Wright Investors Service Holdings, Inc. - FORM 10-Q - November 13, 2013

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

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2013
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from _____ to _____

Commission File Number: 000-50587

WRIGHT INVESTORS’ SERVICE HOLDINGS, INC.
 (Exact Name of Registrant as Specified in its Charter)

Delaware
  
13-4005439
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)

100 South Bedford Road, Suite 2R, Mount Kisco, NY
10549
(Address of principal executive offices)
(Zip code)

(914) 242-5700
(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  x No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x   
 
As of November 8, 2013, there were 18,475,347 shares of the registrant’s common stock, $0.01 par value, outstanding.
 
 
 
 
 

TABLE OF CONTENTS
 
 
 
Part I.  Financial Information
Page No.
     
1 
     
   
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
 
Financial Statements  of  The Winthrop Corporation and Subsidiaries
  
     
   
 
14
     
   
 
15
     
   
 
17
     
   
 
16
     
 
18
     
 
 
25
     
31
     
31
 
 
Part II. Other Information
  
 
32
     
33
   
34
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  
(unaudited)
  
(in thousands, except per share amounts)
  
   
   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2013
    
2012
    
2013
    
2012
  
Revenues
                        
Investment management services
   $ 659     $ -     $ 1,991     $ -  
Other investment advisory services
     648       -       2,050       -  
Financial research and related data
     160       -       437       -  
      1,467       -       4,478       -  
Expenses
                                
Selling, general and administrative
     2,523       423       7,345       1,349  
Acquisition related costs
     -       124       -       860  
      2,523       547       7,345       2,209  
                                 
Operating loss
     (1,056 )     (547 )     (2,867 )     (2,209 )
                                 
Investment and other income (expense),  net
     (26 )      1       (57 )     (27 )
                                 
Change in fair value of contingent consideration
     9       -       (79 )     -  
Loss from continuing operations before income taxes
     (1,073 )     (546 )     (3,003 )     (2,236 )
                                 
Income tax benefit  (expense)
     1       2       2       (193 )
Loss from continuing operations
     (1,072 )     (544 )     (3,001 )     (2,429 )
                                 
Loss from discontinued operations, net of taxes (Note 11 (a))
     (207 )     (6 )     (2,961 )     (46 )
                                 
Net loss
   $ (1,279 )   $ (550 )   $ (5,962 )   $ (2,475 )
                                 
Basic and diluted loss per share
                                
     Continuing operations
   $ (0.06 )   $ (0.03 )   $ (0.16 )   $ (0.14 )
     Discontinued operations
     (0.01 )     -       (0.15 )     -  
Net loss
   $ (0.07 )   $ (0.03 )   $ (0.31 )   $ (0.14 )
 
See accompanying notes to condensed consolidated financial statements.

 
1
 
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
   
September 30,
    
December 31,
  
   
2013
    
2012
  
   
(unaudited)
        
Assets
            
Current assets
            
Cash and cash equivalents
   $ 15,823     $ 18,883  
Short-term investments
     140       190  
Accounts receivable
     322       462  
Refundable and prepaid income taxes
     34       40  
Prepaid expenses and other current assets
     414       262  
                 
Total current assets
     16,733       19,837  
Property and equipment, net of accumulated amortization of $76 and $57
     39       52  
Intangible assets, net
     4,077       4,555  
Goodwill
     3,364       3,364  
Investment in undeveloped land
     355       355  
Other assets
     325       325  
Total assets
   $ 24,893     $ 28,488  
                 
Liabilities and stockholders’ equity
                
Current liabilities
                
Accounts payable and accrued expenses
   $ 1,747     $ 1,875  
Settlement payable (Note 11 (a))
     2,375       -  
Income taxes payable
     -       227  
Deferred revenue
     24       16  
Current portion of officers retirement bonus liability
     100       100  
Total current liabilities
     4,246       2,218  
                 
                 
Liability for contingent consideration
     500       421  
Officers retirement bonus liability, net of current portion
     797       781  
Total liabilities
     5,543       3,420  
                 
Stockholders’ equity
                
Common stock
     190       190  
Additional paid-in capital
     33,032       32,788  
Accumulated deficit
     (12,513 )     (6,551 )
Treasury stock, at cost
     (1,359 )     (1,359 )
Total stockholders' equity
     19,350       25,068  
Total liabilities and stockholders’ equity
   $ 24,893     $ 28,488  

See accompanying notes to condensed consolidated financial statements.

 
2
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, except per share amounts)
             
   
Nine Months Ended September 30,
  
   
2013
    
2012
  
Cash flows from operating activities
            
             
Net loss
   $ (5,962 )   $ (2,475 )
Adjustments to reconcile net loss to cash used in operating activities:
                
Depreciation and amortization
     497       -  
Change in liability for contingent consideration
     79       -  
Equity based compensation, including issuance of stock to directors
     244       76  
Changes in other operating items:
                
       Accounts  receivable
     140       -  
       Investment securities
     50       -  
       Deferred revenue
     8       -  
       Officers retirement bonus liability
     16       -  
       Refundable and prepaid income tax
     6       (4 )
       Income tax payable
     (227 )     -  
       Prepaid expenses and other current assets
     (152 )     16  
       Settlement payable
     2,375       -  
       Accounts payable and accrued expenses
     (128 )     (28 )
Net cash used in operating activities
     (3,054 )     (2,415 )
                 
Cash flows from investing activities
                
Additions to property and equipment
     (6 )     -  
Net cash used in investing activities
     (6 )     -  
                 
Net decrease in cash and cash equivalents
     (3,060 )     (2,415 )
Cash and cash equivalents at the beginning of the period
     18,883       27,247  
Cash and cash equivalents at the end of the period
   $ 15,823     $ 24,832  
                 
Supplemental disclosures of cash flow information
                
Net cash paid during the period for
                
Income taxes
   $ 19     $ 247  
 
See accompanying notes to condensed consolidated financial statements.

 
3
 
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2013
(unaudited)
(in thousands, except per share data)
                                 
Total
  
               
Additional
          
Treasury
    
stock-
  
   
Common stock
    
paid -in
    
Accumulated
    
stock , at
    
holders
  
   
shares
    
amount
    
capital
    
deficit
    
cost
    
equity
  
                                     
                                     
Balance at December 31, 2012
     19,034,834     $ 190     $ 32,788     $ (6,551 )   $ (1,359 )   $ 25,068  
                                                 
Net loss
     -       -       -       (5,962 )     -       (5,962 )
Equity based compensation expense
     -       -       235       -       -       235  
Issuance of common stock to director
     4,057       -       9       -       -       9  
Balance at September 30, 2013
     19,038,891     $ 190     $ 33,032     $ (12,513 )   $ (1,359 )   $ 19,350  
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 
 
 
Notes to Condensed Consolidated Financial Statements
 
Three and nine months ended September 30, 2013 and 2012
 
(unaudited)
 
1.
Basis of presentation and description of activities
 
 Basis of presentation
 
The accompanying interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  The information and note disclosures normally included in complete financial statements have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Balance Sheet as of December 31, 2012 has been derived from audited financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2012 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2013 interim periods are not necessarily indicative of results to be expected for the entire year.

 Description of activities

On February 4, 2013, National Patent Development Corporation changed its name to Wright Investors’ Service Holdings, Inc. (hereinafter referred to as the “Company” or “Wright Holdings”).

On January 15, 2010, the Company completed the sale to The Merit Group, Inc. (“Merit”) of all of the issued and outstanding stock of the Company’s wholly-owned subsidiary, Five Star Products, Inc., the holding company and sole stockholder of Five Star Group, Inc., for cash.   Upon the consummation of the sale, the Company became a “shell company”, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.  As used herein, references to “Five Star” refer to Five Star Products Inc. or Five Star Group Inc., or both, as the context requires.

On December 19, 2012 (the “Closing Date”), the Company, completed the acquisition of The Winthrop Corporation, a Connecticut corporation (“Winthrop”) pursuant to that certain  Agreement and Plan of Merger (the “Merger Agreement”) dated June 18, 2012. Winthrop, through its wholly-owned subsidiaries Wright Investors’ Service, Inc. (“Wright”), Wright Investors’ Service Distributors, Inc. (“WISDI”) and Wright’s wholly-owned subsidiary, Wright Private Asset Management, LLC (“WPAM”) (collectively, the “Wright Companies”), offers investment management services,  financial advisory services and investment research to large and small investors, both taxable and tax exempt.  WISDI is a registered broker dealer with the Financial Industry Regulatory Authority, Inc. (‘FINRA”) and the Securities and Exchange Commission.  In accordance with the Merger Agreement, a wholly-owned newly formed subsidiary of the Company, was merged with and into Winthrop and Winthrop became a wholly-owned subsidiary of the Company (see Note 2).

As a result of the completion of the Merger described above, the Company is no longer a “shell company” and substantially all of the Company’s business operations are carried out through Winthrop and its subsidiaries, the Wright Companies.
 
 
5
 
 
2.
Acquisition

As described in Note 1, on December 19, 2012, the Company acquired 100% of the equity interests of Winthrop for 881,206 shares of Company Common Stock issued to those holders of Winthrop Common Stock who elected to receive Company Common Stock as merger consideration and the Company paid cash totaling $4,852,000 to those holders of Winthrop Common Stock who elected to receive cash as merger consideration. Pursuant to the Merger Agreement and an Investors’ Rights Agreement, holders of Winthrop Common Stock who elected to receive Company Common Stock as merger consideration are subject to a three-year transfer restriction on such Company Common Stock. Further, the Company has agreed to pay contingent consideration in cash to a holder of Winthrop common stock who received 852,228 shares of Company Common Stock to the extent that such shares have a value of less than $1,900,000 ($2.23 per share) on the expiration of the three year period based on the average closing price of the Company’s Common Stock for the ten trading days prior to such date.
 
Pursuant to the Merger Agreement, the Company has entered into employment agreements with four key Winthrop employees having initial terms of five years for one employee and three years for three employees which provide for compensation in the form of base salary, various bonuses and restricted stock units, representing Company Common Stock (“RSUs”).  The employment agreements provide for automatic annual renewals unless notice of non-renewal is given at least six months prior to the applicable employment period. See Note 11 (b).
 
The purchase price is comprised of the following (in thousands):
 
(a) Cash paid
  
$
4,852
  
(b) Issuance of 881,206 common shares  based on the closing price of $2.52 per share on
December 19, 2012 and a 20% discount to reflect the three-year transfer restriction
    
1,776
  
         
(c)Fair value of contingent consideration related to guarantee of a value of certain common
shares issued
    
441
  
         
   
$
7,069
  
         
 
A liability was recognized for an estimate of the acquisition date fair value of the acquisition-related contingent consideration which may be paid.  The fair value was calculated by applying a lattice model, which takes into account the potential for the Company’s stock price being less than $2.23 per share at the end of the 3 year lock-up period.  The fair value measurement is based on significant unobservable inputs that are supported by little market activity and reflect the Company’s own assumptions.  Key assumptions include expected volatility (50%) in the Company’s common stock and the risk free interest rate (0.36%) during the above period.  Changes in the fair value of the contingent consideration subsequent to the acquisition date will be recognized in earnings until the liability is eliminated or settled. The fair value of the liability was $500,000 on September 30, 2013 and accordingly, the Company recognized income (expense) of $9,000 and ($79,000) for the change in the value for the quarter and nine months ended September 30, 2013, respectively.
 
The allocation of the purchase price to Winthrop’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values. The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.  Factors that contributed to a purchase price resulting in the recognition of goodwill primarily relates to the Company’s effort to transition from a shell company and the belief that Winthrop’s platform will provide the Company the opportunity to grow into a significantly larger asset management franchise over time.  
 
For tax purposes, the Merger was treated as a taxable acquisition of Winthrop’s stock with no changes in the tax basis of Winthrop’s assets and liabilities. A net deferred tax liability was recorded for the excess of the fair values over the tax bases of the acquired assets and assumed liabilities with a corresponding increase to goodwill.
 
 
6
 
 
The following unaudited pro forma information presents the Company’s combined results of operations as if the acquisition of Winthrop had occurred as of January 1, 2012. The pro forma net loss reflects amortization of the amounts ascribed to intangible assets acquired in the acquisition, compensation related to employment contracts and RSU’s granted to certain employees and adjustments to reflect increases in charges from a related party (see Note 8). The pro forma results exclude acquisition related expenses and deferred tax benefits resulting from the acquisition and reflect retention bonuses as if they were incurred  on January 1, 2012 instead of December 19, 2012 (in thousands, except for per share data).
 
   
Three Months 
Ended
September 30, 2012
    
Nine Months Ended
September 30, 2012
  
Total revenue
  
$
1,552
    
$
4,976
  
Net loss
    
(560)
      
(3,565)
  
Basic and diluted loss per share
  
$
(0.03)
    
$
(0.19)
  
Weighted average common shares outstanding – 
 basic and diluted (a)
    
19,071
      
19,069
  
 
(a) 
Reflects common shares issued in the acquisition in addition to RSUs to be settled with common shares which vested on the closing date.
 
The pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the acquisition been completed as of the beginning of 2012, nor should it be taken as indicative of the Company’s future consolidated results of operations.
 
3. 
Per share data
        
Loss per share for the three months ended September 30, 2013 and 2012 respectively, is calculated based on 18,953,000 and 17,587,000 weighted average outstanding shares of common stock.

Loss per share for the nine months ended September 30, 2013 and 2012 respectively, is calculated based on 18,951,000 and 17,586,000 weighted average outstanding shares of common stock.

In connection with the Winthrop acquisition on December 19, 2012, 479,280 RSUs vested on such date and are included in the weighted average outstanding shares of common stock for the quarter and nine months ended September 30, 2013. Options for 3,250,000 shares of common stock for the quarter and nine months ended September 30, 2013 and options for 3,300,000 shares of common stock for the quarter and nine months ended September 30, 2012, respectively and unvested RSUs for 387,738 shares of common stock for the quarter and nine months ended September 30, 2013 were not included in the diluted computation as their effect would be anti-dilutive since the Company has losses from continuing operations for both periods.
 
 
7
 
 
4. 
Capital Stock 
 
The Company’s Board of Directors, without any vote or action by the holders of common stock, is authorized to issue preferred stock from time to time in one or more series and to determine the number of shares and to fix the powers, designations, preferences and relative, participating, optional or other special rights of any series of preferred stock.
 
The Board of Directors authorized the Company to repurchase up to 5,000,000 outstanding shares of common stock from time to time either in open market or privately negotiated transactions. At September 30, 2013, the Company had repurchased 1,791,821 shares of its common stock and a total of 3,208,179 shares, remained available for repurchase at September 30, 2013.

  
5.
Short-term investments:
 
The Financial Accounting Standards Board has issued authoritative accounting guidance that defines fair value, establishes a framework for measuring fair value and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. The guidance clarifies that fair value should be based on assumptions that market participants would use when pricing an asset or liability.  The three levels of fair value hierarchy are described below:
    
 
· 
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
· 
Level 2 – Quoted prices in active markets for similar assets and liabilities or quoted prices in less active, dealer or broker markets;

 
· 
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and are unobservable.
 
Short-term investments, which consist of mutual funds managed by a subsidiary of Winthrop and separate securities accounts, are stated at the net asset value of the funds or the year-end closing price of the underlying security (Level 1)
 
The following is a summary of current trading marketable securities at September 30, 2013 (in thousands):
 
   
September 30, 2013
  
   
Cost
    
Unrealized
Gains
    
Estimated
Fair Value
  
Mutual funds
  
$
21
    
$
 -
    
$
21
  
Equity securities
    
93
      
26
      
119
  
   
$
114
    
$
26
    
$
140
  
 
 
8
 
 
6.
Incentive stock plans and stock based compensation
        
The Company has a stock-based compensation plan for employees and non-employee members of its Board of Directors. The plan provides for discretionary grants of stock options, restricted shares, and other stock-based awards. The Company’s plan is administered by the Compensation Committee of the Board of Directors, which consists solely of non-employee directors. No stock options were granted during the nine months ended September 30, 2013.
 
Information with respect to the Company’s outstanding stock options for the nine months ended September 30, 2013 is as follows:

   
Stock
Options
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Contractual
Term
    
Aggregate
Intrinsic
Value
  
Options outstanding at January 1, 2013
    
3,300,000
    
$
2.29
      
4.7
    
$
0
*
Options cancelled
    
(50,000)
    
$
1.50
                  
Options outstanding  at September 30, 2013
    
3,250,000
    
$
2.31
      
3.9
    
$
311,000
*
Options exercisable at September 30, 2013
    
3,250,000
    
$
2.31
      
3.9
    
$
311,000
*
 
 
 
*
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
 
Compensation expense related to option grants amounted to $0 and $20,000 for the quarter and nine months ended September 30, 2013 and $23,000 and $68,000 for the quarter and nine months ended September 30, 2012, respectively.    As of September 30, 2013, there was no additional unrecognized compensation cost related to non-vested options.
 
 
 
Restricted stock units

As a result of the Winthrop acquisition, the Company issued a total of 849,280 RSUs on the closing date to be settled in shares of Company common stock as follows:

 
a)
479,280 RSUs were granted to four key executives of Winthrop, which vested as of the Closing Date and are subject to post-vesting restrictions on sale for three years.  The RSUs were valued at the closing price of the Company’s common stock of $2.52, less a 20% discount for post vesting restrictions on sale, or $2.02 per share.  The total value of these RSUs of $966,000, were accounted for as compensation and charged to retention bonus expense on the closing date.
 
 
b)
370,000 RSUs were granted to four key executives, which vest  equally over three years, with the first third vesting one year from the Closing Date.  The RSUs are valued based on the closing price of the Company’s common stock on the Closing Date of $2.52, less an average discount of 11% for post-vesting restrictions on sale until the three year anniversary of the grant date, or an average price per share of $2.25.  The Company recorded compensation expense of $69,000 and $206,000, respectively, for the quarter and nine months ended September 30, 2013 related to these RSUs. The total unrecognized compensation expense related to these unvested RSUs at September 30, 2013 is $599,000, which will be recognized over the vesting period of approximately 3 years.
 
 
c)
17,738 RSUs were granted to certain employees of the Company on February 4, 2013, which vest equally over three years, with the first third vesting on February 4, 2014.  The RSUs are valued based on the closing price of the Company’s common stock on February 4, 2013 of $2.40, less an average discount of 11% for post-vesting restrictions on sale until the three year anniversary of the grant date, or an average price per share of $2.25.  The Company recorded compensation expense of $3,000 and $9,000, respectively, for the quarter and nine months ended September 30, 2013 related to these RSUs. The total unrecognized compensation expense related to these unvested RSUs at September 30, 2013 is $31,000, which will be recognized over the vesting period of approximately 3 years.
 
 
9
 
 
7. 
Intangible Assets
 
At September 30, 2013, intangible assets subject to amortization which were recorded in connection with the acquisition of Winthrop consisted of the following (in thousands):

Intangible
Estimated
useful life
  
Gross
carrying
amount
    
Accumulated
Amortization
    
Net carrying
amount
  
                     
                     
Investment management and Advisory  Contracts
   9 years
  
$
3,181
    
$
276
    
$
2,905
  
Trademarks
   10 years
    
 433
      
34
      
399
  
Proprietary software and
technology
   
4 years
    
   960
      
187
      
  773
  
     
$
4,574
    
$
497
    
$
4,077
  
 
For the period ended September 30, 2013 amortization expense was $478,000. Estimated amortization expense for each of the five succeeding years and thereafter is as follows (in thousands):

Year ending December 31,
 
  
2013 (remainder)
 
$159
2014
 
  637
2015
 
  637
2016
 
  630
2017
 
  397
2018-2023
1,617
 
 
$4,077
 
 
 
10
 
 
8. 
Related party transactions
 
Effective June 1, 2010, the Company relocated its headquarters to the offices of Bedford Oak in Mount Kisco, New York. Bedford Oak is controlled by Harvey P. Eisen, Chairman, Chief Executive Officer and a director of the Company. From June 1, 2010 through August 31, 2012, the Company had been subleasing a portion of the Bedford Oak space and had access to various administrative support services on a month-to-month basis at a rate of approximately $19,700 per month.

On October 31, 2012, the Company’s Audit Committee approved an increase to approximately $40,700 per month (effective as of September 1, 2012) in the monthly sublease and administrative support services rate, which increased rate the Company believes is necessary to provide for the increased personnel and space requirements necessary for an operating company.    Selling, general and administrative expenses for the nine  months ended September 30, 2013 and 2012, includes $366,000 and $198,000, respectively, and for the three months ended September 30, 2013 and 2012 includes $122,000  and $80,000, respectively, related to the sublease arrangement with Bedford Oak.

On October 31, 2012, also in connection with the Merger and the Company’s transition from a shell company into an operating company, the Company’s Compensation Committee  approved an annual salary of $200,000 for Thomas Hayes, the former Chief Operating Officer of the Company(effective as of September 1, 2012)  since Mr. Hayes was currently devoting and planned to continue devoting 100% of his time to planning for the future growth and operations of the Company, as well as business development activities for Winthrop. Mr. Hayes was also a Managing Director at Bedford Oak.   On January 17, 2013, the employment of Mr. Hayes, was terminated.
 
Wright acts as an investment advisor, its subsidiary acts as a principal underwriter and several officers of Winthrop are officers for a family of mutual funds from which investment management and distribution fees are earned based on the net asset values of the respective funds.  Such fees, which are included in Other investment advisory services, amounted to $231,000 and $742,000 for the three and nine months ended September 30, 2013, respectively.
 

9. 
Income taxes
 
For the nine months ended September 30, 2012, the income tax expense related to continuing operations of $193,000 substantially represents a settlement with New York State over its tax examination of the Company’s 2008 through 2010 tax returns.

For the three and nine months ended September 30, 2013, the income tax expense related to continuing operations of $1,000 and $2,000, respectively, substantially represents minimum state income taxes net of a reduction in the liability for uncertain tax positions due to a settlement with the Internal Revenue Service over its tax examination of the Company’s 2009 and 2010 tax returns, as further discussed below.

Five Star is currently undergoing an income tax examination by the Internal Revenue Service for income tax filings for the years ended December 31, 2007 and 2008 and is being challenged with respect to the timing of certain tax deductions.  As a result, a liability for uncertain tax positions was provided in the year ended December 31, 2010 and charged to discontinued operations.    The deficiency notice was issued on April 25, 2011. On May 17, 2011, Five Star Products Inc. and its subsidiary Five Star Group Inc. filed petitions for reorganization under Chapter 11 of the United States Bankruptcy code. On December 16, 2011, the Plan of Reorganization of TMG Liquidation Corp., Five Star Products Inc.’s parent corporation, was approved by the Bankruptcy Court.  Under the Plan of Reorganization, the Internal Revenue Service is authorized to pursue the Plan Administrator, who is authorized to defend the deficiency notice issued to Five Star Products, Inc.  During the nine months ended September 30, 2013, the Company wrote off the liability for uncertain tax positions with a corresponding credit to discontinued operations as a result of the Company’s settlement with the Plan Administrator (see Note 11(a)).  The liability that was written off amounted to approximately $350,000 for potential federal and state tax deficiencies and related interest, of which approximately $212,000 related to additional tax, and approximately $138,000 related to interest.

The Internal Revenue Service was examining the Company’s 2009 and 2010 consolidated U.S. federal tax returns, which was settled in April 2013 for the amount of $10,000, including interest of $1,000.  As a result of the settlement, the liability for uncertain tax positions was reduced by $15,000 of which $5,000 was credited to income tax benefit.

No tax benefit has been recorded in relation to the pre-tax loss from continuing operations for the three and nine months ended September 30, 2013 and 2012, based on the Company’s estimated annual effective tax rate which reflects a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the loss. The changes in the liability for uncertain tax positions were treated as discrete items. The tax effect of discrete items are reflected in the periods in which they occur and not reflected in the estimated annual effective tax rate which is used for interim period tax provisions.

 
11
 
 
10. 
Retirement plans
 
 
Winthrop maintains an officer retirement bonus plan (the “Bonus Plan”) that is an unfunded deferred compensation program providing retirement benefits equal to 10% of annual compensation, as defined, to those officers upon their retirement.   Effective December 1, 1999, the Plan was frozen so that no additional benefits will be earned.  The total obligation under the Bonus Plan at September 30, 2013 is $1,806,000, of which $100,000 is estimated to be payable over the next twelve months.  The liability is payable to individual retired employees at the rate of $50,000 per year in equal monthly amounts commencing upon retirement.  The liability was recorded at $885,000 at the date of acquisition, representing its estimated fair value computed based on its present value, utilizing a discount rate of 14%, which was estimated to be the acquired company’s weighted average cost of capital on such date from the perspective of a market participant.  The calculated discount of $915,000 is being amortized as interest expense over the period the obligation is outstanding by use of the effective interest method.  For the three and nine months ended September 30, 2013, discount amortization (included in Officers retirement bonus liability) amounted to $30,000 and $91,000, respectively.
 
 
11. 
Contingencies and other
 
 
 
(a) 
 On or about May 17, 2011, the Merit Group, Inc. (“Merit”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of South Carolina. On or about December 14, 2011, the Official Committee of Unsecured Creditors of TMG Liquidation Company (formerly known as The Merit Group, Inc.) filed in that court an adversary proceeding against the Company (the “Avoidance Action”) now captioned CohnResnick LLP, as Plan Administrator v. National Patent Development Corp. (In re TMG Liquidation Co.). The Avoidance Action sought, among other things, to avoid and recover the consideration paid by Merit to the Company for the purchase of Five Star Products, Inc. (“Five Star”) from the Company under the Stock Purchase Agreement, dated November 24, 2009  (the “Agreement”), as a constructive fraudulent transfer under sections 548, 550, and 551 of the Bankruptcy Code.

On August 2, 2013, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with CohnReznick LLP (the “Plan Administrator”) to settle the Avoidance Action.  Under the terms of the Settlement Agreement, the Plan Administrator was required to file with the Bankruptcy Court, no later than August 9, 2013, a motion to approve the Settlement Agreement (the “Settlement Motion”) and a proposed order approving relief to be requested in the Settlement Motion (the “Proposed Order”). Pursuant to the Settlement Agreement, the Company agreed to make a settlement payment of $2,375,000 (the “Settlement Payment”) to the Plan Administrator conditioned upon the entry of an order (the “Approval Order”) by the Bankruptcy Court approving the Settlement Motion, that is in a form acceptable to the Company and in substantially the same form as the Proposed Order.  The Bankruptcy Court entered an order approving the Settlement Agreement on September 4, 2013, and the Settlement Agreement required the Company to make the Settlement Payment within fifteen days of the Approval Order becoming a final, non-appealable order (a “Final Order”).  On October 3, 2013, the Company made a payment of $2,375,000 to the Plan Administrator pursuant to the terms of the Settlement Agreement.
 
 
The Settlement Agreement also provides for general mutual releases by each of the parties, including a general release in favor of the Company and its affiliates, and the Company’s and its affiliates’ officers, directors, employees, agents, and professionals.  The mutual releases became effective upon entry of the Final Order and receipt of the Settlement Payment by the Plan Administrator. In addition, pursuant to the terms of the Settlement Agreement, on October 9, 2013 the Plan Administrator made the requisite filings to dismiss, with prejudice, the Avoidance Action and a second pending adversary complaint against the Company.    Upon entry of the Final Order by the Bankruptcy Court, the Company resolved all claims and causes of action that have been or could have been asserted against it by the Plan Administrator.   

As a result of entering into the Settlement Agreement, during the nine months ended September 30, 2013, the Company recorded a loss of $2,375,000 in connection with the Avoidance Action, which has been charged to discontinued operations.  In addition, legal expenses of $923,000 incurred during the nine months ended September 30, 2013, in connection with the matter have also been charged to discontinued operations, of which $256,000 incurred in the quarter ended March 31, 2013 have been reclassified from continuing operations in the results of operations for nine months ended September 30, 2013.

 
12
 
 
 
(b)
The Company entered into employment agreements with four key executives of Winthrop.  The Company has a call right to acquire any shares of Company common stock held by the four key executives of Winthrop received as merger consideration who terminate employment without “good reason” prior to the third anniversary of the Closing Date, at a purchase price per share equal to the fair market value of Company Common Stock as of the date of the notice of the exercise of the call right.
 
 
 
 
 
 
 
13
 
 
 
CONSOLIDATED BALANCE SHEET
 
(unaudited)
 

 
   
September 30,
 2012
  
Assets
      
Cash and cash equivalents
   $ 464,399  
Short-term investments
     341,183  
Accounts receivable
     530,923  
Property and equipment
     55,765  
Prepaid costs and other
     254,673  
Total Assets
   $ 1,646,943  
 
Liabilities and Shareholders’ Equity (Deficiency)
        
Liabilities:
        
Accounts payable and accrued expenses
   $ 565,923  
Deferred revenue
     17,734  
Accrued compensation and bonuses
     7,790  
Officer retirement bonus payable
     1,203,285  
Total liabilities
     1,794,732  
Commitments
        
Shareholders’ equity (deficiency)
     (147,789 )
Total Liabilities and Shareholders’ Equity (Deficiency)
   $ 1,646,943  
 
See notes to consolidated financial statements.
 
 
14
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
   
Three Months
Ended
September 30,
2012
    
Nine Months
Ended
September 30,
2012
  
Revenues:
            
Investment management services
   $ 663,633     $ 2,109,780  
Other investment advisory services
     716,562       2,170,835  
Financial research and related data
     171,874       695,376  
Total revenues
     1,552,069       4,975,991  
Costs and expenses:
                
Salaries and employee benefits
     1,108,414       3,386,381  
Other selling and administrative
     260,099       750,267  
Facilities
     111,590       420,329  
Professional and outside services
     124,325       365,666  
Total costs and expenses
     1,604,428       4,922,643  
Income (loss) from operations before income taxes
     (52,359 )     53,348  
Income tax expense:
                
Current
              250  
              250  
Net income (loss)
   $ (52,359 )   $ 53,098  
 
See notes to consolidated financial statements.
 
 
15
 
 
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
 
 
                                       
Treasury Stock
        
   
Class A Common
    
Class B Common
                
Shares
    
Amount
        
                           
Additional
                                      
                           
Paid-In
    
Accumulated
                                
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Defecit
    
Class A
    
Class B
    
Class A
    
Class B
    
Total
  
                                                                   
                                                               
 
  
Balance, January 1, 2012
     57,077     $ 57,077       19,070     $ 19,070     $ 1,110,593     $ (984,717 )     11,917       6,695     $ (341,868 )   $ (61,042 )   $ (200,887 )
                                                                                         
Net income
                                             53,098                                       53,098  
                                                                                         
Balance, September 30, 2012
     57,077     $ 57,077       19,070     $ 19,070     $ 1,110,593     $ (931,619 )     11,917       6,695     $ (341,868 )   $ (61,042 )   $ (147,789 )
 
See notes to consolidated financial statements.
 
 
16
 
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
(unaudited)
 
   
Nine Months Ended
 September 30,
  2012
  
Cash flows from operating activities:
      
Net income
   $ 53,098  
Adjustments to reconcile net income to net
        
  cash used in operating activities:
        
Depreciation and amortization
     23,848  
Gain on short-term investments
     (23,860 )
Changes in operating assets and liabilities:
        
Accounts receivable
     (43,711 )
Prepaid costs and other
     4,576  
Accounts payable and accrued expenses
     (19,336 )
Deferred revenue
     4,917  
Deferred compensation and bonuses
     (45,306 )
Net cash used in operating activities
     (45,774 )
Cash flows from investing activities:
        
Additions to property and equipment
     (1,727 )
Net cash used in investing activities
     (1,727 )
Net change in cash and cash equivalents
     (47,501 )
Cash and cash equivalents, beginning
     511,900  
Cash and cash equivalents, ending
   $ 464,399  
 
See notes to consolidated financial statements.
 
 
17
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 
 
 
1.
Summary of significant accounting policies:
 
Business and principles of consolidation:
 
The Company provides a wide range of financial products and services to an international client base consisting primarily of pension plans, banks and other institutions and high net-worth individuals.
 
The consolidated financial statements include the accounts of The Winthrop Corporation and its wholly-owned subsidiaries.  Intercompany accounts and transactions were eliminated in consolidation.
 
The accompanying interim financial statements have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information.  In the opinion of management this interim financial information includes all material adjustments, which are of normal and recurring nature, necessary for a fair presentation.  The results for the 2012 interim period are not necessarily indicative of results expected for the entire year.
 
Estimates and assumptions:
 
Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Actual results could vary from the estimates used.
 
Cash and cash equivalents:
 
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash.  Investments in money market mutual funds are considered cash equivalents.
 
Property and equipment:
 
Property and equipment are stated at cost.  Depreciation is provided by use of the straight-line method over the estimated useful life of the related asset.  Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful life of the related asset.  Accelerated depreciation methods are used for income tax reporting purposes.
 
Revenue recognition:
 
Investment advisory revenue is recognized over the period in which the service is performed.  Accordingly, the amount of investment advisory revenue billed as of the balance sheet date relating to periods after the balance sheet date is included as deferred revenue.  Revenue from research reports is recognized as earned.
 
 
18
 
 
THE WINTHROP CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 
 
 
1.
Summary of significant accounting policies (continued):
 
Profit sharing plan:
 
The Company has a non-contributory Profit Sharing Plan and a contributory Employee Deferred Savings and 401(k) Plan covering substantially all employees.  Employer contributions are made in amounts as determined by the Board of Directors.
 
Income taxes:
 
Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be reversed.  These items relate principally to the deductibility of certain expenses and the future benefits to be recognized upon the utilization of certain operating loss carryforwards.  A valuation allowance is provided for deferred tax assets not expected to be realized.
 
Stock based compensation:
 
The Company accounts for its stock-based compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification No. 718, “Compensation-Stock Compensation” (ASC 718). ASC 718 requires companies to measure and recognize compensation expense for all stock based payments to employees based on the fair value at the date of grant.
 

 
2.
Short-term investments:
 
Estimated fair value is based on the criteria outlined in Accounting Standard Codification No. 820 (ASC 820) “Fair Value Measurements and Disclosures”.  ASC 820 established a “three-tier” valuation hierarchy to prioritize the assumptions used in valuation techniques to measure fair value.  The three levels of fair value hierarchy under ASC 820 are described below:
 
 
· 
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
· 
Level 2 – Quoted prices in active markets for similar assets and liabilities or quoted prices in less active, dealer or broker markets;

 
· 
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and are unobservable.
 
 
19
 
 
THE WINTHROP CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 

 

2.
Short-term investments (continued):
 
Short-term investments, principally in Company managed mutual funds and separate securities accounts, are stated at market based on the net asset value of the funds or the year-end closing price of the underlying security.  Short-term investment values were determined utilizing Level 1 inputs.
 
The following is a summary of current trading marketable securities at June 30, 2012:
 
     2012  
   
Amortized
    
Unrealized
     Estimated  
    Cost     Gains (Losses)     Fair Value  
Cash
   $ 206,170           $ 206,170  
Mutual funds (See Note 6)
     19,858     $ (905 )     18,953  
Equity securities
     100,336       15,224       115,560  
Bonds
     500               500  
    $ 326,864     $ 14,319     $ 341,183  

 
3. 
Accounts receivable:
 
The Company continuously monitors the creditworthiness of customers and establishes an allowance for amounts that may become uncollectible in the future based on current, economic trends, historical payment and bad debt write-off experience, and any specific customer related collection issues.
 
 
4.
Property and equipment:
 
   
September 30,
 2012
  
Computer software
   $ 363,252  
Computer equipment
     213,225  
Office furniture and equipment
     462,832  
Leasehold improvements
     279,079  
Publishing machinery
     42,834  
Automobiles
     58,018  
      1,419,240  
Less accumulated depreciation and amortization
     (1,363,475 )
    $ 55,765  

 
20
 
 
THE WINTHROP CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 

 
5.
Retirement programs:
 
Officer retirement bonus:
 
The officer retirement bonus is an unfunded deferred compensation program providing retirement benefits equal to 10% of annual compensation, as defined, to those officers who are employed by the Company until their retirement.  The total obligation under the Plan is $2,003,574.  The amount provided, computed at present value, utilizing a discount rate of 12% for active employees and 6% for retired employees, was $51,411 in 2012.  Payments under the Plan were $32,962 in 2012.  Effective December 1, 1999, the Plan was frozen so that no additional benefits will be earned.
 
Employee savings and profit sharing plan:
 
The Company has an elective Employee Deferred Savings and 401(k) Plan (Plan) and profit sharing plan to provide its employees with additional income upon retirement.  At the discretion of the Board of Directors, the Company may contribute an amount not to exceed federally imposed limits on qualified plans.  The aggregate benefit payable to any employee is dependent upon the rate of contribution, earnings of the investments selected under the Plan, and the length of time such employee continues as a participant.  The Company had no contributions in 2012 to its 401(k) and profit sharing plans.
 

 
6.
Related party transactions:
 
The Company acts as investment advisor, its subsidiary acts as principal underwriter, and several Company officers are also officers for a family of mutual funds.  The Company invests its excess funds in these mutual funds.  Investment management and distribution fees are calculated based upon the net asset values of the respective funds.  Fees earned were $841,100 in 2012.
 
The Company provided a subsidy to several of its funds by reimbursing certain of the funds’ operating expenses.  Total fund subsidies were $0 for the nine months ended September 30, 2012 and are recorded as part of other investment advisory services revenue.
 

 
7.
Commitments:
 
Leases:
 
The Company leases office facilities under noncancellable operating leases expiring in 2013, which, in addition to the minimum lease payments, require an allocation of electricity and property taxes.
 
 
21
 
  
THE WINTHROP CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 
7.
Commitments (continued):
 
Leases (continued):
 
The Company also subleases a portion of their office facilities under operating leases expiring in 2013.
 
Future minimum payments and sublease receivable under noncancellable operating leases are as follows:
 
Year Ending December 31:
  
Lease
    
Sublease
  
2012
   $ 237,140     $ 53,142  
2013
     212,245       48,708  
    $ 449,385     $ 101,850  
 
8.
Common stock and treasury stock:
 
Class A and B common stock, have $1 par value, 100,000 and 50,000 shares authorized and may elect 30% and 70% respectively, of the Board of Directors.  Class C common stock is non-voting, has a $1 par value and has 50,000 shares authorized with no shares issued.
 
9. 
Income taxes:
 
At December 31, 2011, the Company had approximately $8,424,000 and $1,260,000 of net operating loss carryforwards to offset state and federal taxable income, respectively, which are scheduled to expire at various dates through 2031.  For financial reporting purposes, a valuation allowance of $1,712,000 has been recognized for the related deferred tax asset as of December 31, 2011.
 
   
2012
  
   
Current
    
Deferred
  
Tax expense (benefit) before
            
application of operating loss
            
  carryforward
   $ 36,250        
Benefit of loss carryforward
     (36,000 )   $ 36,000  
Change in valuation allowance
     -       (36,000 )
    $ 250     $ -  
 
 
22
 
 
THE WINTHROP CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Nine Months Ended September 30, 2012
 
(unaudited)
 

 
10.
Supplemental disclosures of cash flow information:
 
Cash paid for income taxes was $250 in 2012.
 

 
11.
Stock plans:
 
The Company has issued non-qualified stock options covering 2,568 shares of Class A, 1,926 shares of Class B and 2,470 shares of Class C common stock.  The purpose of the options is to attract, retain and motivate certain employees by providing the opportunity to acquire an ownership interest in the Company.  Shares awarded entitle the shareholder to all rights of common stock ownership.  Options are granted with an exercise price equal to a purchase price formula defined by the Company which represents the fair market value of the stock at the date of grant.  The options vest based on 5 years of continuous service and have 7 year contractual terms from the date of vesting.  Options granted are fully vested in 2012.
 
The Company has an obligation to repurchase the shares, upon request of the participant, at the price yielded by calculating their value using the same formula as of the calendar year end immediately preceding the repurchase request.  The Company has no liability recorded for this obligation as of 2012.  As part of the acquisition of the Company stock in 2012, the Company voted to terminate its stock option plan.
 
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model.
 
The following summarizes the transactions of the Company’s stock option plan for the years ended December 31, 2011:
 
   
 
 
Shares
Subject
To option
    
Weighted
Average
Exercise
Price
Per Share
    
Weighted
Average
Remaining
Contractual
Life
 (In Years)
  
Outstanding and exercisable at
  June 30, 2012 and December 31, 2011
     6,964     $ 151.59       6.24  
  
 
23
 
 
Stock appreciation rights:
 
The Company has a stock appreciation rights plan that allows for 5,000 rights awards to be provided to certain employees as determined by the Board of Directors.  The value of the right is determined at the award date and is based on a formula of revenue and pre-tax earnings, divided by the number of outstanding shares of common stock and outstanding stock appreciation rights. The right may be redeemed after the second anniversary of the award date within an eight year period.  Based on the formula, the Company has no obligation under this plan at 2012.
 
 
 
 
 
 
 
24
 
 
 
Cautionary Statement Regarding Forward-Looking Statements
 
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.
 
Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed by the Company with the Securities and Exchange Commission (the “SEC”) on April 1, 2013.
 
These forward-looking statements generally relate to our plans, objectives and expectations for future events and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.  These statements are based upon our opinions and estimates as of the date they are made.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond our control, which could cause actual results, performance and achievements to differ materially from results, performance and achievements projected, expected, expressed or implied by the forward-looking statements.  While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report and you are urged to consider all such risks and uncertainties. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved.

On January 15, 2010, we completed the Five Star Sale, in which we sold to Merit all of the issued and outstanding shares of Five Star stock for cash pursuant to the terms and subject to the conditions of the Five Star Stock Purchase Agreement.
 
Five Star’s results of operations for the quarter and nine months ended September 30, 2013 and 2012 has been accounted for as a discontinued operation in the condensed consolidated statements of operations.

Upon the consummation of the Five Star Sale, we became a “shell company”, as defined in Rule 12b-2 of the Exchange Act.  Because we were a shell company, our stockholders are unable to utilize Rule 144 to sell “restricted stock” as defined in Rule 144 or to otherwise use Rule 144 to sell our securities, and we are ineligible to utilize registration statements on Form S-3 or Form S-8 for so long as we remain a shell company and for 12 months thereafter.  As a consequence, among other things, the offering, issuance and sale of our securities is likely to be more expensive and time consuming and may make our securities less attractive to investors.   
On December 19, 2012 (the “Closing Date”) the Company, completed the acquisition of Winthrop, an investment management, financial advisory and investment research firm, pursuant to the Merger Agreement dated June 18, 2012. In accordance with the Merger Agreement, a wholly-owned newly formed subsidiary of the Company, was merged with and into Winthrop and Winthrop became a wholly-owned subsidiary of the Company (see Note 2 to the Condensed Consolidated Financial Statements).

As a result of the completion of the Merger described above, the Company is no longer a “shell company” as that term is defined in Rule 405 under the Securities Act, and Rule 12b-2 under the Exchange Act.  As more fully described below, substantially all of the Company’s business operations are carried out through Winthrop and its subsidiaries, the Wright Companies.

Our Board of Directors is considering strategic uses for the Five Star Sale proceeds including, without limitation, using such funds, together with other funds of the Company, to develop or acquire interests in one or more operating businesses.    Prior to the acquisition of Winthrop the Five Star Sale proceeds have been, and we anticipate will continue to be, invested in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation, until such time as we need to utilize such funds, or any portion thereof, for the purposes described above.  We have not distributed, and do not anticipate distributing, the proceeds of the Five Star Sale to our stockholders.
 
 
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Prior to consummation of the Five Star Sale, the Company’s Board of Directors believed that, although the Company was not engaged primarily in the business of investing, reinvesting or trading in securities, and did not hold itself out as being primarily engaged in those activities, the Company could, upon consummation of the Five Star Sale, fall within the technical definition of “investment company” under Section 3(a)(1) of the Investment Company Act of 1940, as amended (the “Investment Company Act”).  After the Five Star Sale, the Company’s Board of Directors has re-evaluated the characterization and valuation of its assets for purposes of the applicable definitions of the Investment Company Act and has concluded that the Company does not fall within the technical definition of “investment company” because the “investment securities” it holds constitute less than 40% of its total assets (exclusive of government securities and cash and certain cash equivalents).  Accordingly, the Company was not required to take any affirmative steps, including developing or acquiring interests in one or more operating businesses prior to January 15, 2011, in order to avoid becoming an “investment company” for purposes of the Investment Company Act.
 
Significant Developments

 Acquisition

On the Closing Date, 881,206 shares of Company Common Stock were issued by the Company as merger consideration to those holders of Winthrop Common Stock who elected to receive Company Common Stock as merger consideration and the Company paid cash totaling $4,852,000 to those holders of Winthrop Common Stock who elected to receive cash as merger consideration. Pursuant to the Merger Agreement and an Investors’ Rights Agreement, holders of Winthrop Common Stock who elected to receive Company Common Stock as merger consideration are subject to a three-year transfer restriction on such Company Common Stock. Further, the Company has agreed to pay contingent consideration in cash to a holder of Winthrop common stock who received 852,228 shares of Company Common Stock to the extent that such shares have a value of less than $1,900,000 on the expiration of the three year period based on the average closing price of the Company’s Common Stock for the ten trading days prior to such date. The total purchase price for Winthrop was $7,069,000 (see Note 2 to the Condensed Consolidated Financial Statements).
 
Pursuant to the Merger Agreement, the Company has entered into employment agreements with four key Winthrop employees having initial terms of five years for one employee and three years for three employees which provide for compensation in the form of base salary, various bonuses and restricted stock units, representing Company Common Stock (“RSUs”).  The employment agreements provide for automatic annual renewals unless notice of non-renewal is given at least six months prior to the applicable employment period.
 
The Company’s results of operations for the year ended December 31, 2012 included the operating results of Winthrop for the 12 days ended December 31, 2012.


 


Legal Proceedings

On or about May 17, 2011, the Merit Group, Inc. (“Merit”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of South Carolina. On or about December 14, 2011, the Official Committee of Unsecured Creditors of TMG Liquidation Company (formerly known as The Merit Group, Inc.) filed in that court an adversary proceeding against the Company (the “Avoidance Action”) now captioned CohnResnick LLP, as Plan Administrator v. National Patent Development Corp. (In re TMG Liquidation Co.). The Avoidance Action sought, among other things, to avoid and recover the consideration paid by Merit to the Company for the purchase of Five Star Products, Inc. (“Five Star”) from the Company under the Stock Purchase Agreement, dated November 24, 2009  (the “Agreement”), as a constructive fraudulent transfer under sections 548, 550, and 551 of the Bankruptcy Code.

On August 2, 2013, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with CohnReznick LLP (the “Plan Administrator”) to settle the Avoidance Action.  Under the terms of the Settlement Agreement, the Plan Administrator was required to file with the Bankruptcy Court, no later than August 9, 2013, a motion to approve the Settlement Agreement (the “Settlement Motion”) and a proposed order approving relief to be requested in the Settlement Motion (the “Proposed Order”). Pursuant to the Settlement Agreement, the Company agreed to make a settlement payment of $2,375,000 (the “Settlement Payment”) to the Plan Administrator conditioned upon the entry of an order (the “Approval Order”) by the Bankruptcy Court approving the Settlement Motion, that is in a form acceptable to the Company and in substantially the same form as the Proposed Order.  The Bankruptcy Court entered an order approving the Settlement Agreement on September 4, 2013, and the Settlement Agreement required the Company to make the Settlement Payment within fifteen days of the Approval Order becoming a final, non-appealable order (a “Final Order”).  On October 3, 2013, the Company made a payment of $2,375,000 to the Plan Administrator pursuant to the terms of the Settlement Agreement.
 
 
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The Settlement Agreement also provides for general mutual releases by each of the parties, including a general release in favor of the Company and its affiliates, and the Company’s and its affiliates’ officers, directors, employees, agents, and professionals.  The mutual releases became effective upon entry of the Final Order and receipt of the Settlement Payment by the Plan Administrator. In addition, pursuant to the terms of the Settlement Agreement, on October 9, 2013 the Plan Administrator made the requisite filings to dismiss, with prejudice, the Avoidance Action and a second pending adversary complaint against the Company.    Upon entry of the Final Order by the Bankruptcy Court, the Company resolved all claims and causes of action that have been or could have been asserted against it by the Plan Administrator.   

As a result of entering into the Settlement Agreement, during the nine months ended September 30, 2013, the Company recorded a loss of $2,375,000 in connection with the Avoidance Action, which has been charged to discontinued operations.  In addition, legal expenses of $923,000 incurred during the nine months ended September 30, 2013, in connection with the matter have also been charged to discontinued operations, of which $256,000 incurred in the quarter ended March 31, 2013 have been reclassified from continuing operations in the results of operations for nine months ended September 30, 2013.

 
 
Other Assets
 
The Company owns certain non-strategic assets, including an investment in MXL Operations Inc. (MXL), and interests in land and flowage rights in undeveloped property in Killingly, Connecticut.  The Company has a 19.9% interest in MXL carried at its cost of $275,000 under ASC 325, Investments- Other. The Company monitors these investments for impairment by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, and records impairments in carrying values when necessary.   
 
 
 
 
 
 
 
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Results of Operations

Assets Under Management (AUM)
 
Winthrop earns revenue primarily by charging fees based upon AUM.  At September 30, 2013, AUM was $1.41 billion, as compared to $1.48 billion at December 31, 2012.  The change in AUM was due to deposits of $124 million and increased market value of $74 million, offset by redemptions and withdrawals of $268 million.
 
Three months ended September 30, 2013 compared to the three months ended September 30, 2012
 
For the three months ended September 30, 2013, the Company had a loss from continuing operations before income taxes of $1,073,000 compared to a loss from continuing operations before income taxes of $546,000 for the three months ended September 30, 2012.   The increased loss of $527,000 was the result of a $528,000 loss incurred by Winthrop in 2013 and increased General and administrative expenses at the corporate level of $123,000, partially offset by acquisition costs of $124,000 related to Winthrop in 2012.   Included in the loss incurred  for the quarter ended September 30, 2013 for Winthrop are amortization of intangibles of $159,000, amortization of stay and retention bonuses of $34,000 and compensation expense of $73,000 related to RSU’s issued to Winthrop employees.

Selling, general and administrative expenses
 
For the three months ended September 30, 2013 selling, general and administrative expenses were $2,523,000 as compared to $423,000 for the quarter ended September 30, 2012.  The increased selling, general and administrative expenses of $2,100,000 was the result of Winthrop’s selling, general and administrative expenses for the period of $1,968,000 and increased expenses at the corporate level of $132,000.  Winthrop’s selling, general and administrative expenses are primarily comprised of personnel related costs. Included in Winthrop’s selling, general and  administrative expenses are the following; (i) amortization of intangibles of $159,000, (ii) amortization of stay and retention bonuses of $34,000 and (iii) compensation expense of $73,000 related to RSU’s issued to  Winthrop employees.  The increased expenses at the corporate level are primarily due to increased personnel costs, increased facility costs, and increased professional fees.
   
Nine months ended September 30, 2013 compared to the nine months ended September 30, 2012
 
For the nine months ended September 30, 2013, the Company had a loss from continuing operations before income taxes of $3,003,000 compared to a loss from continuing operations before income taxes of $2,236,000 for the nine months ended September 30, 2012.   The increased loss of $767,000 was the result of a $1,296,000 loss incurred by Winthrop and increased General and administrative expenses at the corporate level of $383,000, partially offset by $860,000 of acquisition costs related to Winthrop in 2012.  Included in the loss incurred  for the nine months  ended September 30, 2013 for Winthrop are amortization of intangibles of $494,000, amortization of stay and retention bonuses of $113,000 and compensation expense of $216,000 related to RSU’s issued to Winthrop employees.

Selling, general and administrative expenses
 
For the nine months ended September 30, 2013 selling, general and administrative expenses were $7,345,000 as compared to $1,349,000 for the nine months ended September 30, 2012.  The increased selling, general and administrative expenses of $5,996,000 was the result of Winthrop’s selling, general and administrative expenses for the period of $5,691,000 and increased expenses at the corporate level of $305,000.  Winthrop’s selling, general and administrative expenses are primarily comprised of personnel related costs. Included in Winthrop’s selling, general and  administrative expenses are the following; (i) amortization of intangibles of $318,000, (ii) amortization of stay and retention bonuses of $68,000 and (iii) compensation expense of $144,000 related to RSU’s issued to  Winthrop employees.  The increased expenses at the corporate level are primarily due to increased personnel costs and increased facility costs.

 
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Revenue
 
Winthrop markets its investment management products and services to plan sponsors, trade unions, endowments, corporations, state and local governments, municipalities and foundations.  The Winthrop products include equity, fixed income and balanced portfolios for various plan types, including defined benefit, annuity, self-directed and 401(k), health and welfare and education and training plans. In addition, Wright helps bank trust departments and trust companies satisfy part or all of their investment management functions.  Winthrop delivers fiduciary level investment management services to these institutions’ clients by providing active oversight of each account's asset allocation and security selection.  Its offerings include investment management solutions utilizing individual securities or mutual funds. Mutual fund models developed by Winthrop utilize a combination of Wright Mutual Funds as well as mutual funds from other investment managers.
 
WPAM offers programs to support high net worth investors and other individual investors.  WPAM manages a variety of accounts including: discretionary investment accounts, individual retirement accounts (IRAs), 401k plans and accounts for non-corporate fiduciaries, such as trustees, executors, guardians, personal representatives, attorneys and other professionals who are responsible for the assets of others and must manage those assets in accordance with the Prudent Investor Act.  This investment process, developed and monitored by the Wright Investment Committee, and related investment strategies, are utilized to address the objectives of WPAM clients.
 
Winthrop, through its WISDI affiliate, offers a diversified family of mutual funds. Wright Mutual Funds are utilized by the Wright Companies and others to build or supplement managed investment portfolios designed to address clients’ financial objectives. Following is a brief description of the five Wright-managed mutual funds

Revenue from Investment Management Services was $659,000 and $1,991,000 for the quarter and nine months ended September 30, 2013, respectively.  Within this category, Winthrop primarily bills clients based on AUM values as of calendar quarters.  Revenues are primarily from fees from; (i) Taft-Hartley clients, (ii) Personal Investment Managed Accounts, (iii) and other client serviced accounts.
 
Revenue from Other investment advisory services was $648,000 and $2,050,000 for the quarter and nine months ended September 30, 2013, respectively.  Other investment advisory service revenue includes: (i) revenue from Mutual Funds; (ii) fees from services provided to Bank Trust Departments; and (iii) investment income.  Revenue from Mutual Funds includes distribution fees for both Winthrop-sponsored mutual funds as well as other mutual funds and investment management fees from Winthrop-sponsored mutual funds.
 
Revenue from the sale of Financial research information and related data was $160,000 and $437,000 for the quarter and nine months ended September 30, 2013, respectively.  Revenues are also derived from the distribution of investment research directly and through several third parties who act as distributors of such research content.  The fees paid by the end client are divided between Winthrop and the distributor.  Existing agreements in place with third party distributors, primarily Thomson Reuters, allow for the renegotiation of the revenue split, which could result in a decline in revenue to Winthrop.   In addition, the underlying data we utilize to produce our financial research and related data is primarily obtained from a third-party, Worldscope, at no cost to us.  However in 2014, the Company will have to start paying for updates to the data (at most favored vendor cost) and in 2024 such agreement will terminate.  The revised terms of such agreement may alter our ability to produce investment research on favorable terms and may cause our revenue from the sale of such research products to decline.
 
 
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Income taxes

 For the nine months ended September 30, 2012, the income tax expense related to continuing operations of $193,000 substantially represents a settlement with New York State over its tax examination of the Company’s 2008 through 2010 tax returns.

For the three and nine months ended September 30, 2013, the income tax expense related to continuing operations of $1,000 and $2,000, respectively, substantially represents minimum state income taxes net of a reduction in the liability for uncertain tax positions due to a settlement with the Internal Revenue Service over its tax examination of the Company’s 2009 and 2010 tax returns, as further discussed below.

Five Star is currently undergoing an income tax examination by the Internal Revenue Service for income tax filings for the years ended December 31, 2007 and 2008 and is being challenged with respect to the timing of certain tax deductions.  As a result, a liability for uncertain tax positions was provided in the year ended December 31, 2010 and charged to discontinued operations.    The deficiency notice was issued on April 25, 2011. On May 17, 2011, Five Star Products Inc. and its subsidiary Five Star Group Inc. filed petitions for reorganization under Chapter 11 of the United States Bankruptcy code. On December 16, 2011, the Plan of Reorganization of TMG Liquidation Corp., Five Star Products Inc.’s parent corporation, was approved by the Bankruptcy Court.  Under the Plan of Reorganization, the Internal Revenue Service is authorized to pursue the Plan Administrator, who is authorized to defend the deficiency notice issued to Five Star Products, Inc.  During the nine months ended September 30, 2013, the Company wrote off the liability for uncertain tax positions with a corresponding credit to discontinued operations as a result of the Company’s settlement with the Plan Administrator (see Note 11(a)).  The liability that was written off amounted to approximately $350,000 for potential federal and state tax deficiencies and related interest, of which approximately $212,000 related to additional tax, and approximately $138,000 related to interest.

The Internal Revenue Service was examining the Company’s 2009 and 2010 consolidated U.S. federal tax returns, which was settled in April 2013 for the amount of $10,000, including interest of $1,000.  As a result of the settlement, the liability for uncertain tax positions was reduced by $15,000 of which $5,000 was credited to income tax benefit.

No tax benefit has been recorded in relation to the pre-tax loss from continuing operations for the three and nine months ended September 30, 2013 and 2012, based on the Company’s estimated annual effective tax rate which reflects a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the loss. The changes in the liability for uncertain tax positions were treated as discrete items. The tax effect of discrete items are reflected in the periods in which they occur and not reflected in the estimated annual effective tax rate which is used for interim period tax provisions.

 
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Financial condition
 
Liquidity and Capital Resources

 At September 30, 2013, the Company had cash and cash equivalents totaling $15,823,000, which it intends to use to acquire interests in one or more operating businesses and to fund the Company’s general and administrative expenses.  As described above in “Significant Developments- Legal Proceedings” the Company  entered into a settlement term sheet to pay $2,375,000 in the third quarter of 2013 regarding the bankruptcy of the Merit Group, Inc. The payment was made on October 3, 2013.
 
The decrease in cash and cash equivalents of $3,060,000 for the nine months ended September 30, 2013 was the result of  $3,054,000 of cash used in operations.


Contractual Obligations and Commitments
 
In connection with the sale of Five Star, the Company is responsible for all activities necessary to achieve compliance with the Connecticut Transfer Act, including receipt of approval from the Connecticut Department of Environmental Protection (“CTDEP’) and implementation of a remediation plan, if required, with respect to environmental obligations related to Five Star’s Connecticut warehouse.   For the year ended December 31, 2012 the Company expensed an additional $28,000 to complete the Connecticut Transfer Act process with the CTDEP.  Such amount was included in loss from discontinued operations. The Company has satisfied its remediation and environmental obligations with the New Jersey Department of Environmental Protection.




  
Not required.
 
 
The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
 
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
31
 
  
PART II. OTHER INFORMATION
 
 
Issuances of Equity Securities
 
On January 4, 2013, April 2, 2013, and July 3, 2013 the Company issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), shares of Company common stock to Lawrence G. Schafran, a director of the Company, in payment of his quarterly directors fees.  Mr. Schafran received 1,202, 1,330 and 1,525 shares of Company common stock, respectively.  The aggregate value of the 1,202, 1,330 and 1,525 shares of Company common stock issued to Mr. Schafran were each approximately $3,125 on the date of issuance.  These shares were issued pursuant to exemptions from registration set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
 
This issuance qualified for exemption from registration under the Securities Act because (i) Mr. Schafran is an accredited investor, (ii) the Company did not engage in any general solicitation or advertising in connection with the issuance, and (iii) Mr. Schafran received restricted securities.
 
Purchases of Equity Securities
 
On December 15, 2006, the Board of Directors authorized the Company to repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding shares of common stock from time to time either in open market or privately negotiated transactions. On August 13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000 common shares to be repurchased, and on March 29, 2011 the Company’s Board of Directors authorized an increase of an additional 1,000,000 shares to be repurchased. At September 30, 2013, the Company had repurchased 1,791,821 shares of its common stock and, a total of 3,208,179 shares remained available for repurchase.   There were no common stock repurchases made by or on behalf of the Company during the quarter ended September 30, 2013.
 
 
 
 
 
 
 
32
 
 
 
Exhibit No.
  
 Description
     
10.1
  
Settlement Agreement and Release, between CohnReznick LLP, in its capacity as Plan Administrator, and Wright Investors’ Service Holdings, Inc.  Incorporated herein by reference to Exhibit 10.1 of the Registrants Form 8-K filed on August 2, 2013.
     
31.1
*
Certification of principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
     
31.2
*
Certification of principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
     
32.1
*
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the principal executive officer of the Company and the principal financial officer of the Company
     
101.INS
**
XBRL Instance Document
     
101.SCH
**
XBRL Taxonomy Extension Schema Document
     
101.CAL
**
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
**
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
**
XBRL Extension Labels Linkbase Document
     
101.PRE
**
XBRL Taxonomy Extension Presentation Linkbase Document
___________________________

 *Filed herewith
  
**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.
 

 
   
WRIGHT INVESTORS’ SERVICE HOLDINGS, INC.
     
     
Date: November 13, 2013
  
/s/ HARVEY P. EISEN
   
Name: Harvey P. Eisen
   
Title: Chairman of the Board and Chief Executive Officer
     
     
     
Date: November 13, 2013
  
/s/ IRA J. SOBOTKO
   
Name: Ira J. Sobotko
   
Title: Vice President, Chief Financial Officer
 
 
 
 
 
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