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EX-31.2 - EX-31.2 - WESTWOOD HOLDINGS GROUP INCwhg-ex312_201409309.htm
EX-31.1 - EX-31.1 - WESTWOOD HOLDINGS GROUP INCwhg-ex311_201409308.htm
EX-32.2 - EX-32.2 - WESTWOOD HOLDINGS GROUP INCwhg-ex322_201409306.htm
EX-32.1 - EX-32.1 - WESTWOOD HOLDINGS GROUP INCwhg-ex321_201409307.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014

OR

¨

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 1-31234

 

WESTWOOD HOLDINGS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

75-2969997

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

200 CRESCENT COURT, SUITE 1200

DALLAS, TEXAS

 

75201

(Address of principal executive office)

 

(Zip Code)

(214) 756-6900

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

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  ¨

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  ¨

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 definition of “large accelerated filer”, “accelerated filer” and “ smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Shares of common stock, par value $0.01 per share, outstanding as of October 17, 2014: 8,290,018.

 

 

 

 

 

 


 

WESTWOOD HOLDINGS GROUP, INC.

INDEX

 

PART I

 

FINANCIAL INFORMATION

PAGE

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

1

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

2

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2014

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

 

Item 3.

 

Quantitative And Qualitative Disclosures About Market Risk

24

 

 

 

 

Item 4.

 

Controls and Procedures

24

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

25

 

 

 

 

Item 1A.

 

Risk Factors

25

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

 

Item 6.

 

Exhibits

27

 

 

 

 

Signatures

28

 

 

 

 


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

 

 

September 30,

 

 

 

 

 

 

2014

 

 

December 31,

 

 

(unaudited)

 

 

2013

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,485

 

 

$

10,864

 

Accounts receivable

 

13,784

 

 

 

14,468

 

Investments, at fair value

 

73,099

 

 

 

64,554

 

Deferred income taxes

 

4,161

 

 

 

3,812

 

Other assets

 

1,948

 

 

 

2,521

 

Total current assets

 

109,477

 

 

 

96,219

 

Goodwill

 

11,255

 

 

 

11,255

 

Deferred income taxes

 

5,740

 

 

 

2,041

 

Intangible assets, net

 

3,520

 

 

 

3,789

 

Property and equipment, net of accumulated depreciation of $2,585 and $2,155

 

2,623

 

 

 

2,746

 

Total assets

$

132,615

 

 

$

116,050

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

2,098

 

 

$

2,082

 

Dividends payable

 

4,272

 

 

 

3,935

 

Compensation and benefits payable

 

13,551

 

 

 

17,805

 

Income taxes payable

 

5,433

 

 

 

1,031

 

Total current liabilities

 

25,354

 

 

 

24,853

 

Accrued dividends

 

1,204

 

 

 

1,266

 

Deferred rent

 

1,157

 

 

 

1,268

 

Total liabilities

 

27,715

 

 

 

27,387

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 25,000,000 shares, issued 8,989,877 and

outstanding 8,288,082 shares at September 30, 2014; issued 8,778,613 and outstanding

     8,176,417 shares at December 31, 2013

 

90

 

 

 

88

 

Additional paid-in capital

 

116,189

 

 

 

103,853

 

Treasury stock, at cost - 701,795 shares at September 30, 2014; 602,196 shares at December 31, 2013

 

(29,028

)

 

 

(23,169

)

Accumulated other comprehensive loss

 

(857

)

 

 

(257

)

Retained earnings

 

18,506

 

 

 

8,148

 

Total stockholders' equity

 

104,900

 

 

 

88,663

 

Total liabilities and stockholders' equity

$

132,615

 

 

$

116,050

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

1


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data and share amounts)

(unaudited)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset based

$

22,857

 

 

$

17,956

 

 

$

65,341

 

 

$

49,989

 

Performance based

 

 

 

 

26

 

 

 

3,806

 

 

 

2,561

 

Trust fees

 

5,282

 

 

 

4,672

 

 

 

15,461

 

 

 

13,463

 

Other, net

 

(17

)

 

 

344

 

 

 

368

 

 

 

560

 

Total revenues

 

28,122

 

 

 

22,998

 

 

 

84,976

 

 

 

66,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

13,309

 

 

 

12,508

 

 

 

39,026

 

 

 

36,163

 

Sales and marketing

 

430

 

 

 

326

 

 

 

1,092

 

 

 

947

 

Westwood mutual funds

 

591

 

 

 

599

 

 

 

1,965

 

 

 

1,465

 

Information technology

 

807

 

 

 

690

 

 

 

2,536

 

 

 

2,024

 

Professional services

 

983

 

 

 

887

 

 

 

3,554

 

 

 

2,966

 

General and administrative

 

1,410

 

 

 

1,250

 

 

 

4,242

 

 

 

3,723

 

Total expenses

 

17,530

 

 

 

16,260

 

 

 

52,415

 

 

 

47,288

 

Income before income taxes

 

10,592

 

 

 

6,738

 

 

 

32,561

 

 

 

19,285

 

Provision for income taxes

 

3,474

 

 

 

2,437

 

 

 

11,290

 

 

 

7,211

 

Net income

$

7,118

 

 

$

4,301

 

 

$

21,271

 

 

$

12,074

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(578

)

 

 

104

 

 

 

(600

)

 

 

(131

)

Total comprehensive income

$

6,540

 

 

$

4,405

 

 

$

20,671

 

 

$

11,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.95

 

 

$

0.58

 

 

$

2.83

 

 

$

1.64

 

Diluted

$

0.92

 

 

$

0.57

 

 

$

2.73

 

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

7,525,489

 

 

 

7,374,600

 

 

 

7,507,937

 

 

 

7,347,376

 

Diluted

 

7,734,309

 

 

 

7,597,001

 

 

 

7,801,073

 

 

 

7,667,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.44

 

 

$

0.40

 

 

$

1.32

 

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

2


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2014

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Common Stock, Par

 

 

Paid-In

 

 

Treasury

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Earnings

 

 

Total

 

BALANCE, January 1, 2014

 

8,176,417

 

 

$

88

 

 

$

103,853

 

 

$

(23,169

)

 

$

(257

)

 

$

8,148

 

 

$

88,663

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,271

 

 

 

21,271

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(600

)

 

 

 

 

 

(600

)

Issuance of restricted stock, net of forfeitures

 

211,264

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,913

)

 

 

(10,913

)

Stock based compensation expense

 

 

 

 

 

 

 

10,103

 

 

 

 

 

 

 

 

 

 

 

 

10,103

 

Reclassification of compensation liability to be

     paid in shares

 

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

 

 

 

170

 

Tax benefit related to stock based compensation

 

 

 

 

 

 

 

2,065

 

 

 

 

 

 

 

 

 

 

 

 

2,065

 

Purchase of treasury stock

 

(11,476

)

 

 

 

 

 

 

 

 

(669

)

 

 

 

 

 

 

 

 

(669

)

Restricted stock returned for payment of taxes

 

(88,123

)

 

 

 

 

 

 

 

 

(5,190

)

 

 

 

 

 

 

 

 

(5,190

)

BALANCE, September 30, 2014

 

8,288,082

 

 

$

90

 

 

$

116,189

 

 

$

(29,028

)

 

$

(857

)

 

$

18,506

 

 

$

104,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

3


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

For the

 

 

Nine months ended

 

 

September 30,

 

 

2014

 

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

$

21,271

 

 

$

12,074

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

436

 

 

 

288

 

Amortization of intangible assets

 

270

 

 

 

270

 

Unrealized (gains) losses on trading investments

 

(29

)

 

 

430

 

Stock based compensation expense

 

10,103

 

 

 

8,512

 

Deferred income taxes

 

(4,227

)

 

 

75

 

Excess tax benefits from stock based compensation

 

(1,850

)

 

 

(696

)

Net (purchases) sales of investments - trading securities

 

(8,528

)

 

 

4,202

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

478

 

 

 

(3,241

)

Other current assets

 

367

 

 

 

(480

)

Accounts payable and accrued liabilities

 

10

 

 

 

369

 

Compensation and benefits payable

 

(3,887

)

 

 

(668

)

Income taxes payable and prepaid income taxes

 

6,496

 

 

 

(1,922

)

Other liabilities

 

(42

)

 

 

20

 

Net cash provided by operating activities

 

20,868

 

 

 

19,233

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(337

)

 

 

(651

)

Net cash used in investing activities

 

(337

)

 

 

(651

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of treasury stock

 

(669

)

 

 

(878

)

Restricted stock returned for payment of taxes

 

(5,190

)

 

 

(3,789

)

Excess tax benefits from stock based compensation

 

1,850

 

 

 

696

 

Cash dividends

 

(10,637

)

 

 

(6,346

)

Net cash used in financing activities

 

(14,646

)

 

 

(10,317

)

Effect of currency rate changes on cash

 

(264

)

 

 

(73

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

5,621

 

 

 

8,192

 

Cash and cash equivalents, beginning of period

 

10,864

 

 

 

3,817

 

Cash and cash equivalents, end of period

$

16,485

 

 

$

12,009

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for income taxes

$

9,073

 

 

$

9,093

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

4


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. DESCRIPTION OF THE BUSINESS

Westwood Holdings Group, Inc. (“Westwood”, the “Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood provides investment management services to institutional investors, private wealth clients and financial intermediaries through its subsidiaries, Westwood Management Corp. (“Westwood Management”), Westwood Trust (“Westwood Trust”), Westwood International Advisors Inc. (“Westwood International”) and Westwood Advisors, LLC. Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact revenues and results of operations.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and consequently do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).  The Company’s consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary in the opinion of management to present fairly our interim financial position and results of operations and cash flows for the periods presented. The accompanying condensed consolidated financial statements are presented in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”).

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2013. Operating results for the periods in these condensed consolidated financial statements are not necessarily indicative of the results for any future period. The accompanying condensed consolidated financial statements include the accounts of Westwood and its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

Correction of Immaterial Errors

Pursuant to Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company concluded that certain misstatements were not material to any of its prior period financial statements, including its financial statements for the first and second quarters of 2014.  Although the misstatements were immaterial to prior periods, the prior period financial statements have been revised in this report in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to the significance of the out-of-period correction of this non-cash adjustment to the third quarter of 2014. See Note 3 for further discussion.

5


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Revenue Recognition

Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between our subsidiaries and their clients and are generally based on a percentage of AUM. A limited number of our clients have contractual performance-based fee arrangements, which pay us an additional fee if we outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement period. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized over the periods services are performed. Since billing periods for most of our advance paying clients coincide with the calendar quarter to which payment relates, revenue is recognized within the quarter. Consequently, no significant amount of deferred revenue is contained in our condensed consolidated financial statements. Deferred revenue is shown on the condensed consolidated balance sheets under the heading of “Accounts payable and accrued liabilities”. Other revenues generally consist of interest and investment income and are recognized as earned.

Accounts Receivable

Accounts receivable represents balances arising from services provided to customers and are recorded on an accrual basis, net of any allowance for doubtful accounts. Accounts receivable are written off when determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical write-off experience, existing conditions in the industry, and the customer’s financial stability. Most of our accounts receivable balances consist of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectible. Accordingly, our condensed consolidated financial statements do not include an allowance for bad debt or any bad debt expense.

         

 

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The ASU is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The standard will be effective for annual reporting periods beginning after December 15, 2014, although early adoption is permitted. We do not currently expect the adoption of this ASU to have a significant impact on our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which resulted from a joint project by the FASB and International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The issuance of a comprehensive and converged standard on revenue recognition is expected to improve the ability of financial statement users to understand and consistently analyze an entity’s revenue across industries, transactions, and geographies. The standard will require additional disclosures to help financial statement users better understand the nature, amount, timing, and potential uncertainty of the revenue being recognized. ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2016, and will require either retrospective application to each prior reporting period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. Early application is prohibited. We are currently evaluating the impact that the application of ASU 2014-09 will have on our financial statements and disclosures.

In June 2014, the FASB issued ASU 2014-12 Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which establishes specific guidance on how to account for share-based payments for awards with performance targets after the employee completes the requisite service period. Current U.S. GAAP does not contain explicit guidance on how to account for those share-based payments. The standard will be effective for annual reporting periods beginning after December 15, 2015, although early adoption is permitted. We do not currently expect the adoption of this ASU to have a significant impact on our financial statements.

 

3. CORRECTION OF IMMATERIAL ERRORS

During the third quarter we discovered an understatement of non-cash stock based compensation expense for restricted stock grants subject to both service and performance conditions that had no net effect on total stockholders' equity as of June 30, 2014.  Measurement dates used for fair value determination of the non-cash expense for such grants between 2006 and the second quarter of

6


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2014 were not set in accordance with Financial Accounting Standards Board Accounting Standards Codification No. 718, Compensation-Stock Compensation, and non-cash stock based compensation was thereby understated during such periods.

The cumulative non-cash impact of additional stock based compensation expense from January 1, 2006 to June 30, 2014, resulted in an approximate $3.3 million overstatement of net income. The non-cash net income impact for each of the first and second quarters of 2014 was an overstatement of approximately $0.2 million for an overstatement of approximately $0.4 million for the first half of 2014.  The non-cash net income impact for each of the first, second and third quarters of 2013 was less than $0.1 million representing less than $0.1 million for the first nine months of 2013.

A reconciliation of the effects of the adjustments to the previously reported condensed consolidated balance sheet and condensed consolidated statement of stockholders' equity at December 31, 2013 follows (in millions):

  

 

December 31, 2013

 

 

As Reported

 

 

Adjustment

 

 

As Adjusted

 

Additional paid-in-capital

$

101.0

 

 

$

2.9

 

 

$

103.9

 

Retained earnings

 

11.0

 

 

 

(2.9

)

 

 

8.1

 

Total stockholder’s equity

$

88.7

 

 

$

 

 

$

88.7

 

 

 

4. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the applicable period. Diluted earnings per share is computed based on the weighted average number of shares outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors. There were approximately 5,400 and 6,500 anti-dilutive restricted shares as of September 30, 2014 and September 30, 2013, respectively.

The following table sets forth the computation of basic and diluted shares (in thousands, except per share and share amounts):

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income

$

7,118

 

 

$

4,301

 

 

$

21,271

 

 

$

12,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

7,525,489

 

 

 

7,374,600

 

 

 

7,507,937

 

 

 

7,347,376

 

Dilutive potential shares from unvested restricted shares

 

208,820

 

 

 

222,401

 

 

 

293,136

 

 

 

320,475

 

Weighted average shares outstanding - diluted

 

7,734,309

 

 

 

7,597,001

 

 

 

7,801,073

 

 

 

7,667,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.95

 

 

$

0.58

 

 

$

2.83

 

 

$

1.64

 

Diluted

$

0.92

 

 

$

0.57

 

 

$

2.73

 

 

$

1.57

 

 

 

7


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

5. INVESTMENTS

Investment balances are presented in the table below (in thousands). All investments are carried at fair value and are accounted for as trading securities.

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Market

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government agency obligations

$

59,654

 

 

$

24

 

 

$

 

 

$

59,678

 

Money market funds

 

7,819

 

 

 

 

 

 

 

 

 

7,819

 

Equity funds

 

2,441

 

 

 

136

 

 

 

(21

)

 

 

2,556

 

Fixed income funds

 

3,090

 

 

 

 

 

 

(44

)

 

 

3,046

 

Marketable securities

$

73,004

 

 

$

160

 

 

$

(65

)

 

$

73,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government agency obligations

$

42,595

 

 

$

16

 

 

$

 

 

$

42,611

 

Money market funds

 

8,584

 

 

 

 

 

 

 

 

 

8,584

 

Equity funds

 

2,130

 

 

 

200

 

 

 

(54

)

 

 

2,276

 

Fixed income funds

 

10,984

 

 

 

99

 

 

 

 

 

 

11,083

 

Marketable securities

$

64,293

 

 

$

315

 

 

$

(54

)

 

$

64,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014 $5.6 million in corporate funds were invested in Westwood Funds and Westwood Common Trust Funds. See Note 9.

 

6. FAIR VALUE MEASUREMENTS

We determine estimated fair values for our financial instruments using available information. The fair value amounts discussed in our condensed consolidated financial statements are not necessarily indicative of either amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable, compensation and benefits payable and income taxes payable approximates their carrying value due to their short-term maturities and are classified as level 1 fair value measurements. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations, money market funds, Westwood Funds® mutual funds and Westwood Trust common trust fund shares, equals their fair value based on prices quoted in active markets and, with respect to funds, the net asset value of the shares held as reported by each fund. Market values of our money market holdings generally do not fluctuate.

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value as follows:

·

level 1 – quoted market prices in active markets for identical assets

·

level 2 – inputs other than quoted prices that are directly or indirectly observable

·

level 3 – unobservable inputs where there is little or no market activity

8


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table summarizes the values of our assets as of the dates indicated within the fair value hierarchy (in thousands).

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

$

70,925

 

 

$

2,174

 

 

$

 

 

$

73,099

 

Total financial instruments

$

70,925

 

 

$

2,174

 

 

$

 

 

$

73,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

$

64,554

 

 

$

 

 

$

 

 

$

64,554

 

Total financial instruments

$

64,554

 

 

$

 

 

$

 

 

$

64,554

 

 

Investments categorized as level 2 assets consist of investments in common trust funds sponsored by Westwood Trust. Common trust funds are private investment vehicles comprised of commingled investments held in trusts that are valued using the Net Asset Value (“NAV”) calculated by us as administrator of the funds. The NAV is quoted on an inactive private market however the unit price is based on the market value of the underlying investments that are traded on an active market. Westwood Trust sponsors common trust funds for most of the investment strategies managed by Westwood Management. These strategies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. Investments in the funds are generally redeemable on a daily basis. There are no current plans to sell any of these investments.

 

 

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is not amortized but is tested for impairment at least annually. We completed our annual goodwill impairment assessment during the third quarter of 2014 and determined that no impairment loss was required. No impairments were recorded during any of the periods presented.

Our intangible assets, which totaled $3.5 million (net of accumulated amortization of $1.5 million) at September 30, 2014, represent the acquisition date fair value of acquired client relationships, trade names and non-compete agreements and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We periodically review intangible assets for events or circumstances that would indicate impairment. The estimated annual amortization for these assets is $0.4 million for the next five years.

 

8. BALANCE SHEET COMPONENTS

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (in thousands):

 

 

As of

 

 

As of

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Foreign currency translation adjustment

$

(857

)

 

$

(257

)

Accumulated other comprehensive loss

$

(857

)

 

$

(257

)

 

 

9. VARIABLE INTEREST ENTITIES

Westwood Trust sponsors common trust funds (“CTFs”) for its clients. These funds allow clients to commingle assets to achieve economies of scale. Westwood International provides investment advisory services to Westwood Investment Funds PLC (the “UCITS Fund”), which was authorized by the Central Bank of Ireland on June 18, 2013 pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (“UCITS”), and which is an Ireland domiciled umbrella-type open-ended self-managed investment company. Westwood Management provides investment advisory services to the Westwood Funds®, a family of mutual funds, and to two collective investment trusts (“CITs”). Some clients of Westwood Management hold their investments in ten limited liability companies (“LLCs”) that were formed and sponsored by McCarthy Group Advisors, LLC.

9


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The CTFs, Westwood Funds®, CITs and LLCs (“Westwood VIEs”) are considered variable interest entities (“VIEs”) because our clients, who hold the equity at risk, do not have a direct or indirect ability through voting or similar rights to make decisions about the funds that would have a significant effect on their success. We receive fees for managing assets in these entities commensurate with market rates.

We evaluate all of our advisory relationships and CTFs to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of expected losses or a right to receive the majority of expected residual returns. Since all losses and returns are distributed to the shareholders of the Company’s VIEs, we are not the primary beneficiary and consequently the Westwood VIEs are not included in our condensed consolidated financial statements.

Otherwise, we have not provided any financial support we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of these VIEs. Our investments in the Westwood Funds® and the CTFs are accounted for as investments in accordance with our other investments described in Note 5.

The following table displays assets under management, corporate money invested and risk of loss in each vehicle (in millions).

 

 

 

As of September 30, 2014

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Under

 

 

Corporate

 

 

Risk of

 

 

Management

 

 

Investment

 

 

Loss

 

VIE's:

 

 

 

 

 

 

 

 

 

 

 

Westwood Funds®

$

3,407

 

 

$

3.4

 

 

$

3.4

 

Common Trust Funds

 

2,666

 

 

 

2.2

 

 

 

2.2

 

Collective Investment Trusts

 

306

 

 

 

 

 

 

 

LLCs

 

244

 

 

 

 

 

 

 

UCITS Fund

 

829

 

 

 

 

 

 

 

VIE totals

 

7,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All other assets:

 

 

 

 

 

 

 

 

 

 

 

Trust Services

 

1,129

 

 

 

 

 

 

 

 

 

Advisory Services

 

11,189

 

 

 

 

 

 

 

 

 

Total AUM

$

19,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. LONG-TERM INCENTIVE COMPENSATION

Restricted Stock Awards

We have issued restricted shares to our employees and non-employee directors. The Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, as amended  (the “Plan”) reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock. The total number of shares issuable under the Plan (including predecessor plans to the Plan) may not exceed 3,898,100 shares. At September 30, 2014, approximately 505,000 shares remain available for issuance under the Plan.

Under the Plan, we have granted to employees and non-employee directors restricted stock subject to service conditions and to certain key employees restricted stock subject to both service and performance conditions. As of September 30, 2014, there was approximately $18.8 million of unrecognized compensation expense for restricted stock grants under the Plan that is expected to be recognized over a remaining weighted-average period of 2 years. Our two types of restricted stock grants under the Plan are discussed below.

10


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table presents the total stock based compensation expense recorded for stock based compensation arrangements for the periods indicated (in thousands):

 

 

Nine months ended

 

 

September 30,

 

 

2014

 

 

2013

 

Service condition stock based compensation expense

$

5,612

 

 

$

5,687

 

Performance condition stock based compensation expense

 

4,202

 

 

 

2,653

 

Stock based compensation expense under the Plan

 

9,814

 

 

 

8,340

 

Canada EB Plan stock based compensation expense

 

289

 

 

 

172

 

Total stock based compensation expense

$

10,103

 

 

$

8,512

 

 

Restricted Stock Subject Only to a Service Condition

We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued, an adjustment for restrictions on dividends and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period.

  

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

Restricted shares subject only to a service condition:

Shares

 

 

Value

 

 

 

 

 

 

 

 

 

Non-vested, January 1, 2014

 

511,060

 

 

$

40.49

 

Granted

 

182,990

 

 

 

58.78

 

Vested

 

(186,680

)

 

 

38.76

 

Forfeited

 

(31,291

)

 

 

47.87

 

Non-vested, September 30, 2014

 

476,079

 

 

 

47.72

 

 

Restricted Stock Subject to Service and Performance Conditions

Under the Plan, certain key employees were provided agreements for grants of restricted shares that vest over a five year period provided that annual performance goals established by the Compensation Committee of Westwood’s board of directors are met. Each year the Compensation Committee establishes a specific goal for that year’s vesting of the restricted shares, which historically has been based upon Westwood’s adjusted pre-tax income, as defined. The date that the Compensation Committee establishes the annual goal is considered to be the grant date and the fair value measurement date to determine expense on the shares that are likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the final calculation of adjusted pre-tax income, which is derived from the Company’s audited financial statements. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed. In February 2014, the Compensation Committee established the 2014 goal as adjusted pre-tax income of at least $34.0 million, representing a five-year compound annual growth rate in excess of 10% over annual adjusted pre-tax income recorded in 2009. Our adjusted pre-tax income is determined based on our audited financial statements and is equal to income before income taxes increased by expenses incurred for the year for (i) incentive compensation for all officers and employees and (ii) performance-based restricted stock awards, excluding start up, non-recurring and similar expense items. In the first quarter of 2014, we concluded that it was probable that we would meet the performance goals required to vest the applicable performance based restricted shares this year and began recording expense related to those shares. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed. 

11


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

Restricted shares subject to service and performance conditions:

Shares

 

 

Value

 

 

 

 

 

 

 

 

 

Non-vested, January 1, 2014

 

93,000

 

 

$

44.55

 

Granted

 

101,313

 

 

 

58.59

 

Vested

 

(93,000

)

 

 

44.55

 

Forfeited

 

 

 

 

 

Non-vested, September 30, 2014

 

101,313

 

 

 

58.59

 

The above amounts as of September 30, 2014 do not include 185,252 non-vested restricted shares that potentially vest over performance years subsequent to 2014 in as much as the annual performance goals for those years have not been set by the Compensation Committee and therefore no grant date has been established.

    

Canadian Plan

We have compensation arrangements with certain employees of Westwood International pursuant to which these employees can earn cash awards based on the performance of certain investment products. A portion of such awards may be paid in shares of our stock that vest over a multi-year period. We accrue a liability for these awards over both the annual period in which we determine it is probable that the award will be earned and, for the portion to be settled in shares, over the following three-year vesting period. Cash awards expected to be settled in shares are funded into a trust pursuant to The Share Award Plan of Westwood Holdings Group, Inc. for Service provided in Canada to its Subsidiaries (the “Canadian Plan”).  Generally, the Canadian trust subsequently acquires Westwood common shares in market transactions and holds such shares until the shares are vested and distributed, or until forfeited. Shares held in the trust are shown on our condensed consolidated balance sheets as treasury shares. During the first quarter of 2014 and the second quarter of 2013, the trust purchased in the open market 11,476 and 20,251 Westwood common shares for approximately $670,000 and $880,000, respectively.  Until shares are acquired by the trust, we measure the liability as a cash-based award included in “Compensation and benefits payable” on our condensed consolidated balance sheets. When the number of shares related to an award is determinable, the award becomes an equity award accounted for similarly to restricted stock. The trust formed pursuant to the Canadian Plan holds 31,727 shares of Westwood common stock. Under the Canadian Plan, no more than $10 million CAD (or USD $8.9 million using an exchange rate on September 30, 2014) may be funded to the Plan Trustee to fund purchases of common stock with respect to awards granted under the Canadian Plan. At September 30, 2014, the remaining amount available to be paid to the trustee of the Canadian Plan to fund purchases of Westwood common stock was approximately $7.5 million.

Mutual Fund Share Incentive Awards

We grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our mutual funds achieving certain performance goals. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account.

These awards vest after approximately one year of service following the year in which the participant earns the award. We begin accruing a liability for mutual fund incentive awards when we believe it is probable that the award will be earned and record expense for these awards over the service period of the award, which is approximately two years. During the year in which the amount of the award is determined, we record expense based on the expected value of the award. After the award is earned, we record expense based on the value of the shares awarded and the percentage of the vesting period that has transpired. Our liability under these awards may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Upon vesting, participants receive the value of the mutual fund share awards adjusted for earnings or losses attributable to the underlying mutual funds. For the nine months ended September 30, 2014 and 2013, we recorded expense of $0.7 million and $1.8 million, respectively, related to mutual fund share incentive awards. As of September 30, 2014 and December 31, 2013, we had an accrued liability of $0.6 million and $1.9 million, respectively, related to mutual fund incentive awards.

 

12


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

11. RELATED PARTY TRANSACTIONS

The Company engages in transactions with its affiliates in the ordinary course of business.  Westwood International provides investment advisory services to the UCITS Fund. Certain members of our management and board of directors serve on the board of directors of the UCITS Fund, which began operations in August 2013. Under the terms of the investment advisory agreements, the Company earns quarterly fees paid by clients of the UCITS Fund and, in certain cases, by the UCITS Fund. The fees are based on negotiated fee schedules applied to AUM. These fees are commensurate with market rates and are negotiated and contracted at arm’s length. For the nine months ended September 30, 2014, the Company earned approximately $645,000 in fees directly from the UCITS Fund. This does not include fees paid directly to Westwood International by certain clients invested in the UCITS Fund that have entered into an investment management agreement with Westwood International.

 

12. COMMITMENTS AND CONTINGENCIES

On August 3, 2012, AGF Management Limited and AGF Investments Inc. (collectively, “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and the executive recruiting firm of Warren International, LLC. (“Warren”). The action relates to the hiring of certain members of Westwood’s global and emerging markets investment team previously employed by AGF. AGF is alleging that the former employees breached certain obligations when they resigned from AGF and that Westwood and Warren induced such breaches. AGF is seeking an unspecified amount of damages and punitive damages of $10 million (CAD) in the lawsuit. On November 5, 2012, Westwood responded to AGF’s lawsuit with a counterclaim against AGF for defamation. Westwood is seeking $1 million (CAD) in general damages, $10 million (CAD) in special damages, $1 million (CAD) in punitive damages, and costs. On November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary, alleging that the employee made defamatory statements about AGF. In this second lawsuit, AGF is seeking $5 million (CAD) in general damages, $1 million (CAD) per defendant in punitive damages, unspecified special damages, interest and costs. The pleadings phase is complete and we are now in the discovery phase, which we hope to complete by the end of 2015.

While we intend to vigorously defend both actions and pursue our counterclaims, we are currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these actions and counterclaims. Defending these actions and pursuing these counterclaims may be expensive for us and time consuming for our personnel. While we do not currently believe these proceedings will have a material impact, adverse resolution of these actions and counterclaims could have a material adverse effect on our business, financial condition or results of operations.

Our policy is to not accrue legal fees and directly related costs as part of potential loss contingencies. We have agreed with our Directors & Officers insurance provider that 50% of the defense costs related to both AGF claims, excluding Westwood’s counterclaim against AGF, are covered by insurance. We expense legal fees and directly related costs as incurred. We have received insurance proceeds of approximately $240,000 to date and have recorded a receivable of $325,000 as of September 30, 2014, which represents the current estimate of expenses related to this lawsuit that we expect to recover under our insurance policies. This receivable is part of “Other current assets” on our condensed consolidated balance sheets.

 

13. SEGMENT REPORTING

We operate two segments: Advisory and Trust. These segments are managed separately based on the types of products and services offered and their related client bases. The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision-making purposes. The Company’s Chief Operating Decision Maker evaluates the performance of our segments based primarily on fee revenues and economic earnings. Westwood Holdings Group, Inc., the parent company of Advisory and Trust, does not have revenues and is the entity in which we record typical holding company expenses including employee compensation and benefits for holding company employees, directors’ fees and investor relations costs. All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.

Advisory

Our Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals and the Westwood Funds®, as well as investment subadvisory services to mutual funds and our Trust segment. Westwood Management and Westwood International, which provide investment advisory services to clients of similar type, are included in our Advisory segment along with Westwood Advisors, LLC.

13


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Trust

Trust provides trust and custodial services to its clients and to our Advisory segment and participates in common trust funds that it sponsors to institutions and high net worth individuals. Westwood Trust is included in our Trust segment.

 

 

 

 

 

 

 

 

 

 

 

Westwood

 

 

 

 

 

 

 

 

 

 

Advisory

 

 

Trust

 

 

Holdings

 

 

Eliminations

 

 

Consolidated

 

Three months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fee revenues from external sources

$

22,857

 

 

$

5,282

 

 

$

 

 

$

 

 

$

28,139