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EX-31.1 - EXHIBIT 31.1 - Pzena Investment Management, Inc.pzn2015q3exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Pzena Investment Management, Inc.pzn2015q3exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - Pzena Investment Management, Inc.pzn2015q3exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - Pzena Investment Management, Inc.pzn2015q3exhibit322.htm
10-Q - 10-Q PDF - Pzena Investment Management, Inc.pzn2015093010q.pdf

 
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, 2015
Or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______to______
 
Commission file number 001-33761
PZENA INVESTMENT MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
20-8999751
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
320 Park Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 355-1600

Not Applicable

(Former Address of Principal Executive Offices) (Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a 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 o No x
As of November 3, 2015, there were 15,259,448 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.
As of November 3, 2015, there were 50,719,416 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.
 



PZENA INVESTMENT MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements.  Forward-looking statements provide our current expectations, or forecasts, of future events.  Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.  Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements.  Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in Item 1A, “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2014.  Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report.  We undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events.  You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, or SEC, after the date of this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

our anticipated future results of operations and operating cash flows;
our business strategies and investment policies;
our financing plans and the availability of short- or long-term borrowing, or equity financing;
our competitive position and the effects of competition on our business;
potential growth opportunities available to us;
the recruitment and retention of our employees;
our expected levels of compensation for our employees;
our potential operating performance, achievements, efficiency, and cost reduction efforts;
our expected tax rate;
changes in interest rates;
our expectation with respect to the economy, capital markets, the market for asset management services, and other industry trends; and
the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.
The reports that we file with the SEC, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements.

 

ii


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PZENA INVESTMENT MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per-share amounts)
 
As of
 
September 30, 2015
 
December 31, 2014
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and Cash Equivalents
$
33,643

 
$
39,109

Restricted Cash
3,659

 
2,810

Due from Broker
556

 
94

Advisory Fees Receivable
24,571

 
22,939

Investments
28,369

 
27,945

Receivable from Related Parties
325

 
107

Other Receivables
542

 
647

Prepaid Expenses and Other Assets
933

 
845

Deferred Tax Asset, Net of Valuation Allowance of $53,029 and $44,239, respectively
17,139

 
14,618

Property and Equipment, Net of Accumulated Depreciation of $933 and $3,072, respectively
8,013

 
2,772

TOTAL ASSETS
$
117,750

 
$
111,886

LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Accounts Payable and Accrued Expenses
$
19,629

 
$
5,974

Due to Broker
794

 
698

Securities Sold Short, at Fair Value
2,337

 
1,572

Liability to Selling and Converting Shareholders
19,778

 
15,358

Deferred Compensation Liability
2,096

 
2,211

Lease Liability
247

 
354

Other Liabilities
548

 
686

TOTAL LIABILITIES
45,429

 
26,853

Equity:
 

 
 

Preferred Stock (Par Value $0.01; 200,000,000 Shares Authorized; None Outstanding)

 

Class A Common Stock (Par Value $0.01; 750,000,000 Shares Authorized; 15,285,532 and 13,044,719 Shares Issued and Outstanding in 2015 and 2014, respectively)
152

 
130

Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 50,636,336 and 52,891,939 Shares Issued and Outstanding in 2015 and 2014, respectively)

 

Additional Paid-In Capital
5,636

 
8,007

Retained Earnings
10,697

 
10,264

Accumulated Other Comprehensive Loss
(1
)
 

Total Pzena Investment Management, Inc.'s Equity
16,484

 
18,401

Non-Controlling Interests
55,837

 
66,632

TOTAL EQUITY
72,321

 
85,033

TOTAL LIABILITIES AND EQUITY
$
117,750

 
$
111,886

 See accompanying notes to unaudited consolidated financial statements.

1


PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per-share amounts)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
REVENUE
$
30,772

 
$
29,605

 
$
88,935

 
$
83,951

EXPENSES


 


 


 


Compensation and Benefits Expense
11,645

 
10,622

 
35,515

 
30,571

General and Administrative Expense
2,896

 
2,351

 
10,989

 
7,176

Total Operating Expenses
14,541

 
12,973

 
46,504

 
37,747

Operating Income
16,231

 
16,632

 
42,431

 
46,204

OTHER INCOME/ (EXPENSE)


 
 
 
 

 
 

Interest Income
9

 
20

 
30

 
45

Dividend Income
188

 
74

 
618

 
236

(Losses)/ Gains and Other Investment Income
(4,398
)
 
(434
)
 
(3,923
)
 
80

Change in Liability to Selling and Converting Shareholders
(697
)
 
(1,824
)
 
(1,614
)
 
(3,947
)
Other Expense
(129
)
 
(185
)
 
(266
)
 
(218
)
Total Other Expense
(5,027
)
 
(2,349
)
 
(5,155
)
 
(3,804
)
Income Before Income Taxes
11,204

 
14,283

 
37,276

 
42,400

Income Tax Expense/ (Benefit)
748

 
(220
)
 
2,402

 
1,189

Net Income
10,456

 
14,503

 
34,874

 
41,211

Less: Net Income Attributable to Non-Controlling Interests
8,534

 
12,444

 
29,408

 
35,580

Net Income Attributable to Pzena Investment Management, Inc.
$
1,922

 
$
2,059

 
$
5,466

 
$
5,631

 
 
 
 
 
 
 
 
Net Income for Basic Earnings per Share
$
1,922

 
$
2,059

 
$
5,466

 
$
5,631

Basic Earnings per Share
$
0.13

 
$
0.16

 
$
0.40

 
$
0.45

Basic Weighted Average Shares Outstanding1
14,585,650

 
12,965,606

 
13,591,432

 
12,443,687

 
 
 
 
 
 
 
 
Net Income for Diluted Earnings per Share
$
8,932

 
$
9,503

 
$
25,391

 
$
26,193

Diluted Earnings per Share
$
0.13

 
$
0.14

 
$
0.37

 
$
0.39

Diluted Weighted Average Shares Outstanding1
68,036,216

 
67,632,072

 
68,136,888

 
67,879,923

 
 
 
 
 
 
 
 
Cash Dividends per Share of Class A Common Stock
$
0.03

 
$
0.03

 
$
0.38

 
$
0.32

1 The Company issues restricted shares of Class A common stock and restricted Class B units that have non-forfeitable dividend rights. Under the "two-class method," these shares and units are considered participating securities and are required to be included in the computation of basic and diluted earnings per share. 

See accompanying notes to unaudited consolidated financial statements.


2


PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)



 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
NET INCOME
$
10,456

 
$
14,503

 
$
34,874

 
$
41,211

OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
Foreign Currency Translation Adjustment
(3
)
 

 
(3
)
 

Total Other Comprehensive Loss
(3
)
 

 
(3
)
 

Comprehensive Income
10,453

 
14,503

 
34,871

 
41,211

Less: Comprehensive Income Attributable to Non-Controlling Interests
8,532

 
12,444

 
29,406

 
35,580

Total Comprehensive Income Attributable to Pzena Investment Management, Inc.
$
1,921

 
$
2,059

 
$
5,465

 
$
5,631

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 































See accompanying notes to unaudited consolidated financial statements.

3


PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in thousands, except share and per-share amounts)
  
 
Shares of
Class A
Common Stock
 
Shares of
Class B
Common Stock
 
Class A
Common Stock
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained
Earnings
 
   Non-Controlling
Interests
 
Total
Balance at December 31, 2014
13,044,719

 
52,891,939

 
$
130

 
$
8,007

 
$

 
$
10,264

 
$
66,632

 
$
85,033

Unit Conversion
2,772,171

 
(2,772,171
)
 
28

 
2,745

 

 

 
(2,278
)
 
495

Amortization of Non-Cash Compensation
18,535

 
23,800

 

 
474

 

 

 
1,764

 
2,238

Sale of Shares under Equity Incentive Plan

 
78,093

 

 
87

 

 
 
 
285

 
372

Non-Cash Compensation Modification

 
(142,315
)
 

 
(141
)
 
 
 

 
(572
)
 
(713
)
Directors' Share Grants

 

 

 
63

 

 

 
247

 
310

Net Income

 

 

 

 

 
5,466

 
29,408

 
34,874

Foreign Currency Translation Adjustments

 

 

 

 
(1
)
 

 
(2
)
 
(3
)
Options Exercised
962

 
715,706

 

 
333

 

 

 
1,355

 
1,688

Repurchase and Retirement of Class A Common Stock
(550,855
)
 

 
(6
)
 
(5,017
)
 

 

 

 
(5,023
)
Repurchase and Retirement of Class B Units

 
(158,716
)
 

 
(339
)
 

 

 
(1,392
)
 
(1,731
)
Class A Cash Dividends Declared and Paid ($0.38 per share)

 

 

 

 

 
(5,033
)
 

 
(5,033
)
Contributions from Non-Controlling Interests

 

 

 

 

 

 
496

 
496

Distributions to Non-Controlling Interests

 

 

 

 

 

 
(40,682
)
 
(40,682
)
Other

 

 

 
(576
)
 

 

 
576

 

Balance at September 30, 2015
15,285,532

 
50,636,336

 
$
152

 
$
5,636

 
$
(1
)
 
$
10,697

 
$
55,837

 
$
72,321

  
See accompanying notes to unaudited consolidated financial statements.

4



PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net Income
$
10,456

 
$
14,503

 
$
34,874

 
$
41,211

Adjustments to Reconcile Net Income to Cash
 
 
 
 
 
 
 
Provided by Operating Activities:
 
 
 
 
 
 
 
Depreciation
269

 
57

 
521

 
167

Disposal of Fixed Assets

 

 
428

 

Non-Cash Compensation
1,300

 
1,299

 
4,334

 
3,955

Directors' Share Grants
82

 
80

 
310

 
278

Losses/(Gains) and Other Investment Income
4,398

 
434

 
3,923

 
(80
)
Foreign Currency Translation Adjustments
(3
)
 

 
(3
)
 

Change in Liability to Selling and Converting Shareholders
697

 
1,824

 
1,614

 
3,947

Deferred Income Taxes
127

 
(926
)
 
767

 
(1,126
)
Changes in Operating Assets and Liabilities:


 


 


 


Advisory Fees Receivable
(781
)
 
(684
)
 
(1,632
)
 
(641
)
Due from Broker
(26
)
 
815

 
(463
)
 
(316
)
Restricted Cash
110

 
(25
)
 
(849
)
 
(2,399
)
Prepaid Expenses and Other Assets
(71
)
 
65

 
(15
)
 
(15
)
Non-Cash Compensation Modification

 

 
(713
)
 

Due to Broker
(454
)
 
(860
)
 
96

 
254

Accounts Payable, Accrued Expenses, and Other Liabilities
5,299

 
5,666

 
11,351

 
9,323

Tax Receivable Agreement Payments

 

 

 
(1,945
)
Change in Lease Liability
(496
)
 
(105
)
 
(107
)
 
(318
)
Purchases of Equity Securities and Securities Sold Short
(6,350
)
 
(13,039
)
 
(35,173
)
 
(44,305
)
Proceeds from Equity Securities and Securities Sold Short
6,803

 
12,995

 
31,452

 
37,968

Net Cash Provided by Operating Activities
21,360

 
22,099

 
50,715

 
45,958

INVESTING ACTIVITIES
 
 
 
 
 
 
 
Purchases of Investments
(1,376
)
 
(26
)
 
(8,149
)
 
(584
)
Proceeds from Sale of Investments
1,229

 

 
8,289

 
541

Payments to Related Parties
(12
)
 
(5
)
 
(218
)
 
(10
)
Purchases of Property and Equipment
(643
)
 
(214
)
 
(6,190
)
 
(358
)
Net Cash Used in Investing Activities
(802
)
 
(245
)
 
(6,268
)
 
(411
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
Repurchase and Retirement of Class A Common Stock
(2,680
)
 
(606
)
 
(5,023
)
 
(979
)
Repurchase and Retirement of Class B Units
(147
)
 

 
(1,731
)
 
(541
)
Sale of Shares under Equity Incentive Plan
372

 

 
372

 

Loan Proceeds

 

 

 
205

Option Exercise

 

 
1,688

 

Distributions to Non-Controlling Interests
(8,544
)
 
(12,351
)
 
(40,682
)
 
(41,205
)
Contributions from Non-Controlling Interests
111

 
2,782

 
496

 
4,360

Dividends
(468
)
 
(401
)
 
(5,033
)
 
(3,932
)
Net Cash Used in Financing Activities
(11,356
)
 
(10,576
)
 
(49,913
)
 
(42,092
)
NET CHANGE IN CASH
$
9,202

 
$
11,278

 
$
(5,466
)
 
$
3,455

CASH AND CASH EQUIVALENTS - Beginning of Period
$
24,441

 
$
26,055

 
$
39,109

 
$
33,878

Effect of Deconsolidation

 
(100
)
 

 
(100
)
Net Change in Cash
9,202

 
11,278

 
(5,466
)
 
3,455

CASH AND CASH EQUIVALENTS - End of Period
$
33,643

 
$
37,233

 
$
33,643

 
$
37,233

Supplementary Cash Flow Information:
 
 
 
 
 
 
 
Income Taxes Paid
$
262

 
$
623

 
$
1,031

 
$
2,728


See accompanying notes to unaudited consolidated financial statements.

5

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements


Note 1—Organization
 
Pzena Investment Management, Inc. (the “Company”) functions as the sole managing member of its operating company, Pzena Investment Management, LLC (the “operating company”).   As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interests that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.
 
The operating company is an investment adviser registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York. As of September 30, 2015, the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.
 
The Company, through its own interests, and its interest in the operating company, has consolidated the results of operations and financial condition of the following entities as of September 30, 2015
 
 
 
 Ownership at
Legal Entity
Type of Entity (Date of Formation)
 
September 30, 2015
Pzena Investment Management, Pty
Australian Proprietary Limited Company (12/16/2009)
 
100.0
%
Pzena Financial Services, LLC
Delaware Limited Liability Company (10/15/2013)
 
100.0
%
Pzena Investment Management, LTD
England and Wales Private Limited Company (01/08/2015)
 
100.0
%
Pzena Investment Management Special Situations, LLC
Delaware Limited Liability Company (12/01/2010)
 
99.9
%
Pzena Mid Cap Focused Value Fund, a series of Advisors Series Trust
Open-end Management Investment Company, series of Delaware Statutory Trust (3/31/2014)
 
91.9
%
Pzena Long/Short Value Fund, a series of Advisors Series Trust
Open-end Management Investment Company, series of Delaware Statutory Trust (3/31/2014)
 
83.0
%
Pzena International Value Service, a series of Pzena Investment Management International, LLC
Delaware Limited Liability Company (12/22/2003)
 
42.9
%
Pzena Emerging Markets Focused Value Fund, a series of Advisors Series Trust
Open-end Management Investment Company, series of Delaware Statutory Trust (3/31/2014)
 
16.7
%
Pzena Investment Funds Trust, Pzena Large Cap Value Fund
Massachusetts Trust (11/01/2002)
 
3.0
%
 
Note 2—Significant Accounting Policies
 
Basis of Presentation:
 
The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations.  The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest.  Certain investment vehicles the operating company sponsors for which it is the investment advisor are considered to be variable-interest entities (“VIEs”). The Company consolidates VIEs where the Company is deemed to be the primary beneficiary. The majority-owned subsidiaries in which the Company has a controlling financial interest and the VIEs for which the Company is deemed to be the primary beneficiary are collectively referred to as “consolidated subsidiaries.”  Non-controlling interests recorded on the consolidated financial statements of the Company include the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company.  All significant inter-company transactions and balances have been eliminated through consolidation.

On March 31, 2014, the operating company launched the Pzena Emerging Markets Focused Value Fund, Pzena Mid Cap Focused Value Fund, and Pzena Long/Short Value Fund, for each of which it acts as the investment advisor. These funds each meet the definition of a VIE due to their series trust structure, as the shareholders of the individual funds lack the ability to make decisions regarding the trustees and the key activities of the fund, because those abilities reside at the trust level. For purposes of consolidation, the Company believes it is the primary beneficiary when it, along with its related parties and de-facto agents, owns

6

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


a majority of the fund shares because the majority of the variability of the funds accrues to the Company. On March 31, 2014, the Company provided the initial cash investment for each fund in an effort to generate an investment performance track record to attract third-party investors and had an initial investment representing 100% of the ownership in each entity. As a result, the entities were consolidated with the Company as of March 31, 2014. On August 5, 2014, due to additional subscriptions into the Pzena Emerging Markets Focused Value Fund, the Company's ownership decreased to 42.9% and the entity was deconsolidated. However, as of December 19, 2014, as a result of a shift in equity ownership on that date, the Company was considered the primary beneficiary of the fund and the entity was reconsolidated. During the period when the Company was not considered the primary beneficiary of the Pzena Emerging Markets Focused Value Fund, it removed the related assets, liabilities and non-controlling interest from its consolidated statement of financial condition, the related net investment income from its consolidated statement of operations, and classified the remaining investment as an equity method investment. The Pzena Emerging Markets Focused Value Fund, Pzena Mid Cap Focused Value Fund, and Pzena Long/Short Value Fund will continue to be consolidated to the extent the Company is deemed to be the primary beneficiary of them. At September 30, 2015, the aggregate of these funds' $18.6 million in net assets was included in the Company's consolidated statement of financial condition.

The operating company is the managing member of Pzena International Value Service, a series of Pzena Investment Management International, LLC.  The operating company is considered the primary beneficiary of this entity. At September 30, 2015, Pzena International Value Service’s $3.4 million in net assets were included in the Company’s consolidated statement of financial condition.

Pzena Investment Funds Trust, Pzena Large Cap Value Fund is a Massachusetts Trust in which a majority of the trustees are members of the executive committee of the operating company.  A majority of the trustees do not hold equity investments in this trust.  Since the holders of the equity investments in this partnership lack a controlling financial interest in it, this entity is deemed to be a VIE.  The Company is considered the primary beneficiary of this VIE.  At September 30, 2015, the fund’s $1.1 million in net assets were included in the Company’s consolidated statement of financial condition.

Effective January 1, 2015, substantially all of the Company's investments in third party mutual funds, held to satisfy the Company's obligations under its deferred compensation program, were reallocated to the Pzena Emerging Markets Focused Value Fund, Pzena Mid Cap Focused Value Fund, Pzena Long/Short Value Fund, Pzena Large Cap Value Fund, Pzena International Value Service, a private investment partnership and certain other investments.     

VIEs that are not consolidated continue to receive investment management services from the operating company and are private investment partnerships the operating company sponsors, through which it offers its Global Value and/or Non-U.S. Value Strategies.  The total net assets of these VIEs was approximately $382.9 million and $408.9 million at September 30, 2015 and December 31, 2014, respectively.  As of September 30, 2015, the operating company had a $1.6 million investment in one of these firm-sponsored vehicles held to satisfy the Company's obligations under its deferred compensation program but was not deemed to be primary beneficiary of the entity. As of December 31, 2014, neither the Company nor the operating company was exposed to losses as a result of its involvement with these entities because neither had a direct investment in them.

The Company records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including unit and option issuances, repurchases, and retirements.  The operating company’s pro-rata share of such transactions is recorded as an adjustment to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial position.
 
Management’s Use of Estimates:
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the period.  Actual results could differ from those estimates.
 

 

7

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Revenue Recognition:
 
Revenue, comprised of advisory fee income, is recognized over the period in which advisory services are provided.  Advisory fee income includes management fees that are calculated based on percentages of assets under management (“AUM”), generally billed quarterly, either in arrears or advance, depending on the applicable contractual terms.  Advisory fee income also includes performance fees that may be earned by the Company depending on the investment return of the AUM.  Performance fee arrangements generally entitle the Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark.  The Company’s participation percentage in such return differentials is then multiplied by AUM to determine the performance fees earned.   In general, returns are calculated on an annualized basis over the contract’s measurement period, which usually extends to three years.  Performance fees are generally payable annually.  Following the preferred method identified in the Revenue Recognition Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), such performance fee income is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.  For the three and nine months ended September 30, 2015, the Company recognized approximately $3.2 million and $3.9 million in performance fee income, respectively. For the three and nine months ended September 30, 2014, the Company recognized approximately $2.1 million and $2.6 million in performance fee income, respectively.

Cash and Cash Equivalents:
 
At September 30, 2015 and December 31, 2014, Cash and Cash Equivalents was $33.6 million and $39.1 million, respectively.  The Company considers all money market funds and highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents.  The Company maintains its cash in bank deposits and other accounts whose balances often exceed federally insured limits.
 
Interest on cash and cash equivalents is recorded as interest income on an accrual basis in the consolidated statements of operations.
 
Restricted Cash:
 
The Company maintained compensating balances of Restricted Cash of $3.7 million and $2.8 million at September 30, 2015 and December 31, 2014, respectively. The Company holds letters of credit issued by a third party in lieu of cash security deposits, as required by the Company’s leases for its new corporate headquarters and former office space.  

The Pzena Long/Short Value Fund is required to maintain cash collateral for margin accounts established to support securities sold short, not yet purchased. To satisfy this requirement, cash of $2.3 million and $1.5 million as of September 30, 2015 and December 31, 2014, respectively, was set aside and recorded in Restricted Cash in the consolidated statements of financial condition.

Due to/from Broker:
 
Due to/from Broker consists primarily of amounts payable/receivable for unsettled securities transactions held/initiated at the clearing brokers of the Company’s consolidated subsidiaries.
 
Investments:
 
Investment Securities, trading
Investments classified as trading securities consist of equity securities held by the Company and its consolidated subsidiaries.  Certain of the Company’s investments are held to satisfy the Company’s obligations under its deferred compensation program.  Prior to 2015, the Company held investments in third-party mutual funds to satisfy the Company's obligations under its deferred compensation program. Dividends associated with the Company's investments and the investments of the Company’s consolidated subsidiaries are recorded as dividend income on an ex-dividend basis in the consolidated statement of operations.

Securities Sold Short represents securities sold short, not yet purchased by the Pzena Long/Short Value Fund, which is consolidated with the Company's financial statements. Dividend expense associated with these investments is reflected in Other Expense on an ex-dividend basis in the consolidated statements of operations.
 

8

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


All such investments are recorded at fair value, with net realized and unrealized gains and losses reported in earnings. Net realized and unrealized gains and losses are a component of (Losses)/ Gains and Other Investment Income in the consolidated statements of operations.

Investments in equity method investees
During the three and nine months ended September 30, 2015, the Company accounted for its investment in a private investment partnership in which the Company has a non-controlling interest and exercises significant influence using the equity method. This investment is included in Investments in the Company's consolidated statements of financial condition. The carrying value of this investment is recorded at the amount of capital reported by the private investment partnership. The capital account reflects any contributions paid to, distributions received from, and equity earnings of, the private investment partnership. The earnings of this investment are recorded as equity in the earnings of affiliates and reflected as a component of (Losses)/ Gains and Other Investment Income in the consolidated statements of operations.

Investments in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of impairment losses, if any. During the three and nine months ended September 30, 2015, no impairment losses were recognized.

Fair Value Measurements:
 
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.  The Fair Value Measurements and Disclosures Topic of the FASB ASC also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3).
 
Included in the Company’s consolidated statements of financial condition are investments in equity securities and securities sold short, both of which are exchange-traded securities with quoted prices in active markets. Also included in the Company's investments during 2014 were third-party mutual funds which have a readily available net asset value per share.  The fair value measurements of the equity securities, securities sold short, and investments in third-party mutual funds during 2014 have been classified as Level 1. The investments in equity method investees are held at their carrying value.
 
The following table presents these instruments’ fair value at September 30, 2015:
 
 
Level 1
 
Level 2
 
Level 3
 
Other Assets Not Held at Fair Value
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Equity Securities
$
26,720

 
$

 
$

 
$

 
$
26,720

Investments in Equity Method Investees

 

 

 
1,649

 
1,649

Total
$
26,720

 
$

 
$

 
$
1,649

 
$
28,369



9

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


 
Level 1

Level 2

Level 3

Other Liabilities Not Held at Fair Value

Total
 
(in thousands)
Liabilities:
 

 

 




Securities Sold Short
$
2,337


$

 
$


$


$
2,337



The following table presents these instruments’ fair value at December 31, 2014:
 
Level 1
 
Level 2
 
Level 3
 
Other Assets Not Held at Fair Value
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Equity Securities
$
23,036

 
$

 
$

 
$

 
$
23,036

Investments in Mutual Funds
4,909

 

 

 

 
4,909

Total
$
27,945

 
$

 
$

 
$

 
$
27,945


 
Level 1
 
Level 2
 
Level 3
 
Other Liabilities Not Held at Fair Value
 
Total
 
(in thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
Securities Sold Short
$
1,572

 
$

 
$

 
$

 
$
1,572

    
For the three and nine months ended September 30, 2015 and 2014, there were no transfers between levels. In addition, the Company did not hold any Level 2 or 3 securities during these periods.

Securities Valuation:
 
Investments in equity securities and securities sold short for which market quotations are available are valued at the last reported price or closing price on the primary market or exchange on which they trade.  If no reported equity sales occurred on the valuation date, equity investments are valued at the bid price.  Investments in firm-sponsored investment vehicles and third-party mutual funds during 2014, are valued at the closing net asset value per share of the fund on the day of valuation.  Transactions are recorded on a trade date basis.

The net realized gain or loss on sales of securities, securities sold short, and investments in third-party mutual funds is determined on a specific identification basis and is included in Gains/ (Losses) and Other Investment Income in the consolidated statements of operations.
 
Concentrations of Credit Risk:
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers, and advisory fees receivable.  The Company maintains its cash and cash equivalents in bank deposits and other accounts whose balances often exceed federally insured limits.

The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company.  On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs, collections, and current credit conditions.  For the three and nine months ended September 30, 2015, approximately 10.0% and 10.6% of the Company's advisory fees were generated from advisory agreements with one client relationship, respectively. The Company had no client

10

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


relationships that were greater than 10% of total revenue during 2014. At September 30, 2015 and December 31, 2014, no allowance for doubtful accounts was deemed necessary.
 
Property and Equipment:
 
Property and equipment is carried at cost, less accumulated depreciation and amortization.  Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, which range from three to seven years.  Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.
 
Business Segments:
 
The Company views its operations as comprising one operating segment.
 
Income Taxes:
 
The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company.  The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss.  Similarly, the income of the Company’s consolidated subsidiaries is not subject to income taxes, since it is allocated to each partnership’s individual partners.  The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”).

Judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are in accordance with applicable tax laws. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate. It is also the Company’s policy to recognize accrued interest, and penalties associated with uncertain tax positions in Income Tax Expense/ (Benefit) on the consolidated statements of operations. For the three and nine months ended September 30, 2015 and 2014, no such expenses were recognized. As of September 30, 2015 and December 31, 2014, no such accruals were recorded.
 
The Company and its consolidated subsidiaries account for all federal, state, and local taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the carrying amount and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized.  At September 30, 2015, the Company had a $53.0 million valuation allowance against deferred tax assets recorded as part of the Company’s initial public offering and the subsequent exchanges of Class B units for shares of its Class A common stock.  At December 31, 2014, the Company had a $44.2 million valuation allowance against these deferred tax assets.  The income tax expense, or benefit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. The Company records its deferred tax liabilities as a component of other liabilities in the consolidated statements of financial condition.

Excess tax benefits related to stock- and unit-transactions are not recognized until they result in a reduction of cash taxes payable. The benefit of these excess tax benefits will be recorded in equity when they reduce cash taxes payable. The Company will only recognize a tax benefit from stock- and unit-based awards in Additional Paid-In Capital if an incremental tax benefit is realized after all other tax benefits currently available have been utilized. For the three and nine months ended September 30, 2015, the Company had approximately $0.1 million and $0.3 million, respectively, in tax benefits associated with stock- and unit-based awards that it was not able to recognize. There were less than $0.1 million in such unrecognized tax benefits for each of the three and nine months ended September 30, 2014.
 

11

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Foreign Currency:
 
The functional currency of the Company is the U.S. Dollar.  Assets and liabilities of foreign operations whose functional currency is not the U.S. Dollar are translated at the exchange rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period.  A charge or credit is recorded to other comprehensive income to reflect the translation of these amounts to the extent the non-U.S. currency is designated the functional currency of the subsidiary. Non-functional currency related transaction gains and losses are immediately recorded in the consolidated statements of operations. For the three and nine months ended September 30, 2015 the Company recorded less than $0.1 million of other comprehensive income associated with foreign currency translation adjustments. For the three and nine months ended September 30, 2014, the Company did not record any other comprehensive income.

Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. Dollar amounts at the date of valuation.  Purchases and sales of investment securities, and income and expense items denominated in foreign currencies, are remeasured into U.S. Dollar amounts on the respective dates of such transactions.
 
The Company does not isolate the portion of the results of its operations resulting from the impact of fluctuations in foreign exchange rates on its non-U.S. investments.  Such fluctuations are included in (Losses)/ Gains and Other Investment Income in the consolidated statements of operations.
 
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Company’s books and the U.S. Dollar equivalent of the amounts actually received or paid.  Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.
 
Recently Issued Accounting Pronouncements Not Yet Adopted:

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis". This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective approach to adoption or modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. Early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements, as well as the available transition methods.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. In July 2015, the FASB postponed the effective date of this new guidance from January 1, 2017 to January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the potential impact on the consolidated statements and related disclosures, as well as the available transition methods.

Note 3—Compensation and Benefits
 
Compensation and benefits expense to employees and members is comprised of the following:
 

For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cash Compensation and Other Benefits
$
10,345

 
$
9,323

 
$
31,181

 
$
26,616

Non-Cash Compensation
1,300

 
1,299

 
4,334

 
3,955

Total Compensation and Benefits Expense
$
11,645

 
$
10,622

 
$
35,515

 
$
30,571

   

12

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


All non-cash compensation awards granted have varying vesting schedules and are issued at prices equal to the assessed fair market value at the time of issuance, as discussed below.  Details of non-cash compensation awards granted during the three and nine months ended September 30, 2015 and 2014 are as follows:

 
For the Three Months Ended September 30,
 
2015
 
2014
 
Amount
 
Fair
Value
1
 
Amount
 
Fair
Value
1
Options to Purchase Shares of Class A Common Stock2
2,000,000

 
$
1.23

 

 
$


 
For the Nine Months Ended September 30,
 
2015
 
2014
 
Amount
 
Fair
Value
1
 
Amount
 
Fair
Value
1
Restricted Class B Units
23,782

 
$
9.46

 
32,479

 
$
11.76

Options to Purchase Shares of Class A Common Stock2
3,000,000

 
$
1.18

 

 
$

Deferred Compensation Phantom Class B Units

 
$

 
22,959

 
$
11.76

Participating Shares of Restricted Class A Common Stock3
29,868

 
$
8.37

 

 
$

Restricted Shares of Class A Common Stock
100,000

 
$
6.08

 

 
$

1 Represents the grant date fair value per share or unit.
2 Represents options to purchase shares of Class A common stock issued whose vesting is contingent on meeting various performance goals. These share options contingently vest over a period of 7 years.
3 Represents restricted shares of Class A common stock that receive nonforfeitable rights to dividends.

Pursuant to the Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (“the 2006 Equity Incentive Plan”), the operating company issues Class B units, phantom Class B units and options to purchase Class B units.  The Company also issues Delayed Exchange Class B units pursuant to the 2006 Equity Incentive Plan. These Class B units vested immediately upon grant, but may not be exchanged pursuant to the Amended and Restated Operating Agreement of the operating company until at least the seventh anniversary of the date of grant. These units are also not entitled to any benefit under the Tax Receivable Agreement between the Company and members of the operating company. Under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (“the 2007 Equity Incentive Plan”), the Company issues shares of restricted Class A common stock and contingently vesting options to acquire shares of Class A common stock. No restricted Class B units were forfeited during the three months ended September 30, 2015. During the nine months ended September 30, 2015, 5,775 restricted Class B units were forfeited in connection with employee departures. During the three and nine months ended September 30, 2015, no contingently vesting options vested. During the three months ended September 30, 2015, 78,093 Delayed Exchange Class B units were issued for approximately $0.4 million in cash to certain employee members. During the nine months ended September 30, 2015, 142,315 Delayed Exchange Class B units issued to one employee during 2014 were canceled and replaced with cash compensation. Additional compensation expense of less than $0.1 million was recognized upon cancellation and replacement of the award. No units were canceled during the three months ended September 30, 2015. During the nine months ended September 30, 2014, 270,000 options to purchase Class B units were forfeited in connection with employee departures. During the nine months ended September 30, 2014, 701,299 phantom Class B units were also forfeited in connection with employee departures.

Under the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), eligible employees whose compensation is in excess of certain thresholds have a portion of that excess mandatorily deferred.  These deferred amounts may be invested, at the employee’s discretion, in certain investment options as designated by the Compensation Committee of the Company's Board of Directors.  Amounts deferred in any calendar year reduce that year’s compensation expense and are amortized and vest ratably over a four-year period commencing the following year.  The Company also issued to certain of its employees deferred compensation with certain investment options that also vest ratably over a four-year period. As of September 30, 2015 and December 31, 2014, the liability associated with all deferred compensation investment accounts was $2.1 million and $2.2 million, respectively. During the nine months ended September 30, 2014, 5,953 phantom Class B units issued under the plan and approximately $1.0 million in deferred compensation investments were forfeited in connection with employee departures. No deferred compensation was forfeited during the three or nine months ended September 30, 2015
 

13

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Pursuant to the Pzena Investment Management, Inc. Non-Employee Director Deferred Compensation Plan (the “Director Plan”), non-employee directors may elect to have all or part of their compensation otherwise payable in cash deferred in the form of phantom shares of Class A common stock of the Company.  Elections to defer compensation under the Director Plan are made on a year-to-year basis.  Distributions under the Director Plan are made in a single distribution of shares of Class A common stock at such time as elected by the participant when the deferral was made.  Since inception of the Director Plan in 2009, the Company’s directors have elected to defer 100% of their compensation in the form of phantom shares of Class A common stock.  Amounts deferred in any calendar year are amortized over the calendar year and reflected as General and Administrative Expense.  As of September 30, 2015 and December 31, 2014, there were 231,863 and 190,389 phantom shares of Class A common stock outstanding, respectively. For the three and nine months ended September 30, 2015 and 2014, no distributions were made under the Director Plan.

The Company has issued to certain of its employees delayed-vesting cash awards.  For the three and nine months ended September 30, 2015 and 2014 no such awards were granted.  Previously awarded delayed-vesting cash awards have varying vesting schedules with $0.4 million to be paid at the end of 2015.

As of September 30, 2015 and December 31, 2014, the Company had approximately $26.9 million and $26.8 million, respectively, in unrecorded compensation expense related to unvested awards issued pursuant to its Bonus Plan and certain agreements; Class B units, Delayed Exchange Class B units, contingently vesting option grants, and phantom Class B units issued under the 2006 Equity Incentive Plan; and restricted Class A common stock and option grants issued under the 2007 Equity Incentive Plan. The Company anticipates that this unrecorded cost will amortize over the respective vesting periods of the awards.

Note 4 – Employee Benefit Plans
 
The operating company has a Profit Sharing and Savings Plan for the benefit of substantially all employees.  The Profit Sharing and Savings Plan is a defined contribution profit sharing plan with a 401(k) deferral component.  All full-time employees and certain part-time employees who have met the age and length of service requirements are eligible to participate in the plan.  The plan allows participating employees to make elective deferrals of compensation up to the annual limits which are set by law.  The plan provides for a discretionary annual contribution by the operating company which is determined by a formula based on the salaries of eligible employees as defined by the plan.  For the three and nine months ended September 30, 2015, the expense recognized in connection with this plan was $0.2 million and $0.7 million, respectively.  For the three and nine months ended September 30, 2014, the expense recognized in connection with this plan was $0.1 million and $0.6 million, respectively.  

Note 5—Earnings per Share
 
Basic earnings per share is computed by dividing the Company’s net income attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period.  

Under the two-class method of computing basic earnings per share, basic earnings per share is calculated by dividing net income for basic earnings per share by the weighted average number of common shares outstanding during the period.  The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period.  The Company’s net income for basic earnings per share is reduced by the amount allocated to participating restricted shares of Class A common stock which participate for purposes of calculating earnings per share.  


14

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


For the three and nine months ended September 30, 2015 and 2014,  the Company’s basic earnings per share was determined as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except share and per share amounts)
Net Income for Basic Earnings per Share Allocated to:
 
 
 
 
 
 

Class A Common Stock
$
1,918

 
$
2,059

 
$
5,457

 
$
5,631

Participating Shares of Restricted Class A Common Stock
4

 

 
9

 

Total Net Income for Basic Earnings per Share
$
1,922

 
$
2,059

 
$
5,466

 
$
5,631

Basic Weighted-Average Shares Outstanding
14,555,782

 
12,965,606

 
13,568,566

 
12,443,687

Add: Participating Shares of Restricted Class A Common Stock 1
29,868

 

 
22,866

 

Total Basic Weighted-Average Shares Outstanding
14,585,650

 
12,965,606

 
13,591,432

 
12,443,687

Basic Earnings per Share
$
0.13

 
$
0.16

 
$
0.40

 
$
0.45


1 Certain unvested shares of Class A common stock granted to employees have nonforfeitable rights to dividends and therefore participate fully in the results of the Company from the date they are granted. They are included in the computation of basic earnings per share using the two-class method for participating securities.

Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding operating company membership units, phantom Class B units, phantom Class A common stock, outstanding Class B unit options, options to purchase Class A common stock, and restricted Class A common stock, to the extent they would have a dilutive effect on net income per share for the reporting period.  Net income for diluted earnings per share generally assumes that all outstanding operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of adjustments associated with both the valuation allowance and the liability to selling and converting shareholders and other one-time charges.
 
For the three and nine months ended September 30, 2015 and 2014, the Company’s diluted net income was determined as follows: 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Net Income Attributable to Non-Controlling Interests of Pzena Investment Management, LLC
$
11,139

 
$
12,593

 
$
31,703

 
$
35,599

Less: Assumed Corporate Income Taxes
4,129

 
5,149

 
11,778

 
15,037

Assumed After-Tax Income of Pzena Investment Management, LLC
7,010

 
7,444

 
19,925

 
20,562

Net Income of Pzena Investment Management, Inc.
1,922

 
2,059

 
5,466

 
5,631

Diluted Net Income
$
8,932

 
$
9,503

 
$
25,391

 
$
26,193

 
Under the two-class method of computing diluted earnings per share, diluted earnings per share is calculated by dividing net income for diluted earnings per share by the weighted average number of common shares outstanding during the period, plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method.  The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period.  The Company’s net income for diluted earnings per share is reduced by the amount allocated to participating restricted Class B units for purposes of calculating earnings per share.  Dividend equivalent distributions paid per share on the operating company’s unvested restricted Class B units are equal to the dividends paid per Company Class A common stock.


15

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


For the three and nine months ended September 30, 2015 and 2014, the Company’s diluted earnings per share were determined as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except share and
per share amounts)
Diluted Net Income Allocated to:
 
 
 
 
 
 
 
Class A Common Stock
$
8,916

 
$
9,482

 
$
25,349

 
$
26,135

Participating Shares of Restricted Class A Common Stock
4

 

 
9

 

Participating Class B Units
12

 
21

 
33

 
58

Total Diluted Net Income Attributable to Shareholders
$
8,932

 
$
9,503

 
$
25,391

 
$
26,193

 
 
 
 
 
 
 
 
Total Basic Weighted-Average Shares Outstanding
14,585,650

 
12,965,606

 
13,591,432

 
12,443,687

Dilutive Effect of B Units
51,370,086

 
52,119,925

 
52,491,854

 
52,601,877

Dilutive Effect of Options 1
470,287

 
854,899

 
590,794

 
955,260

Dilutive Effect of Phantom Class B Units & Phantom Shares of Class A Common Stock
1,468,225

 
1,501,722

 
1,327,820

 
1,691,457

Dilutive Effect of Restricted Shares of Class A Common Stock 2
58,888

 
44,228

 
50,004

 
41,800

Dilutive Weighted-Average Shares Outstanding
67,953,136

 
67,486,380

 
68,051,904

 
67,734,081

Add: Participating Class B Units3
83,080

 
145,692

 
84,984

 
145,842

Total Dilutive Weighted-Average Shares Outstanding
68,036,216

 
67,632,072

 
68,136,888

 
67,879,923

Diluted Earnings per Share
$
0.13

 
$
0.14

 
$
0.37

 
$
0.39


1 Represents the dilutive effect of options to purchase operating company Class B units and Company Class A common stock.
2 Certain restricted shares of Class A common stock granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities and are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method.
3 Unvested Class B Units granted to employees have nonforfeitable rights to dividend equivalent distributions and therefore participate fully in the results of the operating company's operations from the date they are granted. They are included in the computation of diluted earnings per share using the two-class method for participating securities.

Approximately 0.6 million options to purchase Class B units were excluded from the calculation of diluted earnings per share for each of the three and nine months ended September 30, 2015. Approximately 0.6 million and 0.7 million options to purchase Class B units were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2014, respectively, as their inclusion would have had an antidilutive effect based on current market prices.

Note 6—Shareholders’ Equity
 
The Company functions as the sole managing member of the operating company.  As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.  Class A and Class B units of the operating company have the same economic rights per unit.  As of September 30, 2015, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 23.2% and 76.8%, respectively, of the economic interests in the operations of the business. As of December 31, 2014, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 19.8% and 80.2%, respectively, of the economic interests in the operations of the business.

Each Class B unit of the operating company has a corresponding share of the Company’s Class B common stock, par value $0.000001 per share.  Each share of the Company’s Class B common stock entitles its holder to five votes, until the first time that the number of shares of Class B common stock outstanding constitutes less than 20% of the number of all shares of the Company’s common stock outstanding.  From this time and thereafter, each share of the Company’s Class B common stock entitles its holder to one vote.  When a Class B unit is exchanged for a share of the Company’s Class A common stock or

16

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


forfeited, a corresponding share of the Company’s Class B common stock will automatically be redeemed and cancelled.  Conversely, to the extent that the Company causes the operating company to issue additional Class B units to employees pursuant to its equity incentive plan, these additional holders of Class B units would be entitled to receive a corresponding number of shares of the Company’s Class B common stock (including if the Class B units awarded are subject to vesting).
 
All holders of the Company’s Class B common stock have entered into a stockholders’ agreement, pursuant to which they agreed to vote all shares of Class B common stock then held by them, and acquired in the future, together on all matters submitted to a vote of the common stockholders.
 
The outstanding shares of the Company’s Class A common stock represent 100% of the rights of the holders of all classes of the Company’s capital stock to receive distributions, except that holders of Class B common stock will have the right to receive the class’s par value upon the Company’s liquidation, dissolution or winding up.
 
Pursuant to the operating agreement of the operating company, each vested Class B unit is exchangeable for a share of the Company’s Class A common stock, subject to certain exchange timing and volume limitation. On July 27, 2015, certain of the operating company's members exchanged an aggregate of 2,772,171 Class B units for an equivalent number of shares of Company Class A common stock. On July 31, 2014, certain of the operating company's members exchanged an aggregate of 1,150,060 of their Class B units for an equivalent number of shares of Company Class A common stock. These acquisitions of additional operating company membership were treated as reorganizations of entities under common control as required by the Business Combinations Topic of the FASB ASC.
 
The Company’s share repurchase program was announced on April 24, 2012.  The Board of Directors authorized the Company to repurchase an aggregate of $10 million of the Company’s outstanding Class A common stock and the operating company’s Class B units on the open market and in private transactions in accordance with applicable securities laws.  On February 11, 2014, the Company announced that its Board of Directors approved an increase of $20 million in the aggregate amount authorized under the program. The timing, number and value of common shares and units repurchased are subject to the Company’s discretion.  The Company’s share repurchase program is not subject to an expiration date and may be suspended, discontinued, or modified at any time, for any reason.

During the nine months ended September 30, 2015, the Company purchased and retired 550,855 shares of Class A common stock and 158,716 Class B units under the current repurchase authorization at a weighted average price per share of $9.12 and $10.90, respectively.  During the nine months ended September 30, 2014, the Company purchased and retired 96,219 shares of Class A common stock and 51,139 Class B units under the repurchase authorization at a weighted average price per unit of $10.16 and $10.58, respectively. The Company records the repurchase of shares and units at cost based on the trade date of the transaction.

During the nine months ended September 30, 2015, 954,764 Class B unit options and 3,375 Class A common stock options were exercised and resulted in the issuance of 715,706 Class B units and 962 shares of Class A common stock, respectively, as a result of the redemption of 239,058 Class B units and 2,413 shares of Class A common stock for the cashless exercise of the options, and $1.7 million in cash. During the nine months ended September 30, 2014, 159,602 Class B unit options and 250,000 Class A common stock options were exercised and resulted in the issuance of 95,199 Class B units and 68,346 shares of Class A common stock, respectively, as a result of the redemption of 64,403 Class B units and 181,654 shares of Class A common stock for the cashless exercise of the options.


17

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Note 7—Non-Controlling Interests
 
Net Income Attributable to Non-Controlling Interests in the operations of the Company’s operating company and consolidated subsidiaries is comprised of the following:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Non-Controlling Interests of Pzena Investment Management, LLC
$
11,139

 
$
12,593

 
$
31,703

 
$
35,599

Non-Controlling Interests of Consolidated Subsidiaries
(2,605
)
 
(149
)
 
(2,295
)
 
(19
)
Net Income Attributable to Non-Controlling Interests
$
8,534

 
$
12,444

 
$
29,408

 
$
35,580

 
Distributions to non-controlling interests represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals from the Company’s consolidated subsidiaries. Contributions from non-controlling interests represent contributions to the Company's consolidated subsidiaries.

Note 8—Investments

The following is a summary of Investments:

 
As of
 
September 30, 2015
 
December 31, 2014
 
(in thousands)
Investment Securities, Trading
 

 
 

Equity Securities
$
26,720

 
$
23,036

Investments in Mutual Funds

 
4,909

Total Investment Securities, Trading
26,720

 
27,945

Investments in Equity Method Investees
1,649

 

Total
$
28,369

 
$
27,945


Investment Securities, Trading
 
Investments, at Fair Value consisted of the following at September 30, 2015:
 
 
Cost
 
Unrealized
Gain/(Loss)
 
Fair Value
 
(in thousands)
Equity Securities
$
31,827

 
$
(5,107
)
 
$
26,720

Total
$
31,827

 
$
(5,107
)
 
$
26,720


    Securities Sold Short, at Fair Value consisted of the following at September 30, 2015:
 
Proceeds
 
Unrealized
(Gain)/ Loss
 
Fair Value
 
(in thousands)
Securities Sold Short
$
2,641

 
$
(304
)
 
$
2,337

Total
$
2,641

 
$
(304
)
 
$
2,337


    

18

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Investments, at Fair Value consisted of the following at December 31, 2014:
 
 
Cost
 
Unrealized
Gain/(Loss)
 
Fair Value
 
(in thousands)
Equity Securities
$
23,789

 
$
(753
)
 
$
23,036

Investments in Mutual Funds
3,820

 
1,089

 
4,909

Total
$
27,609

 
$
336

 
$
27,945


Securities Sold Short, at Fair Value consisted of the following at December 31, 2014:

 
Proceeds
 
Unrealized
(Gain)/ Loss
 
Fair Value
 
(in thousands)
Securities Sold Short
$
1,496

 
$
76

 
$
1,572

Total
$
1,496

 
$
76

 
$
1,572


Investments in Equity Method Investees

The operating company sponsors and provides investment management services to certain private investment partnerships through which it offers its investment strategies. On January 1, 2015, the Company made an investment in one of these private investment partnerships to satisfy its obligations under the Company's deferred compensation program. The Company holds a non-controlling interest and exercises significant influence in this entity, and accounts for its investment as an equity method investment. As of September 30, 2015, the Company owned approximately 4.3% of the private investment partnership with a carrying value of $1.6 million.

Note 9—Property and Equipment
 
Property and Equipment, Net of Accumulated Depreciation is comprised of the following:
 
 
As of
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Leasehold Improvements
$
6,723

 
$
3,206

Computer Hardware
653

 
1,228

Furniture and Fixtures
1,171

 
786

Computer Software
220

 
345

Office Equipment
179

 
279

Total
8,946

 
5,844

Less: Accumulated Depreciation and Amortization
(933
)
 
(3,072
)
Total
$
8,013

 
$
2,772


During the nine months ended September 30, 2015, the Company moved to its new corporate headquarters, as discussed further in Note 11—Commitments and Contingencies, and began depreciating approximately $6.7 million in leasehold improvements and $1.2 million in furniture and fixtures related to its new office space. The Company recognized a $0.4 million loss on the disposal of fixed assets associated with the retirement of assets in our former corporate headquarters, which is included in general and administrative expense. No such losses were recognized during the three or nine months ended September 30, 2014.

19

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)



Depreciation is included in general and administrative expense and totaled approximately $0.3 million and $0.5 million for the three and nine months ended September 30, 2015, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2014, respectively.

Note 10—Related Party Transactions
 
For each of the three months ended September 30, 2015 and 2014, the Company earned $0.8 million in investment advisory fees from unconsolidated VIEs that receive investment management services from the Company.  For the nine months ended September 30, 2015 and 2014, the Company earned $2.4 million and $1.9 million, respectively, in such fees.
 
At both September 30, 2015 and December 31, 2014, the Company had approximately $0.1 million remaining of advances to an international investment company for organization and start-up costs, which are included in Receivable from Related Parties on the consolidated statements of financial condition.  The operating company is the sponsor and investment manager of this entity.
 
At September 30, 2015, Receivable from Related Parties included approximately $0.2 million of a forgivable loan associated with an initial employment agreement. The loan becomes forgivable in installments over a period of approximately 18 months. No loans to employees were recorded at December 31, 2014.

The operating company, as investment adviser for certain Pzena branded SEC-registered mutual funds, private placement funds, and non-U.S. funds, has contractually agreed to waive a portion or all of its management fees and pay fund expenses to ensure that the annual operating expenses of the funds stay below certain established total expense ratio thresholds. For the three and nine months ended September 30, 2015, the Company recognized $0.3 million and $0.8 million of such expenses, respectively. For each of the three and nine months ended September 30, 2014, the Company recognized $0.2 million and $0.4 million of such expenses, respectively.

The operating company manages the personal funds of certain of the Company’s employees, including its CEO, its two Presidents, and its Executive Vice President.  The operating company also manages accounts beneficially owned by a private fund in which certain of the Company’s executive officers invest.  Investments by employees in individual accounts are permitted only at the discretion of the executive committee of the operating company, but are generally not subject to the same minimum investment levels that are required of outside investors.  The operating company also manages the personal funds of some of its employees’ family members.  Pursuant to the respective investment management agreements, the operating company waives or reduces its regular advisory fees for these accounts and personal funds.   In addition, the operating company pays custody and administrative fees for certain of these accounts and personal funds in order to incubate products or preserve performance history.  The aggregate value of the fees that the Company waived related to the Company’s executive officers, other employees, and family members, was approximately $0.2 million for each of the three months ended September 30, 2015 and 2014, respectively. For each of the nine months ended September 30, 2015 and 2014, the Company waived $0.5 million in such fees. The aggregate value of the custody and administrative fees paid related to the Company’s executive offers, other employees, and family members was less than $0.1 million for each of the three and nine months ended September 30, 2015 and 2014.
 
Note 11—Commitments and Contingencies
 
In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants. In certain cases, the Company may have recourse against third parties with respect to these indemnities. The Company maintains insurance policies that may provide coverage against certain claims under these indemnities. The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote. Utilizing the methodology in the Guarantees Topic of the FASB ASC, the Company’s estimate of the value of such guarantees is de minimis, therefore, no accrual has been made in the consolidated financial statements.
 
During the nine months ended September 30, 2015, the Company moved to its new corporate headquarters. The new office space is leased under a non-cancelable operating lease agreement that expires on December 31, 2025. The Company reflects minimum lease expense for its headquarters on a straight-line basis over the lease term. During the nine months ended

20

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


September 30, 2015, the Company entered into a five year sublease agreement commencing on May 1, 2015 and cancelable by either the Company or sublessee given appropriate notice after the third anniversary of the commencement of the sublease agreement. The sublease agreement is for certain office space associated with the Company's operating lease agreement in its new corporate headquarters. The sublease income associated with this agreement will be recognized as it is received and will decrease lease expense.

The Company's former headquarters are leased under a non-cancelable operating lease agreement that expires on October 31, 2015.  During the year ended December 31, 2011, the Company entered into a non-cancelable sublease agreement for certain excess office space associated with its operating lease agreement.  The sublease agreement also expires on October 31, 2015. During the nine months ended September 30, 2015, $1.0 million in losses were recognized in general and administrative expense for the remaining rent and expected disposal costs associated with exiting the Company's former headquarters. No such losses were recognized for the three months ended September 30, 2015, or for the three and nine months ended September 30, 2014.

Lease expenses, including the losses and expenses recorded during the nine months ended September 30, 2015 which we do not expect to recur, were $0.5 million and $2.7 million for the three and nine months ended September 30, 2015, respectively, and are included in general and administrative expense. Such expenses were $0.3 million and $1.1 million for the three and nine months ended September 30, 2014, respectively. Lease expenses for the three and nine months ended September 30, 2015 were net of $0.1 million and $0.2 million of sublease income, respectively. No such income was recognized during the three or nine months ended September 30, 2014.

As of September 30, 2015 and December 31, 2014, the Company's liability for losses and contingencies was $0.2 million and $0.4 million, respectively.
 
Note 12—Income Taxes
 
The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  Neither it nor the Company’s other consolidated subsidiaries have made a provision for federal or state income taxes because it is the individual responsibility of each of these entities’ members (including the Company) to separately report their proportionate share of the respective entity’s taxable income or loss.  The operating company has made a provision for New York City UBT.  The Company, as a “C” corporation under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its economic interest in its operating company, which is net of UBT.  Correspondingly, in its consolidated financial statements, the Company reports both the operating company’s provision for UBT, as well as its provision for federal, state and local corporate taxes.


21

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


The components of the income tax expense are as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Current Provision:
 
 
 
 
 
 
 
Unincorporated and Other Business Taxes
$
621

 
$
703

 
$
1,635

 
$
2,312

Local Corporate Tax

 

 

 

State Corporate Tax

 

 

 

Federal Corporate Tax

 

 

 

Total Current Provision
$
621

 
$
703

 
$
1,635

 
$
2,312

Deferred Provision:
 
 
 
 
 
 
 
Unincorporated and Other Business Taxes
$
(8
)
 
$
(2
)
 
$
41

 
$
6

Local Corporate Tax
79

 
100

 
229

 
348

State Corporate Tax
45

 
213

 
139

 
713

Federal Corporate Tax
885

 
912

 
2,571

 
2,520

Total Deferred Provision
$
1,001

 
$
1,223

 
$
2,980

 
$
3,587

Change in Valuation Allowance
(874
)
 
(2,439
)
 
(2,213
)
 
(5,605
)
Net Adjustment Related to Change in Effective Tax Rate1

 
293

 

 
895

Total Income Tax Expense
$
748

 
$
(220
)
 
$
2,402

 
$
1,189


1 During the three months ended September 30, 2014 and March 31, 2014, the Company recognized adjustments to the deferred tax asset and valuation allowance assessed against the deferred tax asset associated with changes in the effective tax rate.

The Income Taxes Topic of the FASB ASC establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial statements.  

As of September 30, 2015 and December 31, 2014, the Company had available for U.S. federal income tax reporting purposes, a net operating loss carryforward of $8.9 million and $9.5 million, respectively, which expires in varying amounts during the tax years 2027 through 2035.
As of September 30, 2015 and December 31, 2014, approximately $2.5 million and $1.6 million, respectively, of deductions for excess stock- and unit- based transactions were included in net operating losses. The $0.9 million of tax benefit associated with these deductions will be credited to Additional Paid-In Capital when such deductions reduce taxes payable. Although these net operating losses are included in the total carryforward amount, they are not reflected in the table of deferred tax assets as the excess tax benefits are not yet realized.
The Company and the operating company are generally no longer subject to U.S. Federal or state and local income tax examinations by tax authorities for any year prior to 2011.  All tax years subsequent to, and including, 2011 are considered open and subject to examination by tax authorities. In 2013, the statute of limitations in New York City for the Company's 2009 and 2010 tax years were extended in connection with the amendment of prior year tax returns to change the methodology for state and local receipts.
 
The acquisition of operating company Class B units, noted below, has allowed the Company to make an election under Section 754 of the Internal Revenue Code (“Section 754”) to step up its tax basis in the net assets acquired.  This step up is deductible for tax purposes over a 15-year period.  Based on the net proceeds of the initial public offering and tax basis of the operating company, this election gave rise to an initial deferred tax asset of approximately $68.7 million.

Pursuant to a tax receivable agreement between the members of the operating company and the Company, 85% of the cash savings generated by this election will be distributed to the selling and converting shareholders upon the realization of this benefit.
 

22

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


If the Company exercises its right to terminate the tax receivable agreement early, the Company will be obligated to make an early termination payment to the selling and converting shareholders, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement) of all payments that would be required to be paid by the Company under the tax receivable agreement.  If certain change of control events were to occur, the Company would be obligated to make an early termination payment.

As discussed in Note 6 — Shareholders' Equity, on July 27, 2015 and July 31, 2014, certain of the operating company's members exchanged an aggregate of 2,772,171 and 1,150,060 of their Class B units, respectively, for an equivalent number of shares of Company Class A common stock. The Company elected to step up its tax basis in the incremental assets acquired in accordance with Section 754. Based on the exchange-date fair values of the Company's common stock and the tax basis of the operating company, these elections gave rise to $14.3 million and $6.0 million deferred tax assets and corresponding $12.2 million and $5.1 million liabilities to selling and converting shareholders on July 27, 2015 and July 31, 2014, respectively. The Company assessed the realizability of these deferred tax assets associated with the exchanges and determined that a portion of the benefits would go unutilized. Consequently, the Company established $11.0 million and $4.7 million valuation allowances, respectively, to reduce the deferred tax assets to amounts more likely than not to be realized. These deferred tax assets remain available to the Company and can be used in future years. The Company similarly reduced the associated liability to selling and converting shareholders by $9.4 million and $4.0 million, respectively, to reflect the changes in the estimated realization of these assets. As required by the Income Taxes Topic of the FASB ASC, the Company recorded the effects of these transactions in equity.
 
During the three and nine months ended September 30, 2015, after giving effect to the exchange discussed earlier, the Company’s valuation allowance was reduced by approximately $0.9 million and $2.2 million, respectively, due to revised estimates of future taxable income. These changes are reflected as a net adjustment to the Company's Section 754 deferred tax asset, valuation allowance, and other deferred tax assets. To reflect these changes in the estimated realization of the asset and its liability for future payments, the Company increased its liability to selling and converting shareholders by $0.7 million and $1.6 million for the three and nine months ended September 30, 2015, respectively. The effects of these changes to the deferred tax asset and liability to selling and converting shareholders were recorded as a component of the income tax expense and other expense, respectively, on the consolidated statements of operations.  

During the three and nine months ended September 30, 2014, after giving effect to the exchange discussed earlier, the Company’s valuation allowance was reduced by approximately $2.4 million and $5.6 million, respectively, due to revised estimates of future taxable income. Results for the nine months ended September 30, 2014 also reflects changes in the Company's expected future tax benefits due to a decrease in its effective rate. This decrease is reflected as an adjustment to the Company's Section 754 deferred tax asset, valuation allowance, and other deferred tax assets. To reflect these changes in the estimated realization of the asset and its liability for future payments, the Company increased its liability to selling and converting shareholders by $1.8 million and $3.9 million for the three and nine months ended September 30, 2014, respectively. The effects of these changes to the deferred tax asset and liability to selling and converting shareholders were recorded as a component of the income tax expense and other expense, respectively, on the consolidated statements of operations.

As of September 30, 2015 and December 31, 2014, the net values of all deferred tax assets were approximately $17.1 million and $14.6 million, respectively.
 

23

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


The change in the Company’s deferred tax asset, net of valuation allowance, for the three and nine months ended September 30, 2015 is summarized as follows:
 
 
Section 754
 
Other
 
Valuation
Allowance
 
Total
 
(in thousands)
Balance at December 31, 2014
$
54,783

 
$
4,074

 
$
(44,239
)
 
$
14,618

Deferred Tax (Expense)/Benefit
(923
)
 
(80
)
 

 
(1,003
)
Change in Valuation Allowance

 

 
366

 
366

Balance at March 31, 2015
$
53,860

 
$
3,994

 
$
(43,873
)
 
$
13,981

Deferred Tax (Expense)/Benefit
(923
)
 
(64
)
 

 
(987
)
Change in Valuation Allowance

 

 
973

 
973

Balance at June 30, 2015
$
52,937

 
$
3,930

 
$
(42,900
)
 
$
13,967

Deferred Tax (Expense)/Benefit
(1,029
)
 
26

 

 
(1,003
)
Unit Exchange
14,304

 

 
(11,003
)
 
3,301

Change in Valuation Allowance

 

 
874

 
874

Balance at September 30, 2015
$
66,212

 
$
3,956

 
$
(53,029
)
 
$
17,139


The change in the Company’s deferred tax liability, which is included in other liabilities on the Company’s consolidated statements of financial condition, for the three and nine months ended September 30, 2015, is summarized as follows:

 
Total
 
(in thousands)
Balance at December 31, 2014
$
(18
)
Deferred Tax (Expense)/Benefit
11

Balance at March 31, 2015
$
(7
)
Deferred Tax (Expense)/Benefit

Balance at June 30, 2015
$
(7
)
Deferred Tax (Expense)/Benefit
2

Balance at September 30, 2015
$
(5
)
 

24

Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


The change in the Company’s deferred tax asset, net of valuation allowance, for the three and nine months ended September 30, 2014 is summarized as follows:

 
Section 754
 
Other
 
Valuation
Allowance
 
Total
 
(in thousands)
Balance at December 31, 2013
$
61,628

 
$
4,657

 
$
(53,973
)
 
$
12,312

Deferred Tax (Expense)/Benefit
(1,104
)
 
(36
)
 

 
(1,140
)
Change in Valuation Allowance

 

 
767

 
767

   Net Adjustment to Deferred Tax Asset
(6,608
)
 
(351
)
 
6,357

 
(602
)
Balance at March 31, 2014
$
53,916

 
$
4,270

 
$
(46,849
)
 
$
11,337

Deferred Tax (Expense)/Benefit
(965
)
 
(266