under US GAAP. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company-Segment Analysis and Economic Income (Loss)," and Note 27 to the accompanying Company's consolidated financial statements, appearing elsewhere in this Form 10-K, for a reconciliation of Economic Income (Loss) to total Company US GAAP net income (loss). 35
-------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2019 Compared with Year EndedDecember 31, 2018
Consolidated Statements of Operations
Year Ended December 31, Period to Period 2019 2018 $ Change % Change (dollars in thousands) Revenues Investment banking$ 375,025 $ 357,222 $ 17,803 5 % Brokerage 402,747 413,582 (10,835) (3) % Management fees 32,608 29,658 2,950 10 % Incentive income 1,547 3,117 (1,570) (50) % Interest and dividends 174,913 108,009 66,904 62 % Reimbursement from affiliates 1,026 1,038 (12) (1) % Aircraft lease revenue - 1,852 (1,852) NM Reinsurance premiums 46,335 38,096 8,239 22 % Other revenues 5,433 4,504 929 21 % Consolidated Funds revenues 9,809 9,838 (29) - % Total revenues 1,049,443 966,916 82,527 9 % Interest and dividends expense 168,628 104,116 64,512 62 % Total net revenues 880,815 862,800 18,015 2 %
Expenses
Employee compensation and benefits 535,772 512,627 23,145 5 %
Reinsurance claims, commissions and amortization of deferred acquisition costs
44,070 41,086 2,984 7 % Operating, general, administrative and other expenses 335,499 316,180 19,319 6 % Depreciation and amortization expense 20,460 12,436 8,024 65 % Goodwill impairment 4,100 - 4,100 NM Consolidated Funds expenses 8,963 8,615 348 4 % Total expenses 948,864 890,944 57,920 7 % Other income (loss) Net gains (losses) on securities, derivatives and other investments 80,409 68,043 12,366 18 % Gain/(loss) on debt extinguishment - (556) 556 NM Consolidated Funds net gains (losses) 58,363 56,255 2,108 4 % Total other income (loss) 138,772 123,742 15,030 12 % Income (loss) before income taxes 70,723 95,598 (24,875) (26) % Income tax expense (benefit) 14,853 15,719 (866) (6) % Net income (loss) 55,870 79,879 (24,009) (30) % Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds 31,239 37,060 (5,821) (16) % Net income (loss) attributable to Cowen Inc. 24,631 42,819 (18,188) (42) % Preferred stock dividends 6,792 6,792 - - % Net income (loss) attributable toCowen Inc. common stockholders$ 17,839 $ 36,027 $ (18,188) (50) % Revenues Investment Banking Investment banking revenues increased$17.8 million to$375.0 million for the year endedDecember 31, 2019 compared with$357.2 million in the prior year period. During the year endedDecember 31, 2019 , the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions. During the year endedDecember 31, 2018 , the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital markets transactions. Brokerage Brokerage revenues decreased$10.9 million to$402.7 million for the year endedDecember 31, 2019 compared with$413.6 million in the prior year period. This was attributable to a decrease in institutional services and cross asset revenues partially offset by an increase in commission management revenue. Customer trading volumes across the industry (according to Bloomberg) decreased 4% for the year endedDecember 31, 2019 compared to the prior year period. 36 -------------------------------------------------------------------------------- Table of Contents Management Fees Management fees increased$2.9 million to$32.6 million for the year endedDecember 31, 2019 compared with$29.7 million in the prior year period. This increase is primarily related to the healthcare royalty business. Incentive Income Incentive income decreased$1.6 million to$1.5 million for the year endedDecember 31, 2019 , compared with$3.1 million in the prior year period. This decrease is primarily related to the merger arbitrage business. Revenue recognition standards, effectiveJanuary 1, 2018 , require the Company to recognize the majority of incentive income allocated to the Company as net gains (losses) on securities, derivatives and other investments or as incentive income when the fees are no longer subject to reversal or are crystalized. Interest and Dividends Interest and dividends increased$66.9 million to$174.9 million for the year endedDecember 31, 2019 compared with$108.0 million in the prior year period. This is primarily attributable to securities financing activities. The increase in the securities finance activity is due to customer demand which has created greater matched book opportunities for both domestic and international securities. Reimbursements from Affiliates Reimbursements from affiliates remained fairly flat at$1.0 million for the year endedDecember 31, 2019 and the prior year period. Aircraft Lease Revenue Aircraft lease revenue ceased at the end of 2018 due to our exit from the aviation business. Reinsurance Premiums Reinsurance premiums increased$8.2 million to$46.3 million for the year endedDecember 31, 2019 compared with$38.1 million in the prior year period. This increase is due to a higher change in unearned premiums in 2019 compared to 2018 as well as higher premium volume from renewed policies in 2019 compared to 2018. Other Revenues Other revenues increased$0.9 million to$5.4 million for the year endedDecember 31, 2019 compared with$4.5 million in the prior year period. Consolidated Funds Revenues Consolidated Funds revenues decreased$0.1 million to$9.8 million for the year endedDecember 31, 2019 compared with$9.8 million in the prior year period. The decrease is due to earning less interest and dividends income from the Consolidated Funds. Interest and Dividends Expenses Interest and dividends expenses increased$64.5 million to$168.6 million for the year endedDecember 31, 2019 compared with$104.1 million in the prior year period. This is primarily attributable to securities finance activities. The increase in the securities finance activity is due to customer demand which has created greater matched book opportunities for both domestic and international securities. Expenses Employee Compensation and Benefits Employee compensation and benefits expenses increased$23.2 million to$535.8 million for the year endedDecember 31, 2019 compared with$512.6 million in the prior year period. The increase is primarily due to a higher compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 45% for the year endedDecember 31, 2019 , compared with 47% in the prior year period. Reinsurance Claims, Commissions and Amortization of Deferred Acquisition Costs Reinsurance related expenses increased$3.0 million to$44.1 million for the year endedDecember 31, 2019 compared with$41.1 million in the prior year period. This increase is primarily due to additional reinsurance related expenses in 2019 from additional reinsurance policies, partially offset by a better claims experience in 2019 compared to 2018. 37 -------------------------------------------------------------------------------- Table of Contents Operating, General, Administrative and Other Expenses Operating, general, administrative and other expenses increased$19.3 million to$335.5 million for the year endedDecember 31, 2019 compared with$316.2 million in the prior year period. The increase is primarily related to increased professional fees and client servicing and business development costs. Depreciation and Amortization Expenses Depreciation and amortization expenses increased$8.1 million to$20.5 million for the year endedDecember 31, 2019 compared with$12.4 million in the prior year period. The increase in amortization expense primarily related to intangibles acquired through the Quarton acquisition inJanuary 2019 . Goodwill Impairment In conjunction with the Company's change in segments, during the second quarter of 2019, the Company restructured its historical investment management reporting unit between the Op Co's CIM division reporting unit and the Asset Co reporting unit. Based on the change in segments and restructuring of reporting units, the Company determined that it was necessary to perform a quantitative impairment test. The Company estimated the fair value of its reporting units immediately before and after the change in segments and restructuring of reporting units using the income and market approach, which involves estimates of future cash flows, discount rates, economic forecast and other assumptions, which are then used in the market approach (earnings and/or transactions multiples) and/or income approach (discounted cash flow method). During the second quarter of 2019, based on the results of the impairment analysis performed, the Company recognized a goodwill impairment in the amount of$4.1 million within the Asset Co reporting unit. Consolidated Funds Expenses Consolidated Funds expenses increased$0.4 million to$9.0 million for the year endedDecember 31, 2019 compared with$8.6 million in the prior year period. The increase is due to increased professional, advisory and other fees expenses in the Consolidated Funds. Other Income (Loss) Other income (loss) increased$15.1 million to$138.8 million for the year endedDecember 31, 2019 compared with$123.7 million in the prior year period. The increase primarily relates to an increase in performance in the Company's own invested capital. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests. Income Taxes Income tax expense decreased$0.9 million to$14.9 million for the year endedDecember 31, 2019 compared with an income tax expense of$15.7 million in the prior year period. This change is primarily attributable to the change in the Company's income before income taxes and non-deductible expenses for the respective periods. Net Income (Loss) Attributable to Non-controlling Interests Net income (loss) attributable to non-controlling interests decreased$5.9 million to$31.2 million for the year endedDecember 31, 2019 compared with$37.1 million in the prior year period. The decrease was primarily the result of a decrease in income earned by the Consolidated Funds in the current year period. 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. Preferred Stock Dividends OnMay 19, 2015 , the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. 38 -------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2018 Compared with the Year EndedDecember 31, 2017
Consolidated Statements of Operations
Year Ended December 31, Period to Period 2018 2017 $ Change % Change (dollars in thousands) Revenues Investment banking$ 357,222 $ 223,614 $ 133,608 60 % Brokerage 413,582 293,610 119,972 41 % Management fees 29,658 33,245 (3,587) (11) % Incentive income 3,117 5,383 (2,266) (42) % Interest and dividends 108,009 49,440 58,569 118 % Reimbursement from affiliates 1,038 2,860 (1,822) (64) % Aircraft lease revenue 1,852 3,751 (1,899) (51) % Reinsurance premiums 38,096 30,996 7,100 23 % Other revenues 4,504 8,561 (4,057) (47) % Consolidated Funds revenues 9,838 7,321 2,517 34 % Total revenues 966,916 658,781 308,135 47 % Interest and dividends expense 104,116 60,949 43,167 71 % Total net revenues 862,800 597,832 264,968 44 %
Expenses
Employee compensation and benefits 512,627 404,087 108,540 27 %
Reinsurance claims, commissions and amortization of deferred acquisition costs
41,086 30,486 10,600 35 % Depreciation and amortization 12,436 13,078 (642) (5) % General, administrative and other expenses 316,180 227,709 88,471 39 % Restructuring costs - 8,763 (8,763) NM Consolidated Funds expenses 8,615 12,526 (3,911) (31) % Total expenses 890,944 696,649 194,295 28 % Other income (loss) Net gain (loss) on securities, derivatives and other investments 68,043 76,179 (8,136) (11) % Bargain purchase gain, net of tax - 6,914 (6,914) NM Gain/(loss) on debt extinguishment (556) (16,039) 15,483 (97) % Consolidated Funds net gains (losses) 56,255 38,725 17,530 45 % Total other income (loss) 123,742 105,779 17,963 17 % Income (loss) before income taxes 95,598 6,962 88,636 (1,273) % Income tax expense (benefit) 15,719 44,053 (28,334) 64 % Net income (loss) 79,879 (37,091) 116,970 315 % Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds 37,060 23,791 13,269 56 % Net income (loss) attributable to Cowen Inc. 42,819 (60,882) 103,701 170 % Preferred stock dividends 6,792 6,792 - - % Net income (loss) attributable toCowen Inc. common stockholders$ 36,027 $ (67,674) $ 103,701 153 % Revenues Investment Banking Investment banking revenues increased$133.6 million to$357.2 million for the year endedDecember 31, 2018 compared with$223.6 million in the prior year period. During the year endedDecember 31, 2018 , the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital market transactions. During the year endedDecember 31, 2017 , the Company completed 103 underwriting transactions, 16 strategic advisory transactions and two debt capital market transactions. The implied average underwriting fee per transaction was 21.1% greater for the year endedDecember 31, 2018 as compared to the prior year period. The increase is also related to adoption of the new revenue recognition standard, effectiveJanuary 1, 2018 , which a) requires underwriting expenses to be shown within expenses rather than net of associated investment banking revenues and b) expenses reimbursed from client to be shown gross in investment banking revenues rather than net in their respective expense category. 39 -------------------------------------------------------------------------------- Table of Contents Brokerage Brokerage revenues increased$120.0 million to$413.6 million for the year endedDecember 31, 2018 compared with$293.6 million in the prior year period. This was attributable to an increase in revenues due to the acquisition ofConvergex Group inJune 2017 and increased revenue in our options and electronic trading businesses. Customer trading volumes across the industry (according to Bloomberg) increased 12% for the year endedDecember 31, 2018 compared to the prior year period. Management Fees Management fees decreased$3.5 million to$29.7 million for the year endedDecember 31, 2018 compared with$33.2 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the healthcare royalty business and as a result of the company's exit of two investment management strategies, one in the fourth quarter of 2017 and the other in the first quarter of 2018. Incentive Income Incentive income decreased$2.3 million to$3.1 million for the year endedDecember 31, 2018 , compared with$5.4 million in the prior year period. This decrease was related to the new revenue recognition standards, effectiveJanuary 1, 2018 , for which the Company now recognizes the majority of incentive income allocated to the Company as net gains (losses) on securities, derivatives and other investments. Interest and Dividends Interest and dividends increased$58.6 million to$108.0 million for the year endedDecember 31, 2018 compared with$49.4 million in the prior year period. This was primarily attributable to securities financing activities related to theJune 2017 acquisition ofConvergex Group . Reimbursements from Affiliates Reimbursements from affiliates decreased$1.9 million to$1.0 million for the year endedDecember 31, 2018 compared with$2.9 million in the prior year period. The decrease is primarily related to a decrease in reimbursements from the activist business. Aircraft Lease Revenues Aircraft lease revenues decreased$1.9 million to$1.9 million for the year endedDecember 31, 2018 compared to$3.8 million in the prior year period. This decrease was related to the sale of one plane during the third quarter of 2017 and several more planes sold during the fourth quarter of 2018. Reinsurance Premiums Reinsurance premiums increased$7.1 million to$38.1 million for the year endedDecember 31, 2018 compared with$31.0 million in the prior year period. This increase reflects premiums earned in 2018 from additional reinsurance policies in force compared to 2017 as well as the change in unearned premiums during 2018 from policies that were in force at the end of 2017. Other Revenues Other revenues decreased$4.1 million to$4.5 million for the year endedDecember 31, 2018 compared with$8.6 million in the prior year period. This decrease is primarily related to a gain on the sale of one of the Company's planes in the third quarter of 2017. Consolidated Funds Revenues Consolidated Funds revenues increased$2.5 million to$9.8 million for the year endedDecember 31, 2018 compared with$7.3 million in the prior year period. The increase is due to interest and dividends income from the Consolidated Funds. Interest and Dividends Expenses Interest and dividends expenses increased$43.2 million to$104.1 million for the year endedDecember 31, 2018 compared with$60.9 million in the prior year period. This was primarily attributable to securities finance activities related to theJune 2017 acquisition ofConvergex Group . Expenses Employee Compensation and Benefits Employee compensation and benefits expenses increased$108.5 million to$512.6 million for the year endedDecember 31, 2018 compared with$404.1 million in the prior year period. The increase is primarily due to$308.1 million higher total revenues and$17.9 million higher other income (loss) during 2018 as compared to 2017 resulting in a higher 40 -------------------------------------------------------------------------------- Table of Contents compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 47% for the year endedDecember 31, 2018 , compared with 53% in the prior year period. Reinsurance Claims Commissions Reinsurance related expenses increased$10.6 million to$41.1 million for the year endedDecember 31, 2018 compared with$30.5 million in the prior year period. This increase reflects reinsurance-related expenses incurred from additional policies in force compared to 2017 as well as the occurrence of several highly unlikely events that led to higher claims in 2018 such as widespread wildfires inCalifornia , extreme flash floods inAustralia and devastating floods inGermany . Operating, General, Administrative and Other Expenses Operating, general, administrative and other expenses increased$88.5 million to$316.2 million for the year endedDecember 31, 2018 compared with$227.7 million in the prior year period. The increase is primarily related to higher brokerage and trade execution costs, due to higher brokerage revenue, increased marketing and business development expenses and increased occupancy costs, which are mostly related to the acquisition ofConvergex Group in June 2017.The increase is also related to adoption of the new revenue recognition standard, effectiveJanuary 1, 2018 , which a) requires underwriting expenses to be shown within expenses rather than net of associated investment banking revenues and b) expenses reimbursed from client to be shown gross in investment banking revenues rather than net in their respective expense category. Depreciation and Amortization Expenses Depreciation and amortization expenses decreased$0.7 million to$12.4 million for the year endedDecember 31, 2018 compared with$13.1 million in the prior year period. There was a decrease in amortization from certain intangibles which have been fully amortized partially offset by an increase in depreciable fixed assets related to the acquisition ofConvergex Group inJune 2017 . Restructuring Costs Restructuring costs expenses were$8.8 million for the year endedDecember 31, 2017 and there were none in the current period. In conjunction with the integration of the acquired businesses ofConvergex Group , the Company evaluated the combined investment bank businesses and operations and incurred integration and restructuring costs, which primarily related to exit and disposal costs, discontinuation of redundant technology services and severance costs. Consolidated Funds Expenses Consolidated Funds expenses decreased$3.9 million to$8.6 million for the year endedDecember 31, 2018 compared with$12.5 million in the prior year period. The decrease is due to decreased interest and dividends expense in the Consolidated Funds. Other Income (Loss) Other income (loss) increased$17.9 million to$123.7 million for the year endedDecember 31, 2018 compared with$105.8 million in the prior year period. The increase primarily relates to an increase in performance in the Company's own invested capital offset only partially by the bargain purchase gain related to the acquisition ofConvergex Group inJune 2017 . The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests. Income Taxes Income tax expense decreased$28.4 million to$15.7 million for the year endedDecember 31, 2018 compared with an income tax expense of$44.1 million in the prior year period. This decrease in expense is primarily attributable to the re-measurement in 2017 of the Company's deferred tax assets using the reduced statutory Federal tax rate of the federal tax reform enacted in 2017. Net Income (Loss) Attributable to Non-controlling Interests Net income (loss) attributable to non-controlling interests increased$13.3 million to$37.1 million for the year endedDecember 31, 2018 compared with$23.8 million in the prior year period. The increase was primarily the result of an increase in income earned by the merger arbitrageConsolidated Fund in the current year period. 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. Preferred Stock Dividends OnMay 19, 2015 , the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. 41 -------------------------------------------------------------------------------- Table of Contents Segment Analysis and Economic Income (Loss) Segments The Company conducts its operations through two segments:Op Co andAsset Co. For a more detailed discussion regarding the Company's recent change in segments, see Part I Item 1. Business "Overview" section. Economic Income (Loss) The performance measure used by the Company for each segment is Economic Income (Loss), which management uses to evaluate the financial performance of and to make operating decisions for the Company 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 (Loss) 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 (Loss) may not be comparable to similarly titled measures used by other companies. We use Economic Income (Loss) as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income (Loss) 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 US GAAP. As a result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) has limitations in that it does not take into account certain items included or excluded under US GAAP, including our Consolidated Funds. Economic Income (Loss) is considered by management as a supplemental measure to the US GAAP results to provide a more complete understanding of each segment's performance as measured by management. For a reconciliation of Economic Income (Loss) to US GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 27 to the Company's consolidated financial statements included elsewhere in this Form 10-K. In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for Consolidated Funds and excludes (ii) goodwill and intangible impairment (iii) certain other transaction-related adjustments and/or reorganization expenses and (iv) certain costs associated with debt. Economic Operating Income (Loss) represents Economic Income (Loss) before depreciation and amortization expenses. In addition, Economic Income (Loss) 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 US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) 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 and the Company's investment in the activist business and certain investment funds. For US GAAP purposes, all of these items, are recorded in other income (loss). Economic Income (Loss) recognizes (a) incentive fees during periods when the fees are not yet crystallized for US GAAP reporting, (b) start-up costs of a fund over the expected life of the fund and (c) retainer fees, relating to investment banking activities, earned during the period that would otherwise be deferred until closing for US GAAP reporting. In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue. Economic Income (Loss) Revenues The Company's principal sources of Economic Income (Loss) revenues are derived from activities in the following business segments: The Op Co segment generates revenue through five principal sources: investment banking revenue, brokerage revenue, management fees, incentive income and investment income from the Company's own capital. The Asset Co segment generates revenue through three principal sources: management fees, incentive income and investment income from the Company's own capital. Economic Income (Loss) Expenses The Company's Economic Income (Loss) expenses consist of non-interest expenses and interest expense. Non-interest expenses consist of compensation and benefits and non-compensation expenses (fixed and variable), 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 partners of such entities. 42 -------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2019 Compared with Year EndedDecember 31, 2018 Year EndedDecember 31 , Total 2019 2018 Period-to-Period Operating Operating Company Asset Company Total Company Asset Company Total $ Change % Change (dollars in thousands) Economic Income Revenues Investment banking$ 352,192 $ -$ 352,192 $ 329,061 $ -$ 329,061 $ 23,131 7 % Brokerage 440,413 - 440,413 452,299 - 452,299 (11,886) (3) % Management fees 43,698 1,976 45,674 43,466 5,709 49,175 (3,501) (7) % Incentive income (loss) 45,041 1,152 46,193 16,851 6,896 23,747 22,446 95 % Investment income (loss) 51,344 3,111 54,455 53,593 2,753 56,346 (1,891) (3) % Other income (loss) 5,785 58 5,843 (1,619) 451 (1,168) 7,011 (600) % Total economic income revenues 938,473 6,297 944,770 893,651 15,809 909,460 35,310 4 % Interest expense 22,576 5,449 28,025 17,489 5,524 23,013 5,012 22 % Total net revenues$ 915,897 $ 848 $ 916,745 $ 876,162 $ 10,285 $ 886,447 $ 30,298 3 % Economic Income (Loss) Total Economic Operating Income (Loss) (which is Economic Income (Loss) before depreciation and amortization) was$69.1 million for the year endedDecember 31, 2019 , a decrease of$11.8 million compared to Economic Operating Income (Loss) of$80.9 million in the prior year period. Total Economic Income (Loss) was$48.6 million for the year endedDecember 31, 2019 , a decrease of$20.7 million compared to Economic Income (Loss) of$69.3 million in the prior year period. Total Economic Income (Loss) revenues were$944.8 million for the year endedDecember 31, 2019 , an increase of$35.3 million compared to Economic Income (Loss) revenues of$909.5 million in the prior year period. This was primarily related to an increase in investment banking and incentive income offset partially by a decrease in brokerage income. Operating Company Segment Revenues The Op Co segment Economic Income (Loss) revenues were$938.5 million for the year endedDecember 31, 2019 , an increase of$44.8 million compared to Economic Income (Loss) revenues of$893.7 million in the prior year period. Investment Banking. Investment banking revenues increased$23.1 million to$352.2 million for the year endedDecember 31, 2019 compared with$329.1 million in the prior year period. During the year endedDecember 31, 2019 , the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions. During the year endedDecember 31, 2018 , the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital markets transactions. Brokerage. Brokerage revenues decreased$11.9 million to$440.4 million for the year endedDecember 31, 2019 , compared with$452.3 million in the prior year period. This was attributable to a decrease in institutional services and cross asset revenues partially offset by an increase in commission management revenue. Customer trading volumes across the industry (according to Bloomberg) decreased 4% for the year endedDecember 31, 2019 compared to the prior year period. Management Fees. Management fees for the segment increased$0.2 million to$43.7 million for the year endedDecember 31, 2019 compared with$43.5 million in the prior year period. This increase in management fees was primarily related to an increase from our healthcare royalty business partially offset by a decrease in management fees from our activist business. Incentive Income (Loss). Incentive income for the segment increased$28.1 million to$45.0 million for the year endedDecember 31, 2019 compared with$16.9 million in the prior year period. This increase was related to an increase in performance fees from our activist and healthcare investments businesses. Investment Income (Loss). Investment income for the segment decreased$2.3 million to$51.3 million for the year endedDecember 31, 2019 compared with$53.6 million in the prior year period. The decrease primarily relates to a decrease in performance of the Company's own invested capital. Other Income (Loss). Other income (loss) for the segment increased$7.4 million to$5.8 million for the year endedDecember 31, 2019 compared with a loss of$1.6 million in the prior year period. The increase is due to higher premiums and lower claims and claims related reserves from our reinsurance business through 2019 compared to the same period in 2018. 43 -------------------------------------------------------------------------------- Table of Contents Asset Company Segment RevenuesThe Asset Company segment Economic Income (Loss) revenues were$6.3 million for the year endedDecember 31, 2019 , a decrease of$9.5 million compared with Economic Income (Loss) revenues of$15.8 million in the prior year. Management Fees. Management fees for the segment decreased$3.7 million to$2.0 million for the year endedDecember 31, 2019 compared with$5.7 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the real estate investments. Incentive Income (Loss). Incentive income for the segment decreased$5.7 million to$1.2 million for the year endedDecember 31, 2019 compared with income of$6.9 million in the prior year period. This decrease was related to a decrease in performance fees from the real estate investments and was partially offset by an increase in performance fees from the multi-strategy business. Investment Income (Loss). Investment income for the segment increased$0.3 million to$3.1 million for the year endedDecember 31, 2019 , compared with income of$2.8 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital. Other Income (Loss). Other income (loss) for the segment decreased$0.4 million to$0.1 million for the year endedDecember 31, 2019 , compared with$0.5 million in the prior year period. Interest expense Interest expense increased$5.0 million to$28.0 million for the year endedDecember 31, 2019 compared with$23.0 million in the prior year period. Interest expense primarily relates to debt issued. The increase is primarily related to new debt issued in June of 2018 and May of 2019. Non-Interest Expenses Non-interest expenses. Total non-interest expenses increased$51.1 million to$856.5 million for the year endedDecember 31, 2019 , compared with$805.4 million in the prior year period. Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses, increased$28.0 million to$537.5 million for the year endedDecember 31, 2019 compared with$509.6 million in the prior year period. The increase is due to a slightly higher compensation to revenue ratio which was 57% for the year endedDecember 31, 2019 compared with 56% in the prior year period. Non-compensation Expenses-Fixed. Fixed non-compensation expenses, included within non-interest expenses, increased$6.2 million to$146.7 million for the year endedDecember 31, 2019 compared with$140.5 million in the prior year period. The increase is primarily related to increased professional, advisory and other fees offset partially by lower expenses from equity investments. The following table shows the components of the non-compensation expenses-fixed, for the year endedDecember 31, 2019 and 2018: Year Ended December 31, Period-to-Period 2019 2018 $ Change % Change (dollars in thousands) Non-compensation expenses-fixed: Communications$ 30,097 $ 29,325 $ 772 3 % Professional, advisory and other fees 27,975 22,647 5,328 24 % Occupancy and equipment 38,334 39,560 (1,226) (3) % Service fees 23,647 20,034 3,613 18 % Expenses from equity investments 7,690 12,001 (4,311) (36) % Reimbursement from affiliates (1,130) (1,304) 174 (13) % Other 20,059 18,248 1,811 10 % Total$ 146,672 $ 140,511 $ 6,161 4 % Depreciation and amortization expenses. Depreciation and amortization expenses increased to$20.4 million for the year endedDecember 31, 2019 compared with$11.6 million in the prior year period. The increase in amortization expense primarily related to intangibles acquired through the Quarton acquisition inJanuary 2019 . 44 -------------------------------------------------------------------------------- Table of Contents Non-compensation Expenses-Variable. Variable non-compensation expenses, included within non-interest expenses, which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased$8.3 million to$151.9 million for the year endedDecember 31, 2019 compared with$143.6 million in the prior year period. The increase is related to increased marketing and business development costs offset partially by lower brokerage and trade execution costs. The following table shows the components of the non-compensation expenses-variable, for the year endedDecember 31, 2019 and 2018: Year Ended December 31, Period-to-Period 2019 2018 $ Change % Change (dollars in thousands) Non-compensation expenses-Variable: Brokerage and trade execution costs$ 102,336 $ 106,115 $ (3,779) (4) % HealthCare Royalty Partners syndication costs 264 529 (265) (50) % Expenses related to Luxembourg companies 2,631 3,831 (1,200) (31) % Marketing and business development 41,305 31,255 10,050 32 % Other 5,330 1,919 3,411 178 % Total$ 151,866 $ 143,649 $ 8,217 6 % Non-Controlling Interests Net income (loss) attributable to non-controlling interests decreased by$0.2 to$4.8 million for the year endedDecember 31, 2019 compared with$5.0 million in the prior year period. Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries. Preferred Stock Dividends OnMay 19, 2015 , the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. 45 -------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2018 Compared with the Year EndedDecember 31, 2017 Year EndedDecember 31 , Total 2018 2017 Period-to-Period Operating Operating Company Asset Company Total Company Asset Company Total $ Change % Change (dollars in thousands) Economic Income Revenues Investment banking$ 329,061 $ -$ 329,061 $ 223,614 $ -$ 223,614 $ 105,447 47 % Brokerage 452,299 - 452,299 312,780 - 312,780 139,519 45 % Management fees 43,466 5,709 49,175 45,007 10,380 55,387 (6,212) (11) % Incentive income (loss) 16,851 6,896 23,747 17,872 8,156 26,028 (2,281) (9) % Investment income (loss) 53,593 2,753 56,346 7,204 37,938 45,142 11,204 25 % Other income (loss) (1,619) 451 (1,168) 3,307 (76) 3,231 (4,399) (136) %
Total economic income revenues 893,651 15,809 909,460 609,784 56,398 666,182 243,278 37 % Interest Expense 17,489 5,524 23,013 13,599 5,289 18,888 4,125 22 % Total net revenues$ 876,162 $ 10,285 $ 886,447 $ 596,185 $ 51,109 $ 647,294 $ 239,153 37 % Economic Income (Loss) Total Economic Operating Income (Loss) (which is Economic Income (Loss) before depreciation and amortization) was$80.9 million for the year endedDecember 31, 2018 , an increase of$60.3 million compared to Economic Operating Income (Loss) of$20.6 million in the prior year period. Total Economic Income (Loss) was$76.1 million for the year endedDecember 31, 2018 , an increase of$60.3 million compared to Economic Income (Loss) of$15.8 million in the prior year period. Total Economic Income (Loss) revenues were$909.5 million for the year endedDecember 31, 2018 , an increase of$243.3 million compared to Economic Income (Loss) revenues of$666.2 million in the prior year period. This was primarily related to an increase in investment banking and brokerage activity. Operating Company Segment Revenues The Op Co Segment Economic Income (Loss) revenues were$893.7 million for the year endedDecember 31, 2018 , an increase of$283.9 million compared to Economic Income (Loss) revenues of$609.8 million in the prior year period. Investment Banking. Investment banking revenues increased$105.5 million to$329.1 million for the year endedDecember 31, 2018 compared with$223.6 million in the prior year period. During the year endedDecember 31, 2018 , the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital markets transactions. During the year endedDecember 31, 2017 , the Company completed 103 underwriting transactions, 16 strategic advisory transactions and two debt capital markets transactions. The implied average underwriting fee per transaction was 21.1% greater for the year endedDecember 31, 2018 as compared to the prior year period. Brokerage. Brokerage revenues increased$139.5 million to$452.3 million for the year endedDecember 31, 2018 , compared with$312.8 million in the prior year period. This was attributable to an increase in revenues due to the acquisition ofConvergex Group inJune 2017 and increased revenue in our options and electronic trading businesses. Customer trading volumes across the industry (according to Bloomberg) increased 12% for the year endedDecember 31, 2018 compared to the prior year period. Management Fees. Management fees for the segment decreased$1.5 million to$43.5 million for the year endedDecember 31, 2018 compared with$45.0 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the activist business and healthcare royalty business which was only partially offset with an increase in management fees from our private healthcare business. Incentive Income (Loss). Incentive income for the segment decreased$1.0 million to$16.9 million for the year endedDecember 31, 2018 compared with$17.9 million in the prior year period. This decrease was related to a decrease in performance fees from the activist business offset almost completely by an increase in performance fees in our private healthcare and merger arbitrage businesses. Investment Income (Loss). Investment income for the segment increased$46.4 million to$53.6 million for the year endedDecember 31, 2018 compared with$7.2 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital. 46 -------------------------------------------------------------------------------- Table of Contents Other Income (Loss). Other income (loss) for the segment decreased$4.9 million to a loss of$1.6 million for the year endedDecember 31, 2018 compared with income of$3.3 million in the prior year period. The decrease primarily relates to a decrease in income from the Company's reinsurance business. Asset Company Segment Revenues Asset Co segment Economic Income (Loss) revenues were$15.8 million for the year endedDecember 31, 2018 , a decrease of$40.6 million compared with Economic Income (Loss) revenues of$56.4 million in the prior year. . Management Fees. Management fees for the segment decreased$4.6 million to$5.8 million for the year endedDecember 31, 2018 compared with$10.4 million in the prior year period. This decrease in management fees was primarily related to the company's exit of two investment management strategies, one in the fourth quarter of 2017 and the other in the first quarter of 2018. . Incentive Income (Loss).. Incentive income for the segment decreased$1.3 million to$6.9 million for the year endedDecember 31, 2018 compared with$8.2 million in the prior year period. This decrease was related to a net payout related to the performance of certain multi-strategy assets. Investment Income (Loss). Investment income for the segment decreased$35.1 million to$2.8 million for the year endedDecember 31, 2018 , compared with$37.9 million in the prior year period. The decrease primarily relates to a decrease in performance of the Company's own invested capital. Other Income (Loss). Other income (loss) for the segment increased$0.6 million to$0.5 million for the year endedDecember 31, 2018 , compared with a loss of$0.1 million in the prior year period. Interest expense Interest expense increased$4.1 million to$23.0 million for the year endedDecember 31, 2018 compared with$18.9 million in the prior year period. Interest expense primarily relates to debt issued. The increase is primarily related to new debt issued in June of 2018. Non-Interest Expenses Non-interest expenses. Total non-interest expenses increased$180.1 million to$805.4 million for the year endedDecember 31, 2018 , compared with$625.3 million in the prior year period. Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses, increased$121.6 million to$509.6 million for the year endedDecember 31, 2018 compared with$388.0 million in the prior year period. The increase is due to$243.3 million higher revenues during 2018 as compared to 2017 which resulted in a higher compensation and benefits accrual. The compensation to revenue ratio was 56% for the year endedDecember 31, 2018 compared with 58% in the prior year period. Non-compensation Expenses-Fixed. Fixed non-compensation expenses, included within non-interest expenses, increased$20.4 million to$140.5 million for the year endedDecember 31, 2018 compared with$120.1 million in the prior year period. The increase is primarily related to the acquisition ofConvergex Group inJune 2017 . The following table shows the components of the non-compensation expenses-fixed, for the year endedDecember 31, 2018 and 2017: Year Ended December 31, Period-to-Period 2018 2017 $ Change % Change (dollars in thousands) Non-compensation expenses-fixed: Communications$ 29,325 $ 23,378 $ 5,947 25 % Professional, advisory and other fees 22,647 20,944 1,703 8 % Occupancy and equipment 39,560 33,928 5,632 17 % Service fees 20,034 14,896 5,138 34 % Expenses from equity investments 12,002 11,156 846 8 % Reimbursement from affiliates (1,304) (2,033) 729 (36) % Other 18,248 17,819 429 2 % Total$ 140,512 $ 120,088 $ 20,424 17 % 47
-------------------------------------------------------------------------------- Table of Contents Depreciation and amortization expenses. Depreciation and amortization expenses remained flat at$11.6 million for the year endedDecember 31, 2018 and the prior year period. This is due to an increase in depreciable fixed assets related to the acquisition ofConvergex Group inJune 2017 , offset by a decrease in amortization from certain intangibles which have been fully amortized. Non-compensation Expenses-Variable. Variable non-compensation expenses, included within non-interest expenses, which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased$37.8 million to$143.6 million for the year endedDecember 31, 2018 compared with$105.8 million in the prior year period. The increase is primarily related to higher brokerage and trade execution costs, related to the acquisition ofConvergex Group inJune 2017 . The following table shows the components of the non-compensation expenses-variable, for the year endedDecember 31, 2018 and 2017: Year Ended December 31, Period-to-Period 2018 2017 $ Change % Change (dollars in thousands) Non-compensation expenses-Variable: Brokerage and trade execution costs$ 106,115 $ 73,133 $ 32,982 45 % HealthCare Royalty Partners syndication costs 529 528 1 - % Expenses related to Luxembourg companies 3,831 3,279 552 17 % Marketing and business development 31,255 27,336 3,919 14 % Other 1,919 1,510 409 27 % Total$ 143,649 $ 105,786 $ 37,863 36 % Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to the investment management segment decreased$0.7 million to$1.3 million for the year endedDecember 31, 2018 compared to$2.0 million in the prior year period. Non-Controlling Interests Net income (loss) attributable to non-controlling interests decreased by$1.1 million to$5.0 million for the year endedDecember 31, 2018 compared with$6.1 million in the prior year period. Non-Controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries. Preferred Stock Dividends OnMay 19, 2015 , the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. Liquidity and Capital Resources We continually monitor our liquidity position. The working capital needs of the Company's business have been met through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months will be: •pay our operating expenses, primarily consisting of compensation and benefits, interest on debt and other general and administrative expenses; and •provide capital to facilitate the growth of our existing business. Based on our historical results, management's experience, our current business strategy and current assets under management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next twelve months. Our cash reserves include cash, cash equivalents and assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are generally readily marketable. As ofDecember 31, 2019 , we had cash and cash equivalents of$301.1 million and net liquid investment assets of$542.3 million , which includes cash and cash equivalents and short-term investments held by foreign subsidiaries as ofDecember 31, 2019 of$43.7 million . The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in theUnited Kingdom ,Germany ,Switzerland ,Canada ,South Africa andHong Kong . 48 -------------------------------------------------------------------------------- Table of Contents The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which can make up a significant portion of total compensation, are generally paid once a year byMarch 15th . As a clearing member firm providing services to certain of our brokerage customers, we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers' trading activity and market volatility. AtDecember 31, 2019 , we had security deposits totaling$91.8 million with clearing organizations in theU.S. for the settlement of equity trades. In the normal course of ourU.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures. Unfunded commitments The following table summarizes unfunded commitments as ofDecember 31, 2019 : Entity Unfunded Commitments Commitment term (dollars in thousands) HealthCare Royalty Partners funds (a) $ 7,605 5 years
$ 88 5 years Lagunita Biosciences, LLC $ 500 4 years Eclipse Fund II, L.P. $ 180 6 years Eclipse Continuity Fund I, L.P. $ 152 7 years Cowen Healthcare Investments II LP $ 3,406 2 years Cowen Healthcare Investments III LP $ 8,602 7 years Cowen Sustainable Investments I LP $ 25,000 10 years (a) The Company is a limited partner of theHealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member ofHealthCare Royalty Partners General Partners . The Company will make its pro-rata investment in theHealthCare Royalty Partners funds along with the other limited partners. Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by our customers and clearing house requirements, among others. Certain regulatory requirements constrain the use of a portion of our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different requirements and uses. Preferred Stock and Purchase of Capped Call Option OnMay 19, 2015 , the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided$117.2 million of proceeds, net of underwriting fees and issuance costs of$3.6 million . Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, onFebruary 15 ,May 15 ,August 15 andNovember 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the Company's existing and future indebtedness with respect to dividend rights and rights upon the Company's involuntary liquidation, dissolution or winding down. Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, into a number of shares of our Class A common stock equal to the liquidation preference of$1,000 divided by the conversion rate. The initial conversion rate (subsequent to theDecember 5, 2016 reverse stock split) is 38.0619 shares (which equates to$26.27 per share) of the Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or afterMay 20, 2020 , the Company may elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the Company's Class A common stock, cash or a combination thereof, at the Company's election, in each case, based on the then-applicable conversion rate, if the last reported sale price of the Company's Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, 49 -------------------------------------------------------------------------------- Table of Contents the conversion rate may be adjusted based on certain events including but not limited to the issuance of cash dividends or Class A common stock as dividends to the Company's Class A common shareholders or a share split or combination. In connection with the issuance and sale of the Series A Convertible Preferred Stock, the Company entered into a capped call option transaction (the "Capped Call Option Transaction") withNomura Global Financial Products Inc. for$15.9 million . The Capped Call Option Transaction is expected generally to reduce the potential dilution to the Company's Class A common stock (if the Company elects to convert to common shares) and/or offset any cash payments that the Company is required to make upon conversion of any Series A Convertible Preferred Stock. The Capped Call Option Transaction has an initial effective strike price of$26.27 per share, which matches the initial conversion price of the Series A Convertible Preferred Stock, and a cap price of$33.54 per share. However, to the extent that the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if it is settled in cash or stock it qualifies for equity classification as a reduction to additional paid in capital. The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital. Regulation As registered broker-dealers,Cowen and Company , Cowen Execution, ATM Execution,Cowen Prime andWestminster are subject to theSEC's Uniform Net Capital Rule 15c3-1 ("SEC Rule 15c3-1"), which requires the maintenance of minimum net capital. Each registered broker-dealer has elected to compute net capital under the alternative method permitted by that rule. Under the alternative method,Cowen and Company's minimum net capital requirement, as defined in (a)(4) ofSEC Rule 15c3-1, is$1.0 million . Cowen Execution, ATM Execution,Cowen Prime andWestminster are required to maintain minimum net capital, as defined in (a)(1)(ii) of SEC Rule 15c3-1, equal to the greater of$250,000 or 2% of aggregate debits arising from customer transactions. Advances to affiliates, repayment of borrowings, distributions, dividend payments and other equity withdrawals are subject to certain notification and other provisions of SEC Rule 15c3-1 and other regulatory bodies. OnFebruary 7, 2019 ,FINRA approved the transfer of all ofCowen Securities' business and personnel toCowen and Company .Cowen Securities subsequently filed a Form BDW, pursuant to Section 15(b) of the Securities Exchange Act of 1934, withFINRA to withdraw its status as a broker-dealer given that it will no longer conduct a securities business. OnMay 21, 2019 , Cowen Securities Form BDW was approved and officially deregistered with theSEC . As ofDecember 31, 2019 , the entity has been dissolved.Cowen Prime is also subject to Commodity Futures Trading Commission Regulation 1.17 ("Regulation 1.17"). Regulation 1.17 requires net capital equal to or in excess of$45,000 or the amount of net capital required by SEC Rule 15c3-1, whichever is greater. Cowen Execution is also subject toOptions Clearing Corporation ("OCC") Rule 302. OCC Rule 302 requires maintenance of net capital equal to the greater of$2,000,000 or 2% of aggregate debit items. AtDecember 31, 2019 , Cowen Execution had$103.2 million of net capital in excess of this minimum requirement.Cowen International Ltd andCowen Execution Ltd are subject to the capital requirements of theFCA , as defined, and must exceed the minimum capital requirement set forth by theFCA . EffectiveJune 1, 2018 , theFCA approved RamiusUK's application to cancel all of itsFCA authorization permissions. Accordingly, RamiusUK is no longer anFCA regulated and authorized firm. InApril 2019 ,Cowen Execution Ltd was formally approved to trade in a principal capacity. Cowen Asia, a previously established entity, was re-registered with regulatory approval onMay 17, 2019 . Cowen Asia is subject to the financial resources requirements of theSecurities and Futures Commission ("SFC") ofHong Kong . Financial Resources must exceed the Total Financial Resources requirement of the SFC. As ofDecember 31, 2019 , these regulated broker-dealers had regulatory net capital or financial resources, regulatory net capital requirements or minimumFCA or SFC requirement and excess as follows: 50
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Table of Contents Subsidiary Net Capital Net Capital Requirement Excess Net Capital (dollars in thousands) Cowen and Company$ 91,348 $ 1,000 $ 90,348 Cowen Execution$ 105,822 $ 2,673 $ 103,149 ATM Execution$ 5,354 $ 250 $ 5,104 Cowen Prime$ 13,659 $ 250 $ 13,409 Westminster$ 14,797 $ 250 $ 14,547 Cowen International Ltd$ 15,988 $ 7,597 $ 8,391 Cowen Execution Ltd$ 11,808 $ 2,509 $ 9,299 Cowen Asia$ 1,307 $ 385 $ 922 The Company'sU.S. broker-dealers must also comply withSEC's Customer Protection Rule ("SEC Rule 15c3-3") or claim an exemption pursuant to subparagraphs (k)(2)(i) (the "(k)(2)(i) exemption") or (k)(2)(ii) (the "(k)(2)(ii) exemption") of that rule. Firms can rely on more than one exemption.Cowen and Company ,Cowen Prime , Cowen Execution and ATM Execution claim the (k)(2)(ii) exemption with regards to some or all of their customer accounts and transactions that are introduced on a fully-disclosed basis to their clearing agents for clearing, settlement and custody.Cowen and Company ,Cowen Prime andWestminster claim the (k)(2)(i) exemption with regards to customer transactions and balances that are cleared, settled and custodied in bank accounts designated as Special Accounts for the Exclusive Benefit of Customers ("Special Bank Account"). In accordance with the requirements of SEC Rule 15c3-3, Cowen Execution may be required to deposit in a Special Reserve Account cash or acceptable qualified securities for the exclusive benefit of customers. As ofDecember 31, 2019 , Cowen Execution had segregated approximately$17.6 million of cash, while its required deposit was$5.5 million . As a clearing broker-dealer, Cowen Execution is required to compute a reserve requirement for proprietary accounts of broker-dealers ("PAB"), as defined in SEC Rule 15c3-3. Cowen Execution conducts PAB reserve computations in order to determine the amount it is required to deposit in its PAB Reserve Bank Accounts pursuant to SEC Rule 15c3-3. This allows each correspondent firm that uses Cowen Execution as its clearing broker-dealer to classify its PAB account assets held at Cowen Execution as allowable assets in the correspondent's net capital calculation. AtDecember 31, 2019 , Cowen Execution had$22.5 million of cash on deposit in PAB Reserve Bank Accounts, which was more than its required deposit of$14.8 million .Cowen and Company , ATM Execution,Cowen Prime and Cowen Execution also maintain certain assets in PAB accounts held at their respective clearing brokers. Each treats its assets held in those PAB accounts at the respective clearing brokers as allowable assets for net capital purposes. Cowen's Luxembourg reinsurance companies, Vianden RCG Re SCA and Hollenfels, individually and their Luxembourg parent holding company, Ramius Enterprise Luxembourg Holdco S.à r.l., on a combined basis with the reinsurance companies, are required to maintain a solvency capital ratio as calculated by relevantEuropean Commission directives and local regulatory rules in Luxembourg. Each reinsurance company's individual solvency capital ratio as well as the combined solvency capital ratio of the holding and reinsurance companies calculated as ofDecember 31 of each year must exceed a minimum requirement. As of the last testing date,December 31, 2019 , all of these entities were in excess of this minimum requirement. The companies are currently, and management expects they will be at the next testing date ofDecember 31, 2020 , in compliance with these requirements. Based on minimum capital and surplus requirements pursuant to the laws of the state ofNew York that apply to captive insurance companies,RCG Insurance Company , Cowen's captive insurance company incorporated and licensed in the state ofNew York , was required to maintain capital and surplus of approximately$0.3 million as ofDecember 31, 2019 .RCG Insurance Company's capital and surplus as ofDecember 31, 2019 totaled approximately$32.8 million . 51 -------------------------------------------------------------------------------- Table of Contents Cash Flows Analysis The Company's primary sources of cash are derived from its operating activities, fees and realized returns on its own invested capital. The Company's primary uses of cash include compensation and general and administrative expenses. Operating Activities. Net cash used in operating activities of$179.9 million for the year endedDecember 31, 2019 was primarily related to the purchases of securities owned, at fair value, held at broker dealer, offset partially by stock borrow stock loan activity. Net cash provided by operating activities of$324.5 million for the year endedDecember 31, 2018 was primarily related to the (i) proceeds from sales of other investments in consolidated funds (ii) proceeds from sales of securities owned, at fair value, (iii) increase in payable to customers offset by decrease in receivable from brokers, dealers and clearing organizations and purchases of securities owned, at fair value. Net cash provided by operating activities of$3.4 million for the year endedDecember 31, 2017 was primarily related to purchases of securities owned, at fair value and decrease in securities borrowed partially offset by proceeds from sales of securities owned, at fair value. Investing Activities. Net cash used in investing activities of$47.6 million for the year endedDecember 31, 2019 was primarily related to the purchase of Quarton and other investments. Net cash used in investing activities of$17.9 million for the year endedDecember 31, 2018 was primarily related to purchases of other investments partially offset by proceeds from sales of other investments. Net cash used in investing activities of$2.4 million for the year endedDecember 31, 2017 was primarily related to the purchase ofConvergex Group , loans issued and purchases of other investments offset partially by sales of other investments and fixed assets. Financing Activities. Net cash provided by financing activities for the year endedDecember 31, 2019 of$200.4 million was primarily related to (i) capital contributions by non-controlling interests offset only partially by capital withdrawals by non-controlling interests in Consolidating Funds and (ii) borrowings on notes and other debt. Net cash provided by financing activities for the year endedDecember 31, 2018 of$128.7 million was primarily related to capital withdrawal to non-controlling interests in Consolidating Funds offset partially contributions from non-controlling interests in Consolidated Funds. Net cash provided by financing activities for the year endedDecember 31, 2017 of$137.9 million was primarily related to proceeds from the issuance of convertible debt, borrowings on notes and other debt and contributions from non-controlling interests in Consolidated Funds offset partially by repayments on convertible debt, notes and other debt, withdrawals from non-controlling interests in Consolidated Funds and purchase of treasury stock. Debt Convertible DebtDecember 2022 Convertible Notes The Company, onDecember 14, 2017 , issued$135.0 million aggregate principal amount of 3.00% convertible senior notes dueDecember 2022 (the "December 2022 Convertible Notes"). TheDecember 2022 Convertible Notes are due onDecember 15, 2022 unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such date. The interest on theDecember 2022 Convertible Notes is payable semi-annually onDecember 15 andJune 15 of each year. TheDecember 2022 Convertible Notes are senior unsecured obligations of Cowen. TheDecember 2022 Convertible Notes may be converted into cash or shares of Class A common stock at the Company's election based on the current conversion price. TheDecember 2022 Convertible Notes were issued with an initial conversion price of$17.375 per share of Cowen's Class A common stock. The Company used the net proceeds, together with cash on hand, from the offering for general corporate purposes, including the repurchase or repayment of$115.1 million of the Company's outstanding 3.0% cash convertible senior notes dueMarch 2019 (the "March 2019 Convertible Notes") and the repurchase of approximately$19.5 million of the Company's shares of its Class A common stock, which were consummated substantially concurrently with the closing of the offering. As ofDecember 31, 2019 , the outstanding principal amount of theDecember 2022 Convertible Notes was$135.0 million . OnJune 26, 2018 , the Company received shareholder approval for the Company to settle theDecember 2022 Convertible Notes entirely in Class A common stock. Upon receiving shareholder approval, the Company reclassified the separately recognized conversion option from a derivative liability to equity. The Company recorded interest expense of$4.1 million ,$4.1 million and$0.2 million for the year endedDecember 31, 2019 , 2018 and 2017, respectively. The Company recognized the embedded cash conversion option at issuance date fair value, which also represents the initial unamortized discount on theDecember 2022 Convertible Notes of$23.4 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount, included within interest and dividends expense in the accompanying consolidated statements of operations is$4.3 million ,$4.0 million and$0.2 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively, based on an effective interest rate of 7.13%. The Company capitalized the debt issuance costs in the amount of$2.2 million , which is a direct deduction from 52 -------------------------------------------------------------------------------- Table of Contents the carrying value of the debt and will be amortized over the life of theDecember 2022 Convertible Notes in interest and dividends expense in the accompanying consolidated statements of operations.March 2019 Convertible Notes OnMarch 10, 2014 , the Company issued$149.5 million of 3.0% cash convertible senior notes (the "March 2019 Convertible Notes"). TheMarch 2019 Convertible Notes matured onMarch 15, 2019 and were fully repaid by the Company. The Company recorded interest expense of$0.1 million ,$1.1 million , and$4.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Amortization on the discount, included within interest and dividends expense in the accompanying consolidated statements of operations was$0.3 million ,$1.5 million and$7.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively, based on an effective interest rate of 8.89%. Notes Payable May 2024 Notes OnMay 7, 2019 , the Company completed its private placement of$53.0 million aggregate principal amount of 7.25% senior notes dueMay 2024 (the "May 2024 Notes") with certain institutional investors. OnSeptember 30, 2019 , the Company issued an additional$25.0 million of the same series of notes. The additionalMay 2024 Notes were purchased at a premium of$0.5 million , which is shown net in notes payable in the accompanying consolidated statement of financial condition. To date the May 2024 Notes have maintained their initial private rating, and the interest rate has remained unchanged. Interest on theMay 2024 Notes is payable semi-annually in arrears onMay 6 andNovember 6 . The Company recorded interest expense of$2.9 million for the year endedDecember 31, 2019 . The Company capitalized debt issuance costs of approximately$1.5 million inMay 2019 and$0.6 million inDecember 2019 , which is a direct deduction from the carrying value of the debt and will be amortized over the life of theMay 2024 Notes in interest and dividends expense in the accompanying consolidated statements of operations. June 2033 Notes OnJune 11, 2018 , the Company completed its public offering of$90.0 million of 7.75% senior notes dueJune 2033 (the "June 2033 Notes") and subsequently the underwriters exercised in full their option to purchase an additional$10.0 million principal amount of theJune 2033 Notes. Interest on theJune 2033 Notes is payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 . The Company recorded interest expense of$7.7 million and$4.3 million for the years endedDecember 31, 2019 and 2018, respectively. The Company capitalized debt issuance costs of approximately$3.6 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of theJune 2033 Notes in interest and dividends expense in the accompanying consolidated statements of operations.December 2027 Notes OnDecember 8, 2017 , the Company completed its public offering of$120.0 million of 7.35% senior notes dueDecember 2027 (the "December 2027 Notes") and subsequently the underwriters exercised in full their option to purchase an additional$18.0 million principal amount of theDecember 2027 Notes. Interest on theDecember 2027 Notes is payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 . The Company recorded interest expense of$10.1 million ,$10.1 million and$0.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The Company capitalized debt issuance costs of approximately$5.0 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of theDecember 2027 Notes in interest and dividends expense in the accompanying consolidated statements of operations. The net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by the Company were used to redeem all of its 8.25% senior notes dueOctober 2021 and for general corporate purposes. Term Loan OnJune 30, 2017 , a subsidiary of the Company borrowed$28.2 million to fund general corporate purposes. This term loan has an effective interest rate of LIBOR plus 3.75% with a lump sum payment of the entire principal amount due (as amended) onJune 26, 2020 . InJuly 2019 , the subsidiary of the Company borrowed an additional$4.0 million to fund general corporate purposes. The loan is secured by the value of the Company's limited partnership interests in two affiliated investment funds. The Company has provided a guarantee for this loan. The Company recorded interest expense of$1.8 million ,$1.6 million and$0.7 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Other Notes Payable DuringJanuary 2019 , the Company borrowed$2.2 million to fund insurance premium payments. This note had an effective interest rate of 2.51% and was due onDecember 31, 2019 , with monthly payment requirements of$0.2 million . As ofDecember 31, 2019 , the note was fully repaid. Interest expense was$0.1 million for the year endedDecember 31, 2019 . 53 -------------------------------------------------------------------------------- Table of Contents DuringNovember 2019 , the Company borrowed$2.6 million to fund general corporate capital expenditures. This note is dueNovember 2024 , with monthly payment requirements of$0.1 million . As ofDecember 31, 2019 , the note had a balance of$2.5 million . Interest expense for the year endedDecember 31, 2019 was insignificant. Revolver The Company, inDecember 2019 , entered into a two-year committed credit facility with a capacity of$25 million . This agreement has an effective interest rate of LIBOR plus 3.25% on any money drawn from the credit facility and the commitment or unused line fee is 50 basis points on the undrawn amount. Finance Lease Obligations The Company has entered into various finance leases for computer equipment. These finance lease obligations are included in notes payable and other debt in the accompanying consolidated statements of financial condition, and have a weighted average lease term of 3.21 years and weighted average interest rate of 4.88% as ofDecember 31, 2019 . For the year endedDecember 31, 2019 , 2018 and 2017, quantitative information regarding the Company's finance lease obligations reflected in the accompanying consolidated statement of operations, the supplemental cash flow information and certain other information related to finance leases were as follows: Year Ended December 31, 2019 2018 Lease Cost Finance Lease Cost: Amortization of finance lease right-of-use assets$ 1,266 $ 1,627 Interest on lease liabilities 227 231
Other Information Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases 227 231 Financing cash flows from finance leases$ 1,266 $ 2,186 Letters of Credit As ofDecember 31, 2019 , the Company has the following six irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has pledged collateral for reinsurance agreements which amounted to$2.0 million as ofDecember 31, 2019 , and$1.0 million as ofDecember 31, 2018 , which are released annually betweenMarch 2020 andMarch 2023 based on the policy periods covered by the reinsurance agreements. Location Amount Maturity (dollars in thousands) Boston $ 382 March 2020 New York $ 359 April 2020 New York $ 398 October 2020 New York $ 1,125 October 2020 New York $ 1,629 November 2020 San Francisco $ 716 October 2025 To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As ofDecember 31, 2019 and 2018, there were no amounts due related to these letters of credit. 54 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following tables summarize the Company's contractual cash obligations as ofDecember 31, 2019 : More Than Total < 1 Year 1-3 Years 3-5 Years 5 Years (dollars in thousands) Equipment, Service and Facility Leases Real Estate and Other Facility Rental$ 110,509 $ 22,848
56,683 22,217 24,032 6,033 4,401 Operating Equipment Leases 639 360 279 - - Total 167,831 45,425 69,348 38,432 14,626 Debt Convertible Debt 147,150 4,050 143,100 - - Notes Payable 527,217 23,548 47,096 122,269 334,304 Finance Lease Obligation 4,276 1,290 2,564 422 - Term Loan 33,126 33,126 - - - Other Notes Payable 2,915 593 1,186 1,136 - Total$ 714,684 $ 62,607 $ 193,946 $ 123,827 $ 334,304 Clawback obligations For financial reporting purposes, the general partners of a real estate fund had recorded a liability for potential clawback obligations to the limited partners, due to changes in the unrealized value of the real estate fund's remaining investments and where the real estate fund's general partner has previously received carried interest distributions. The clawback liability was not realized until the end of the real estate fund's life. The clawback obligations for the real estate fund were$6.5 million atDecember 31, 2019 . The liability was fully repaid inDecember 2019 . (see Notes 6 and 22 to the Company's consolidated financial statements). Minimum payments for all debt outstanding Annual scheduled maturities of debt and minimum payments for all debt outstanding as ofDecember 31, 2019 , are as follows: Other Notes Finance Lease Convertible Debt Notes Payable Term Loan Payable Obligation (dollars in thousands) 2020 $ 4,050$ 23,548 $ 33,126 $ 593 $ 1,290 2021 4,050 23,548 - 593 1,398 2022 139,050 23,548 - 593 1,166 2023 - 23,548 - 593 411 2024 - 98,721 - 543 11 Thereafter - 334,304 - - - Subtotal 147,150 527,217 33,126 2,915 4,276 Less (a) (28,462) (220,399) (946) (399) (339) Total$ 118,688 $ 306,818 $ 32,180 $ 2,516 $ 3,937 (a)Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the convertible debt. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements as ofDecember 31, 2019 . However, through indemnification provisions in our clearing agreements, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the clearing agreements, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.Cowen and Company ,Cowen Prime , Cowen Execution and ATM Execution are members of various securities exchanges and clearing organizations. Under the standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the various securities exchanges and clearing organizations, all other members would be required to meet the shortfall. The Company's liability under 55 -------------------------------------------------------------------------------- Table of Contents these arrangements is not quantifiable. Accordingly, no contingent liability is carried in the accompanying consolidated statements of financial condition for these arrangements. Cowen Execution loans securities temporarily to other brokers in connection with its securities lending activities. Cowen Execution receives cash as collateral for the securities loaned. Increases in security prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, Cowen Execution may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. Cowen Execution controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis, and by requiring additional cash as collateral or returning collateral when necessary. Cowen Execution borrows securities temporarily from other brokers in connection with its securities borrowing activities. Cowen Execution deposits cash as collateral for the securities borrowed. Decreases in security prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return collateral, Cowen Execution may be exposed to the risk of selling the securities at prevailing market prices. Cowen Execution controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by depositing additional collateral with counterparties or receiving cash when deemed necessary. Critical Accounting Policies and Estimates Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in its consolidated financial statements or the notes thereto. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent. Actual results may differ materially from these estimates. The following is a summary of what the Company believes to be its most critical accounting policies and estimates. Consolidation The Company's consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The Company's investment funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting. The Company's consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the Consolidated Funds were eliminated in consolidation; however, the Company's allocated share of net income from these investment funds was increased by the amount of this eliminated income. Hence, the consolidation of these investment funds had no net effect on the Company's net earnings. The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary. The Company consolidates five investment funds for which it acts as the managing member/general partner and investment manager. AtDecember 31, 2019 , the Company consolidated the following investment funds:Ramius Enterprise LP ("Enterprise LP "),Ramius Merger Fund LLC (the "Merger Fund"),Cowen Private Investments LP ("Cowen Private"),Ramius Merger Arbitrage UCITS Fund ("UCITS Fund "), andCowen Sustainable Investments I LP ("CSI I LP ") (each a "Consolidated Fund " and collectively the "Consolidated Funds"). The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP. Voting Operating Entities-VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, (ii) the equity holders at risk 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 and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns. Under US GAAP consolidation requirements, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units. 56 -------------------------------------------------------------------------------- Table of Contents Variable Interest Entities-VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it. The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE. In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights. The Company does not consolidate certain funds that are VIEs due to the Company's conclusion that it is not the primary beneficiary of these funds in each instance. Investment fund investors are entitled to all of the economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company has equity interests in the funds as both general partner and limited partner. In these instances the Company has concluded that the variable interests are not potentially significant to the VIE. Although the Company may advance amounts and pay certain expenses on behalf of the investment funds that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services. Equity Method Investments-For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary. Other-If the Company does not consolidate an entity or apply the equity method of accounting, the Company accounts for such entities (primarily, all securities of such entity which are bought and held principally for the purpose of selling them in the near term as trading securities), at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations. Retention of Specialized Accounting-The Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting. The Company reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within net realized and unrealized gains (losses) on investments and other transactions. Accordingly, the accompanying consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company. In addition, the Company's broker-dealer subsidiaries apply the specialized industry accounting for brokers and dealers in securities. The Company also retains specialized accounting upon consolidation. Valuation of investments and derivative contracts US GAAP establishes 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
57 -------------------------------------------------------------------------------- Table of Contents 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. For additional information regarding the use of unobservable inputs to fair value assets and liabilities see Note 7 in the accompanying consolidated financial statement in Part 1 Item 1. The Company and its operating 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 analysis, 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 impact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized 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" to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes 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. The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed, as well as the way that financial instruments in other parts of the business are recorded.Securities- Securities with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities include active listed equities, certainU.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds 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 trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering, trading activity, broker quotes, 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. As level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability. Derivative contracts-Derivative 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 58 -------------------------------------------------------------------------------- Table of Contents are therefore classified within level 2. OTC derivatives, such as swaps and options where market data is not readily available or observable are classified as level 3. Other investments-Other investments consist primarily of investment funds, real estate investments, carried interest and equity method investments, which are valued as follows: i. Portfolio funds-Portfolio funds ("Portfolio Funds") include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value ("NAV") per share (or its equivalent). The guidance permits an entity holding investments in certain entities that either are investment companies as defined by theAmerican Institute of Certified Public Accountants ("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. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy. ii. Real estate investments-Real estate debt and equity investments are measured at fair value. The fair value of real estate investments is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. Real estate investments without a public market are valued based on assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence, as well as independent external appraisals. In general, the Company considers several valuation techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for significant changes at the property level or a significant change in the overall market which would impact the value of the real estate investment resulting in unrealized appreciation or depreciation. 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. The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value. iii. Carried Interest-For the private equity and debt fund products the Company offers, the company is allocated incentive income by the investment funds based on the extent of which the investment funds performance exceeds predetermined thresholds. Carried interest allocations are generally structured from a legal standpoint as an allocation of capital in the Company's capital account. The Company accounts for carried interest allocations by applying an equity ownership model. Accordingly, the Company accrues performance allocations quarterly based on the fair value of the underlying investments assuming hypothetical liquidation at book value. iv. Equity Method Investments-For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company applies the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.Goodwill and Intangible AssetsGoodwill Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed.Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit. 59 -------------------------------------------------------------------------------- Table of Contents In accordance with US GAAP requirements for testing for impairment of goodwill, inclusive of the newly adopted amendments, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Intangible assets Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value. The Company continually monitors the estimated average useful lives of existing intangible assets. Income taxes The Company accounts for income taxes in accordance with US GAAP which requires the recognition of tax benefits or expenses based on the estimated future tax effects of temporary differences between the financial statement and tax basis of its assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely than not to be realized. We evaluate our deferred tax assets for recoverability considering negative and positive evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, and tax planning strategies. We record a valuation allowance against our deferred tax assets to bring them to a level that it is more likely than not to be utilized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management-approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws, we have identified the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate. Legal Reserves The Company estimates potential losses that may arise out of legal and regulatory proceedings 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 US GAAP. These amounts are reported in other expenses, net of recoveries, in the consolidated statements of operations. See Note 22 "Commitments and Contingencies" in our accompanying consolidated financial statements for the annual endedDecember 31, 2019 for further discussion. Recently adopted and future adoption of accounting pronouncements
For a detailed discussion, see Note 2 "Recent pronouncements" in our
accompanying consolidated financial statements for the annual ended
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