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EXCEL - IDEA: XBRL DOCUMENT - WESTWOOD HOLDINGS GROUP INCFinancial_Report.xls
EX-31.1 - EX-31.1 - WESTWOOD HOLDINGS GROUP INCwhg-ex311_201503319.htm
EX-31.2 - EX-31.2 - WESTWOOD HOLDINGS GROUP INCwhg-ex312_201503318.htm
EX-32.1 - EX-32.1 - WESTWOOD HOLDINGS GROUP INCwhg-ex321_201503317.htm
EX-32.2 - EX-32.2 - WESTWOOD HOLDINGS GROUP INCwhg-ex322_201503316.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 March 31, 2015

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 April 17, 2015: 8,622,423.

 

 

 

 

 


 

WESTWOOD HOLDINGS GROUP, INC.

INDEX

 

PART I

 

FINANCIAL INFORMATION

PAGE

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

1

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014

2

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2015

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

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

15

 

 

 

 

Item 3.

 

Quantitative And Qualitative Disclosures About Market Risk

21

 

 

 

 

Item 4.

 

Controls and Procedures

21

 

 

 

 

PART II

 

OTHER INFORMATION

22

 

 

 

 

Item 1.

 

Legal Proceedings

22

 

 

 

 

Item 1A.

 

Risk Factors

22

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

 

Item 6.

 

Exhibits

24

 

 

 

 

Signatures

25

 

 

 

 


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

 

 

March 31,

 

 

 

 

 

 

2015

 

 

December 31,

 

 

(unaudited)

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,607

 

 

$

18,131

 

Accounts receivable

 

14,840

 

 

 

14,540

 

Investments, at fair value

 

64,039

 

 

 

79,620

 

Deferred income taxes

 

4,826

 

 

 

4,060

 

Other current assets

 

2,538

 

 

 

2,413

 

Total current assets

 

105,850

 

 

 

118,764

 

Goodwill

 

11,255

 

 

 

11,255

 

Deferred income taxes

 

3,542

 

 

 

3,792

 

Intangible assets, net

 

3,340

 

 

 

3,430

 

Property and equipment, net of accumulated depreciation of $2,847 and $2,720

 

2,871

 

 

 

2,633

 

Total assets

$

126,858

 

 

$

139,874

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

3,694

 

 

$

2,334

 

Dividends payable

 

4,792

 

 

 

4,868

 

Compensation and benefits payable

 

5,284

 

 

 

18,504

 

Income taxes payable

 

2,031

 

 

 

1,498

 

Total current liabilities

 

15,801

 

 

 

27,204

 

Accrued dividends

 

914

 

 

 

1,450

 

Deferred rent

 

1,216

 

 

 

1,213

 

Total liabilities

 

17,931

 

 

 

29,867

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 25,000,000 shares, issued 9,280,996 and

   outstanding 8,467,815 shares at March 31, 2015; issued 9,010,255 and outstanding

   8,308,460 shares at December 31, 2014

 

93

 

 

 

90

 

Additional paid-in capital

 

125,661

 

 

 

119,859

 

Treasury stock, at cost - 813,181 shares at March 31, 2015; 701,795 shares at

   December 31, 2014

 

(35,893

)

 

 

(29,028

)

Accumulated other comprehensive loss

 

(2,619

)

 

 

(1,231

)

Retained earnings

 

21,685

 

 

 

20,317

 

Total stockholders' equity

 

108,927

 

 

 

110,007

 

Total liabilities and stockholders' equity

$

126,858

 

 

$

139,874

 

 

 

 

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

 

 

March 31,

 

 

2015

 

 

2014

 

REVENUES:

 

 

 

 

 

 

 

Advisory fees

 

 

 

 

 

 

 

Asset based

$

23,929

 

 

$

20,389

 

Performance based

 

288

 

 

 

363

 

Trust fees

 

5,150

 

 

 

5,028

 

Other, net

 

241

 

 

 

169

 

Total revenues

 

29,608

 

 

 

25,949

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

Employee compensation and benefits

 

15,309

 

 

 

12,852

 

Sales and marketing

 

395

 

 

 

287

 

Westwood mutual funds

 

827

 

 

 

652

 

Information technology

 

1,037

 

 

 

715

 

Professional services

 

2,072

 

 

 

1,382

 

General and administrative

 

1,590

 

 

 

1,448

 

Total expenses

 

21,230

 

 

 

17,336

 

Income before income taxes

 

8,378

 

 

 

8,613

 

Provision for income taxes

 

2,768

 

 

 

3,051

 

Net income

$

5,610

 

 

$

5,562

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(1,388

)

 

 

(354

)

Total comprehensive income

$

4,222

 

 

$

5,208

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$

0.74

 

 

$

0.74

 

Diluted

$

0.71

 

 

$

0.72

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

7,596,223

 

 

 

7,474,415

 

Diluted

 

7,861,090

 

 

 

7,751,243

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.50

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

2


 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2015

(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, 2015

 

8,308,460

 

 

$

90

 

 

$

119,859

 

 

$

(29,028

)

 

$

(1,231

)

 

$

20,317

 

 

$

110,007

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,610

 

 

 

5,610

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,388

)

 

 

 

 

 

(1,388

)

Issuance of restricted stock, net of forfeitures

 

270,741

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,242

)

 

 

(4,242

)

Stock based compensation expense

 

 

 

 

 

 

 

3,678

 

 

 

 

 

 

 

 

 

 

 

 

3,678

 

Reclassification of compensation liability to be

   paid in shares

 

 

 

 

 

 

 

338

 

 

 

 

 

 

 

 

 

 

 

 

338

 

Tax benefit related to stock based compensation

 

 

 

 

 

 

 

1,789

 

 

 

 

 

 

 

 

 

 

 

 

1,789

 

Purchases of treasury stock

 

(21,193

)

 

 

 

 

 

 

 

 

(1,289

)

 

 

 

 

 

 

 

 

(1,289

)

Restricted stock returned for payment of taxes

 

(90,193

)

 

 

 

 

 

 

 

 

(5,576

)

 

 

 

 

 

 

 

 

(5,576

)

BALANCE, March 31, 2015

 

8,467,815

 

 

$

93

 

 

$

125,661

 

 

$

(35,893

)

 

$

(2,619

)

 

$

21,685

 

 

$

108,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

$

5,610

 

 

$

5,562

 

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

 

 

 

 

 

 

 

Depreciation

 

145

 

 

 

144

 

Amortization of intangible assets

 

90

 

 

 

90

 

Unrealized gains on trading investments

 

(119

)

 

 

(57

)

Stock based compensation expense

 

3,678

 

 

 

3,479

 

Deferred income taxes

 

(570

)

 

 

3,924

 

Excess tax benefits from stock based compensation

 

(1,392

)

 

 

(1,893

)

Net sales of investments - trading securities

 

15,700

 

 

 

19,206

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(690

)

 

 

(450

)

Other current assets

 

42

 

 

 

338

 

Accounts payable and accrued liabilities

 

1,285

 

 

 

(189

)

Compensation and benefits payable

 

(12,406

)

 

 

(13,963

)

Income taxes payable and prepaid income taxes

 

2,414

 

 

 

(1,557

)

Other liabilities

 

(6

)

 

 

(37

)

Net cash provided by operating activities

 

13,781

 

 

 

14,597

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(288

)

 

 

(121

)

Net cash used in investing activities

 

(288

)

 

 

(121

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of treasury stock

 

(1,289

)

 

 

(669

)

Restricted stock returned for payment of taxes

 

(5,576

)

 

 

(5,170

)

Excess tax benefits from stock based compensation

 

1,392

 

 

 

1,893

 

Cash dividends

 

(4,855

)

 

 

(3,942

)

Net cash used in financing activities

 

(10,328

)

 

 

(7,888

)

Effect of currency rate changes on cash

 

(1,689

)

 

 

(78

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

1,476

 

 

 

6,510

 

Cash and cash equivalents, beginning of period

 

18,131

 

 

 

10,864

 

Cash and cash equivalents, end of period

$

19,607

 

 

$

17,374

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for income taxes

$

957

 

 

$

761

 

 

 

 

 

 

 

 

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.

Acquisition of Woodway Financial Advisors

On January 15, 2015, we entered into an agreement to acquire Woodway Financial Advisors (“Woodway”), a Houston-based private wealth and trust company that managed assets of approximately $1.6 billion at December 31, 2014. We completed the acquisition on April 1, 2015.

The acquisition of Woodway will be accounted for as a business combination using the acquisition method of accounting, whereby the purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. See further discussion of the acquisition of Woodway in Note 13 “Subsequent Events.”

 

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”). Our consolidated financial statements include all necessary reclassification adjustments to conform prior year results to the current period presentation.

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, 2014. 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.

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 adoption of this ASU did not have an 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 the 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, 2017, 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.

5


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. The new guidance will be effective for the year ending December 31, 2016. Earlier adoption is permitted. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items. The ASU eliminates the concept of extraordinary items, which are currently required to be separately classified, presented and disclosed in financial statements. ASU 2015-01 is effective for annual reporting periods, including interim periods within those periods, beginning after December 31, 2015. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation Analysis. This amendment modifies the analysis required to evaluate whether certain legal entities should be consolidated, including variable interest entities. This amendment changes the evaluation of fee arrangements and related party transactions when determining whether to consolidate a variable interest entity. The amendment is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within reporting periods beginning after December 15, 2017, although early adoption is permitted. We are currently evaluating the impact that the application of ASU 2015-02 will have on our financial statements and disclosures.

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software. This amendment provides guidance about whether a cloud computing arrangement includes a software license. The new guidance clarifies that software licenses included in a cloud computing software should be accounted for in the same manner as other software licenses. If the cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the impact that the application of ASU 2015-05 will have on our financial statements.

 

3. 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 44,000 and 103,000 anti-dilutive restricted shares as of March 31, 2015 and March 31, 2014, respectively.

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

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Net income

$

5,610

 

 

$

5,562

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

7,596,223

 

 

 

7,474,415

 

Dilutive potential shares from unvested restricted shares

 

264,867

 

 

 

276,828

 

Weighted average shares outstanding - diluted

 

7,861,090

 

 

 

7,751,243

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$

0.74

 

 

$

0.74

 

Diluted

$

0.71

 

 

$

0.72

 

 

6


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

4. 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

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government agency obligations

$

30,293

 

 

$

17

 

 

$

(1

)

 

$

30,309

 

Money market funds

 

26,332

 

 

 

 

 

 

 

 

 

26,332

 

Equity funds

 

7,163

 

 

 

279

 

 

 

(44

)

 

 

7,398

 

Marketable securities

$

63,788

 

 

$

296

 

 

$

(45

)

 

$

64,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government agency obligations

$

66,761

 

 

$

20

 

 

$

(8

)

 

$

66,773

 

Money market funds

 

8,250

 

 

 

 

 

 

 

 

 

8,250

 

Equity funds

 

4,477

 

 

 

223

 

 

 

(103

)

 

 

4,597

 

Marketable securities

$

79,488

 

 

$

243

 

 

$

(111

)

 

$

79,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2015 and December 31, 2014, $5.8 million and $4.6 million in corporate funds were invested in Westwood Funds, Westwood Common Trust Funds and the UCITS Fund. See Note 8 “Variable Interest Entities.”

 

5. 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, other current assets, 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. 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

7


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 March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

$

60,639

 

 

$

3,400

 

 

$

 

 

$

64,039

 

Total financial instruments

$

60,639

 

 

$

3,400

 

 

$

 

 

$

64,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

$

77,327

 

 

$

2,293

 

 

$

 

 

$

79,620

 

Total financial instruments

$

77,327

 

 

$

2,293

 

 

$

 

 

$

79,620

 

 

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 calculated using indirectly observed inputs, as the unit price is based on the market value of the underlying investments traded on an active market. We can make withdrawals from the common trust funds on a daily basis, as needed for liquidity, and there are no restrictions on redemption as of March 31, 2015.

 

 

6. 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 $3.3 million (net of accumulated amortization of $1.9 million) at March 31, 2015, 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.

 

7. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

 

 

As of

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Foreign currency translation adjustment

$

(2,619

)

 

$

(1,231

)

Accumulated other comprehensive loss

$

(2,619

)

 

$

(1,231

)

 

 

8. 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 and Westwood Management provide 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 two collective investment trusts (“CITs”). Some clients of Westwood Management hold their investments in ten limited liability companies (“LLCs”). The CTFs, UCITS, 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.

8


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

In January 2015 and January 2014, the Company provided $1.0 million and $2.0 million, respectively, to common trust funds for the sole purpose of showing economic substance needed to establish the funds. In October 2014, the Company provided €1.6 million, or $2.0 million, to the UCITS Fund for the sole purpose of showing economic substance needed to establish a new sub-fund. The corporate capital invested in these funds is included in “Investments, at fair value” on our consolidated balance sheet at March 31, 2015.

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®, the CTFs and the UCITS Fund are accounted for as investments in accordance with our other investments described in Note 5. We recognized fee revenue from the Westwood VIEs of approximately $14.3 million and $11.2 million for the three months ended March 31, 2015 and March 31, 2014, respectively.

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

 

 

As of March 31, 2015

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Under

 

 

Corporate

 

 

Risk of

 

 

Management

 

 

Investment

 

 

Loss

 

VIE's:

 

 

 

 

 

 

 

 

 

 

 

Westwood Funds®

$

4,239

 

 

$

1

 

 

$

1

 

Common Trust Funds

 

2,108

 

 

 

3

 

 

 

3

 

Collective Investment Trusts

 

309

 

 

 

 

 

 

 

LLCs

 

142

 

 

 

 

 

 

 

UCITS Fund

 

820

 

 

 

2

 

 

 

2

 

VIE totals

 

7,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All other assets:

 

 

 

 

 

 

 

 

 

 

 

Private Wealth

 

1,775

 

 

 

 

 

 

 

 

 

Institutional

 

12,329

 

 

 

 

 

 

 

 

 

Total AUM

$

21,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9. 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 March 31, 2015, approximately 214,000 shares remain available for issuance under the Plan.

Canadian Plan

The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) provides compensation in the form of common stock for services performed by employees of Westwood International. Under the Canadian Plan, no more than $10 million CDN (or $7.9 million in U. S. Dollars using the exchange rate on March 31, 2015) may be funded to the Plan Trustee to fund purchases of common stock with respect to awards granted under the Canadian Plan. At March 31, 2015, approximately $5.4 million remains available for issuance under the Canadian Plan, or approximately 89,000 shares based on the closing share price of our stock of $60.30 as of March 31, 2015. During the first quarter of

9


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2015, the trust formed pursuant to the Canadian Plan purchased in the open market 21,193 Westwood common shares for approximately $1.3 million. As of March 31, 2015, the trust holds 52,920 shares of Westwood common stock. As of March 31, 2015, unrecognized compensation cost related to restricted stock grants under the Canadian Plan totaled $1.4 million, which we expect to recognize over a weighted-average period of 2.3 years.

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

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Service condition stock based compensation expense

$

2,183

 

 

$

1,814

 

Performance condition stock based compensation expense

 

1,354

 

 

 

1,249

 

Stock based compensation expense under the Plan

 

3,537

 

 

 

3,063

 

Canada EB Plan stock based compensation expense

 

141

 

 

 

416

 

Total stock based compensation expense

$

3,678

 

 

$

3,479

 

 

Restricted Stock

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 March 31, 2015, there was approximately $33.5 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.9 years. Our two types of restricted stock grants under the Plan are discussed below.

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.

The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the three months ended March 31, 2015:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

Restricted shares subject only to a service condition:

Shares

 

 

Value

 

 

 

 

 

 

 

 

 

Non-vested, January 1, 2015

 

496,457

 

 

$

48.14

 

Granted

 

235,945

 

 

 

61.74

 

Vested

 

(174,008

)

 

 

40.85

 

Forfeited

 

(204

)

 

 

58.79

 

Non-vested, March 31, 2015

 

558,190

 

 

$

56.16

 

 

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 as derived from the Company’s audited financial statements. If a portion of the

10


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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 2015, the Compensation Committee established the 2015 goal as adjusted pre-tax income of at least $46.0 million, representing a five-year compound annual growth rate in excess of 10% over annual adjusted pre-tax income recorded in 2010. 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, (ii) performance-based restricted stock awards, and (iii) mutual fund share incentive awards, excluding start up, non-recurring and similar expense items, at the Committee’s discretion. In the first quarter of 2015, 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.

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

Restricted shares subject to service and performance conditions:

Shares

 

 

Value

 

 

 

 

 

 

 

 

 

Non-vested, January 1, 2015

 

101,313

 

 

$

58.59

 

Granted

 

101,313

 

 

 

61.29

 

Vested

 

(101,313

)

 

 

58.59

 

Forfeited

 

 

 

 

 

Non-vested, March 31, 2015

 

101,313

 

 

$

61.29

 

The above amounts as of March 31, 2015 do not include 118,939 non-vested restricted shares that potentially vest over performance years subsequent to 2015 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.      

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 three months ended March 31, 2015 and 2014, we recorded expense of $426,000 and $125,000, respectively, related to mutual fund share incentive awards. As of March 31, 2015 and December 31, 2014, we had an accrued liability of $1.4 million and $844,000, respectively, related to mutual fund incentive awards.

 

10. RELATED PARTY TRANSACTIONS

Some of our directors, executive officers and their affiliates invest their personal funds directly in trust accounts that we manage. There were no amounts due from these accounts as of March 31, 2015 or December 31, 2014. For the three months ended March 31, 2015 and 2014, we recorded trust fees from these accounts of $74,000 and $59,000, respectively.

The Company engages in transactions with its affiliates in the ordinary course of business.  Westwood International and Westwood Management provide 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 three months ended March 31, 2015 and 2014, the Company earned approximately $346,000  and $36,000 in fees directly from the UCITS Fund. This does not include fees paid directly to Westwood International by

11


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

certain clients invested in the UCITS Fund that have entered into an investment management agreement with Westwood International. As of March 31, 2015 and December 31, 2014, $120,000 and $256,000, respectively, of these fees were unpaid and included in “Accounts receivable” on our consolidated balance sheet.

 

11. 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 CDN 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 CDN in general damages, $10 million CDN in special damages, $1 million CDN 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 CDN in general damages, $1 million CDN per defendant in punitive damages, unspecified special damages, interest and costs. The pleadings phase was completed in 2013, and we are currently 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 $379,000 to date and have recorded a receivable of $343,000 as of March 31, 2015, which represents our current minimum estimate of the related expenses that we expect to recover under our insurance policies. This receivable is part of “Other current assets” on our condensed consolidated balance sheets.

 

12. 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, the Westwood Funds®, and the UCITS Fund, 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.

12


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Trust

Trust provides trust and custodial services and participation 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 March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fee revenues from external sources

$

24,217

 

 

$

5,150

 

 

$

 

 

$

 

 

$

29,367

 

Net intersegment revenues

 

3,627

 

 

 

 

 

 

 

 

 

(3,627

)

 

 

 

Net interest and dividend revenue

 

49

 

 

 

 

 

 

 

 

 

 

 

 

49

 

Other revenue

 

191

 

 

 

1

 

 

 

 

 

 

 

 

 

192

 

Total revenues

$

28,084

 

 

$

5,151

 

 

$

 

 

$

(3,627

)

 

$

29,608

 

Economic Earnings

$

10,717

 

 

$

503

 

 

$

(1,804

)

 

$