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EX-32.1 - Duff & Phelps Corpv164527_ex32-1.htm
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EX-31.1 - Duff & Phelps Corpv164527_ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2009

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 001-33693

DUFF & PHELPS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE
20-8893559
(State of other jurisdiction or
incorporation or organization)
(I.R.S. employer
identification no.)

55 East 52nd Street, 31st Floor
New York, New York  10055
(Address of principal executive offices)
(Zip code)

(212) 871-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o Smaller reporting company o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o  No þ

The number of shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, was 23,985,989 as of October 15, 2009.  The number of shares outstanding of the registrant’s Class B common stock, par value $0.0001 per share, was 16,243,979 as of October 15, 2009.
 


 
 

 

DUFF & PHELPS CORPORATION
AND SUBSIDIARIES

TABLE OF CONTENTS

Part I.
Financial Information
 
       
 
Item 1.
Financial Statements
1
     
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
27
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
51
       
 
Item 4.
Controls and Procedures.
51
       
Part II.
Other Information
 
       
 
Item 1.
Legal Proceedings
52
       
 
Item 1A.
Risk Factors
52
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
52
       
 
Item 3.
Defaults Upon Senior Securities
52
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
52
       
 
Item 5.
Other Information
52
       
 
Item 6.
Exhibits
53
       
 
Signatures
 
54
 
 
 

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues
  $ 93,240     $ 96,314     $ 272,558     $ 287,268  
Reimbursable expenses
    3,394       2,781       8,057       7,946  
Total revenues
    96,634       99,095       280,615       295,214  
                                 
Direct client service costs
                               
Compensation and benefits (including $4,294 and $7,551 of equity-based compensation for the three months ended September 30, 2009 and 2008, respectively, and $13,631 and $17,182 for the nine months ended September 30, 2009 and 2008, respectively)
    52,287       57,280       155,115       166,276  
Other direct client service costs
    2,954       2,410       5,801       5,828  
Acquisition retention expenses
    -       206       -       782  
Reimbursable expenses
    3,468       2,813       8,120       7,926  
Subtotal
    58,709       62,709       169,036       180,812  
                                 
Operating expenses
                               
Selling, general and administrative expenses (including $2,018 and $2,845 of equity-based compensation for the three months ended September 30, 2009 and 2008, respectively, and $5,574 and $8,164 for the nine months ended September 30, 2009 and 2008, respectively)
    24,620       29,538       74,048       83,301  
Depreciation and amortization
    2,594       2,446       7,712       6,903  
Subtotal
    27,214       31,984       81,760       90,204  
                                 
Operating income
    10,711       4,402       29,819       24,198  
                                 
Other expense/(income)
                               
Interest income
    (17 )     (90 )     (34 )     (654 )
Interest expense
    91       847       1,079       2,569  
Loss on early extinguishment of debt
    -       -       1,737       -  
Other expense
    50       (21 )     137       (92 )
Subtotal
    124       736       2,919       1,823  
                                 
Income before income taxes
    10,587       3,666       26,900       22,375  
                                 
Provision for income taxes
    2,999       1,348       7,532       6,343  
                                 
Net income
    7,588       2,318       19,368       16,032  
                                 
Less:  Net income attributable to noncontrolling interest
    4,136       2,165       12,417       13,204  
                                 
Net income attributable to Duff & Phelps Corporation
  $ 3,452     $ 153     $ 6,951     $ 2,828  
                                 
Weighted average shares of Class A common stock outstanding
                               
Basic
    21,625       13,299       17,517       13,166  
Diluted
    22,448       13,673       18,197       13,397  
                                 
Net income per share attributable to stockholders of Class A common stock of Duff & Phelps Corporation (Note 5)
                               
Basic
  $ 0.15     $ 0.01     $ 0.37     $ 0.20  
Diluted
  $ 0.14     $ 0.01     $ 0.35     $ 0.20  
                                 
Cash dividends declared per common share
  $ 0.05     $ -     $ 0.10     $ -  

See accompanying notes to the condensed consolidated financial statements.

 
1

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 84,196     $ 81,381  
Restricted cash
    689       -  
Accounts receivable, net
    62,340       55,876  
Unbilled services
    26,949       17,938  
Prepaid expenses and other current assets
    5,996       6,599  
Net deferred income taxes, current
    3,191       4,304  
Total current assets
    183,361       166,098  
                 
Property and equipment, net
    28,266       28,350  
Goodwill
    117,012       116,456  
Intangible assets, net
    28,812       32,197  
Other assets
    2,758       3,541  
Investments related to deferred compensation plan (Note 10)
    16,368       7,946  
Net deferred income taxes, non-current
    91,633       61,609  
Total non-current assets
    284,849       250,099  
                 
Total assets
  $ 468,210     $ 416,197  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable
  $ 4,250     $ 3,692  
Accrued expenses
    7,944       4,424  
Accrued compensation and benefits
    21,315       39,282  
Accrued benefits related to deferred compensation plan (Note 10)
    17,167       8,479  
Deferred revenue
    4,499       3,280  
Equity-based compensation liability
    441       1,115  
Current portion of long-term debt (Note 8)
    -       794  
Current portion due to non-controlling unitholders
    3,148       3,148  
Total current liabilities
    58,764       64,214  
                 
Long-term debt, less current portion (Note 8)
    -       42,178  
Other long-term liabilities
    15,916       16,715  
Due to non-controlling unitholders, less current portion
    88,879       55,331  
Total non-current liabilities
    104,795       114,224  
                 
Total liabilities
    163,559       178,438  
                 
Commitments and contingencies (Note 11)
               
                 
Stockholders' equity
               
Preferred stock (50,000 shares authorized; zero issued and outstanding)
    -       -  
Class A common stock, par value $0.01 per share (100,000 shares authorized; 23,984 and 14,719 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)
    240       147  
Class B common stock, par value $0.0001 per share (50,000 shares authorized; 16,244 and 20,889 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)
    2       2  
Additional paid-in capital
    176,904       100,985  
Accumulated other comprehensive income
    1,048       122  
Retained earnings/(accumulated deficit)
    3,446       (1,127 )
Total stockholders' equity of Duff & Phelps Corporation
    181,640       100,129  
Noncontrolling interest
    123,011       137,630  
Total stockholders' equity
    304,651       237,759  
Total liabilities and stockholders' equity
  $ 468,210     $ 416,197  

See accompanying notes to the condensed consolidated financial statements.

 
2

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 19,368     $ 16,032  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    7,712       6,903  
Equity-based compensation
    19,205       25,345  
Bad debt expense
    1,698       1,251  
Net deferred income taxes
    4,637       8,575  
Loss on early extinguishment of debt
    1,674       -  
Other
    (582 )     1,163  
Changes in assets and liabilities providing/(using) cash:
               
Accounts receivable
    (8,065 )     (12,168 )
Unbilled services
    (9,012 )     (2,216 )
Prepaid expenses and other current assets
    973       63  
Other assets
    (2,396 )     1,542  
Accounts payable and accrued expenses
    4,668       (2,070 )
Accrued compensation and benefits
    (10,019 )     (29,998 )
Deferred revenues
    1,219       (3,004 )
Other liabilities
    (1,399 )     690  
Due to noncontrolling unitholders
    -       (3,092 )
Net cash provided by operating activities
    29,681       9,016  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (4,744 )     (8,093 )
Business acquisitions, net of cash acquired
    (61 )     (16,427 )
Purchase of investments for deferred compensation plan
    (6,409 )     (9,991 )
Proceeds from sale of investments in deferred compensation plan
    -       1,692  
Net cash used in investing activities
    (11,214 )     (32,819 )
                 
Cash flows from financing activities:
               
Net proceeds from sale of Class A common stock
    111,808       -  
Proceeds from exercises of IPO Options
    456       -  
Redemption of noncontrolling unitholders
    (67,112 )     -  
Repayments of debt
    (42,763 )     (595 )
Distributions and other payments to noncontrolling unitholders
    (15,510 )     (7,888 )
Increase in restricted cash
    (689 )     -  
Dividends
    (2,394 )     -  
Repurchases of Class A common stock
    (821 )     -  
Fees associated with early extinguishment of debt
    (63 )     -  
Net cash used in financing activities
    (17,088 )     (8,483 )
                 
Effect of exchange rate on cash and cash equivalents
    1,436       (853 )
                 
Net increase/(decrease) in cash and cash equivalents
    2,815       (33,139 )
Cash and cash equivalents at beginning of period
    81,381       90,243  
Cash and cash equivalents at end of period
  $ 84,196     $ 57,104  

See accompanying notes to the condensed consolidated financial statements.

 
3

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

               
Stockholders of Duff & Phelps Corporation
       
                                             
Accumulated
   
Retained
       
   
Total
                                       
Other
   
Earnings/
       
   
Stockholders'
   
Comprehensive
   
Common Stock - Class A
   
Common Stock - Class B
   
Additional
   
Comprehensive
   
(Accumulated
   
Noncontrolling
 
   
Equity
   
Income
   
Shares
   
Dollars
   
Shares
   
Dollars
   
Paid-in-Capital
   
Income
   
Deficit)
   
Interest
 
                                                                               
Balance as of December 31, 2008
  $ 237,759             14,719     $ 147       20,889     $ 2     $ 100,985     $ 122     $ (1,127 )   $ 137,630  
                                                                               
Comprehensive income
                                                                             
Net income for the nine months ended September 30, 2009
    19,368     $ 19,368       -       -       -       -       -       -       6,951       12,417  
Currency translation adjustment
    1,435       1,435       -       -       -       -       -       1,035       -       400  
Amortization of post-retirement benefits
    28       28       -       -       -       -       -       16       -       12  
Total comprehensive income
    20,831     $ 20,831       -       -       -       -       -       1,051       6,951       12,829  
                                                                                 
Sale of Class A common stock
    111,808               8,050       81       -       -       111,727       -       -       -  
Allocation of noncontrolling interest in D&P Acquisitions
    -               -       -       -       -       (62,153 )     -       -       62,153  
Issuance of Class A common stock
    180               10       -       -       -       78       -       -       102  
Net issuance of restricted stock awards
    (807 )             1,292       13       -       -       (371 )     -       -       (449 )
Redemption of New Class A Units
    (67,112 )             -       -       (4,550 )     -       (29,060 )     -       -       (38,052 )
Adjustment to Tax Receivable Agreement as a result of the redemption of New Class A Units
    (543 )             -       -       -       -       (543 )     -       -       -  
Exercise of IPO Options
    793               51       -       -       -       448       -       -       345  
Forfeitures
    1               (138 )     (1 )     (95 )     -       2       -       -       -  
Equity-based compensation
    19,798               -       -       -       -       10,457       -       -       9,341  
Income tax benefit on equity-based compensation
    (103 )             -       -       -       -       (103 )     -       -       -  
Distributions to noncontrolling unitholders
    (15,510 )             -       -       -       -       (6,187 )     -       -       (9,323 )
Change in ownership interests between periods
    -               -       -       -       -       51,791       (125 )     -       (51,666 )
Adjustment to due to noncontrolling unitholders
    (3,579 )             -       -       -       -       (3,579 )     -       -       -  
Deferred tax asset effective tax rate conversion
    3,513               -       -       -       -       3,412       -       -       101  
Dividends on Class A common stock
    (2,378 )             -       -       -       -       -       -       (2,378 )     -  
Balance as of September 30, 2009
  $ 304,651               23,984     $ 240       16,244     $ 2     $ 176,904     $ 1,048     $ 3,446     $ 123,011  

See accompanying notes to the condensed consolidated financial statements.

 
4

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

               
Stockholders of Duff & Phelps Corporation
       
                                             
Accumulated
   
Retained
       
   
Total
                                       
Other
   
Earnings/
       
   
Stockholders'
   
Comprehensive
   
Common Stock - Class A
   
Common Stock - Class B
   
Additional
   
Comprehensive
   
(Accumulated
   
Noncontrolling
 
   
Equity
   
Income
   
Shares
   
Dollars
   
Shares
   
Dollars
   
Paid-in-Capital
   
Income/(Loss)
   
Deficit)
   
Interest
 
                                                             
Balance as of December 31, 2007
  $ 181,483             13,125     $ 131       21,090     $ 2     $ 75,375     $ 348     $ (6,352 )   $ 111,979  
                                                                               
Comprehensive income/(loss)
                                                                             
Net income for the nine months ended September 30, 2008
    16,032     $ 16,032       -       -       -       -       -       -       2,828       13,204  
Currency translation adjustment
    (853 )     (853 )     -       -       -       -       -       (353 )     -       (500 )
Amortization of post-retirement benefits
    36       36       -       -       -       -       -       15       -       21  
Total comprehensive income/(loss)
    15,215     $ 15,215       -       -       -       -       -       (338 )     2,828       12,725  
                                                                                 
Issuance of common stock
    5,443               322       3       -       -       2,221       -       -       3,219  
Issuance of restricted stock awards
    12               1,156       12       -       -       -       -       -       -  
Exercise of IPO options
    114               7       -       -       -       114       -       -       -  
Forfeitures
    -               (13 )     -       (46 )     -       -       -       -       -  
Equity-based compensation
    25,274               -       -       -       -       10,418       -       -       14,856  
Income tax benefit on equity-based compensation
    175               -       -       -       -       175       -       -       -  
Distributions to noncontrolling unitholders
    (7,888 )             -       -       -       -       (3,160 )     -       -       (4,728 )
Change in ownership interests between periods
    -               -       -       -       -       4,821       (202 )     -       (4,619 )
Other
    (762 )             -       -       -       -       (577 )     -       -       (185 )
Balance as of September 30, 2008
  $ 219,066               14,597     $ 146       21,044     $ 2     $ 89,387     $ (192 )   $ (3,524 )   $ 133,247  

See accompanying notes to the condensed consolidated financial statements.

 
5

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 1  - 
DESCRIPTION OF BUSINESS

Duff & Phelps Corporation (the “Company”) is a leading provider of independent financial advisory, corporate finance consulting and investment banking services.  Its mission is to help its clients protect, maximize and recover value.  The foundation of its services is its ability to provide independent advice on issues involving highly technical and complex assessments in the areas of valuation, taxation, dispute consulting, financial restructuring and M&A advisory.  The Company believes the Duff & Phelps brand is associated with a high level of professional service and integrity, knowledge leadership and independent, trusted advice.  The Company serves a global client base through offices in 24 cities, comprised of offices in 18 U.S. cities, including New York, Chicago, Dallas and Los Angeles, and six international offices located in Amsterdam, London, Munich, Paris, Shanghai and Tokyo.

Note 2  - 
BASIS OF PRESENTATION

The Company was incorporated on April 23, 2007 as a Delaware corporation and formed as a holding company for the purpose of facilitating an initial public offering (“IPO”) of the Company’s common equity and to become the sole managing member of Duff & Phelps Acquisitions, LLC and subsidiaries (“D&P Acquisitions”).

IPO and Related Transactions

As a result of the IPO and the Recapitalization Transactions (as defined and described below), the Company became the sole managing member of and has a controlling interest in D&P Acquisitions.  The Company’s only business is to act as the sole managing member of D&P Acquisitions, and, as such, the Company operates and controls all of the business and affairs of D&P Acquisitions and consolidates the financial results of D&P Acquisitions into the Company’s consolidated financial statements effective as of the close of business October 3, 2007.

Immediately prior to the closing of the IPO of the Company on October 3, 2007, D&P Acquisitions effectuated certain transactions intended to simplify the capital structure of D&P Acquisitions (the “Recapitalization Transactions”).  Prior to the Recapitalization Transactions, D&P Acquisitions' capital structure consisted of seven different classes of membership interests (Classes A through G, collectively “Legacy Units”), each of which had different capital accounts and amounts of aggregate distributions above which its holders share in future distributions.  The net effect of the Recapitalization Transactions was to convert the multiple-class structure into a single new class of units called “New Class A Units.” Pursuant to the Recapitalization Transactions and IPO, the Company issued a number of shares of Class B common stock to existing unitholders of D&P Acquisitions in an aggregate amount equal to the number of New Class A Units held by existing unitholders of D&P Acquisitions.  The IPO, Recapitalization Transactions and the Company’s capital structure are further detailed in its Annual Report on Form 10-K for the year ended December 31, 2008.

Offering of Class A Common Stock

On May 18, 2009, the Company consummated a follow-on offering with the sale of 8,050 newly issued shares of Class A common stock at $14.75 per share, less an underwriting discount of $0.7375 per share, as summarized in the following table (“May 2009 Follow-On Offering”):

Stock subscription of 7,000 shares at $14.75 per share
  $ 103,250  
Over allotment of 1,050 shares at $14.75 per share
    15,488  
Underwriting discount of 8,050 shares at $0.7375 per share
    (5,937 )
Offering related expenses
    (993 )
Net proceeds
  $ 111,808  
 
 
6

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The Company used $67,112 of net proceeds to redeem 3,500 New Class A Units of D&P Acquisitions held by entities affiliated with Lovell Minnick Partners and Vestar Capital Partners and 1,050 New Class A Units of D&P Acquisitions held by employees (including executive officers), directors and entities affiliated with directors.  Units were redeemed at a price per unit equal to the public offering price.  In connection with the redemption, a corresponding number of shares of Class B common stock were cancelled.  In addition, the Company used $42,366 of the net proceeds to repay outstanding borrowings and terminated its former credit facility with GE Capital Corporation (see Note 8).  In connection with the repayment, the Company incurred a nonrecurring charge of $1,737 to reflect the accelerated amortization of the debt discount and issuance costs of which $1,674 was non-cash.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the SEC for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation.  The financial statements require the use of management estimates and include the accounts of the Company, its controlled subsidiaries and other entities consolidated as required by GAAP.  References to the “Company,” “its” and “itself,” refer to Duff & Phelps Corporation and its subsidiaries, unless the context requires otherwise.

The balance sheet at December 31, 2008 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  In management’s opinion, all adjustments necessary for a fair presentation are reflected in the interim periods presented.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements

In September 2009, the Company adopted FASB ASC 105-10, Generally Accepted Accounting Principles – Overall.  FASB ASC 105-10 establishes the FASB Accounting Standards CodificationTM (“Codification”) to become the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. FASB ASC 105-10 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of this standard will not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 855-10, Subsequent Events – Overall.  FASB ASC 855-10 establishes principles and requirements for subsequent events and sets forth (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  The adoption of FASB ASC 855-10 did not have a material impact on the Company’s consolidated financial position or results of operations.
 
Effective January 1, 2009, the Company implemented FASB ASC 810-10, Business Combinations – Identifiable Assets and Liabilities, and Any Noncontrolling Interest.  The implementation of this standard primarily effected the presentation of the Company’s consolidated financial statements whereby noncontrolling interest is presented as a component of stockholders’ equity.  The presentation and disclosure requirements were applied retrospectively for all periods presented.

 
7

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
Effective January 1, 2009, the Company adopted FASB ASC 805-20, Business Combinations – Identifiable Assets and Liabilities, and Any Noncontrolling Interest.  FASB ASC 805-20 requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, requires expensing of most transaction costs, and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination.  The effect this pronouncement will have on the Company is dependent upon each specific acquisition which may or may not occur in the current or future periods.

Effective January 1, 2009, the Company adopted the remaining provisions of FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall –Transition and Open Effective Date Information, related to fair-value measurements of certain nonfinancial assets and liabilities.  The adoption of the remaining provisions of FASB ASC 820-10-65 did not have a material impact on the Company’s consolidated financial position or results of operations.

Recently Issued Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”).  ASU 2009-05 amends FASB ASC 820, Fair Value Measurements and Disclosures, by providing additional guidance clarifying the measurement of liabilities at fair value.  ASU 2009-05 applies to the fair value measurement of liabilities within the scope of ASC 820 and addresses several key issues with respect to estimating fair value of liabilities. Among other things, ASU 2009-05 clarifies how the price of a traded debt security (an asset value) should be considered in estimating the fair value of the issuer’s liability. ASU 2009-05 is effective for the first reporting period beginning after its issuance.  The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements.  ASU 2009-13 supersedes certain guidance in FASB ASC 605-25, Revenue Recognition – Multiple-Element Arrangements and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (the relative-selling-price method). ASU 2009-13 eliminates the use of the residual method of allocation in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverable subject to ASU 2009-13.  ASU 2009-13 must be adopted no later than the beginning of the first fiscal year beginning on or after June 15, 2010, with early adoption permitted through either prospective application for revenue arrangement entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangement for all periods presented.  The Company is evaluating the impact that the adoption of ASU 2009-13 will have on its consolidated financial statements.

Critical Accounting Policies

There have been no other significant changes in new accounting pronouncements or in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.  The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008.  The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.

 
8

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 3  - 
NONCONTROLLING INTEREST

The Company has sole voting power in and controls the management of D&P Acquisitions, and it owns a majority economic interest in D&P Acquisitions (59.6% at September 30, 2009).  As a result, the Company consolidates the financial results of D&P Acquisitions and records noncontrolling interest for the economic interest in D&P Acquisitions held by the existing unitholders to the extent the book value of their interest in D&P Acquisitions is greater than zero.  Net income attributable to noncontrolling interest on the statement of operations represents the portion of earnings or loss attributable to the economic interest in D&P Acquisitions held by the noncontrolling unitholders.  Noncontrolling interest on the balance sheet represents the portion of net assets of D&P Acquisitions attributable to the noncontrolling unitholders based on the portion of total New Class A Units owned by such unitholders.  The ownership of the New Class A Units is summarized as follows:

   
Duff &
   
Non-
       
   
Phelps
   
Controlling
       
   
Corporation
   
Unitholders
   
Total
 
December 31, 2008
    14,719       20,889       35,608  
Sale of Class A common stock
    8,050       -       8,050  
Issuance of Class A common stock
    10       -       10  
Redemption of New Class A Units
    -       (4,550 )     (4,550 )
Net issuance of restricted stock awards
    1,292       -       1,292  
Exercises of IPO Options
    51       -       51  
Forfeitures
    (138 )     (95 )     (233 )
September 30, 2009
    23,984       16,244       40,228  
                         
Percent of total New Class A Units
                       
December 31, 2008
    41.3 %     58.7 %     100 %
September 30, 2009
    59.6 %     40.4 %     100 %

As a result of the May 2009 Follow-On Offering, the Company’s economic interest in D&P Acquisitions changed from a minority to a majority position.  This change did not result in a change of control as the Company has always maintained sole voting power in and control of the management of D&P Acquisitions.

 
9

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

A reconciliation from “Income before income taxes” to “Net income attributable to the noncontrolling interest” and “Net income attributable to Duff & Phelps Corporation” is detailed as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Income before income taxes
  $ 10,587     $ 3,666     $ 26,900     $ 22,375  
Less: provision for income taxes for entities other than Duff & Phelps Corporation(a)(b)
    (292 )     (101 )     (964 )     (162 )
Income before income taxes, as adjusted
    10,295       3,565       25,936       22,213  
Ownership percentage of noncontrolling interest(d)
    40.2 %     60.7 %     47.9 %     59.4 %
Net income attributable to noncontrolling interest
    4,136       2,165       12,417       13,204  
Income before income taxes, as adjusted, attributable to Duff & Phelps Corporation
    6,159       1,400       13,519       9,009  
Less: provision for income taxes of Duff & Phelps Corporation(a)(c)
    (2,707 )     (1,247 )     (6,568 )     (6,181 )
Net income attributable to Duff & Phelps Corporation
  $ 3,452     $ 153     $ 6,951     $ 2,828  
 

(a)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Duff & Phelps Corporation and (ii) the provision for income taxes of Duff & Phelps Corporation.  The consolidated provision for income taxes totaled $2,999 and $1,348 for the three months ended September 30, 2009 and 2008, respectively, and $7,532 and $6,343 for the nine months ended September 30, 2009 and 2008, respectively.

 
(b)
The provision for income taxes for entities other than Duff & Phelps Corporation represents taxes imposed directly on Duff & Phelps, LLC, a wholly-owned subsidiary of D&P Acquisitions, and its subsidiaries, such as taxes imposed on certain domestic subsidiaries (e.g., Rash & Associates, L.P.), taxes imposed by certain foreign jurisdictions, and taxes imposed by certain local and other jurisdictions (e.g., New York City).  Since Duff & Phelps, LLC is taxed as a partnership and a flow-through entity for U.S. federal and state income tax purposes, there is no provision for these taxes on income allocable to the noncontrolling interest.

 
(c)
The provision of income taxes of Duff & Phelps Corporation includes all U.S. federal and state income taxes.

 
(d)
Income before income taxes, as adjusted, is allocated to the noncontrolling interest based on the total New Class A Units vested for income tax purposes (“Tax-Vested Units”) owned by the noncontrolling interest as a percentage of the aggregate amount of all Tax-Vested Units.  This percentage may not necessarily correspond to the total number of New Class A Units at the end of each respective period.
 
 
10

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Distributions and Other Payments to Noncontrolling Unitholders

The following table summarizes distributions and other payments to noncontrolling unitholders, as described more fully below:

   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
 
Distributions for taxes
  $ 14,197     $ 7,888  
Other distributions
    1,313       -  
Payments pursuant to the Tax Receivable Agreement
    -       -  
    $ 15,510     $ 7,888  

Distributions for taxes

As a limited liability company, D&P Acquisitions does not incur significant federal or state and local taxes, as these taxes are primarily the obligations of the members of D&P Acquisitions.  As authorized by the Third Amended and Restated LLC Agreement of D&P Acquisitions, D&P Acquisitions is required to distribute cash, generally, on a pro rata basis, to its members to the extent necessary to provide funds to pay the members' tax liabilities, if any, with respect to the earnings of D&P Acquisitions.  The tax distribution rate has been set at 45%.  During the nine months ended September 30, 2009 and 2008, D&P Acquisitions made aggregate distributions to its members totaling $14,197 and $7,888, respectively, not including the Company, with respect to estimated taxable income for year-to-date 2009 and 2008, respectively.  D&P Acquisitions is only required to make such distributions if cash is available for such purposes as determined by the Company.  The Company expects cash will be available to make these distributions.  Upon completion of its tax returns with respect to the prior year, D&P Acquisitions may make true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year.

Other distributions

During the nine months ended September 30, 2009, the Company distributed $1,313 to holders of New Class A Units of D&P Acquisitions (other than Duff & Phelps Corporation).  The distributions were made concurrently with the dividend of $0.05 per share of Class A common stock outstanding to shareholders of record on June 12, 2009 and August 18, 2009.  Concurrent with the payment of the dividends, holders of New Class A Units received a $0.05 distribution per vested unit which will be treated as a reduction in basis of each member’s ownership interests.  Pursuant to the terms of the Third Amended and Restated LLC Agreement of D&P Acquisitions, a distribution of $0.05 per unvested unit was deposited into a segregated account and will be released once a year with respect to units that vested during that year.  The segregated amount for unvested units totaled $312 and is included as a component of “Restricted cash” on the Consolidated Balance Sheet at September 30, 2009.  The distribution on unvested units that forfeit will be returned to the Company.

Payments pursuant to the Tax Receivable Agreement

As a result of the Company’s acquisition of New Class A Units of D&P Acquisitions, the Company expects to benefit from depreciation and other tax deductions reflecting D&P Acquisitions' tax basis for its assets.   Those deductions will be allocated to the Company and will be taken into account in reporting the Company’s taxable income.  Further, as a result of a federal income tax election made by D&P Acquisitions applicable to a portion of the Company’s acquisition of New Class A Units of D&P Acquisitions, the income tax basis of the assets of D&P Acquisitions underlying a portion of the units the Company has and will acquire (pursuant to the exchange agreement) will be adjusted based upon the amount that the Company has paid for that portion of its New Class A Units of D&P Acquisitions.

 
11

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The Company has entered into a tax receivable agreement (“TRA”) with the existing unitholders of D&P Acquisitions (for the benefit of the existing unitholders of D&P Acquisitions) that provides for the payment by the Company to the unitholders of D&P Acquisitions of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company realizes (i) from the tax basis in its proportionate share of D&P Acquisitions' goodwill and similar intangible assets that the Company receives as a result of the exchanges and (ii) from the federal income tax election referred to above.  There were no payments under the TRA in the nine months ended September 30, 2009 as these payments are typically made in the fourth quarter of each year.  In December 2009, the Company expects to make payments under the TRA of $3,148 relating to the year ended December 31, 2008.  In December 2008, the Company made payments of $791 with respect to the period from October 4 through December 31, 2007.  D&P Acquisitions expects to make future payments under the TRA to the extent cash is available for such purposes.

At September 30, 2009, the Company recorded a liability of $92,027, representing the payments due to D&P Acquisitions’ unitholders under the TRA.  This amount includes additional obligations generated from the redemption of 4,550 New Class A Units of D&P Acquisitions (see Note 2) in conjunction with the May 2009 Follow-On Offering.  This transaction resulted in an increase in the TRA liability of $33,548 and an associated increase in net deferred tax assets.  

Within the next 12 month period, the Company expects to pay $3,148 of the total amount.  The basis for determining the current portion of the payments due to D&P Acquisitions’ unitholders under the TRA is the expected amount of payments to be made within the next 12 months.  The long-term portion of the payments due to D&P Acquisitions’ unitholders under the tax receivable agreement is the remainder.  Payments are anticipated to be made annually over 15 years, commencing from the date of each event that gives rise to the TRA benefits, beginning with the date of the closing of the IPO on October 3, 2007.  The payments are made in accordance with the terms of the TRA.  The timing of the payments is subject to certain contingencies including Duff & Phelps Corporation having sufficient taxable income to utilize all of the tax benefits defined in the TRA.

To determine the current amount of the payments due to D&P Acquisitions’ unitholders under the tax receivable agreement, the Company estimated the amount of taxable income that Duff & Phelps Corporation has generated over the previous fiscal year.  Next, the Company estimated the amount of the specified TRA deductions at year end.  This was used as a basis for determining the amount of tax reduction that generates a TRA obligation.  In turn, this was used to calculate the estimated payments due under the TRA that the Company expects to pay in the next 12 months.  These calculations are performed pursuant to the terms of the TRA, filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2007.

Obligations pursuant to the Tax Receivable Agreement are obligations of Duff & Phelps Corporation.  They do not impact the noncontrolling interest.  These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes.  Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.  In general, items of income and expense are allocated on the basis of member’s ownership interests pursuant to the Third Amended and Restated Limited Liability Company Agreement of Duff & Phelps Acquisitions, LLC, filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2007.

During the nine months ended September 30, 2009, the Company recorded an immaterial adjustment to increase the payments due to D&P Acquisitions’ unitholders under the tax receivable agreement by $3,579 with an offsetting credit to additional paid-in-capital.  The adjustment resulted from a correction to the calculation of the tax receivable agreement liability in conjunction with the IPO transactions.  Although the revision related to the date of the closing of the IPO transactions, it did not have a material impact on the Company’s financial position through and as of September 30, 2009.

 
12

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 4   -
ACQUISITIONS

The following table summarizes the Company’s recent acquisitions:

Effective
       
Date
 
Acquisition
 
Description
         
4/11/08
 
Dubinsky & Company, P.C.
 
Washington, D.C. metro based specialty consulting primarily
       
focused on litigation support and forensic services.
         
7/15/08
 
World Tax Service US, LLC
 
Tax advisory firm focused on the delivery of sophisticated
       
international and domestic tax services.
         
7/31/08
 
Kane Reece Associates, Inc.
 
Valuation, management and technical consulting firm with a
       
focus on the communications, entertainment and media industries.
         
8/8/08
 
Financial and IP Analysis, Inc.
 
Financial consulting firm that specializes in intellectual
   
(d/b/a The Lumin Expert Group)
 
property dispute support and expert testimony.

The purchase price of each of these acquisitions is immaterial to the Company’s consolidated financial statements, both individually and in the aggregate.  Each of these acquisitions operates as part of the Financial Advisory segment.

Pursuant to the terms of the acquisition of Chanin Capital Partners, LLC (“Chanin”) by D&P Acquisitions on October 31, 2006, the Chanin sellers are eligible for one remaining earn-out payment estimated to be a minimum of approximately $4,000 up to a maximum of approximately $5,000 for the annual period ending October 31, 2009.  This earn-out payment is subject to the achievement of certain contingent performance results of Chanin.   

 
13

 

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 5  - 
EARNINGS PER SHARE

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period.  Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period.  The treasury stock method is used to determine the dilutive potential of stock op