UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 20092011

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)

 

(I.R.S. Employer


Identification No.)

 

200 Crescent Court, Suite 1200

Dallas, Texas 75201

 75201
(Address of principal executive offices) (Zip Code)

Registrant'sRegistrant’s telephone number, including area code: (214) 756-6900

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

 

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨     No  x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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. (Check one):

 

Large accelerated filer ¨  Accelerated filer x
Non-accelerated filer ¨  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

The aggregate market value on June 30, 20092011 of the voting and non-voting common equity held by non-affiliates of the registrant was $235,650,000.$243,536,000. For purposes of this calculation, the registrant has assumed that stockholders that are not officers or directors of the registrant are not affiliates of the registrant.

The number of shares of registrant'sregistrant’s Common Stock, par value $0.01 per share, outstanding as of February 22, 2010: 7,151,472.24, 2012: 8,021,978.

DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the registrant'sregistrant’s definitive Proxy Statement for the 20102012 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

 

 

 


WESTWOOD HOLDINGS GROUP, INC.

Index

 

      PAGE

PART I:

  

            Item 1.

  Business  1

            Item 1A.

  Risk Factors  10

            Item 2.

  Properties  14

            Item 3.

  Legal Proceedings  1415

PART II:

    

            Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  1516

            Item 6.

  Selected Consolidated Financial Data  1820

            Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations  1921

            Item 7A.

  Quantitative and Qualitative Disclosures about Market Risk  2831

            Item 8.

  Financial Statements and Supplementary Data  2931

            Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  2931

            Item 9A.

  Controls and Procedures  2931

PART III:

  

            Item 10.

  Directors and Executive Officers of the Company  2932

            Item 11.

  Executive Compensation  3032

            Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  3032

            Item 13.

  Certain Relationships and Related Transactions, and Director Independence  3032

            Item 14.

  Principal Accountant Fees and Services  3033

PART IV:

  

            Item 15.

  Exhibits and Financial Statement Schedules  3033

i


PART I

 

Item 1.Business.

Unless the context otherwise requires, the term “we,” “us,” “our,” “Westwood,” or “Westwood Holdings Group” when used in this Form 10-K (“Report”) and in the Annual Report to the Stockholders refers to Westwood Holdings Group, Inc., a Delaware corporation, and its consolidated subsidiaries and predecessors taken as a whole. This Report contains some forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including without limitation those set forth under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors”.

General

We manage investment assets and provide services for our clients through our two subsidiaries, Westwood Management Corp. (“Westwood Management”) and Westwood Trust. Westwood Management provides investment advisory services to corporate retirement plans, public retirement plans, endowments and foundations, a family of mutual funds which we callcalled the WHGWestwood FundsTM, other mutual funds, individuals and clients of Westwood Trust. We changed the name of our mutual fund family in early 2012 from the WHG Funds to the Westwood FundsTM as part of an effort to consolidate our branding strategies under the Westwood name, which has significant meaning to our firm and we believe will better resonate with our clients. Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds that it sponsors to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management and at December 31, 2009, Westwood Management and Westwood Trust collectively managed assets valued at approximately $10.2 billion.$13.1 billion at December 31, 2011. We have been providing investment advisory services since 1983 and, according to recognized industry sources includingsuch as Morningstar, Inc.,performance of our principal investment strategies rank at or above median within their peer groups when measured over multi-year periods of ten years and longer, our principal asset classes rank at or above the median in performance within their peer groups.longer.

The core of our business is dependent on our client relationships. We believe that, in addition to investment performance, client service is paramount in the asset management business. As such,Accordingly, a major focus of our business strategy is to continue buildingbuild strong relationships with clients to better enable usenhance our ability to anticipate their needs and to satisfy their investment objectives. Our team approach is designed to result indeliver efficient, responsive service forto our clients. Our future success is dependent to a significant degree on both investment performance and our ability to provide attentive client service.

We were incorporated under the laws of the State of Delaware on December 12, 2001. We are an independent public company and our common stock is listed on the New York Stock Exchange under the ticker symbol “WHG.” We are a holding company and ourwhose principal assets consist of the capital stock of Westwood Management and Westwood Trust.

One of theseveral priorities on which we have focused since 2002 is the building of a foundation in terms of personnel and infrastructure to support a potentially much larger business. We have also developed products that we believe willexpect to be desirable within our target institutional, private wealth and private clientmutual fund markets. The costcosts of developing new products and building the organization as a whole can result in our incurring expenses before materialsignificant offsetting revenue isrevenues are realized. We believe that the business foundation and a range of appropriate products are now in place and we have been taking these products to the institutional marketplace in recent years. Weyears to our served markets where they have seenbeen received with a high level of interest from institutional investors in these products, which we hope will generate new revenue streams.

Available Information

We maintain a website at www.westwoodgroup.com. Information contained on, or connected to, our website is not incorporated by reference into this Form 10-K and should not be considered part of this reportReport or any other filing that we make with the SEC. All filings made by us with the Securities and Exchange Commission (“SEC”),. All of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website. Additionally, our Code of Business Conduct and Ethics, our

Corporate Governance Guidelines and our Audit Committee, Compensation Committee and Governance/Nominating Committee Charters are available without charge on our website. Stockholders also may obtain print copies of these documents free of charge by submitting a written request to William R. Hardcastle, Jr. at the address set forth in the front of this Report. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, including Westwood Holdings Group, Inc. that file electronically with the SEC. The public can also obtain any document we file with the SEC atwww.sec.gov.

Westwood Management

General

Westwood Management provides investment advisory services to large institutions, including corporate retirement plans, public retirement plans, endowments and foundations, having at least $10 – $25 million in investable assets, dependingfoundations. Institutional separate account minimums depend on the asset class.strategy offered but generally range from $10 million to $25 million. Westwood Management also provides advisory services to individuals and the WHGWestwood FundsTM and subadvisory services to other mutual funds. Our overall investment philosophy was developed by our Founder and Chairman, Susan M. Byrne, and is determinedimplemented by a team of investment professionals includingunder the leadership of our chief investment officer, Susan M. Byrne, and, withMark Freeman. With respect to the bulk of assets under management consists ofwe utilize a value-oriented approach“value” investment style focused on achieving a superior long-term, risk-adjusted return by investing in companies generatingwith high levels of free cash flow, with strongimproving returns on equity, strengthening balance sheets and well positioned for growth but whose value is not fully recognized as such in the marketplace. This investment approach is designed to preserve capital during unfavorable periods and provide superior real returns over the long term. Westwood Management’sOur investment advisory team consistsmembers average investment experience of a number of investment management, researchfifteen years and trading professionals with substantial investment management experience. The continuityone third of the team and itshas worked together at Westwood for more than ten years. Team continuity plus years of experience are among the critical elements inrequired for successfully managing investments.

Managed Asset Classes

Asset ManagementInvestment Strategies.

We offer a broad range of investment asset classesstrategies allowing us to serve various client types of clients and varying investment objectives. More than halfOver 40% of our assets under management are invested in our LargeCap Value asset class.strategy. The following sets forth the principal asset classesinvestment strategies currently managed by Westwood Management:Management follow:

LargeCap Value: Investments in equity securities of approximately 45-6040-60 well-seasoned companies with market capitalizations generally over $5 billion. This portfolio is invested in companies where we expect that future profitability, driven by operational improvements, will be higher thanexceed expectations reflected in current share prices. The median

Dividend Growth: Investments in equity securities of approximately 40-60 high quality companies with market capitalizationcapitalizations generally over $1 billion. This portfolio is invested in companies of our LargeCap Valuewhich at least 80% are paying dividends and whose prospects for dividend growth are strong. This strategy combines quantitative and fundamental research to create a diversified portfolio was $31.8 billion as of December 31, 2009.companies we believe can create value for shareholders.

MidCap Value:Investments in equity securities of approximately 50-70 companies with market capitalizations between $4 billion and $20 billion. Similar to the LargeCap Value asset class,strategy, we look for mid-sized firms with earnings growth driven by operational improvements that can be purchased inexpensively.

SMidCap Plus+: Investments in equity securities of approximately 45-65 companies with market capitalizations between $2 billion and $15 billion. Similar to our other value-oriented investment strategies, we seek to discover operational improvements that are driving earnings growth within small to mid-sizemid-sized companies that can be purchased inexpensively.

SMidCap Value: Investments in equity securities of approximately 45-6045-65 companies with market capitalizations between $100 million and $10 billion. Similar to our other value-oriented asset classes,investment strategies, we seek to discover operational improvements that are driving earnings growth within small to mid-size companies that can be purchased inexpensively. This strategy reached its asset capacity in 2010 and is now closed to new investors.

SmallCap Value: Investments in equity securities of approximately 50-70 companies with market capitalizations between $100 million and $2.5$2 billion. Similar to our other value-oriented asset classes,investment strategies, we seek to invest in high quality companies whose earnings growth is driven by operational improvements not yet fully recognized by the market.

AllCap Value: Investments in equity securities of approximately 60-80 well-seasoned companies. The portfolio is generally comprised of thecomprises our investment professionals’ best ideas within allamong companies with market capitalizations above $100 million. Similar to our other value-oriented asset classes,investment strategies, we seek to invest in companies across a broad range of market capitalizations where we expect that future profitability, driven by operational improvements, will be higher than expectations currently reflected in share prices.

LargeCap Enhanced: Investments in equity securities of approximately 75-100 long and 20-30 short, well-seasoned companies with market capitalizations above $3 billion. Using fundamental research with a quantitative screening overlay, this portfolio is invested in companies where we expect that future profitability, driven by operational improvements, will be higher than expectations reflected in current share prices and also shorts companies where we expect that future profitability is below what is reflected in current share prices.

Balanced: Investments in a combination of equity and fixed income securities, designed to provide both growth opportunities and income, while also emphasizing asset preservation in “down” markets. Westwood Management applies its expertise in dynamic asset allocation and security selection decisions in carrying out this balanced strategy approach.

Income Opportunity: Investments in dividend-paying common stocks, straight andpreferred stocks, convertible preferred stock,securities, master limited partnerships, royalty trusts, REITs and selected debt instruments. This portfolio’s strategy focuses on companies with strong and improving cash flow sufficient to support a sustainable or rising income stream for investors. This asset classstrategy is targeted towards investors seeking high current income, a competitive total return and low volatility through dividend-paying and/or interest-bearing securities.

Master Limited Partnerships (MLPs)(“MLPs”): Investments include MLPs (including limited partnerships “LPs,” and general partnerships, “GPs”)partnerships), securities of tanker and other marine shipping companies and other securities. Within these types of securities, whose characteristics are consistent with those listed above. Thethe portfolio focuses on companies that over time, exhibit higher dividend yields, stable and predictable cash flows, low correlations to other asset classes, and growth opportunities.potential.

Core/IntermediateInvestment Grade Fixed Income: Investments in high-grade, intermediate term corporate and government bonds. We seek to add value to client portfolios through yield curve positioning and investing in debt instruments with improving credit quality potential.

Each asset classinvestment strategy consists of a portfolio of equity and/or fixed income securities selected by Westwood Management’sWestwood’s portfolio teams and chosen to best provide the long termoptimize long-term returns consistent with Westwood Management’sWestwood’s investment philosophy. Our portfolio teams make decisions for all of Westwood Management’s asset classesManagement investment strategies in accordance with the investment objectives and policies of such asset classes,strategies, including determining when and which securities to purchase and sell.

We employ a value-oriented approach in managingfor our equity asset classes.investment strategies. The common thread that permeates our investmentthese strategies is our focus on a disciplined approach to controlling risk and whenever possible, preserving the core value of our clients’ assets. Our value-oriented asset classes place a greater emphasis on identifying companies where earnings result from actual operational improvements rather than from improvements derived from financial statement adjustments. Our desire to prevent the loss of the core value of client assets whenever possible. Our investment teams seek to invest in companies with high levels of free cash flow, improving returns on equity, and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the overriding objective of this strategy, even at the cost of potentially higher returns.marketplace. Through investments in companies that exhibit these characteristics, Westwood Management seekswe seek to demonstrate consistently superior performance relative to our industry peers and relevant benchmark indices.

More than halfOver 40% of our assets under management are invested in equity securities of companies with large market capitalizations. When measured over multi-year periods of ten years and longer, Westwood Management’sWestwood’s principal asset classesinvestment strategies have consistently ranked above the median within peer group median performance rankings according to recognized industry sources, including Morningstar, Inc.

Our ability to grow assets under management is primarily dependent on our competitive long-term performance record, our success in building strong relationships with investment consulting firms nationwideand other financial intermediaries as well as our ability to develop new client relationships. We continually look for opportunitiesseek to expand our assets under management by growing our existing asset classes andinvestment strategies as well as developing new portfolios focusing on investment areas not part of our current asset classes under management.ones. We primarily intend to grow our asset classesinvestment strategies internally but may consider acquiring new asset classesinvestment strategies from third parties, as discussed under “—Growth Strategy” below. Our growth strategy provides our clients with more investment opportunities and diversifies our assets under management, thereby reducing our risk in any one area of investment and increasing our competitive ability to attract new clients.

Advisory and Subadvisory Service Agreements

Westwood Management manages client accounts under investment advisory and subadvisory agreements. Typical withinof the asset management industry, such agreements are usually terminable upon short notice and provide for compensation based on the market value of the client’sclient assets under management. Westwood Management’sWestwood’s advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the previous quarter, or are based on a daily or monthly analysis of assets under management for the stated period. A limited number of ourfew clients have acontractual performance-based fee component in their contract,arrangements, which generatesgenerate additional revenues if we outperform a specified index over a specific period of time. We record revenueRevenue for performance-based fees is recorded at the end of the measurement period. Revenue from advance payments is deferred and recognized over the period that services are performed. Pursuant to these agreements, Westwood Management provides overall investment management services, including directing investments in conformity with theclient-established investment objectives and restrictions established by clients.restrictions. Unless otherwise directed in writing by our client,clients, Westwood Management has the authority to vote all proxies with respect to client assets.

Westwood Management is also a party to subadvisory agreements with other investment advisors under which it performs substantially the same services as it does under its advisory agreements. However, the investment strategy adopted for a particular client is subject to supervision and review by the client. Our subadvisory fees are generally computed based upon the average daily net assets of the clientunder management and are payable on a monthly basis. As with our advisory agreements, these agreements are terminable upon short notice.

Under our subadvisory agreement with Teton Advisors, Inc. (formerly Gabelli Advisers, Inc.), Westwood Management provides investment advisory services to the GAMCO Westwood Funds family of mutual funds. Westwood Management owns shares of Class A Common Stock representing a 15.3% economic interest in Teton Advisors, Inc., an affiliate of GAMCO Investors, Inc. Based on SEC filings, we believe that GAMCO Investors, Inc. owned 13.2%11.8% of our common stock as of December 31, 2009.2011. Westwood Management received subadvisory payments from Teton Advisors, Inc. oftotaling $502,000, $573,000 and $617,000 $784,000 and $844,000 for the twelve months ended December 31, 2009, 20082011, 2010 and 2007,2009, respectively.

While Westwood Management provides subadvisory services with respect to the GAMCO Westwood Funds family of mutual funds, Westwood Management provides investment advisory services directly to the WHGWestwood FundsTM family of mutual funds, which includes the WHG SMidCap Fund, the WHGWestwood Income Opportunity Fund, the WHGWestwood SMidCap Fund, the Westwood LargeCap Value Fund, the WHGWestwood Balanced Fund, the Westwood SmallCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus+ Fund and the WHG SmallCap ValueWestwood Short Duration High Yield Fund. “WHG Funds” represent the familyThe Westwood Short Duration High Yield Fund is subadvised by SKY Harbor Capital Management, LLC, a registered investment adviser based in Greenwich, Connecticut. As of institutional mutual funds for which Westwood Management serves as advisor. “Westwood Funds” represent the family of mutual funds for which Westwood Management serves as subadvisor.

One of our largest clients in terms of assets paid us both asset-based and performance-based advisory fees two of the last three years. Due to a significant performance fee earned in 2008, this client accounted for 19.5% of our fee revenues in 2008; however, this client did not pay us a performance fee in 2009 and accounted for less than 1% of our revenues for the year ended December 31, 2009. 2011, the Westwood FundsTM had assets under management of $1.3 billion.

Our four largest clients accounted for approximately 13.1%14.3% of our fee revenues for the year ended December 31, 2009.2011. The loss of some or all of these large clients or the failure to achieve superior investment performance necessary to earn a performance fee could have a material adverse affect on our business and our results of operations.

Westwood Trust

General

Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals and families generally having at least $1$2 million in assets under management. Westwood Trust seeks to define and improve the risk/return profileprofiles of the client’sclient investment portfolioportfolios by complementing or enhancing existing investment strategies. Westwood Trust provides back office services to its clients, including tax reporting, distribution of income to beneficiaries, preparation of account statements and attending to the special needs of particular trusts, and also serves as trustee for tax and estate-planning purposes and for special needs trusts. Westwood Trust is chartered and regulated by the Texas Department of Banking.

Westwood Trust primarily provides services for employee benefit trusts and personal trusts. Employee benefit trusts include retirement plans of businesses to benefit their employees, such asincluding defined contribution plans, pensions and profit sharing plans. Westwood Trust may also be appointed as a trustee and may provide administrative support for these plans, as well as investment advisory and custodial services. Personal trusts are developed to achieve a number of different objectives and Westwood Trust acts as trustee to thesesuch trusts and assists them in developing tax-efficient trust portfolios. The feesFees charged by Westwood Trust are separately negotiated with each client and are typically based on the complexity of the operations of the trust and the amount of assets under management.

Services

Westwood Trust undertakes a fiduciary responsibility toward the management of each client’s assets and utilizes a consultative asset allocation approach. This approach involves Westwood Trustour examining the client’s financial situation, including the client’s current portfolio of investments, and advising the client on ways in which it canto enhance its investment returns and strengthen its financial position. Westwood Trust also provides custodial services, safekeeping and accounting services.

Common Trust Funds

Westwood Trust sponsors a number of common trust funds in which our clients’client assets are commingled to achieve economies of scale. Westwood Trust’s common trust funds fall within two basic categories: personal trusts and employee benefit trusts. Westwood Trust sponsors common trust funds for most of the asset classesinvestment strategies managed by Westwood Management. Westwood Trust also engages third partythird-party subadvisors for some common trust funds, such as our Growth Equity, International Equity and High Yield Bond common trust funds.

Enhanced Balanced Portfolios

Westwood Trust is a strong proponent of asset class diversification and offers its clients the ability to diversify among multiplemany different asset classes. Westwood Trust Enhanced Balanced ™Balanced™ portfolios seek to combine these asset classes into a customizable portfolio for clients seeking to maximize return for a given level of risk. Periodic adjustments are made to asset class weightings in Enhanced Balanced ™Balanced™ portfolios based on historical returns, risk and correlation data as well as an analysis ofand our current capital markets outlook.

Distribution Channels

We market our services through several distribution channels that allow us to expand the reach of our investment advisory services. These channels enable us to leverage existingthe distribution infrastructureinfrastructures and capabilities of other financial services firms and intermediaries while focusing on our core competency of developing outstandingand managing investment asset classes.strategies.

Institutional Investment Consultants

Investment management consulting firms serve as gatekeepers to manythe majority of corporate retirement plans, public retirement plans, endowments and foundations, which represent Westwood’s primary clientinstitutional target markets. Consultants provide guidance to their clients in setting asset allocation strategy, as well as creating investment policies. Consultants also make recommendations for investment firms they believe can best meet their client’s investment objectives. We have established strong relationships with many national and regional investment consulting firms, which has resulted inhave contributed to our being considered and hired by many of their clients. Continuing to enhance our existing consulting firm relationships, as well as forging new relationships, serves to increase the awareness of our services in both the consultant community and their underlyingserved institutional client base.

Subadvisory Relationships

Our subadvisory relationships allow us to extend the reach of our investment managementadvisory services to clients of other investment companies with broad, established distribution capabilities. In subadvisory arrangements, our client is typically the investment company through which our services are offered to investors. In these subadvisory arrangements, our investment advisory services areinvestors, typically made available through retail-basedvia mutual fund offerings. The investment company that sponsors the mutual fund is responsible for relevant marketing, distribution, operationsoperational and accounting related to these funds.activities.

Managed Accounts

Managed accounts are similar in some respects to subadvisory relationships in that a third-party financial institution, such as a brokerage firm or turnkey asset management program provider, handles distribution to the end client. The end client in a managed account is typically a high net worth individual or small institution. In these arrangements, the third partythird-party financial institution is responsible to the end client for client service, operations and accounting.

Growth Strategy

We believe that we have established a strong platform to support future growth, deriving our strength in large part from the experience and capabilities of our management team and skilled investment professionals. We believe that this focused, stable team has contributed in large partsignificantly to our solid investment performance, superior client service and a growing array of asset classes.investment strategies. We believe that opportunities for future growth may come from our ability to:

 

generate growth from new and existing clients and consultant relationships

 

attract and retain key employees

 

grow assets in our additional asset classesexisting investment strategies

 

foster continued growth of the Westwood Trust platform

 

foster expanded distribution via mutual funds

 

pursue strategic acquisitions and alliancescorporate development opportunities

 

continue to strengthen our brand name.

Generate growth from new and existing clients and consultant relationships. As our primary business objective, we intend to maintain and enhance existing relationships with clients and investment consultants by continuing to provide solid investment performance and high quality customer service to existing relationships. Additionally, weattentive client service. We also intend to pursue growth through targeted sales and marketing efforts that emphasize our investment performance and superior client service. New institutional client accounts are generally derived through investment consultants and we have been successful in developing soliddeveloped productive long-term relationships with many national and regional investment consultants. We believe that the familiarity within depth knowledge of our firm, our people and our processes that we have builtembedded in our consultant and client relationships is one of thea key factors infactor when being considered for new client investment mandates.

Attract and retain key employees. In order to achieve our investment performance and client relationship objectives, we must be able to retain and attract talented investment professionals. We believe that we have created a workplace environment in which motivated, performance-driven, and client-oriented individuals thrive. As a public company, we are able to offer to our employees a compensation program that includes strong equity incentives such that their success will be closely aligned with the success of our employees will be closely tied to the success of our clients.clients and stockholders. We believe that these factors are critical ingredients in maintaining a stable, client-focused environment and accordingly we have built a firm that we believe can support significant future growth.

Grow assets in our additional asset classesexisting investment strategies. LargeCap Value is our flagship productlargest investment strategy in terms of assets under management and we believe it has significant capacity for additional assets; however, we continue to develop additional asset classesassets. We have also developed other investment strategies in response to client needs and themarketplace opportunities. We continue to look for opportunities we see in the marketplace.to expand our range of investment strategies and will consider internally-developed strategies as well as those that may be acquired externally. We believe these additional asset classes provide opportunities forstrategies will enable us to grow our assets under management. For instance, we have achieved meaningfulsuch significant growth in assets in our SMidCap Value productstrategy since we began marketing this asset classit to institutions in 2004. As a result of this growth, the SMidCap Value asset class2004 that it was closed to new institutional assetsinvestors in 2009.2010. The WHGWestwood SMidCap mutual fund only remains open.open to existing shareholders. In July 2010 we launched the SMidCap Plus+ strategy, managed by the same team responsible for the SMidCap strategy. We have also developed new asset classesbelieve SMidCap Plus+ is an attractive investment alternative for clients looking to invest in recent yearssmall to mid size companies and it exceeded $500 million in assets under management by the end of last year. Assets in our Income Opportunity strategy grew substantially in 2011, exceeding $900 million at the end of 2011, as the strategy continued to receive strong interest from our private wealth and mutual fund channels as well as from additional institutional mandates. Based upon increased interest in our AllCap Value strategy in 2011, we believe that we intend to introduce tothe AllCap approach is now accepted as a viable strategy in the institutional marketplace in the future. SmallCap Value has a six-year track record, Income Opportunity has compiled a seven-year track record and AllCap Value will soon complete an eight-year track record.marketplace. We began marketing SmallCap Value to institutions in 2007 and it has already completed the approval process at many investment consulting firms, earning several institutional mandates. Our AllCap product has been receiving increased interest and was awarded several institutional mandates. In 2007, we launched an MLP portfolio in response to the needs of an existing client. We believe that we have the team in place to support these productsinvestment strategies in theour target institutional, marketplace.private wealth and mutual fund markets. If we continue to deliver strong investment performance, we believe that demand for these asset classesstrategies can provide meaningful growth in our assets under management.

Foster continued growth of the Westwood Trust platformplatform.. Westwood Trust has experienced solid growth in serving small-small to medium-sized institutions andas well as high net worth individuals.individuals and families. We are seeinganticipate continued interest from clients and prospects in theour diversified, highly attentive service model that we have developed.model. A significant percentage of new asset growth at Westwood Trust stems from referrals and gathering additional assets from existing clients. We believe the continued acceptance ofthat our Enhanced Balanced ™ product,Balanced™ strategy, which offers diversified exposure to multiple asset classes in a tax efficient,tax-efficient, comprehensive solution for clients, provides us with opportunities for future growth. Our 2010 acquisition of McCarthy Group Advisors, LLC in Omaha, Nebraska, enabled us to introduce Westwood Trust to a new served market with attractive growth opportunities for our products and services.

Foster expanded distribution via mutual funds. The WHGWe started the Westwood Funds consistTM family of WHGmutual funds in 2005 with the launch of Westwood SMidCap (WHGMX), WHG and Westwood Income Opportunity (WHGIX), WHG. Subsequently we have launched six additional funds: Westwood LargeCap Value (WHGLX), WHGWestwood Balanced (WHGBX) and WHG, Westwood SmallCap Value (WHGSX), Westwood Dividend Growth (WHGDX), Westwood SMidCap Plus+ (WHGPX) and Westwood Short Duration High Yield (WHGHX). We believe that providing investors access to our investment strategies via mutual funds is a key component to achieving asset growth in the defined contribution and retirement marketplaces and in the registered investment advisor distribution channel. With the exception of Westwood Short Duration High Yield, which were launched from 2005 through 2007. The WHGis subadvised by SKY Harbor Capital Management, LLC, the Westwood Funds whichTM mirror our institutional strategies,strategies. The funds offer capped expense ratios and are available in an institutional share class for all funds. In December 2007 weWe have also launched an A shareshares for WHGWestwood LargeCap Value and WHGWestwood Income Opportunity in order to target No Transaction Fee (“NTF”) mutual fund supermarket platforms and the broker/dealer marketplace. The WHG SMidCap Fund has been awarded a 5-star rating by Morningstar Inc., while WHG LargeCap, WHG Income Opportunity and WHG Balanced each have a 4-star rating. We expect WHG SmallCap Value to be rated by Morningstar Inc. in 2010 after it completes its 3-year track record at the end of the first quarter 2010. In 2009 we reduced the expense cap for WHG Income Opportunity and WHG Balanced in order to increase their appeal to investors. We believe that access to our SMidCap Value, Income Opportunity, LargeCap Value, Balanced and SmallCap Value asset classes via an institutional mutual fund vehicle will present an attractive offering for certain segments of institutional investors, including 401(k) plans.

Pursue strategic acquisitions and alliancescorporate development opportunities. We will carefully evaluate strategic acquisition, joint venture and alliance opportunities.corporate development opportunities in order to augment organic growth. We may express an interest in pursuing acquisitionspursue various transactions, including acquisition of asset management firms, mutual funds or trust companies having assets where we have expertiseprivate wealth firms as well as hiring investment professionals or that appear appropriate as a means of expanding theteams. We consider opportunities to enhance our existing operations, expand our range of asset classesinvestment strategies and services or services we offer or expandingfurther develop our distribution capabilities. By acquiring investment firms or by hiring investment professionals or teams that successfully manage asset classesinvestment strategies beyond our current expertise, we could increase opportunities tocan attract new clients and provide existing clients with an even more diversified range of asset classes.investment strategies. We may also consider entering intoforging alliances with other financial services firms to allow us to leverage our core competency of developing superior investment productsstrategies in combination with alliance partners thatwho could provide us with enhanced distribution capabilities or provide our clients with access to additional service offerings.

Continue strengtheningto strengthen our brand name. We believe that the strength of our brand name has been a key component to our successful long-term tenuresuccess in the investment industry and will continue to be instrumental to our future success. We have developed our strong brand name largely through excellent performance coupled with high profile coverage in various investment publications and electronic media. A numberSeveral of our investment professionals, including Ms.Susan Byrne, David Spika, Investment Strategist, Mark Freeman, Senior Vice President,David Spika and Ragen Stienke, Vice President, enjoy ahave been visible presence in print and electronic media whichand we believe enhances our brand name. We will continue to look for creative ways to strengthen our brand name and reputation in our target client markets.

Competition

We are subject to substantial and growing competition in all aspects of our business. Barriers to entry to the asset management business are relatively low and we believe that we willexpect to face a growing number of competitors. Although no one company dominates the asset management industry, many companies are larger, better known and have greater resources than us.we do.

Further, we compete with other asset management firms on the basis of asset classesinvestment strategies offered, the investment performance of those asset classesstrategies both in absolute terms and relative to peer group performance,groups, quality of service, fees charged, the level and type of compensation offered to key employees, and the manner in which asset classesinvestment strategies are marketed. Many of our competitors offer more asset classesinvestment strategies and services than we do and may also have substantially greater assets under management.

We compete against numerous investment dealers, banks, insurance companies and others that sell equity funds, taxable income funds, tax-free investments and other investment products. In addition, the allocation of assets by many investors of assets from active equity investment to index funds, fixed income or similar asset classes has enhanced the ability of firms offering non-equity asset classes and passive equity management to compete with us effectively. In short, thesummary, our competitive landscape in which we operate is both intense and dynamic and there can be no assurance that we willmay not be able to compete effectively in the future as an independent company.

Additionally, most prospective clients perform a thorough review of an investment manager’s background, investment policies and performance before committing assets to that manager. In many cases, prospective clients invite a number of competing firms to make presentations. The process of obtaining a new client typically takes twelve to eighteen months from the time of the initial contact. While we have achieved a high degree of success in competing successfully for new clients, it is a process to which we must continue to dedicate significant resources over an extended period, with no certainty of success.

Regulation

Westwood Management

Virtually all aspects of our business are subject to federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and stockholders of registered investment advisers. Under such laws and regulations, agencies that regulate investment advisers like us have broad administrative powers, including the power to limit, restrict or prohibit advisers from carrying on their business in the event that they fail to comply with such laws and regulations. In such event, the possiblePossible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines. We believe that we are in substantial compliance with all material laws and regulations.

Our business is subject to regulation at both the federal and state levellevels by the SEC and other regulatory bodies. Westwood Management is registered with the SEC under the Investment Advisers Act of 1940 and under the laws of various states. As a registered investment adviser, Westwood Management is regulated and subject to examination by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, record keeping requirements, operational requirements, marketing requirements and disclosure obligations. Westwood Management also acts as adviser to the Westwood FundsTM, a family of mutual funds the WHG Funds, which are registered with the SEC under the Investment Company Act of 1940. As an adviser to a registered investment company, Westwood Management must comply with the requirements of the Investment Company Act and related regulations. The Investment Company Act imposes numerous obligations on registered investment companies, including requirements relating to operations, fees charged, sales, accounting, record-keeping, disclosure, governance and restrictions on transactions with affiliates. Under the rules and regulations of the SEC promulgated pursuant to the federal securities laws, we are subject to periodic examination by the SEC.SEC examinations. The SEC is authorized tocan institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from censure to termination of an investment adviser’s registration. The failure of Westwood Management to comply with theSEC requirements of the SEC could have a material adverse effect on Westwood. We must also comply with anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001.2001, as subsequently amended and reauthorized. We believe that we are in substantial compliance with the requirements of the regulations under the Investment Advisers Act, the Investment Company Act and the USA PATRIOT Act.

Westwood Trust

Westwood Trust operates in a highly regulated environment and is subject to extensive supervision and examination. As a Texas chartered trust company, Westwood Trust is subject to the Texas Finance Code (the “Finance Code”), the rules and regulations promulgated under the Finance Code and supervision by the Texas Department of Banking. These laws are intended primarily for the protection of Westwood Trust’s clients and creditors rather than for the benefit of investors. The Finance Code provides for and regulates a variety of matters, such as:

 

minimum capital maintenance requirements

 

restrictions on dividends

 

restrictions on investments of restricted capital

lending and borrowing limitations

 

prohibitions against engaging in certain activities

 

periodic examinations by the office of the Texas Department of Banking Commissioner

 

furnishing periodic financial statements to the Texas Department of Banking Commissioner

 

fiduciary record-keeping requirements

 

prior regulatory approval for certain corporate events (such as mergers, sale/purchase of all or substantially all of the assets and transactions transferring control of a trust company).

The Finance Code also gives the Banking Commissioner broad regulatory powers (including penalties and civil and administrative actions) if the trust company violates certain provisions of the Finance Code or conservatorship or closure if Westwood Trust is determined to be in a “hazardous condition” (as defined by law). Westwood Trust’s failure to comply with the Finance Code could have a material adverse effect on Westwood.

Westwood Trust is limited by the Finance Code in the payment of dividends to undivided profits which is described as that part of equity capital equal to the balance of net profits, income, gains, and losses since its formation date minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate board resolutions. At the discretion of its board of directors, Westwood Trust has made quarterly and special dividend payments to Westwood Holdings Group out of undivided profits.

Employee Retirement Income Security Act of 1974

We are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to the related regulations, insofar as we are a “fiduciary” under ERISA with respect to some of our clients. ERISA and applicable provisions of the Internal Revenue Code impose certain duties on persons who are fiduciaries under ERISA or who provide services to ERISA plan clients and prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect on us.effect.

Employees

At December 31, 2009,2011, we had 6480 full-time employees, including 2731 investment management, research and trading professionals, 1925 marketing and client service professionals, and 1824 operations and business management professionals. No employees are represented by a labor union and we believe our employee relations to be good.

Segment informationInformation

For information about our operating segments, Westwood Management and Westwood Trust, please see footnote 1413 “Segment Reporting” in the financial statements accompanying this Report.

Item 1A.Risk Factors

We believe these represent the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should carefully consider the risks described below before making an investment decision. You should also refer to the other information included or incorporated by reference in this Report, including our financial statements and related notes.

Poor investment performance of assets managed by us could adversely affect our results of operations.

Because we compete with many asset management firms on the basis of asset classes offered and the investment performance of those asset classes,strategies we offer, our success is dependent to a significant extent on the investment performance of the assets that we manage. Because our revenue is primarily generated from fees derived as a percentage of assets under management, poor performance tends to result in the loss or reduction of client accounts, which correspondingly decreases revenues. Underperformance relative to peer groups for our various asset classesinvestment strategies could adversely affect our results of operations, especially if such underperformance continues for a lengthy period of time.

Some managementkey employees are considered critical to our success, and our inability to attract and retain key employees could compromise our future success.

We believe that our future success will depend to a significant extent upon the services of our executive officers,certain key employees, particularly Susan M. Byrne, our Chairman of the BoardBrian O. Casey, President and Chief Executive Officer, Mark Freeman, Chief Investment Officer, and Brian O. Casey, our President and Chief Executive Officer.Ragen Stienke, Senior Portfolio Manager. As with other asset management businesses, our future performance depends to a significant degree upon the continued contributions of these and other key officers, investment professionals, as well as marketing, client service and management personnel. There is substantial competition for skilled personnel and the loss of one or more of our key employees or our failure to attract, retain and motivate qualified personnel, could negatively impact our business, financial condition, results of operations and future prospects.

Our revenues are dependent upon the performance of the securities markets and negative performance of the securities markets could reduce our revenues.

Our results of operations are affected by many economic factors, including the performance of the securities markets. Negative performance within the securities markets or short-term volatility within the securities markets could result in investors withdrawing assets, decreasing their rates of investment or shifting assets to cash or other asset classes or strategies that we do not manage, all of which could reduce our revenues. Because most of our revenues are based on the value of assets under management, a decline in the value of those assets would also adversely affect our revenues. In addition, in periods of slowing growth or declining revenues, profits and profit margins are adversely affected because certain expenses remain relatively fixed.

In particular, more than halfa significant portion of our assets under management areis invested in equity securities of companies with a large market capitalization.capitalizations. As a consequence, we are particularly susceptible to the volatility associated with changes in the market for large capitalization stocks. Due to this concentration, any change or reduction in such markets, including a shift of our clients’ and potential clients’ preference from investments in equity securities of large capitalization stocks to other equity or fixed income securities could have a significant negative impact on our revenues and results of operations. This negative impact could occur due to the depreciation in value of our assets under management, the election by clients to select other firms to manage their assets or the election by clients to allocate assets away from asset classes that we manage. Any of these events would result in decreased assets under management and therefore reduced revenues and a decline in results of operations.

If we are unable to realize benefits from the costs we have incurred and are continuing to incur to develop new asset classesinvestment strategies and otherwise broaden our capabilities, our growth opportunities may be adversely affected.

We have incurred significant costs during the last several years to develop new asset classes,investment strategies, including SmallCap Value, AllCap Value, Income Opportunity, MidCap Value, LargeCap Enhanced (130/30) and, Global Strategic Diversification, an MLP portfolio and SMidCap Plus+, to launch five new mutual funds under the WHGWestwood FundsTM name and to upgrade our business infrastructure.infrastructure and we expect to continue to incur significant costs to develop and launch new investment strategies. Some of the costs associated with these improvements and new investment strategies will continue to be incurred in future periods and are relatively fixed. We may not realize the benefits of these investments and, in the event we are not ableif unable to do so, our results of operations and growth opportunities may be adversely affected.

Due to the substantial cost and time required to introduce new asset classesinvestment strategies in our industry, we may not be able to successfully introduce new asset classesinvestment strategies in a timely manner, or at all.

The development and marketing of new asset classes in our industryinvestment strategies, whether through acquisition or internal development, requires a substantial amount of time and significant financial resources.resources, including expenses related to compensation, sales and marketing, information technology, legal counsel and other professional services. Our ability to market and sell a new asset class successfullyinvestment strategy depends on our financial resources, the investment performance results of the specific asset class,strategy, the timing of the offering and our marketing strategies. Once an asset classinvestment strategy is developed, whether through acquisition or internal development, we must still effectively market the asset classstrategy to our existing and prospective clients. This entails incurring substantial financial costs related to research on the target assets and the demand for such asset class in the market, as well as sales and marketing costs associated with attracting assets to the new asset class. In addition, ourOur ability to sell new asset classesinvestment strategies to our existing and prospective clients depends on our ability to meet or exceed the performance of our competitors who offer the same or similar asset classes.strategy. We may not be able to manage the assets within a given asset classinvestment strategy profitably. Moreover, it may take years before we are able to produce the level of results that will enable us to attract clients. If we are unable to realize the benefits of the costs and expenses incurred in developing new asset classes,investment strategies, we may experience losses as a result of our management of these asset classes,investment strategies, and our ability to introduce further new asset classesinvestment strategies and compete in our industry may be hampered.

Our business is dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal. As a result, we could lose any of our clients on very short notice.

Substantially all of our revenues are derived pursuant to investment advisory, subadvisory and trust agreements with our clients. In general, either party may terminate these agreements upon 30 days’ notice. Any termination of, or failure to renew, a material number of these agreements could have a material adverse impact on us, particularly because many of our costs are relatively fixed.

A small number of clients account for a substantial portion of our business. As such, the reduction or loss of business with any of these clients could have ana significantly adverse impact on our business, financial condition and results of operations.

One of our largest clients in terms of assets paid us both asset-based and performance-based advisory fees two of the last three years. Due to a significant performance fee earned in 2008, this client accounted for 19.5% of our fee revenues for the year ended December 31, 2008; however, this client did not pay us a performance fee in 2009 and accounted for less than 1% of our revenues for the year ended December 31, 2009. Our four largest clients accounted for approximately 13.1%14% of fee revenues for the year ended December 31, 2009.2011. We are therefore dependent to a significant degree on our ability to maintain our existing relationships with these clients. There can be no assurance that we will be successful in maintaining these existing client relationships, securing additional clients or achieving the superior investment performance necessary to earn a performance-based advisory fee.fees. Any failure by us to retain one or more of these large clients or establish profitable relationships with additional clients could have a material adverse effect on our business, financial condition and results of operations.

Competitive fee pressures could reduce revenues and profit margins.

The investment management business is highly competitive and has relatively low barriers to entry. To the extent we have to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment management fees vary from product to product, we have competed primarily on the performance of our products and client service rather than on the level of our investment management fees relative to our competitors. In recent years there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that make investors willing to pay our fees. We cannot be assured that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.

Performance fees could have a significant effect on our revenues and results of operations.

We have performance fee agreements with a small number of ourfew clients, which would pay us a fee if we outperform a specified index over predetermined periods of time. There canWe may not be no assurance that we will perform well relativeable to outperform such indexes and the failure to do so would cause us to earn none or only part of those potential revenues, which would have a material adverse effect on our revenues and results of operations. Our revenues from performance-based fees could fluctuate significantly from one measurement period to the next, depending on how we perform relative to the indexes specified in these agreements. For example, we earned a significant performance fee in 2008,2011, but did not earn a performance feefees in 2009.2009 or 2010.

Any event that negatively affects the asset management industry in general could have a material adverse effect on us.

Any event affecting the asset management industry that results in a general decrease in assets under management or a significant general decline in the number of advisory clients or accounts could negatively impact our revenues. Our future growth and success depends in part upon the growth of the asset management industry.

Our business is subject to extensive regulation with attendant costs of compliance and serious consequences for violations.

Virtually all aspects of our business are subject to various laws and regulations including the Investment Advisers Act, the Investment Company Act, and anti-money laundering laws. These laws and regulations generally grant regulatory agencies broad administrative powers, including the power to limit or restrict us from operating our business as well as the powers to place us under conservatorship or closure in the event we fail to comply with such laws and regulations. Violations of such laws or regulations could subject us and/or our employees to disciplinary proceedings and civil or criminal liability, including revocation of licenses, censures, fines or temporary suspension,suspensions, permanent barbarring from the conduct of business, conservatorship, or closure. Any such proceeding or liability could have a material adverse effect upon our business, financial condition, results of operations and business prospects. Due to the extensive regulations and laws to which we are subject, our management is required to devote substantial time and effort to legal and regulatory compliance issues.

In addition, the regulatory environment in which we operate is subject to change. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. See “Item 1. Business — Regulation.”

Misuse of assets and information in the possession of our investment professionals and employees could result in costly litigation and liability for us and our clients.

Our investment professionals handle a significant amountamounts of assets along with financial and personal information for our clients. Although weWe have implemented a system of controls to minimize the risk of a fraudulent taking or misuse of assets and information, there can be no assurance thathowever our controls willmay not be sufficiently adequate to prevent such fraudulent actions by our portfolio managers or employees. If our controls are ineffective, in preventing the fraudulent taking or misuse of assets and information, we could be subject to costly litigation, which could consume a substantial amount of ourfinancial resources, distract our management from our operations, and could also result in regulatory sanctions. Additionally, any suchSuch fraudulent actions could also adversely affect some of our clients, in other ways, and these clients couldcausing them to seek redress against us.redress.

Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the holdings of current stockholders.

As part of our long-term business strategy, we may consider acquisitionspursue corporate development transactions including the acquisition of similarasset management firms, mutual funds, private wealth firms, investment professionals or complementary businesses.teams. See “Item 1. Business — Growth Strategy.” If we are not correctincorrect when we assessassessing the value, strengths, weaknesses, liabilities and potential profitability of acquisition candidatessuch transactions, or if we are not successful in integrating the operations offail to integrate the acquired businesses or individuals, the success of the combined business could be compromised. Any futurebusiness acquisitions will be accompanied byare subject to the risks commonly associated with acquisitions. These risks include,such transactions including, among others, potential exposure to unknown liabilities of acquired companies and to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruptiondisruptions to the business of the combined company and potential diversion of management’s time

and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of the changes in management, potential futurelitigation or other legal risks, potential write-downs related to goodwill impairment in connection with acquisitions, and dilution to the stockholders of the combined company if the acquisition is made for stock of the combined company. In addition, asset classes,investment strategies, technologies or businesses of acquired companies may not be effectively assimilated into our business or may have a positivenegative effect on the combined company’s revenues or earnings. The combined company may also incur significant expense to complete acquisitions and to support the acquired asset classesinvestment strategies and businesses. Further, any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting the holdings or limiting the rights of stockholders. Finally, we may not be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms.

Our acquisitions were forecasted to add revenues, expenses and earnings to our business. The failure to realize these revenues and earnings could adversely impact our results of operations.

We have made two business acquisitions in the last three years. These acquisitions may not yield the benefits that we forecasted due to a variety of factors, including our failure to retain the clients of the businesses we acquired. If these acquisitions do not yield expected benefits, our revenues and results of operations could be negatively impacted and we could be required to record an impairment against earnings for the intangible assets and goodwill acquired in these transactions.

Our business involves risks of being engaged in litigation and liability that could increase our expenses and reduce our results of operations

Many aspects of our business involve substantial risks of liability. We could be named as defendants or co-defendants in lawsuits or could be involved in disputes that involve the threat of lawsuits seeking substantial damages. As an SEC-registered adviser, mutual fund adviser and publicly traded entity, we are subject to governmental and self-regulatory organization examinations, investigations and proceedings. Similarly, the investment strategies that we manage could be subject to actual and threatened lawsuits and governmental and self-regulatory organization investigations and proceedings, any of which could harm the investment returns or reputation of the applicable fund or result in our being liable for any resulting damages. There has been an increased incidence of litigation and regulatory investigations in the asset management industry in recent years, including customer claims as well as class action suits seeking substantial damages.

Various factors may hinder the declaration and payment of dividends.

We have historically paid a quarterly dividend. However, the payment of future dividends is subject to the discretion of our Board of Directors, and various factors may prevent us from paying dividends. Such factors include our financial position, capital requirements and liquidity, the existence of a stock repurchase program, state corporate and banking law restrictions, results of operations and such other factors as our Board of Directors may consider relevant. In addition, as a holding company, our ability to pay dividends is dependent on the dividends and income we receive from our subsidiaries. At the present timeCurrently, our primary source of cash isconsists of dividends that may be received from Westwood Management or Westwood Trust. The payment of dividends by Westwood Management or Westwood Trust is subject to the discretion of their Boards of Directors and compliance with applicable laws, including, in particular, the provisions of the Texas Finance Code applicable to Westwood Trust. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our business is vulnerable to systems failures that could have a material adverse effect on our business, financial condition and results of operations.

Any delays or inaccuracies in securities pricing information or information processing could give rise to claims against us, which could have a material adverse effect on our business, financial condition and results of operations. We are highly dependent on communications and information systems and on third partythird-party vendors for securities pricing information and updates from certain software. We may suffer a systems failure or interruption, whether caused by an earthquake, fire, other natural disaster, power or telecommunications failure, unauthorized access, act of God, act of war or otherwise, and our back-up procedures and capabilities may not be adequate or sufficientinadequate to eliminate the risk of extended interruptions in operations.

We may not be able to fund future capital requirements on favorable terms, if at all.

We cannot be certain that financing to fund our working capital or other cash requirements, if needed, will be available on favorable terms, if at all. Our capital requirements willmay vary greatly from quarter to quarter depending on, among other things, capital expenditures, fluctuations in our operating results and financing activities. If future financing isbecomes necessary, we may or may not be able to obtain financing on favorable terms, if at all. Further, any future equity financings could dilute the relative percentage ownership of the then existing holders of our common stock,stockholders and any future debt financings could involve restrictive covenants that limit our ability to take certain actions.

Failure to maintain effective internal controls could have a material adverse effect on our business and stock price.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore,limitations and even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We cannot be certain that the measures we take to evaluate and improve our internal controls will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time;time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. In addition, failureFailure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

Our organizational documents contain provisions that may prevent or deter another group from paying a premium over the market price to our stockholders to acquire our stock.

Our organizational documents contain provisions that require a vote of two-thirds of the shares of stock entitled to vote to remove directors for cause, establish that stockholders cannot act by written consent, and that authorize our boardBoard of directorsDirectors to issue, without shareholder approval, blank check preferred stock. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law relating to business combinations. These provisions could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of our common stock that some or a majority of our stockholders might consider to be in their best interests.

We are a holding company and are dependent on the operations and funds of our subsidiaries.

We are a holding company, with no revenue generating operations and no assets other than our ownership interests in Westwood Management and Westwood Trust. Accordingly, we are dependent on the cash flow generated by these operating subsidiaries and must rely on dividends or other intercompany transfers from theseour operating subsidiaries to generate the funds necessary to meet our obligations.

 

Item 2.Properties.

Westwood, Westwood Management and Westwood Trust conduct their principal operations through a leased propertyoffice space with approximately 21,60025,555 square feet, located in Dallas, Texas. TheTexas pursuant to a lease with an initial term of the lease agreementthat expires in May 2011.November 2021. In addition, we lease office space with approximately 5,045 square feet located in Omaha, Nebraska pursuant to a lease with an initial term that expires in July 2014. We believe these facilities will be adequate to serve our currently anticipated business needs.

Item 3.Legal Proceedings.

We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our business. We do not believe the outcome of these proceedings will have a material impact on our financial position, operations or cash flow.

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock has traded on the New York Stock Exchange (the “NYSE”) under the symbol “WHG” since July 1, 2002. At December 31, 2009,2011, there were approximately 170174 record holders of our common stock, although we believe that the number of beneficial owners of our common stock is substantially greater. The table below sets forth the high and low sale prices for the common stock, as reported by the NYSE for the periods indicated.

 

   High  Low

2009

    

Fourth Quarter

  $40.60  $33.35

Third Quarter

   42.28   33.50

Second Quarter

   44.44   37.28

First Quarter

   42.92   24.12

2008

    

Fourth Quarter

  $48.05  $22.47

Third Quarter

   53.31   39.05

Second Quarter

   43.00   33.38

First Quarter

   39.00   32.31
   2011   2010 
   High   Low   High   Low 

For the Quarter Ended:

        

March 31

  $40.96    $34.85    $40.48    $34.10  

June 30

   41.35     34.13     40.56     33.84  

September 30

   40.51     30.33     39.00     28.49  

December 31

   38.60     31.11     40.65     33.19  

Dividends

We have declared a cash dividend on our common stock for each quarter since the date that our common stock was first publicly traded. The table below sets forth the quarterly dividends declared for the periods indicated.

 

  Quarterly  Dividend per share of
common stock
 

2009

  
  Regular   Special 

2011

    

Fourth Quarter

  $0.33  $0.37    

Third Quarter

   0.30   0.35    

Second Quarter

   0.30   0.35    

First Quarter

   0.30   0.35    

2008

  

2010

    

Fourth Quarter

  $0.30  $0.33    $0.33  

Third Quarter

   0.30   0.33    

Second Quarter

   0.30   0.33    

First Quarter

   0.30   0.33    

In addition, on February 4, 20102, 2012 we declared a quarterly cash dividend of $0.33$0.37 per share on our common stock payable on April 1, 20102, 2012 to stockholders of record on March 15, 2010.2012. We currently intend to continue paying cash dividends in such amounts as our Board of Directors determines ismay determine to be appropriate. Any paymentfuture payments of cash dividends in the future will be at the discretion of the Board of Directors and subject to some limitations under the Delaware General Corporation Law.

Westwood Holdings Group Inc. is the sole stockholder of both Westwood Management and Westwood Trust. Westwood Trust is limited under applicable Texas law in the payment of dividends to the amount of undivided profits, which is defined as that part of equity capital equal to the balance of net profits, income, gains, and losses since its formation date minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate boardBoard of directorDirectors’ resolutions.

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information as of December 31, 20092011 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under the Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, our only equity compensation plan in effect at that time. The material terms of this plan were approved by our stockholders at our 20092011 Annual Meeting.Meeting and are discussed in note 9 of the financial statements included in this Form 10-K.

 

Plan Category

  Number of
securities
to be issued
upon
exercise of
outstanding
options

(a)
  Weighted-
average
exercise
price of
outstanding
options

(b)
  Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))

(c)
  Number of
securities
to be issued
upon
exercise of
outstanding
options

(a)
   Weighted-
average
exercise
price of
outstanding
options

(b)
   Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))

(c)
 

Equity compensation plans approved by security holders

  54,900  $12.90  699,000   16,250    $12.90     873,000  

Equity compensation plans not approved by security holders

  —     —    —     —       —       —    
           

 

   

 

   

 

 

Total

  54,900  $12.90  699,000   16,250    $12.90     873,000  
           

 

   

 

   

 

 

PERFORMANCE GRAPH

The following graph compares total stockholder returns of Westwood since December 31, 20042005 with the total return of the Russell 2000 Index and the SNL Asset Manager Index. The SNL Asset Manager Index is a composite of 32 publicly traded33 publicly-traded asset management companies.

Comparison of Cumulative Five Year Total Return

 

Index

  Period ended  Cumulative
Five-Year
Total
Return
   Period ended   Cumulative
Five-Year
Total
Return
 
12/31/04  12/31/05  12/31/06  12/31/07  12/31/08  12/31/09   12/31/06   12/31/07   12/31/08   12/31/09   12/31/10   12/31/11   

Westwood Holdings Group, Inc.

  $100.00  $98.04  $132.45  $224.97  $175.99  $232.67  132.67  $100.00    $169.85    $132.87    $175.67    $202.06    $192.44     92.44

Russell 2000 Index

   100.00   104.55   123.76   121.82   80.66   102.58  2.58     100.00     98.43     65.18     82.89     105.14     100.75     0.75  

SNL Asset Manager Index

   100.00   127.18   147.49   167.89   79.79   129.44  29.44     100.00     113.83     54.10     87.76     101.02     87.38     (12.62

The total return for our stock and for each index assumes $100 invested on December 31, 20042006 in our common stock, the Russell 2000 Index, and the SNL Asset Manager Index, including reinvestment of dividends. Our common stock is traded on the NYSE.NYSE under the ticker symbol “WHG.”

The closing price of our common stock on the last trading day of the year ended December 31, 20092011 was $36.34$36.55 per share. Historical stock price performance is not necessarily indicative of future price performance.

Purchases of Equity Securities by the Issuer

The following table displays information with respect to treasury shares we purchased during the quarter ended December 31, 2011.

Period

  Total
number
of shares
purchased
   Average
price
paid
per
share
   Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs
   Maximum
number (or
approximate
dollar value)
of shares
that may yet
be
purchased
under the
plans or
programs (1)
 

October 1 through October 31, 2011

   —       —       87,686    $7,037,954  

November 1 through November 30, 2011

   2,854    $34.59     90,540     6,939,238  

December 1 through December 31, 2011

   —       —       90,540     6,939,238  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   2,854    $34.59     90,540    $6,939,238  

(1)On August 9, 2011, our Board of Directors authorized management to repurchase up to $10.0 million of our outstanding common stock on the open market or in privately negotiated transactions. This share repurchase program will expire on August 9, 2012.

Item 6.Selected Consolidated Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for the five years ended December 31, 2009,2011, except Assets Under Management, is derived from our consolidated financial statements as audited by Grant Thornton LLP, independent registered public accounting firm as of and for the years ended December 31, 2011, 2010, 2009, 2008 2007 and 2006, and from our consolidated financial statements as audited by Deloitte & Touche LLP, independent registered public accounting firm as of and for the year ended December 31, 2005,2007, and should be read in conjunction with those statements. The information set forth below should be read in conjunction with “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report.

 

  Year ended December 31,
(in thousands, except per share amounts)
  Year ended December 31,
(in thousands, except per share amounts)
 
  2009  2008  2007  2006  2005  2011   2010   2009   2008   2007 

Consolidated Statements of Income Data:

                    

Total revenues

  $42,553  $46,456  $36,292  $27,364  $21,940  $68,909    $55,313    $42,553    $46,456    $36,292  

Total expenses

   30,235   29,921   24,085   20,110   15,897   45,800     37,592     30,235     29,921     24,085  

Income before income taxes

   12,318   16,535   12,207   7,254   6,043   23,109     17,721     12,318     16,535     12,207  

Provision for income taxes

   4,423   5,992   4,263   2,785   2,407   8,423     6,441     4,423     5,992     4,263  

Income before cumulative effect of accounting change

   7,895   10,543   7,944   4,469   3,636

Net income

   7,895   10,543   7,944   4,508   3,636   14,686     11,280     7,895     10,543     7,944  

Income before cumulative effect of change in accounting principle per share – basic

  $1.25  $1.73  $1.36  $0.80  $0.67

Income before cumulative effect of change in accounting principle per share – diluted

  $1.18  $1.63  $1.28  $0.79  $0.66

Earnings per share – basic

  $1.25  $1.73  $1.36  $0.81  $0.67  $2.11    $1.62    $1.10    $1.53    $1.19  

Earnings per share – diluted

  $1.18  $1.63  $1.28  $0.79  $0.66  $2.04    $1.58    $1.09    $1.52    $1.18  

Cash dividends declared per common share

  $1.23  $1.20  $1.15  $1.33  $1.09  $1.42    $1.65    $1.23    $1.20    $1.15  

 

   As of December 31,
(in thousands)
   2009  2008  2007  2006  2005

Consolidated Balance Sheet Data:

          

Cash and investments

  $45,125  $31,650  $26,704  $20,110  $19,775

Total assets

   59,886   50,847   39,024   28,722   27,310

Stockholders’ equity

   47,218   38,794   29,346   22,735   21,559

Assets Under Management (in millions)

  $10,174  $7,185  $7,853  $5,927  $4,928

   As of December 31,
(in thousands)
 
   2011   2010   2009   2008   2007 

Consolidated Balance Sheet Data:

          

Cash and investments

  $60,132    $45,044    $45,125    $31,650    $26,704  

Total assets

   90,597     72,628     59,886     50,847     39,024  

Stockholders’ equity

   70,757     60,677     47,218     38,794     29,346  

Assets Under Management (in millions)

  $13,079    $12,477    $10,174    $7,185    $7,853  

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis in conjunction with “Selected Consolidated Financial Data” included in this Report, as well as our consolidated financial statements and related notes thereto appearing elsewhere in this Report.

Forward-Looking Statements

Statements in this Report and the Annual Report to Stockholders that are not purely historical facts, including, without limitation, statements about our expected future financial position, results of operations or cash flows, as well as other statements including, without limitation, words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “may,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results, our financial condition, and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements due to a number of factors, including, without limitation, those set forth below:include, among others:

 

our ability to identify and successfully market services that appeal to our customers;

 

the significant concentration of our revenues in four of our customers;

 

our relationships with investment consulting firms;

 

our relationships with current and potential customers;

 

our ability to retain qualified personnel;

 

our ability to develop and market new asset classesinvestment strategies successfully;

 

our ability to maintain our fee structure in light of competitive fee pressures;

 

competition in the marketplace;

 

downturns in financial markets;

 

new legislation adversely affecting the financial services industries;

 

interest rates;

 

changes in our effective tax rate;

 

our ability to maintain an effective system of internal controls; and

 

the other risks as detailed from time to time in our SEC reports.

Additional factors that could cause our actual results and financial condition to differ materially from our expectationsthose indicated in the forward-looking statements are discussed under the section entitled “Risk Factors” and elsewhere in this Report. You should not rely unduly on theseThe forward-looking statements whichare based only on currently available information and speak only as of the date of this Report. Other unknown or unpredictable factors may cause actual results to differ materially from those projected by the forward-looking statements. Most of these factors are difficult to anticipate and may be beyond our control. Except as required by law, weWe are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this Report or to reflect the occurrence of unanticipated events.events or otherwise.

Overview

We manage investment assets and provide services for our clients through our two subsidiaries, Westwood Management and Westwood Trust. Westwood Management provides investment advisory services to corporate retirement plans, public retirement plans, endowments and foundations, the WHGWestwood FundsTM, other mutual funds, individuals and clients of Westwood Trust. Westwood Trust provides institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors.sponsors to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management and at December 31, 20092011 Westwood Management and Westwood Trust collectively managed assets valued at approximately $10.2$13.1 billion. We have been providing investment advisory services since 1983 and, according to recognized industry sources including Morningstar, Inc., our principal investment strategies have consistently ranked above median performance within their peer groups when measured over multi-year periods.

With respect to the bulk of our client assets under management, we utilize a “value” investment style focused on achieving superior long-term, risk-adjusted returns by investing in companies with high levels of free cash flow, improving returns on equity, strengthening balance sheets and well positioned for growth but whose value is not fully recognized in the marketplace. This investment approach is designed to preserve capital during unfavorable periods and provide superior real returns over the long term. Our investment teams have significant industry experience. Our Founder, Susan M. Byrne, has over forty years of investment experience. Our investment team has average investment experience of fifteen years while one third of our principal asset classes have consistently ranked above the median in performance within their peer groups.team has worked together at Westwood for over ten years.

One of the priorities on which weWe have focused since our spin-off in 2002 ison building a foundation in terms of personnel and infrastructure to support a potentially much larger business. We have also developed productsinvestment strategies that we believe will be desirable within our target institutional, private wealth and private clientmutual fund markets. The cost of developing new products and the organization as a whole has resulted in usour incurring expenses that, in some cases, do not currently have materialsignificant offsetting revenue. Nowrevenues. We believe that we believe the appropriate foundation and the products are now in place we are taking these new products to the institutional marketplace and believe that institutional investors will recognize the value in these products, and generatethereby generating new revenue streams for us.

Westwood.

2011 Highlights

We began marketing our SMidCap Value product to institutional investment consultants in late 2004. As a result of this targeted marketing effort, assets in SMidCap Value increased from $78 million atThe following items are highlights for the year ended December 31, 2004 to $2.7 billion at2011:

Assets under management as of December 31, 2009. As2011 were $13.1 billion, a result of this growth, the SMidCap Value asset class was closed5% increase compared to new institutionalDecember 31, 2010; average assets in 2009. The WHG SMidCap mutual fund remains open. We continueunder management for 2011 were $12.9 billion, a 20% increase compared to devote significant marketing efforts to the institutional market for our LargeCap Value, SmallCap Value, AllCap Value and other products. Our SmallCap Value product has progressed through the approval process at many investment consulting firms and we are seeing interest in this capacity-constrained product. We won our first institutional mandates in AllCap Value in 2009. Between December 2005 and April 2007 we also launched five mutual funds under the WHG Funds name. 2010.

Net asset inflows were $665 million, including net inflows to the Westwood FundsTM of $309 million, for an organic growth rate of 32%.

As of December 31, 2009,2011, over 90% of our investment strategies have outperformed their respective benchmarks since inception.

With the addition of three funds in 2011, our Westwood FundsTM family of mutual funds now includes eight funds and ended the year with $1.3 billion in assets under management.

Our Income Opportunity strategy, with its focus on current income and lower volatility, experienced tremendous client inflows in the turbulent market of 2011, more than doubling its assets to over $900 million.

Our SMidCap Plus+ strategy exceeded $500 million in assets in these five funds were $566 million. its first full year of operation.

We completed the first year of operation of our Westwood Trust Omaha office, which was added via the acquisition of McCarthy Group Advisors, LLC in November 2010.

Total revenue was a record $68.9 million, a 25% increase over the prior year

Net income was a record $14.7 million, a 30% increase over the prior year

In additionOctober 2011, the Board approved an increase in our quarterly dividend to $0.37 per share, or an annual rate of $1.48, resulting in a dividend yield of 4.0% at the funds’ existing institutional share class,year-end stock price of $36.55.

We repurchased 90,540 shares of our common stock during the year and have approximately $6.9 million remaining under a stock repurchase program authorized by our Board of Directors in December 2007 we launched an A share for WHG LargeCap Value and WHG Income Opportunity in order to target No Transaction Fee (“NTF”) mutual fund supermarket platforms and the broker/dealer marketplace. We have an additional WHG Fund registered with the SEC, the WHG AllCap Value Fund, and are evaluating opportunities to launch this fund in the future.August 2011.

Our financial position remains strong with liquid cash and investments of $57.1 million as of December 31, 2011 (excludes shares of Teton Advisors, Inc.).

Revenues

We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management, which manages client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management and are paid in accordance with the terms of the agreements. Westwood Management’s advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the previous quarter, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management recognizes revenues as services are rendered. A limited number of our clients have aagreed to contractual performance-based fee component in their contract,fees, which generatesgenerate additional revenues if we

outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement periods. In 2008, we recognized a performance-based fee for a client in the second quarter and a separate performance-based fee for another client in the fourth quarter. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter. Consequently, there is not a significant amount of deferred revenue contained in our financial statements.

Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since billing periods for the majority of Westwood Trust’s advance paying clients’ billing periodsclients coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter;quarter and consequently there is not a significant amount of deferred revenue contained in our financial statements.

Our other revenues generally consist of interest and investment income. Although we invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds.

Assets Under Management

Assets under management increased $3.0$602 million, or 5%, to $13.1 billion at December 31, 2011 compared to $12.5 billion at December 31, 2010. Quarterly average assets under management increased $2.2 billion, or 42%20%, to $12.9 billion for 2011 compared with $10.7 billion for 2010.

Assets under management increased $2.3 billion, or 23%, to $12.5 billion at December 31, 2010 compared to $10.2 billion at December 31, 20092009. Quarterly average assets under management increased $2.3 billion, or 27%, to $10.7 billion for 2010 compared to $7.2with $8.5 billion atfor 2009.

The following table sets forth our assets under management as of December 31, 2008. This2011, 2010 and 2009:

   As of December 31,
(in millions)
   % Change 
   2011   2010   2009   2011 vs. 2010  2010 vs. 2009 

Institutional

  $8,735    $8,359    $7,599     4  10

Private Wealth

   3,051     3,148     2,009     (3  57  

Mutual Funds

   1,293     970     566     33    71  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Assets Under Management

  $13,079    $12,477    $10,174     5  23
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Our assets under management disclosure reflects management’s view of our three main lines of business: institutional, private wealth and mutual funds.

Institutional includes: separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood Management provides investment management services for funds offered by other financial institutions; and managed account relationships with brokerage firms and other registered investment advisors who offer Westwood Management’s products to their customers.

Private Wealth includes assets for which Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements. Also included are assets acquired in the McCarthy transaction representing institutional and high net worth clients for which Westwood provides investment management and advisory services.

Mutual Funds include the Westwood FundsTM, a family of mutual funds for which Westwood Management serves as advisor.

Roll-Forward of Assets Under Management

   Twelve Months Ended December 31, 2011
(in millions)
 
   Institutional  Private Wealth  Mutual Funds  Total 

Beginning of period assets

  $8,359   $3,148   $970   $12,477  

Client flows:

     

Inflows/new accounts

   1,566    308    563    2,437  

Outflows/closed accounts

   (1,133  (385  (254  (1,772
  

 

 

  

 

 

  

 

 

  

 

 

 

Net inflows/(outflows)

   433    (77  309    665  

Market appreciation/(depreciation)

   (57  (20  14    (63

Net change

   376    (97  323    602  
  

 

 

  

 

 

  

 

 

  

 

 

 

End of period assets

  $8,735   $3,051   $1,293   $13,079  
  

 

 

  

 

 

  

 

 

  

 

 

 

The increase in assets under management for the twelve months ended December 31, 2011 was primarily due to new inflows of $2.4 billion, partially offset by outflows of $1.8 billion and market depreciation of $63 million. Inflows were driven primarily by additional inflows into institutional separate accounts, subadvisory mandates and the Westwood FundsTM. Outflows were primarily related to outflows and some account closings by institutional separate account clients and subadvisory mandates and outflows from the Westwood FundsTM.

   Twelve Months Ended December 31, 2010
(in millions)
 
   Institutional  Private Wealth  Mutual Funds  Total 

Beginning of period assets

  $7,599   $2,009   $566   $10,174  

Client flows:

     

Inflows/new accounts

   971    99    372    1,442  

Outflows/closed accounts

   (1,518  (230  (157  (1,905
  

 

 

  

 

 

  

 

 

  

 

 

 

Net inflows/(outflows)

   (547  (131  215    (463

Acquisition related

   —      1,057    64    1,121  

Market appreciation/(depreciation)

   1,307    213    125    1,645  

Net change

   760    1,139    404    2,303  
  

 

 

  

 

 

  

 

 

  

 

 

 

End of period assets

  $8,359   $3,148   $970   $12,477  
  

 

 

  

 

 

  

 

 

  

 

 

 

The increase in assets under management for the twelve months ended December 31, 2010 was primarily due to market appreciation of $1.6 billion, the acquisition of $1.1 billion of assets under managementin the McCarthy transaction and netnew inflows of assets$1.4 billion, partially offset by outflows of $1.9 billion. Inflows were driven primarily by additional inflows into the Westwood FundsTM, institutional separate accounts and subadvisory mandates. Outflows were primarily related to rebalancing and some account closings by institutional separate account clients and outflows from new clients. Quarterly average assets under management increased $747 million, or 10%, to $8.5 billion for 2009 compared with $7.7 billion for 2008.subadvisory mandates and the Westwood FundsTM.

   Twelve Months Ended December 31, 2009
(in millions)
 
   Institutional  Private Wealth  Mutual Funds  Total 

Beginning of period assets

  $5,374   $1,558   $253   $7,185  

Client flows:

     

Inflows/new accounts

   1,601    241    299    2,141  

Outflows/closed accounts

   (702  (117  (128  (947
  

 

 

  

 

 

  

 

 

  

 

 

 

Net inflows/(outflows)

   899    124    171    1,194  

Acquisition related

   —      —      52    52  

Market appreciation/(depreciation)

   1,326    327    90    1,743  

Net change

   2,225    451    313    2,989  
  

 

 

  

 

 

  

 

 

  

 

 

 

End of period assets

  $7,599   $2,009   $566   $10,174  
  

 

 

  

 

 

  

 

 

  

 

 

 

Assets under management decreased $668 million, or 9%, to $7.2 billion at December 31, 2008 compared to $7.9 billion at December 31, 2007. The decreaseincrease in assets under management for the twelve months ended December 31, 2009 was primarily due to new inflows of $2.1 billion and market depreciationappreciation of assets under management,$1.7 billion, partially offset by netoutflows of $947 million. Inflows were driven primarily by new institutional separate accounts and subadvisory mandates, additional inflows of assetsinto the Westwood FundsTM, institutional separate accounts and subadvisory mandates, new private wealth accounts and inflows into existing private wealth accounts. Outflows were primarily related to rebalancing and some account closings by institutional separate account clients and outflows from newsubadvisory mandates and existing clients. Quarterly average assets under management increased $813 million, or 12%, to $7.7 billion for 2008 compared with $6.9 billion for 2007.

   As of December 31,
(in millions)
  % Change 
   2009  2008  2007  2009 vs. 2008  2008 vs. 2007 

Westwood Management Corp.

         

Separate Accounts

  $4,889  $3,080  $3,846  59 (20)% 

Subadvisory

   1,972   1,619   1,051  22   54  

WHG Funds

   566   253   234  124   8  

Westwood Funds

   289   300   362  (4 (17

Managed Accounts

   449   375   491  20   (24
                   

Total

   8,165   5,627   5,984  45   (6

Westwood Trust

         

Commingled Funds

   1,511   1,173   1,427  29   (18

Private Accounts

   376   286   324  31   (12

Agency/Custody Accounts

   122   99   118  23   (16
                   

Total

   2,009   1,558   1,869  29   (17

Total Assets Under Management

  $10,174  $7,185  $7,853  42 (9)% 
                   

the Westwood Management.In the preceding table, “Separate Accounts” represent corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals. “Subadvisory” represents relationships where Westwood Management provides investment management services for funds offered by other financial institutions. “WHG Funds” represent the family of institutional mutual funds for which Westwood Management serves as advisor. “Westwood Funds” represent the family of mutual funds for which Westwood Management serves as subadvisor. “Managed Accounts” represent relationships with brokerage firms and other registered investment advisors who offer Westwood Management’s products to their customers.FundsTM.

Westwood Trust. In the preceding table, “Commingled Funds” represent funds that have been established to facilitate investment of fiduciary funds of multiple clients by combining assets into a single trust for taxable and tax-exempt entities. “Private Accounts” represent discretionary accounts where Westwood Trust acts as trustee or agent and has full investment discretion. “Agency/Custody Accounts” represent non-discretionary accounts in which Westwood Trust provides agent or custodial services, but does not act in an advisory capacity. For certain assets in this category, Westwood Trust currently provides limited custody services for a minimal or zero fee, but views these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock currently being held in custody for clients, but will likely transfer to fee-generating managed assets during an inter-generational transfer of wealth at some future date.

Results of Operations

The following table and discussion of our results of operations is based upon data derived from our consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with these statements, which are included elsewhere in this Report.

 

  Years ended December 31,
(in thousands)
  % Change   Years ended December 31,
(in thousands)
   % Change 
  2009  2008 2007  2009 vs. 2008 2008 vs. 2007   2011   2010   2009   2011 vs. 2010 2010 vs. 2009 

Revenues

                 

Advisory fees

                 

Asset-based

  $31,794  $26,966   $21,719  18 24  $54,246    $42,153    $31,794     29  33

Performance-based

   —     8,725    3,021  (100 189     991     —       —       —      —    

Trust fees

   10,304   11,018    10,275  (6 7     13,453     12,051     10,304     12    17  

Other revenues

   455   (253  1,277  280   (120   219     1,109     455     (80  144  
                  

 

   

 

   

 

   

 

  

 

 

Total revenues

   42,553   46,456    36,292  (8 28     68,909     55,313     42,553     25    30  

Expenses

                 

Employee compensation and benefits

   23,730   23,209    18,411  2   26     35,081     29,001     23,730     21    22  

Sales and marketing

   576   803    581  (28 38     994     823     576     21    43  

WHG mutual funds

   600   384    161  56   139  

Westwood mutual funds

   790     662     600     19    10  

Information technology

   1,221   1,114    970  10   15     2,054     1,351     1,221     52    11  

Professional services

   1,531   1,749    1,630  (12 7     2,981     2,941     1,531     1    92  

General and administrative

   2,577   2,662    2,332  (3 14     3,900     2,814     2,577     39    9  
                  

 

   

 

   

 

   

 

  

 

 

Total expenses

   30,235   29,921    24,085  1   24     45,800     37,592     30,235     22    24  
                  

 

   

 

   

 

   

 

  

 

 

Income before income taxes

   12,318   16,535    12,207  (26 35     23,109     17,721     12,318     30    44  

Provision for income taxes

   4,423   5,992    4,263  (26 41     8,423     6,441     4,423     31    46  
                  

 

   

 

   

 

   

 

  

 

 

Net income

  $7,895  $10,543   $7,944  (25)%  33  $14,686    $11,280    $7,895     30  43
                  

 

   

 

   

 

   

 

  

 

 

Year Ended December 31, 20092011 Compared to Year Ended December 31, 20082010

Total Revenue.OurIn 2011 our total revenues decreasedincreased by 8%25% to $42.6$68.9 million compared with $55.3 million in 2009 compared with $46.5 million in 2008.2010. Asset-based advisory fees increased by 18%29% to $31.8$54.2 million in 20092011 from $27.0$42.2 million in 20082010 due to higher average assets under management primarily due to assets acquired in the McCarthy transaction in November 2010 as a result of market appreciation of assets andwell as net inflows from new clients. Performance-basedof assets. We earned a performance-based advisory fees decreased 100% from $8.7fee of $1.0 million in 20082011 compared to no performance-based fees in 2010. Trust fees increased by 12% to $13.5 million in 2011 from $12.1 million in 2010 due to no performance fees earned in 2009. We are eligible to earn a performance fee in 2010 dependent upon out-performance in 2010, subject to an under-performance carry-forward from 2009. Trust fees decreased by 6% to $10.3 million in 2009 from $11.0 million in 2008 due to lowerhigher average beginning-of-quarter assets under management in 2009. The vast majorityprimarily due to net inflows of our Trust fees is billed in advance based on assets at the end of the previous quarter and were negatively impacted by the sharp market decline in the fourth quarter of 2008 and the first quarter of 2009.assets. Other revenues, which generally consist of interest and investment income, increaseddecreased by 280%80% to $455,000$219,000 in 20092011 compared with $(253,000)$1.1 million in 2008. Other revenues increased2010 primarily due to a $1.6$1.0 million decrease in unrealized gains, partially offset by a $124,000 increase in net unrealizedrealized gains. Partially offsetting this increase were an increase of $456,000 in net realized losses and a $399,000 decrease in interest and dividend income.

Employee Compensation and Benefits. Employee compensation and benefits, which generally consist of salaries, incentive compensation, equity-based compensation expense and benefits, increased by 2%21% to $23.7$35.1 million compared with $23.2$29.0 million in 2008.2010. This increase was primarily due to an increaseincreases of $931,000$3.1 million in incentive compensation due to increased pre-tax income, $1.6 million in salary expense primarily due to a full year of salary expense for our Omaha office in 2011 as well as additional hires in the Dallas office and $700,000 in restricted stock expense due to additional restricted stock grantsa higher number of shares granted in February 2009 as well as the2011 and at a higher market price at the time the shares were granted compared to prior grants, and an increase of $526,000 in salary expense due to salary increases for certain employees and increased headcount. These increases were partially offset by decreases of $845,000 in incentive compensation expense and $203,000 in profit sharing contributions both due to lower pretax income.than previous grants. We had 6480 full-time employees as of December 31, 20092011 compared to 6377 at December 31, 2008.2010.

Sales and Marketing. Sales and marketing costs consist of expenses associated with our marketing efforts, including travel and entertainment, direct marketing, and advertising costs. Sales and marketing costs decreasedincreased by 28%21% to $576,000$994,000 in 20092011 compared with $803,000$823,000 in 2008.2010. The decreaseincrease is primarily the result of decreases in traveldue to referral fees on acquired assets and entertainment costs of $135,000 and inincreased direct marketing expense of $69,000.expenses.

WHGWestwood Mutual Funds. WHGWestwood Mutual Funds expenses generally consist of costs associated with our marketing, distribution, administration and administrationacquisition efforts related to the WHG Funds. WHG mutual fundsWestwood FundsTM. Westwood Mutual Funds expenses increased 56%19% to $600,000$790,000 in 20092011 compared with $384,000$662,000 in 2008. This increase is2010 primarily due to an increase of $358,000 in shareholder servicing fees due to higher fund assets partially offset by decreases in adjusting deferred acquisition liabilities to fair value from a $164,000 increase2009 fund acquisition and in legalprofessional fees and a $40,000 increase in direct marketing expense. Legal fees were related to the reorganization of the PhiladelphiaMcCarthy Multi-Cap Stock Fund into the WHG LargeCap ValueWestwood Dividend Growth Fund. On November 16, 2009, we acquired the business and substantially all of the related assets of Baxter Financial Corporation related to its management of the Philadelphia Fund. In connection with this acquisition, the Philadelphia Fund was reorganized into the WHG LargeCap Value Fund. Related to this acquisition, we recorded total assets of $2.7 million and deferred liabilities of $1.7 million. We paid consideration on the closing date and are obligated to pay deferred payments twelve and twenty-four months from the transaction closing date.

Information Technology. Information technology expenses are generally costs associated with proprietary investment research tools, computing hardware, software licenses, maintenance and support, telecommunications and other related costs. Information technology expense increased by 10%52% to $1.2$2.1 million in 20092011 compared with $1.1$1.4 million in 2008. The increase is2010 primarily due to increasesan increase of $48,000 in IT environment support costs, $43,000$478,000 in software maintenance and licenses primarily for upgraded client portfolio accounting and $43,000performance reporting systems and an increase of $146,000 in data fees.research tools.

Professional Services. Professional services expenses generally consist of audit, external subadvisor expense, legal and other professional fees. Professional services expense decreasedexpenses increased by 12%1% to $1.5$3.0 million in 20092011 compared with $1.7$2.9 million in 2008.2010. The decreaseincrease is primarily due to a $354,000 decrease$176,000 increase in audit fees related to additional audits required for investment vehicles that hold client assets and a $176,000 increase in advisory fees paid to external subadvisors due to growth in subadvised common trust funds sponsored by Westwood Trust being temporarily invested in passive index funds. IncreasesTrust. Partially offsetting these increases were a decrease of $73,000$187,000 in legal expensefees primarily related to the McCarthy acquisition completed in 2010 and $56,000other legal fees and a decrease of $159,000 in other professional fees partially offsetrelated to the decrease.McCarthy acquisition and other growth initiatives undertaken in 2010.

General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, insurance, amortization of intangible assets, office supplies, custody expense, investor relations, charitable contributions and other miscellaneous expenses. General and administrative expenses decreasedincreased by 3%39% to $2.6$3.9 million in 20092011 compared with $2.7$2.8 million in 2008. The decrease is2010 primarily due to decreasesincreases of $82,000$343,000 in miscellaneous expenses, $43,000amortization of intangible assets acquired in occupancy2010 and $276,000 in rent expense $40,000related to a full year of lease expense for our Omaha office and a new lease for our Dallas corporate office and $136,000 in directors fees related to a new director fee structure. Partially offsetting these increases were decreases in custody expense and $30,000 in training and seminars expense. Partially offset these decreases, we incurred an increase of $121,000 in insurance expense as we increased professional liability coverage amounts due to the requirements of certain large new clients.depreciation expenses.

Provision for Income Taxes. Provision for income taxes decreasedincreased by 26%31% to $4.4$8.4 million in 20092011 compared with $6.0$6.4 million in 20082010 primarily due to lowerhigher income before taxes. The effective tax rate was 35.9% in 2009 compared to 36.2% in 2008.

Year Ended December 31, 20082010 Compared to Year Ended December 31, 20072009

Total Revenue.OurIn 2010 our total revenues increased by 28%30% to $46.5$55.3 million compared with $42.6 million in 2008 compared with $36.3 million in 2007.2009. Asset-based advisory fees increased by 24%33% to $27.0$42.2 million in 20082010 from $21.7$31.8 million in 20072009 due to higher average assets under management primarily due to net inflows from new and existing clients. These increases were partially offset by the withdrawalmarket appreciation of assets by certain clients. Performance-based advisory fees increased 189% to $8.7 million in 2008 from $3.0 million in 2007 primarily due to an out-performance fee of $5.2 million carried over from 2007, which was subject to potential under-performance reductions in 2008, which did not occur. Performance fees for 2008 out-performance were fully recognized in 2008 and there is no carryover into 2009. We are eligible to earn a performance fee in 2009 dependent on out-performance in 2009.assets. 2010 Trust fees increased by 7%17% to $11.0$12.1 million in 2008 from $10.3 million in 2007 primarily2009 due to higher average fee realizations.assets under management primarily due to market appreciation of assets. Other revenues, which generally consist of interest and investment income, decreasedincreased by 120%144% to $(253,000)$1.1 million in 20082010 compared with $1.3 million$455,000 in 2007. Other revenues decreased2009 primarily due to an $872,000a $596,000 increase in unrealized losses, a $405,000 decrease in net realized gains and a $390,000 decrease$106,000 increase in interest income.net unrealized gains. Partially offsetting these decreasesincreases was an increasea decrease of $143,000$67,000 in dividendinterest income.

Employee Compensation and Benefits. Employee compensation and benefits increased by 26%22% to $23.2$29.0 million compared with $18.4$23.7 million in 2007.2009. This increase resultedwas primarily due to an increaseincreases of $1.6$2.6 million in incentive compensation expense due to higher pretaxincreased pre-tax income, an increase of approximately $1.4 million$926,000 in performance-based restricted stock expense duefrom an award granted in April 2010 that included additional shares granted at a higher market price compared to additional restricted stockprior grants, $778,000 in February 2008 and July 2007, an increase of $1.2 million inadditional salary expense due to increased headcount and salary increases for certain employees and an increase of $251,000increased headcount, $677,000 in profit sharing contributions.restricted stock expense from awards granted in February 2010 at a higher market price than previous grants We had 6377 full-time employees as of December 31, 20082010 compared to 5264 at December 31, 2007.2009.

Sales and Marketing. Sales and marketing costs increased by 38%43% to $803,000$823,000 in 20082010 compared with $581,000$576,000 in 2007.2009. The increase iswas primarily the result of increases inincreased travel related to European marketing tours with subadvisory partner Pictet & Cie and entertainment costs of $185,000 and inincreased direct marketing expense of $31,000.expenses.

WHGWestwood Mutual Funds. WHG mutual fundsWestwood Mutual Funds expenses increased 139%10% to $384,000$662,000 in 20082010 compared with $161,000$600,000 in 2007.2009. This increase iswas primarily due to an $189,000 increase of $133,000 in expense related to recording to fair value the deferred acquisition liability from a fund acquisition we made in 2009 and an increase of $86,000 in shareholder servicing expense and a $106,000 increase in legal fees. Decreased fund reimbursement expensefees due to lower reimbursementshigher fund assets. Partially offsetting these increases was a net decrease in professional and legal fees due to a higher levelthe acquisition of assetsthe Philadelphia Fund and its reorganization into the Westwood LargeCap Value Fund in 2009. In 2010 we incurred costs related to the funds compared to last year partially offset these increases.reorganization of the McCarthy Multi-Cap Stock Fund, which was acquired in November 2010, into the Westwood Dividend Growth Fund.

Information Technology. Information technology expense increased by 15%11% to $1,114,000$1.4 million in 20082010 compared with $970,000$1.2 million in 2007.2009. The increase is primarily due to increases of $43,000 in IT environment support costs, $32,000$94,000 in software maintenance and licenses $30,000 in quotations and $24,000 in$37,000 for research tools.

Professional Services. Professional services expense increased by 7%92% to $1.7$2.9 million in 20082010 compared with $1.6$1.5 million in 2007. The increase is2009 primarily due to an increase of $759,000 in legal and other professional fees related to the McCarthy acquisition and other growth initiatives undertaken in 2010 and a $55,000$600,000 increase in advisory fees paid to external subadvisors due to increased average assets under management in growth and high yieldfor common trust funds sponsored by Westwood Trust a $33,000 increasethat were temporarily invested in other professional fees related to collective fund start-up costs and an increasepassive index funds in public relations expense and a $21,000 increase in legal expense.2009.

General and Administrative. General and administrative expenses increased by 14%9% to $2.7$2.8 million in 20082010 compared with $2.3$2.6 million in 2007. The increase is2009 primarily due to increasesan increase of $147,000$142,000 in custody expense due to the additionamortization of a second international subadvisor at Westwood Trust, $39,000intangible assets acquired in occupancy expense, $36,000acquisitions made in miscellaneous expenses2009 and $36,000 in office supplies expense.2010.

Provision for Income Taxes. Provision for income taxes increased by 41%46% to $6.0$6.4 million in 20082010 compared with $4.3$4.4 million in 20072009 primarily due to higher income before taxes. The effective tax rate was 36.2% in 2008 compared to 34.9% in 2007. The increase in the effective tax rate from 35.9% in 2009 to 36.3% in 2010 was primarily due to more taxable income in the 35% tax bracket forhigher federal income taxes than in the previous year.tax bracket.

Supplemental Financial Information

As supplemental information, we are providing non-generally accepted accounting principles (“non-GAAP”) performance measures that we refer to as cash earningsEconomic Earnings and cash expenses.Economic Expenses. We provide these measures in addition to, but not as a substitute for, net income and total expenses, which are reported on a U.S. generally accepted accounting principles (“GAAP”) basis. Both our Management and the Board of Directors review cash earningsEconomic Earnings and cash expensesEconomic Expenses to evaluate our ongoing performance, allocate resources and review dividend policy. We believe that these non-GAAP performance measures, while not substitutes for GAAP net income and total expenses, are useful for both management and investors to evaluate our underlying operating and financial performance and our available resources. We do not advocate that investors consider these non-GAAP measures without considering financial information prepared in accordance with GAAP.

In calculating cash earnings,Economic Earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock and stock options, amortization of intangible assets and the deferred taxes related to the tax-basis amortization of goodwill. We define cash expensesEconomic Expenses as total expenses less non-cash equity-based compensation expense and amortization of intangible assets. Although depreciation on fixed assetsproperty and equipment is a non-cash expense, we do not add it back when calculating cash earningsEconomic Earnings or deduct it when calculating cash expensesEconomic Expenses because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.

For the year ended December 31, 2009,2011, our cash earnings decreasedEconomic Earnings increased by 10%22% to $15.6$25.3 million compared with $17.3$20.8 million for the year ended December 31, 2008,2010, primarily due to an 8% decreasea 25% increase in total revenues.

The following table provides a reconciliation of net income to cash earningsEconomic Earnings and total expenses to cash expensesEconomic Expenses for the years presented:

 

(in thousands)  2009  2008  2007  % Change 
        % Change 
(in thousands) 2009  2008  2007  2009 vs. 2008 2008 vs. 2007   2011 2010 2009 2011 vs. 2010 2010 vs. 2009 
   (25)%  33  $14,686   $11,280   $7,895    30  43

Add: Restricted stock expense

   7,666    6,735    5,316   14   27     9,969    9,269    7,666    8    21  

Add: Intangible amortization

   13    —      —     —     —       498    155    13    222    1,092  

Add: Deferred taxes on goodwill

   5    —      —     —     —    

Add: Tax benefit from goodwill amortization

   189    59    5    222    1,080  
                  

 

  

 

  

 

  

 

  

 

 

Cash earnings

  $15,579   $17,278   $13,260   (10 30  

Economic Earnings

  $25,342   $20,763   $15,579    22    33  
                  

 

  

 

  

 

  

 

  

 

 

Total expenses

  $30,235   $29,921   $24,085   1   24    $45,800   $37,592   $30,235    22    24  

Less: Restricted stock expense

   (7,666  (6,735  (5,316 14   27     (9,969  (9,269  (7,666  8    21  

Less: Intangible amortization

   (13  —      —     —     —       (498  (155  (13  222    1,092  
                  

 

  

 

  

 

  

 

  

 

 

Cash expenses

  $22,556   $23,186   $18,769   (3)%  24

Economic Expenses

  $35,333   $28,168   $22,556    25  25
                  

 

  

 

  

 

  

 

  

 

 

Liquidity and Capital Resources

   As of December 31 

(in thousands)

  2011  2010  2009 

Balance Sheet Data:

    

Assets:

    

Cash and cash equivalents

  $5,264   $1,744   $2,879  

Accounts Receivable

   7,707    7,348    6,406  
  

 

 

  

 

 

  

 

 

 

Total liquid assets

   12,971    9,092    9,285  

Investments

  $54,868   $43,300   $42,246  
   For the years ended December 31 
   2011  2010  2009 

Cash Flow Data:

    

Operating cash flows

  $18,548   $18,277   $10,606  

Investing cash flows

   (2,244  (5,662  (1,724

Financing cash flows

   (12,784  (13,750  (9,501

Historically we have funded our operations and cash requirements with cash generated from operating activities. As of December 31, 2009,2011, we had no long-term debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the effect of non-cash items and changes in working capital. Changes in working capital, especially accounts receivable and accounts payable, are generally the result of timing differences between collection of fees billed and payment of operating expenses.

During 2009,2011, cash flow provided by operating activities, principally our investment advisory business, was $10.6$18.5 million compared to cash used in operations of $6.3 million during 2008 and cash provided by operations of $11.7$18.3 million during 2007.2010 and $10.6 million during 2009. The increase of $16.9 million$271,000 was primarily due primarily to the reducedincreased net income and an increase in accounts and compensation payables, partially offset by increased net purchases of U.S. Treasury Bills and a decrease in accounts receivable.Bills. The decreaseincrease of $18.0$8.4 million from 20072009 to 20082010 was primarily due primarily to theincreased net purchaseincome, reduced net purchases of U.S. Treasury Bills and an increase in accounts receivable,and compensation payables, partially offset by an increasehigher accounts receivable.

Cash flow used in investing activities during 2011 of $2.2 million primarily reflected the purchase of property and equipment and cash earnings. At December 31, 2009 and 2008, we had working capital of $43.0paid to acquire businesses. Cash flow used in investing activities during 2010 was $5.7 million and $35.2 million, respectively.

was primarily related to cash paid to acquire businesses. Cash flow used in investing activities during 2009 wasof $1.7 million and was primarily related to net sales of available-for-sale investments and cash paid to acquire a business. Cash flow used in investing activities during 2008 of $13.1 million was primarily due to the net sales of investments, partially offset by the purchase of fixed assets. Cash flow used in investing activities during 2007 of $3.1 million was primarily due to net purchases of available-for-sale investments.

Cash used in financing activities of $12.8 million, $13.8 million and $9.5 million $7.9 millionduring 2011, 2010 and $6.2 million during 2009, 2008 and 2007, respectively, was primarily duerelated to the payment of cash dividends and the purchase of treasury stock, partially offset in part by excess tax benefits related to vested restricted shares and proceeds from the issuance of stock due toupon option exercises.

We hadheld cash and investments of $45.1$60.1 million and $31.7$45.0 million at December 31, 20092011 and December 31, 2008,2010, respectively. At December 31, 2011 and 2010, working capital aggregated $54.9 million and $44.1 million respectively. As required by the Texas Finance Code, Westwood Trust maintains current assets in an amount equal to the required minimum restricted capital of $1.0 million, which is included in Investments in the accompanying consolidated balance sheets. We had no liabilities for borrowed money at December 31, 20092011 or December 31, 2008,2010, and our accounts payable were paid in the ordinary course of business for each of the periods then ended.

Our future liquidity and capital requirements will depend upon numerous factors, including our results of operations, the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors described in this Form 10-K. We believe that current cash and short-term investment balances and cash generated from operations will be sufficient to meet the operating and capital requirements of our ordinary business operations through at least the next twelve months. However, there can be no assurance that we will not require additional financing within this time frame. TheA failure to raise needed capital on attractive terms, if at all, could have a material adverse effect on our business, financial condition and results of operations.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 20092011 (in thousands).

 

  Payments due in:  Payments due in: 

Contractual Obligations

  Total  Less than
1 year
  1-3
years
  3-5
years
  Total   Less than
1 year
   1-3
years
   4-5
years
   After 5
years
 

Operating lease obligations

  $973  $680  $293  $—    $9,189    $1,023    $1,977    $1,752    $4,437  

Deferred acquisition liabilities

   1,696   900   796   —  
            

Total

  $2,669  $1,580  $1,089  $—  

Accounting Developments

In December 2007,June 2011, the FASB amended ASC No. 805, “Business Combinations”Financial Accounting Standards Board (“ASC 805”FASB”). ASC 805 establishes principles issued new guidance regarding the presentation of comprehensive income. Under this new guidance, an entity must present the components of net income and requirements for how an acquirer: (1) recognizes and measurescomprehensive income in its financial statementsa single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the identifiable assets acquired, the liabilities assumed, and any noncontrolling interestoption to present other comprehensive income in the acquiree; (2) recognizesstatement of shareholders’ equity. The new guidance becomes effective for fiscal years, and measures the goodwill acquiredinterim periods within those years, beginning after December 15, 2011. We have adopted this guidance early in the business combination or gain from a bargain purchase; and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first reporting period for fiscal years beginning on or after December 15, 2008. We adopted ASC 805 during 2009 and it did not impact our financial statements.

In December 2009, the FASB issued SFAS No. 167 Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 establishes general standards of accounting for and disclosures for interestspresented in variable interest entities (“VIE”). This standard changes the manner in which an entity determines whether it is the primary beneficiary of a VIE, whether that VIE should be consolidated and requires additional disclosures. As proposed, SFAS 167 would be effective for our fiscal year 2010. We are currently evaluating the potential impact of SFAS 167 on our financial statements.

In May 2009, the FASB issued ASC No. 855, “Subsequent Events” (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We have included the required disclosure in the notes to our financial statements.

In April 2009, the FASB issued further guidance under ASC No. 825, “Financial Instruments” (“ASC 825”). The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements to improve the transparency and quality of financial reporting and requires those disclosures in summarized financial information at interim reporting periods. This guidance was effective for the second quarter of 2009 and did not have a material impact on our financial statements and disclosures.

In April 2009, the FASB issued further guidance under ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The additional guidance addresses estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased along with providing guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820 was effective for the second quarter of 2009 and did not have a material impact on our financial statements.

In June 2009, the FASB issued ASC No. 105, “Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 established Accounting Standards Codification as the source of authoritative GAAP recognized by the FASB and requires references to the codification in place of references to previously issued and organized accounting pronouncements. We adopted ASC 105 during 2009 andthis Form 10-K however it did not have a material impacteffect on our consolidated financial statementsstatements.

In September 2011, the FASB issued new guidance regarding testing of goodwill for impairment, which allows entities to perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value in order to determine if quantitative testing is required. This optional qualitative assessment is intended to reduce the cost and disclosures.complexity of annual goodwill impairment tests. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is allowed provided the entity has not yet performed its 2011 impairment test or issued its financial statements. This guidance will not have a material effect on our consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we often must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical. Historically, actual results have not differed materially from estimates.

Goodwill

During the third quarters of 2009, 20082011, 2010 and 2007,2009, we completed our annual impairment assessment as required by SFAS 142ASC 350 “Goodwill and Other Intangible Assets”. No impairment losses were required. We perform our annual impairment assessment as of July 1 and would reassess if circumstances indicated a potential impairment between our annual assessment dates. We assess the fair value of our business units with goodwill using a market multiple approach. NoWe reevaluated our assessment at the end of 2011 and determined that no events occurred in the last half of 20092011 that indicatedwould indicate that these assets should be retested for impairment.

Intangible Assets

Our intangible assets represent the acquisition date fair value of the mutual fundintangible assets acquired and are reflected net of amortization. The values of these assets are comprised mostly of customer lists but also include valuations of trade names and non-compete agreements. In valuing these assets, we made significant estimates regarding the useful life, growth rates and potential attrition of the assets acquired. We periodically review our intangible assets for events or circumstances that would indicate impairment. If the carrying value of these assets exceeded the fair value,impairment and we would record an impairment to remove the excess.excess if their carrying value exceeded fair value.

Restricted Stock

We have granted restricted stock to employees and non-employee directors and a non-employee consultant.directors. 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 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 estimate of shares that will not vest due to forfeitures is based on our historical forfeiture rate and our expectation of potential forfeitures, which is dependent upon our judgment. If actual experience differs significantly from these estimates, stock based compensation expense and our results of operations could be materially affected. If forfeitures of restricted stock do not occur or are significantly less than our estimation, we would record as much as $45,000$209,000 of additional compensation cost in addition to what we currently expect to expensecosts over the next 2.2two years.

Accounting for Income Taxes

Our provision for income taxes reflects the statutory tax obligations of the jurisdictions in which we operate. Significant judgment and complex calculations are used inwhen determining our tax liability and in evaluating our tax positions. We adjust our income tax provision in the period in which we determine that actual outcomes will likely be different from our estimates. Changes in tax laws may result in a changechanges to our tax position and effective tax rate.rates. We classify any interest or penalties related to income taxes as a component of income tax expense.

Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities as measured at enacted income tax rates. Our deferred taxes relate principally to stock-based compensation expense, which is deductible for tax purposes at the time restricted stock vests and stock options are exercised.

Allocation of Purchase Price paid for Baxter Financial Corporation

On November 16, 2009, we acquired the business and substantially all of the related assets of Baxter Financial Corporation related to its management of the Philadelphia Fund. In connection with this acquisition, the Philadelphia Fund was reorganized into the WHG LargeCap Value Fund. Related to this acquisition, we recorded total assets of $2.7 million and deferred liabilities of $1.7 million. We paid consideration on the closing date and are obligated to pay deferred payments twelve and twenty-four months from the transaction closing date. With the assistance of a third party valuation expert, we made assumptions to determine the values of the assets we acquired and the amount of the deferred liabilities we expect to pay. The settlement amounts of these liabilities could be materially different from what we recorded on the acquisition date, based on the value of assets in the acquired customer accounts as of the deferred payment dates. Any such difference would be recorded in our earnings in the periods leading up to the payments.

Significant Accounting Policies

Our significant accounting policies are summarized below.

Revenue Recognition

Investment advisory and trust fees are recognized in the period the services are provided. These fees are determined in accordance with contracts between our subsidiaries and their clients and are generally based on a percentage of assets under management. Performance-based fees may pay us an additional feeare due if we outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement period when the fees have been fully earned.

Accounting for Investments

We have designated our investments, other than money market holdings and shares of Teton Advisors, Inc. (“Teton shares”), as “trading” securities, which are recorded at market value with the related unrealized gains and losses reflected in “Other revenues” in theour consolidated statements of income. Our “trading” securities, primarily U.S. Government and Government agency obligations, as well asmoney market holdings and mutual fund and common trust fund shares, are valued based upon quoted market prices and, with respect to funds, thereported net asset valuevalues of the shares held as reported by the fund.held. We have designated our investments in money market accounts and the Teton shares as “available for sale.” The market values of our money market holdings generally do not fluctuate. The Teton shares are carried at quoted market value with a 25% discount for lack of marketability. Unrealized gains and losses on the Teton shares are recorded through other comprehensive income. Dividends and interest on all of our investments are accrued as earned.

 

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

We invest our corporate capital in various financial instruments such as United States treasury bills, equity mutual funds and United States government agency obligations, which entail certain inherent market risks. We do not currently participate in any hedging activities, nor do we currently utilize any derivative financial instruments. The following information describes the key aspects of certain financial instruments that haveinvolve market risks.

Interest Rates and Securities Markets

Our cash equivalents and other investment instruments are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. These instruments are not entered into for trading purposes. We do not expect our interest income to be significantly affected by a sudden changechanges in market interest rates.

The value of our assets under management is affected by changes in interest rates and fluctuations in securities markets. Since we derive a substantial portion of our revenues from investment advisory and trust fees based on the value of assets under management, our revenues may be adversely affected by changing interest rates or a decline in the prices of securities generally.

 

Item 8.Financial Statements and Supplementary Data.

The independent registered public accounting firm’s reports and financial statements listed in the accompanying index are included in Item 15 of this Report. See Index“Index to Financial StatementsStatements” on page F-1.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A.Controls and Procedures.

Our disclosure controls and procedures are designed to ensure that information we are required to be disclosed by usdisclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. An evaluation was performed under the supervision and with the participation of our management, including

our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of December 31, 2009,2011, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Please refer to Westwood Holdings Group, Inc.’s Management Assessment of Internal Control over Financial Reporting on page F-4 of this Report.

Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting. This report can be found on page F-3.

For the fiscal year ended December 31, 2009,2011, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

 

Item 10.Directors and Executive Officers of the Company.

The information required by this item is or will be set forth in the definitive proxy statement relating to the 20102012 Annual Meeting of Stockholders of Westwood Holdings Group, Inc., which is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Proxy Statement”). The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

Item 11.Executive Compensation.

The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

 

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

Item 14.Principal Accountant Fees and Services.

The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

PART IV

 

Item 15.Exhibits and Financial Statement Schedules.

Financial Statement Schedules

The financial statements included in this Report are listed in the Index to Financial Statements on page F-1 of this Report. Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instructions or are inapplicable.

Exhibits

The exhibits required to be furnished pursuant to Item 15 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of Westwood Holdings Group, Inc., a Delaware corporation, and the undersigned directors and officers of Westwood Holdings Group, Inc. hereby constitutes and appoints Brian O. Casey and William R. Hardcastle, Jr., or any one of them, its, his or her true and lawful attorney-in-fact and agent, for it, him or her and in its, his or her name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WESTWOOD HOLDINGS GROUP, INC.
By: 

/S/s/    BRIAN O. CASEY        

 Brian O. Casey
 President & Chief Executive Officer and President

Dated: February 25, 201028, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures

    

Title

/S/s/    BRIAN O. CASEY        

  President & Chief Executive Officer and President (Principal Executive Officer)
Brian O. Casey Executive Officer)

/S/s/    WILLIAM R. HARDCASTLE, JR.        

  Chief Financial Officer (Principal Financial Officer)
William R. Hardcastle, Jr. 

/S/s/    CRAIG WHITTEN        

  Controller (Principal Accounting Officer)
Craig Whitten  

/S/s/    SUSAN M. BYRNE        

  Chairman of the Board of Directors and Chief Investment
Susan M. Byrne  Officer

/S/s/    TOM C. DAVIS        

  Director
Tom C. Davis  

/S/s/    RICHARD M. FRANK        

  Director
Richard M. Frank  

/S/s/    ROBERT D. MCTEER        

  Director
Robert D. McTeer  

/S/    FREDERICK R. MEYER        

Director
Frederick R. Meyer

/S/    JON L. MOSLE, JR.        

Director
Jon L. Mosle, Jr.

/S/s/    GEOFFREY R. NORMAN        

  Director
Geoffrey R. Norman  

/s/    MSARTIN J. WEILAND        

Director
Martin J. Weiland

/s/    RAYMOND E. WOOLDRIDGE        

  Director
Raymond E. Wooldridge  

INDEX TO FINANCIAL STATEMENTS

 

   Page

Audited Consolidated Financial Statements of Westwood Holdings Group, Inc.

  

Report of Independent Registered Public Accounting Firm, Grant Thornton LLP on the financial statements of Westwood Holdings Group, Inc. as of December 31, 2011 and for2010 and each of the three years in the period ended December 31, 2009, 2008 and 20072011

  F-2

Report of Independent Registered Public Accounting Firm, Grant Thornton LLP – audit of the effectiveness of internal control over financial reporting

  F-3

Report of Westwood Holdings Group, Inc.’s management assessment of internal control over financial reporting

  F-4

Consolidated Balance Sheets as of December 31, 20092011 and 20082010

  F-5

Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 20082011, 2010 and 20072009

  F-6

Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2009, 20082011, 2010 and 20072009

  F-7

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 20082011, 2010 and 20072009

  F-8

Notes to Consolidated Financial Statements

  F-9

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Westwood Holdings Group, Inc.

We have audited the accompanying consolidated balance sheets of Westwood Holdings Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20092011 and December 31, 2008,2010, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009.2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westwood Holdings Group, Inc. and subsidiaries as of December 31, 20092011 and 2008,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2011, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,2011, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 25, 201023, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Dallas, Texas

February 25, 201028, 2012

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Westwood Holdings Group, Inc.

We have audited Westwood Holdings Group, Inc. (a Delaware corporation) and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2009,2011, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Westwood Holdings Group, Inc.’s Management Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2011, based on criteria established inInternal Control-Integrated Framework issued by COSO.

We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009,2011, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for the year then ended, and our report dated February 25, 201023, 2012 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Dallas, Texas

February 25, 201028, 2012

REPORT OF WESTWOOD HOLDINGS GROUP, INC.’S MANAGEMENT ASSESSMENT OF INTERNAL

CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders of

Westwood Holdings Group, Inc.:

The management of Westwood Holdings Group, Inc. (“Westwood”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Westwood’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, havecontain inherent limitations. Therefore, even those systems determined to be effective can only provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Westwood assessed the effectiveness of Westwood’s internal control over financial reporting as of December 31, 2009.2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2009,2011, Westwood’s internal control over financial reporting is effective based on those criteria.

Westwood’s independent registered public accounting firm has issued an audit report on our assessment of Westwood’s internal control over financial reporting. This report appears on page F-3.

 

By: 

/S/s/    BRIAN O. CASEY        

 Brian O. Casey, President & Chief Executive Officer
 

/S/s/    WILLIAM R. HARDCASTLE, JR.        

 William R. Hardcastle, Jr., Chief Financial Officer

February 25, 201028, 2012

Dallas, Texas

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 20092011 and 20082010

(in thousands, except par values and share amounts)

 

  2009 2008   2011 2010 
ASSETS      

Current Assets:

      

Cash and cash equivalents

  $2,879   $3,498    $5,264   $1,744  

Accounts receivable

   6,406    12,638     7,707    7,348  

Investments, at market value

   42,246    28,152  

Investments, at fair value

   54,868    43,300  

Deferred income taxes

   2,187    1,781     3,142    2,757  

Other current assets

   625    700     1,501    733  
         

 

  

 

 

Total current assets

   54,343    46,769     72,482    55,882  

Goodwill

   3,915    2,302     11,255    11,281  

Deferred income taxes

   —      934  

Intangible assets, net

   1,050    —       4,621    5,119  

Property and equipment, net of accumulated depreciation of $1,315 and $1,234

   578    842  

Property and equipment, net of accumulated depreciation of $1,647 and $1,542

   2,239    346  
         

 

  

 

 

Total assets

  $59,886   $50,847    $90,597   $72,628  
         

 

  

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current Liabilities:

      

Accounts payable and accrued liabilities

  $995   $1,105    $1,674   $1,290  

Dividends payable

   2,359    2,087     3,074    —    

Compensation and benefits payable

   6,273    7,052     12,677    9,369  

Income taxes payable

   823    1,359     85    173  

Deferred acquisition liability

   900    —       —      899  

Other current liabilities

   11    9     13    13  
         

 

  

 

 

Total current liabilities

   11,361    11,612     17,523    11,744  

Deferred acquisition liability

   796    —    

Deferred income taxes

   238    —       969    117  

Deferred rent

   273    441     1,348    90  
         

 

  

 

 

Total long-term liabilities

   1,307    441     2,317    207  
         

 

  

 

 

Total liabilities

   12,668    12,053     19,840    11,951  
         

 

  

 

 

Stockholders’ Equity:

      

Common stock, $0.01 par value, authorized 25,000,000 shares, issued 7,308,812 and outstanding 7,151,472 shares at December 31, 2009; issued 7,052,727 and outstanding 6,958,238 shares at December 31, 2008

   73    71  

Common stock, $0.01 par value, authorized 25,000,000 shares, issued 8,105,018 and outstanding 7,707,189 shares at December 31, 2011; issued 7,874,873 and outstanding 7,645,678 shares at December 31, 2010

   81    79  

Additional paid-in capital

   47,741    37,458     76,969    65,639  

Treasury stock, at cost – 157,340 shares at December 31, 2009; 94,489 shares at December 31, 2008

   (6,026  (3,500

Treasury stock, at cost – 397,829 shares at December 31, 2011; 229,195 shares at December 31, 2010

   (14,706  (8,749

Accumulated other comprehensive income

   1,559    —       1,940    926  

Retained earnings

   3,871    4,765     6,473    2,782  
         

 

  

 

 

Total stockholders’ equity

   47,218    38,794     70,757    60,677  
         

 

  

 

 

Total liabilities and stockholders’ equity

  $59,886   $50,847    $90,597   $72,628  
         

 

  

 

 

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2009, 20082011, 2010 and 20072009

(in thousands, except per share data)

 

  2009  2008 2007  2011   2010 2009 

REVENUES:

          

Advisory fees

          

Asset-based

  $31,794  $26,966   $21,719  $54,246    $42,153   $31,794  

Performance-based

   —     8,725    3,021   991     —      —    

Trust fees

   10,304   11,018    10,275   13,453     12,051    10,304  

Other revenues, net

   455   (253  1,277   219     1,109    455  
           

 

   

 

  

 

 

Total revenues

   42,553   46,456    36,292   68,909     55,313    42,553  
           

 

   

 

  

 

 

EXPENSES:

          

Employee compensation and benefits

   23,730   23,209    18,411   35,081     29,001    23,730  

Sales and marketing

   576   803    581   994     823    576  

WHG mutual funds

   600   384    161

Westwood mutual funds

   790     662    600  

Information technology

   1,221   1,114    970   2,054     1,351    1,221  

Professional services

   1,531   1,749    1,630   2,981     2,941    1,531  

General and administrative

   2,577   2,662    2,332   3,900     2,814    2,577  
           

 

   

 

  

 

 

Total expenses

   30,235   29,921    24,085   45,800     37,592    30,235  
           

 

   

 

  

 

 

Income before income taxes

   12,318   16,535    12,207   23,109     17,721    12,318  

Provision for income taxes

   4,423   5,992    4,263   8,423     6,441    4,423  
           

 

   

 

  

 

 

Net income

  $7,895  $10,543   $7,944   14,686    $11,280   $7,895  
           

 

   

 

  

 

 

Other comprehensive income – unrealized gain (loss) on investment securities, net of income taxes of $560, $(341) and $800, respectively

   1,014     (633  1,559  
  

 

   

 

  

 

 

Total comprehensive income

  $15,700    $10,647   $9,454  
  

 

   

 

  

 

 

Earnings per share:

          

Basic

  $1.25  $1.73   $1.36  $2.11    $1.62   $1.10  

Diluted

  $1.18  $1.63   $1.28  $2.04    $1.58   $1.09  

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2009, 20082011, 2010 and 20072009

(in thousands, except share and per share data)

 

  Westwood Holdings
Group, Inc.

Common Stock, Par
  Additional
Paid-In
Capital
  Treasury
Stock
  Other
Comprehensive
Income
  Retained
Earnings
  Total   Westwood Holdings
Group, Inc.
Common Stock, Par
   Additional
Paid-In
Capital
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income
  Retained
Earnings
  Total 
Shares Amount        Shares Amount    

BALANCE, January 1, 2007

  6,638,525   $66  $20,289   $—     $—    $2,380   $22,735  

BALANCE, January 1, 2009

   6,958,238   $71    $37,458   $(3,500 $—     $4,765   $38,794  

Net income

          7,944    7,944           7,895    7,895  

Issuance of restricted stock

  154,571    2   (2      —    

Amortization of stock compensation

      5,316        5,316  

Tax benefit related to equity compensation

      1,558        1,558  

Dividends declared ($1.15 per share)

          (7,746  (7,746

Stock options exercised

  47,231    —     609        609  

Purchases of treasury stock

  (32,919     (1,070     (1,070
                      

BALANCE, December 31, 2007

  6,807,408   $68  $27,770   $(1,070 $—    $2,578   $29,346  

Net income

          10,543    10,543  

Issuance of restricted stock

  192,500    2   (2      —    

Amortization of stock compensation

      6,735        6,735  

Tax benefit related to equity compensation

      2,699        2,699  

Dividends declared ($1.20 per share)

          (8,356  (8,356

Stock options exercised

  19,900    1   256        257  

Purchases of treasury stock

  (61,570     (2,430     (2,430
                      

BALANCE, December 31, 2008

  6,958,238   $71  $37,458   $(3,500 $—    $4,765   $38,794  

Net income

          7,895    7,895  

Other comprehensive income – unrealized gain on investment securities

        1,559     1,559  

Issuance of restricted stock

  233,150    2   (2      —       233,150    2     (2     —    

Issuance of stock for business combination

  20,435    —     752        752     20,435    —       752       752  

Amortization of stock compensation

      7,666        7,666        7,666       7,666  

Other comprehensive income – unrealized gain on investment securities

        1,559    1,559  

Tax benefit related to equity compensation

      1,834        1,834        1,834       1,834  

Dividends declared ($1.23 per share)

          (8,789  (8,789         (8,789  (8,789

Stock options exercised

  2,500    —     33        33     2,500    —       33       33  

Purchases of treasury stock

  (62,851     (2,526     (2,526   (62,851     (2,526    (2,526
                        

 

  

 

   

 

  

 

  

 

  

 

  

 

 

BALANCE, December 31, 2009

  7,151,472   $73  $47,741   $(6,026 $1,559  $3,871   $47,218     7,151,472   $73    $47,741   $(6,026 $1,559   $3,871   $47,218  

Net income

         11,280    11,280  

Other comprehensive income – unrealized loss on investment securities

        (633   (633

Issuance of restricted stock

   368,100    4     (4     —    

Issuance of stock for business combination

   181,461    2     6,932       6,934  

Amortization of stock compensation

      9,269       9,269  

Tax benefit related to equity compensation

      1,488       1,488  

Dividends declared ($1.65 per share)

         (12,369  (12,369

Stock options exercised

   16,500    —       213       213  

Purchases of treasury stock

   (71,855     (2,723    (2,723
                        

 

  

 

   

 

  

 

  

 

  

 

  

 

 

BALANCE, December 31, 2010

   7,645,678   $79    $65,639   $(8,749 $926   $2,782   $60,677  

Net income

         14,686    14,686  

Other comprehensive income – unrealized gain on investment securities

        1,014     1,014  

Issuance of restricted stock

   207,995    2     (2    

Amortization of stock compensation

      9,969       9,969  

Tax benefit related to equity compensation

      1,077       1,077  

Dividends declared ($1.42 per share)

         (10,995  (10,995

Stock options exercised

   22,150      286       286  

Purchases of treasury stock

   (168,634     (5,957    (5,957
  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

BALANCE, December 31, 2011

   7,707,189   $81     76,969    (14,706  1,940    6,473    70,757  
  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2009, 20082011, 2010 and 20072009

(in thousands)

 

  2009 2008 2007   2011 2010 2009 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

  $7,895   $10,543   $7,944    $14,686   $11,280   $7,895  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Adjustments to reconcile net income to net cash provided by operating activities, net of business combinations:

    

Depreciation

   241    232    228     264    274    241  

Amortization of intangible assets

   13    —      —       498    155    13  

Fair market valuation of deferred acquisition liabilities

   23    —      —    

Fair value adjustment of deferred acquisition liabilities

   (31  156    23  

Unrealized losses (gains) on investments

   (588  974    102     291    (694  (588

Loss on disposal of property

   20    —      —    

Restricted stock amortization

   7,666    6,735    5,316     9,969    9,269    7,666  

Deferred income taxes

   (73  (978  (256   (93  (350  (73

Excess tax benefits from stock based compensation

   (1,518  (2,271  (1,286   (805  (1,026  (1,518

Net purchases of investments – trading securities

   (9,721  (20,256  (1,339   (10,285  (714  (9,721

Changes in operating assets and liabilities:

        

Accounts receivable

   6,232    (6,039  (3,488   (359  (572  6,232  

Other assets

   76    (47  (186

Other current assets

   (755  (18  76  

Accounts payable and accrued liabilities

   (101  81    246     381    (2,167  (101

Compensation and benefits payable

   (779  2,204    2,047     3,308    2,343    (779

Income taxes payable and prepaid taxes

   1,298    2,553    2,374     989    838    1,298  

Other liabilities

   (58  (41  (16   470    (497  (58
            

 

  

 

  

 

 

Net cash provided by (used in) operating activities

   10,606    (6,310  11,686  

Net cash provided by operating activities

   18,548    18,277    10,606  
            

 

  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchases of money market funds – available for sale

   (64,984  (34,849  (8,009   —      (39,877  (64,984

Sales of money market funds – available for sale

   63,597    48,123    5,035     —      39,257    63,597  

Cash paid for business combination

   (251  —      —    

Cash paid for business combination, net of cash acquired

   (816  (4,993  (251

Purchases of property and equipment

   (86  (153  (114   (1,431  (49  (86

Sale of property and equipment

   3    —      —    
            

 

  

 

  

 

 

Net cash provided by (used in) investing activities

   (1,724  13,121    (3,088

Net cash used in investing activities

   (2,244  (5,662  (1,724
            

 

  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Purchases of treasury stock

   (2,526  (2,430  (1,070   (5,957  (2,723  (2,526

Excess tax benefits from stock based compensation

   1,518    2,271    1,286     805    1,026    1,518  

Proceeds from exercise of stock options

   33    257    609     286    213    33  

Cash dividends

   (8,526  (7,971  (7,040   (7,918  (12,266  (8,526
            

 

  

 

  

 

 

Net cash used in financing activities

   (9,501  (7,873  (6,215   (12,784  (13,750  (9,501
            

 

  

 

  

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

   (619  (1,062  2,383  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   3,520    (1,135  (619

Cash and cash equivalents, beginning of year

   3,498    4,560    2,177     1,744    2,879    3,498  
            

 

  

 

  

 

 

Cash and cash equivalents, end of year

  $2,879   $3,498   $4,560    $5,264   $1,744   $2,879  
            

 

  

 

  

 

 

Supplemental cash flow information:

        

Cash paid during the year for income taxes

  $3,199   $4,418   $2,144    $7,502   $5,937   $3,199  

Issuance of restricted stock

   7,263    7,032    5,330  

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2009, 20082011, 2010 and 20072009

1. DESCRIPTION OF THE BUSINESS:

Westwood Holdings Group, Inc. (“Westwood”, “we” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood manages investment assets and provides services for its clients through two subsidiaries, Westwood Management Corp. (“Westwood Management”) and Westwood Trust (“Westwood Trust”). Westwood Management provides investment advisory services to corporate retirement plans, public retirement plans, endowments and foundations, mutual funds, individuals and also clients of Westwood Trust. Westwood Trust provides institutions and high net worth individuals with trust and custodial services and participation in common trust funds that it sponsors. 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.

Westwood Management is a registered investment adviser under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly our financial position as of December 31, 2011, and results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements are presented using the accrual basis of accounting and have been prepared in accordance with the instructions for the presentation of annual financial information as prescribed by the Securities and Exchange Commission (“SEC”). Operating results for the periods in these financial statements are not necessarily indicative of the results for any future period. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of Westwood and its wholly-owned subsidiaries, Westwood Management and Westwood Trust.subsidiaries. All significant intercompany balancesaccounts and transactions have been eliminated. We have examined our relationships for potential variable interest entities (“VIE”) and determined that the common trust funds we manage are VIEs in which we have variable interests, but for which consolidation is not required.eliminated upon consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between our subsidiaries and their clients and are generally based on a percentage of assets under management. A limited number of our clients have acontractual performance-based fee component in their contract,arrangements, which would pay us an additional fee if we outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement period. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized over the periods services are performed. Since billing periods for most of our advance paying clients’ billing periodsclients coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter. Consequently there is not a significant amount of deferred revenue contained in our financial statements. Deferred revenue is shown on the balance sheet under the heading of “Other current liabilities”. Other revenues generally consist of interest and investment income. These revenues are recognized as earned or as the services are performed.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Variable Interest Entities

A variable interest entity (“VIE”) is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the voting rights of the equity investors are not proportional to their obligations to absorb expected losses or receive expected residual returns of the entity.

We have examined whether the entities in which we have an interest are VIEs and whether we qualify as the primary beneficiary of the VIEs that we identify. We have included the disclosures related to VIEs in a note to these financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less.less, other than pooled investment vehicles that are considered investments.

Investments

MoneyPrior to the fourth quarter of 2010, money market securities are generallywere classified as available for sale securities. In the fourth quarter of 2010, we reevaluated our classification of investments and determined that money market securities more closely fit the trading classification and began to account for them as such. In that money market securities have no significantly fluctuating values.values, there was no impact on the balance sheet or income statement upon reclassification of these securities. Class A shares of Teton Advisors, Inc. (“Teton shares”) are classified as available for sale. The Teton shares are carried at quoted market value with a 25% discount for lack of marketability. Unrealized gains and losses on the Teton shares are recorded through other comprehensive income. All other marketable securities are classified as trading securities. All securities except the Teton shares,and are carried at quoted market value on the accompanying consolidated balance sheet. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. The Teton shares are carried at quoted market value with a 25% discount for lack of marketability. Unrealized gains and losses on the Teton shares are recorded through other comprehensive income. We measure realized gains and losses on investments using the specific identification method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation of furniture and equipment is provided over the estimated useful lives of the assets (from 3 to 710.5 years), and depreciation on leasehold improvements is provided over the lease term using the straight-line method. We capitalize leasehold improvements, furniture and fixtures, computer hardware and most office equipment purchases. The following table reflects information about our fixed assetsproperty and equipment as of December 31, 20092011 and 2008.2010.

 

  2009 2008   2011 2010 

Leasehold improvements cost

  $504   $613    $1,410   $411  

Leasehold improvements – accumulated depreciation

   (278  (228   (352  (329

Furniture and fixtures cost

   783    763     1,364    792  

Furniture and fixtures – accumulated depreciation

   (570  (465   (744  (693

Computer hardware and office equipment cost

   597    701     1,112    696  

Computer hardware and office equipment – accumulated depreciation

   (458  (542   (551  (531
         

 

  

 

 

Net fixed assets

  $578   $842  

Net property and equipment

  $2,239   $346  
         

 

  

 

 

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 annually for impairment.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the third quarters of 2009, 20082011, 2010 and 2007,2009, we completed annual goodwill impairment assessments. No impairment losses were required. We perform our annual impairment assessment as of July 1 and would reassess if circumstances indicated a potential impairment between our annual assessment dates. We assess the fair value of our business units in connection with goodwill using a market multiple approach. NoWe reevaluated our assessment at the end of 2011 and determined that no events occurred in the last half of 20092011 that would indicateindicated that these assets should be retested for impairment.

Our intangible assets represent fair value as of the acquisition date fair value of the acquired customer accounts, mutual fund assets, acquiredtrade names and non-compete agreements and are reflected net of amortization. In valuing these assets, we made significant estimates regarding the useful life, growth rates and potential attrition of the assets acquired. We periodically review our intangible assets for events or circumstances that would indicate impairment. If the carrying value of these assets exceeded the fair value, we would record an impairment to remove the excess.

WESTWOOD HOLDINGS GROUP, INC. For a further discussion of our goodwill and intangible assets, please see “Note 6. ACQUISITIONS, GOODWILL AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

INTANGIBLE ASSETS” of these financial statements.

Federal Income Taxes

We file a Federal income tax return as a consolidated group for Westwood and its subsidiaries. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in the deferred tax assets and liabilities. Deferred taxes relate primarily to stock-based compensation expense.

Other Comprehensive Income

We record all changes in other comprehensive incomedo not have uncertain tax positions for any of the years presented. If an uncertain tax position should arise, we would report a liability for an unrecognized tax benefit from an uncertain tax position taken or expected to be taken on a tax return. We include penalties and interest on income-based taxes in the Consolidated Statement of Stockholder’s Equity. Other comprehensive“Provision for income includes unrealized gainstaxes” line on available for sale securities.our income statement.

Accounting Developments

In December 2007,June 2011, the FASB amended ASC No. 805, “Business Combinations”Financial Accounting Standards Board (“ASC 805”FASB”). ASC 805 establishes principles issued new guidance regarding the presentation of comprehensive income. Under this new guidance, an entity must present the components of net income and requirements for how an acquirer: (1) recognizes and measurescomprehensive income in its financial statementsa single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the identifiable assets acquired, the liabilities assumed, and any noncontrolling interestoption to present other comprehensive income in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or gain from a bargain purchase; and (3) determines what information to disclose to enable usersstatement of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively to business combinations for which the acquisition dateshareholders’ equity. The new guidance is on or after the beginning of the first reporting periodeffective for fiscal years, and interim periods within those years, beginning on or after December 15, 2008.2011. We adopted ASC 805 during 2009 and it did not impact ourthis guidance early in these financial statements.

In December 2009, the FASB issued SFAS No. 167 Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 establishes general standards of accounting for and disclosures for interests in variable interest entities (“VIE”). This standard changes the manner in which an entity determines whether it is the primary beneficiary of a VIE, whether that VIE should be consolidated and requires additional disclosures. As proposed, SFAS 167 would be effective for our fiscal year 2010. We are currently evaluating the potential impact of SFAS 167 on our financial statements.

In May 2009, the FASB issued ASC No. 855, “Subsequent Events” (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We have included the required disclosure in the notes to our financial statements.

In April 2009, the FASB issued further guidance under ASC No. 825, “Financial Instruments” (“ASC 825”). The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements to improve the transparency and quality of financial reporting and requires those disclosures in summarized financial information at interim reporting periods. This guidance was effective for the second quarter of 2009 and did not have a material impact on our financial statements and disclosures.

In April 2009, the FASB issued further guidance under ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The additional guidance addresses estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased along with providing guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820 was effective for the second quarter of 2009 and did not have a material impact on our financial statements.

In June 2009, the FASB issued ASC No. 105, “Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 established Accounting Standards Codification as the source of authoritative GAAP recognized by the FASB and requires references to the codification in place of references to previously issued and organized accounting pronouncements. We adopted ASC 105 during 2009 and it did not have a material impacteffect on our consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Stock Based Compensation

We account for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) No. 718, Compensation-Stock Compensation (“ASC 718.718”). Under ASC 718, stock-based compensation expense reflects the fair value of stock-based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The compensation cost we recordrecorded for these awards is based on their grant-date fair value as required by ASC 718.

We have issued restricted stock and stock options in accordance with our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”). We valued stock options issued based upon the Black-Scholes option-pricing model and recognized this value as an expense over the periods in which the options vested. Implementation of the Black-Scholes option-pricing model required us to make certain assumptions, including expected volatility, the risk-free interest rate, expected dividend yield and expected life of the options. We utilized assumptions that we believed to be most appropriate at the time of the valuation. Had we used different assumptions in the pricing model, the expense recognized for stock options may have been different than the expense recognized in our financial statements. We must also apply judgment in developing an expectation of awards of restricted stock and stock options that may be forfeited. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

Fair ValueWESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. ACCOUNTS RECEIVABLE:

Our trade accounts receivable balances do not include any allowance for doubtful accounts nor has any bad debt expense attributable to trade receivables been recorded for the years ended December 31, 2011, 2010 and 2009. The majority of Financial Instrumentsour accounts receivable balances consists of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectable.

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 December 31, 2011 and 2010. For the years 2011, 2010 and 2009, we recorded trust fees from these accounts of $429,000, $442,000 and $382,000, respectively.

4. INVESTMENTS:

Investment balances are presented in the table below (in thousands). All of these investments are carried at fair value. Our investment in Teton shares are accounted for as available for sale securities. All other investments are accounted for as trading securities.

   Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

December 31, 2011:

       

U.S. Government and Government agency obligations

  $35,499    $8    $—     $35,507  

Money Market Funds

   11,458     —       —      11,458  

Equity – available for sale

   —       2,999     —      2,999  

Equity Funds – trading

   3,161     248     (9  3,400  

Fixed Income Funds – trading

   1,503     1     —      1,504  
  

 

 

   

 

 

   

 

 

  

 

 

 

Marketable securities

  $51,621    $3,256    $(9 $54,868  
  

 

 

   

 

 

   

 

 

  

 

 

 
   Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

December 31, 2010:

       

U.S. Government and Government agency obligations

  $32,774    $11    $—     $32,785  

Money Market Funds

   3,795     —       —      3,795  

Equity – available for sale

   —       1,425     —      1,425  

Equity Funds – trading

   4,767     533     (5  5,295  
  

 

 

   

 

 

   

 

 

  

 

 

 

Marketable securities

  $41,336    $1,969    $(5 $43,300  
  

 

 

   

 

 

   

 

 

  

 

 

 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following amounts, except for income tax amounts, are included in our income statement under the heading “Other revenues” for the years indicated (in thousands):

   2011  2010  2009 

Realized gains

  $407   $104   $10  

Realized losses

   (182  (3  (505
  

 

 

  

 

 

  

 

 

 

Net realized gains/(losses)

   225    101    (495
  

 

 

  

 

 

  

 

 

 

Income tax expense/(benefit) from gains/(losses)

   82    37    (173

Interest income—trading

   61    104    171  

Interest income—available-for -sale

   —      —      1  

Dividend income

   221    189    187  

Unrealized gains/(losses)

   (291  694    588  

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

We have determined the estimated fair values of our financial instruments using available information. The fair value amounts discussed in Notes 4 and 5 are not necessarily indicative of either the amounts realizeablerealizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, as well as of accounts receivable and 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, as well as WHGmoney market funds, Westwood FundsTM mutual funds and Westwood Trust common trust fund shares, equals their fair value which is equal tobased on prices quoted in active markets and, with respect to funds, the reported net asset value of the shares held as reported by the fund. The carrying amount of investments designated as “available for sale” securities, including money market accounts and Teton shares, equals their fair value. The fair value of money market accounts is equal to the net asset value of the shares held as reported by the fund. The marketheld. Market values of our money market holdings generally do not fluctuate. The fair value of the Teton shares, which is designated as an “available for sale” security, is equal to the closing market price as of December 31, 20092011 of $15.99$19.99 per share less a 25% discount for lack of marketability.

Effective January 1, 2008, we adopted the provisions of ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three tierthree-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 and

 

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

3. ACCOUNTS RECEIVABLE:

Our trade accounts receivable balances do not include any allowance for doubtful accounts nor has any bad debt expense attributable to trade receivables been recorded forThe following table summarizes the years ended December 31, 2009 and 2008. As of December 31, 2008, our accounts receivable balance included $8.7 million due from our largest client. This amount was collected in the first quarter of 2009. The majorityvalues of our accounts receivable balances is advisory and trust fees receivable from customers that we believe and have experienced to be fully collectable.

Certain of our directors, executive officers and their affiliates invest their personal funds directly in accounts held and managed by us. There were no amounts due from these accountsassets as of December 31, 2009 and 2008. For the years 2009, 2008 and 2007, we recorded trust fees from these accounts of $382,000, $407,000 and $296,000, respectively.dates indicated within the fair value hierarchy (in thousands).

   Level 1   Level 2   Level 3   Total 

As of December 31, 2011

        

Investments in securities:

        

Trading

  $50,592    $1,277    $—      $51,869  

Available-for-sale

   —       —       2,999     2,999  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial instruments

  $50,592    $1,277    $2,999    $54,868  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2010

        

Investments in securities:

        

Trading

  $39,277    $2,598    $—      $41,875  

Available-for-sale

   —       —       1,425     1,425  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial instruments

  $39,277    $2,598    $1,425    $43,300  
  

 

 

   

 

 

   

 

 

   

 

 

 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. INVESTMENTS:

Investment balances are presented in the table below (in thousands). All of these investments are carried at fair value. The money market funds and Teton shares are accounted for as available for sale securities. The other investments are accounted for as trading securities.

   Cost  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Market
Value

December 31, 2009:

       

U.S. Government and Government agency obligations

  $33,949  $3  $—     $33,952

Funds:

       

Money Market

   3,230   —     —      3,230

Equity – available for sale

   —     2,399   —      2,399

Equity – trading

   2,823   35   (193  2,665
                

Marketable securities

  $40,002  $2,437  $(193 $42,246
                

December 31, 2008:

       

U.S. Government and Government agency obligations

  $22,142  $83  $—     $22,225

Funds:

       

Money Market

   1,843   —     —      1,843

Equity

   4,910   —     (826  4,084
                

Marketable securities

  $28,895  $83  $(826 $28,152
                

The following amounts are included in our income statement under the heading “Other revenues” for the years indicated (in thousands):

   2009  2008  2007 

Realized gains

  $10   $12   $368  

Realized losses

   (505  (51  (2
             

Net realized (losses)/gains

   (495  (39  366  
             

Interest income—trading

   171    161    145  

Interest income—available-for -sale

   1    255    597  

Dividend income

   187    295    152  

Unrealized gains/(losses)

   588    (974  (102

We realized income tax (benefits)/expense related to realized investment gains and losses of (in thousands): $(173), $(14) and $128 for the years ended 2009, 2008 and 2007, respectively.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTSInvestments categorized as level 2 assets consist of investments in a common trust fund sponsored by Westwood Trust. Common trust funds are private investment vehicles comprised of commingled investments held in trusts that are valued using the Net Asset Value (“NAV”) calculated by us as administrator of the funds. The NAV is quoted on a private market that is not active; however, the unit price is based on the market value of the underlying investments that are traded on an active market.

The following table summarizes the values of our assets as of December 31, 2009 within the fair value hierarchy, which is described in “Note 2. Summary of Significant Accounting Policies” under the heading “Fair Value of Financial Instruments”

Assets

  Level 1  Level 2  Level 3  Total

Investments in securities:

        

Trading

  $36,617  $—    $—    $36,617

Available-for-sale

   3,230   —     2,399   5,629
                

Total Financial instruments

  $39,847  $—    $2,399  $42,246
                

The following table presents information regarding the assets that weWe used level 3 inputs to determine the fair value (in thousands). This representsof 200,000 Class A shares of Teton Advisors, Inc. that we own. We determined the fair value of these shares as the closing market price as of December 31, 2009 less a 25% discount for lack of marketability. This fair value amount is not necessarily indicative of either the amount we would realize upon disposition of these shares or our intent or ability to dispose of them. There were no transfers of level 3 assets to or from other asset classes and there were no gains, losses, purchases or sales of the Teton shares. The following table presents information regarding this investment.

 

Asset

  Beginning
balance
  Unrealized gains
included in Other
Comprehensive

Income
  Ending
balance

Investment in securities, available-for-sale

  $—    $2,399  $2,399
   For the years ended 

Investments in available-for-sale securities (in thousands)

  2011   2010 

Beginning balance

  $1,425    $2,399  

Unrealized gains/(losses) included in Other Comprehensive Income

   1,574     (974
  

 

 

   

 

 

 

Ending balance

  $2,999    $1,425  
  

 

 

   

 

 

 

6. ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS

On November 18, 2010, we acquired the business and all related assets of McCarthy Group Advisors, L.L.C. (“McCarthy”), a Nebraska limited liability company and registered investment advisor based in Omaha, Nebraska. Subsequent to closing, the McCarthy business was added to our Westwood Management segment. We expect a significant portion of client assets will transition to Westwood Trust products over time. This acquisition was made in order to increase assets in our private wealth and Westwood Trust operating units, increase revenue from the WHG Funds through the reorganization of the McCarthy Multi-Cap Stock Fund into the Westwood Dividend Growth Fund, which was completed in February 2011, and expand the Westwood Trust platform by adding an office of seasoned professionals in a new market. At closing, we paid consideration totaling $12.0 million, comprised of 181,461 shares of Westwood Holdings Group, Inc. common stock and $5.0 million in cash. Related to this acquisition, we recorded goodwill of $7.4 million, intangible assets of $4.2 million and net working capital and property and equipment of $0.4 million, which is detailed by assets and liabilities in a table below. The intangible assets purchased were primarily McCarthy’s customer accounts but also included allocations to trade-name and non-compete agreements, which together comprised approximately 7% of the allocated purchase price. Pro forma results of operations have not been presented because the results of operations for the years ended December 31, 2010, 2009 and 2008, including McCarthy’s operations, would not have been materially different from those reported in our Consolidated Statement of Income.

The following tables display the assets and liabilities we acquired from McCarthy:

   Amount
($  thousands)
 

Goodwill:

  

Other goodwill

  $6,875  

Assembled workforce

   491  
  

 

 

 

Total goodwill

  $7,366  
  

 

 

 

Intangible assets:

  

Customer accounts

  $3,965  

Trade name

   234  

Non-compete agreements

   24  
  

 

 

 

Total Intangible assets

  $4,223  
  

 

 

 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Tangible assets

  Amount
($  thousands)
 

Cash

  $1,008  

Receivables

   370  

Property and equipment

   88  

Prepaid expenses

   76  

Bonuses payable

   (753

Unearned Income

   (296

Other liabilities

   (101
  

 

 

 

Net tangible assets

  $392  
  

 

 

 

On November 16, 2009, we acquired the business and substantially all the related assets of Baxter Financial Corporation related to its management of the Philadelphia Fund. In connection with this acquisition, the Philadelphia Fund was reorganized into the WHGWestwood LargeCap Value Fund. This acquisition was made in order to increase WHG Funds revenue, increase economies of scaleOn November 21, 2011, we paid cash for the final deferred payment in the WHG LargeCap Value Fund and increase fund assets to a level that is more attractive to potential institutional clients. At closing, we paid consideration totaling $1.0 million, comprisedamount of 20,435 shares of Westwood Holdings Group, Inc. common stock and $251,000 in cash, which was the result of a multiple applied to the total mutual fund assets we obtained. We are obligated to pay deferred payments twelve and twenty-four months from the transaction closing date. These deferred payments, which are subject to a total purchase price cap, are payable in shares of Westwood Holdings Group, Inc. common stock and/or cash at our discretion and are subject to adjustment based on the value of assets in the acquired customer accounts as of the deferred payment dates. Related to this acquisition, we recorded total assets of $2.7 million, comprised solely of goodwill and intangible assets, and deferred liabilities of $1.7 million. Proforma results of operations have not been presented because the results of operations would not have been materially different from those reported in our Consolidated Statement of Income.$867,000.

The goodwill we acquired is not amortized but does provide a tax deduction. The changes in goodwill for the last two years were as follows (in thousands):

 

   2009  2008

Beginning balance

  $2,302  $2,302

Acquired goodwill

   1,613   —  
        

Ending balance

  $3,915  $2,302
        

   2011  2010 

Beginning balance

  $11,281   $3,915  

Acquired goodwill

   (26  7,366  
  

 

 

  

 

 

 

Ending balance

  $11,255   $11,281  
  

 

 

  

 

 

 

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIESIntangible Assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The intangible assets we purchased were primarily the customer accounts of the Philadelphia Fund, but also include allocations to trade-name and a non-solicitation agreement, which together comprise approximately 1% of the allocated purchase price. The following is a summary of our intangible assets at December 31, 20092011 and 2010 (in thousands)thousands, except years):

 

   Weighted
Average

Amortization
Period
  Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Amount

Intangible assets

  10.8 years  $1,063  $(13 $1,050
   Weighted
Average

Amortization
Period
(years)
   Gross
Carrying
Amount
   Accumu-
lated

Amortiz-
ation
  Net
Carrying
Amount
 

2011

       

Client relationships

   14.2    $5,005    $(498 $4,507  

Trade names

   2.0     256     (153  103  

Non-compete agreements

   2.3     26     (15  11  
    

 

 

   

 

 

  

 

 

 

Total

    $5,287    $(666 $4,621  
    

 

 

   

 

 

  

 

 

 

2010

       

Client relationships

   14.2    $5,005    $(139 $4,866  

Trade names

   2.0     256     (27  229  

Non-compete agreements

   2.3     26     (2  24  
    

 

 

   

 

 

  

 

 

 

Total

    $5,287    $(168 $5,119  
    

 

 

   

 

 

  

 

 

 

Amortization expense, which is included in “General and administrative” expense on our Consolidated Statement of Income, was $498,000, $155,000 and $13,000 for the yearyears ended December 31, 2009.2011, 2010 and 2009, respectively. Estimated amortization expense for the intangible assets for the next five years is as follows (in thousands):

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

For the Year ending December 31,

  Estimated
Amortization
Expense

2010

  $106

2011

   104

2012

   95

2013

   95

2014

   95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the Year ending December 31,

  Estimated
Amortization
Expense
 

2012

  $472  

2013

   359  

2014

   359  

2015

   359  

2016

   359  

7. INCOME TAXES:

Income tax expense for the years ended December 31, 2009, 20082011, 2010 and 20072009 differs from the amount that would otherwise have been calculated by applying the Federal corporate tax rates to income before income taxes. The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in thousands):

 

  2009 2008 2007   2011 2010 2009 

Federal statutory rate

   35.0  35.0  35.0   35.0  35.0  35.0

Effective tax rate

   35.9  36.2  34.9   36.4  36.3  35.9

Income tax expense at the statutory rate

  $4,311   $5,788   $4,173    $8,088   $6,202   $4,311  

State margin, franchise and income taxes

   230    238    168     353    295    230  

Other, net

   (118  (34  (78   (18  (56  (118
            

 

  

 

  

 

 

Total income tax expense

  $4,423   $5,992   $4,263    $8,423   $6,441   $4,423  
            

 

  

 

  

 

 

We include penalties and interest on income basedincome-based taxes in the “Provision for income taxes” line on our income statement. We recorded penalties and interest of $135, $13,212 and $4,103 $25,748in 2011, 2010 and $388 in 2009, 2008 and 2007, respectively.

Income taxes as set forth in the consolidated statements of income consisted of the following components (in thousands):

 

   2009  2008  2007 

State – current

  $345   $373   $266  

State – deferred

   4    (7  (8

Federal – current

   4,151    6,597    4,253  

Federal – deferred

   (77  (971  (248
             

Total income tax expense

  $4,423   $5,992   $4,263  
             

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

   2011  2010  2009 

State – current

  $546   $450   $345  

State – deferred

   (2  3    4  

Federal – current

   7,944    6,341    4,151  

Federal – deferred

   (65  (353  (77
  

 

 

  

 

 

  

 

 

 

Total income tax expense

  $8,423   $6,441   $4,423  
  

 

 

  

 

 

  

 

 

 

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 20092011 and 20082010 are presented below (in thousands):

 

  2009 2008   2011   2010 

Deferred tax assets:

       

Restricted stock amortization

  $2,489   $2,046    $3,647    $3,191  

Stock option expense

   105    110     31     74  

Incentive compensation

   175    347     34     119  

Unrealized losses on investments

   55    264  

Contingent liability

   —       17  

Deferred rent

   42    63     182     13  

Other

   4    4     9     4  
         

 

   

 

 

Total deferred tax assets

   2,870    2,834     3,903     3,418  
         

 

   

 

 

Deferred tax liabilities:

   

Depreciation at rates different for tax than for financial reporting

   (79  (119

Intangibles

   (3  —    

Unrealized gains on investments

   (839  —    
       

Total deferred tax liabilities

   (921  (119
       

Net deferred tax assets

  $1,949   $2,715  
       

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

   2011  2010 

Deferred tax liabilities:

   

Depreciation at rates different for tax than for financial reporting

   (445  (43

Intangibles

   (138  (45

Unrealized gains on investments

   (1,147  (690
  

 

 

  

 

 

 

Total deferred tax liabilities

   (1,730  (778
  

 

 

  

 

 

 

Net deferred tax assets

  $2,173   $2,640  
  

 

 

  

 

 

 

Net deferred tax assets and liabilities are reflected on our balance sheet as of December 31, 20092011 and 20082010 as follows (in thousands):

 

  2009 2008   2011 2010 

Net current deferred tax asset

  $2,187   $1,781    $3,142   $2,757  
         

 

  

 

 

Non-current deferred tax assets

   683    1,053     761    661  

Non-current deferred tax liabilities,

   (921  (119   (1,730  (778
         

 

  

 

 

Net non-current deferred tax (liabilities)/assets reflected on the balance sheet

   (238  934  

Net non-current deferred tax liabilities reflected on the

balance sheet

   (969  (117
         

 

  

 

 

Total net deferred tax assets

  $1,949   $2,715    $2,173   $2,640  
         

 

  

 

 

As a result of our history of taxable income and the nature of the items from which deferred tax assets are derived, management believes that it is more likely than not that we will realize the benefit of our deferred tax assets. For federal income taxes, 20062008 through 20082010 are open tax years. For Texas franchise taxes, 2005years for federal income taxes. 2007 through 20082010 are open tax years.years for Texas franchise taxes. We are not currently under audit by any taxing jurisdiction.

8. REGULATORY CAPITAL REQUIREMENTS:

Westwood Trust is subject to the capital requirements of the Texas Department of Banking and has a minimum capital requirement of $1.0 million. At December 31, 2009,2011, Westwood Trust had total stockholders’ equity of approximately $3.3$12.7 million, which is $2.3$11.7 million in excess of its minimum capital requirement.

Westwood Trust is limited under applicable Texas law in the payment of dividends to undivided profits:profits, which is that part of equity capital equal to the balance of net profits, income, gains and losses since its formation date minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate Board resolutions. At the discretion of its board of directors, Westwood Trust has made quarterly and special dividend payments to us out of its undivided profits.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. EMPLOYEE BENEFITS:

We have issued stock options and restricted shares to our employees and non-employee directors and a non-employee consultant and offer 401(k) matching and profit sharing contributions to our employees. 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 and stock options. The total number of shares that may be issued under the Plan (including the predecessor plans to the Plan) may not exceed 2,648,1003,398,100 shares. In the event of a change in control of Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock and stock options. At December 31, 2009,2011, approximately 699,000873,000 shares remain available for issuance under the Plan.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the total stock-based compensation expense we recorded and the total income tax benefit recognized for stock-based compensation arrangements for the years indicated (in thousands):

 

  2009  2008  2007  2011   2010   2009 

Total stock based compensation expense

  $7,666  $6,735  $5,316  $9,969    $9,269    $7,666  

Total income tax benefit recognized related to stock-based compensation

   3,699   4,184   3,049   3,872     3,497     3,699  

Restricted Stock

Under the Plan, we have granted restricted stock to employees and non-employee directors, and a non-employee consultant, which are subject to a service condition, and to our Chief Executive Officer, Brian O. Casey, and Chief Investment Officer,Chairman, Susan M. Byrne, which are subject to a service condition and performance goals. Until the shares vest, they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. 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 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. As of December 31, 2009,2011, there was approximately $13.5$16.4 million of unrecognized compensation cost, which we expect to recognize over a weighted-average period of 2.22.1 years. In order to satisfy tax liabilities that employees will owe on their shares that vest, we may withhold a sufficient number of vested shares from employees on or about the date vesting occurs. We estimate that approximately 72,000withheld 78,094 shares could potentially be withheld in 20102011 for this purpose. Our two types of restricted stock grants are discussed below.

Employee and non-employee director restricted share grants

For the years ended December 31, 2009, 20082011, 2010 and 2007,2009, we granted restricted stock to employees and non-employee directors and a non-employee consultant.directors. The employees’ shares vest over four years and the directors’ and consultant’s shares vest over one year. The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the year ended December 31, 2009:2011:

 

Restricted shares subject only to a service condition:

  Shares  Weighted
Average

Grant
Date Fair
Value

Non-vested, January 1, 2009

  507,450   $29.74

Granted

  242,500    31.15

Vested

  (191,450  26.06

Forfeited

  (9,350  31.15
       

Non-vested, December 31, 2009

  549,150    31.62
     

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Restricted shares subject only to a service condition:

  Shares  Weighted Average
Grant Date Fair
Value
 

Non-vested, January 1, 2011

   551,100   $34.83  

Granted

   220,220    36.64  

Vested

   (198,025  32.39  

Forfeited

   (12,225  36.32  
  

 

 

  

Non-vested, December 31, 2011

   561,070    36.37  
  

 

 

  

The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated:

 

Restricted shares subject only to a service condition:

  2009  2008  2007  2011   2010   2009 

Weighted-average grant date fair value

  $31.15  $36.51  $32.77  $36.64    $39.06    $31.15  

Fair value of shares vested (in thousands)

  $8,020  $8,675  $6,491  $7,380    $7,026    $8,020  

CEO and CIO performance-basedPerformance-based restricted share grants

In 2006,Under the Plan, we granted restricted shares to our Chief Executive Officer, Brian O. Casey, and our Chief Investment OfficerChairman, Susan M. Byrne, that vest over four yearsfive and six years, respectively, provided annual performance goals established by the Compensation Committee of Westwood’s board of directors are met. For the year 2009,ended December 31, 2011, the officers became vested in the applicable percentage of their restricted shares since Westwood’s adjusted pre-tax income for 20092011 was at least $12,075,000,$19,330,265, representing a compound annual growth rate of 7%10% over the adjusted pre-tax income for the year 2004.2006. Each year during the compensation committeeapplicable vesting period, the Compensation Committee will establish a specific goal for that year’s vesting of the restricted shares, which will beis based in all cases upon Westwood’s adjusted pre-tax income, as defined. If the performance goal is not met in any year during the vesting period, the performance goal is not met, the Compensation Committee may establish a goal for a subsequent vesting period, which, if achieved or exceeded, may result in full or

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

partial vesting of the shares that did not otherwise become vested in a prior year. However, inIn no event, under the current grants, will the maximum number of shares which may become vested over the vesting period exceed 100,000175,000 shares in the case of our Chief Executive Officer andor 300,000 shares in the case of our Chief Investment Officer.Chairman. If a portion of the performance-based restricted shares do not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to the shares that do not vest would be reversed.

 

Restricted shares subject to service and performance conditions:

  Shares Weighted Average
Grant Date Fair
Value
  Shares Weighted Average
Grant Date Fair
Value
 

Non-vested, January 1, 2009

  175,000   $18.81

Non-vested, January 1, 2011

   190,000   $34.35  

Granted

  —      —     —      —    

Vested

  (75,000  18.81   (85,000  27.49  

Forfeited

  —      —     —      —    
       

 

  

Non-vested, December 31, 2009

  100,000   $18.81

Non-vested, December 31, 2011

   105,000   $39.90  
       

 

  

The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated:

 

Restricted shares subject to a service and performance condition:

  2009  2008  2007  2011   2010   2009 

Weighted-average grant date fair value

  $—    $—    $—    $—      $39.90    $—    

Fair value of shares vested (in thousands)

  $2,726  $2,131  $2,820  $3,107    $3,397    $2,942  

Because the performance goal was met in 2009,2011, the shares are vested in substance but require certification by our Compensation Committee, at which time a share price will be determined for tax purposes. As a result, we estimate that the total fair value of the shares that vested in 20092011 was approximately $2,726,000, which uses$3,107,000 based on a share price of $36.34,$36.55, the closing price of our stock as of the last business day of 2009.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2011.

Stock Options

Options granted under the Plan have a maximum ten-year term and vest over a period of four years. Options exercised represent newly issued shares. Westwood’s outstanding stock options which are all exercisable and have an exercise pricesprice of $12.90 and $14.80 and a weighted-average remaining contractual life of 2.5 years.six months. A summary of the status of Westwood'sWestwood’s outstanding stock options as of December 31, 2009, 20082011, 2010 and 20072009 is presented below.

 

  December 31, 2009  December 31, 2008  December 31, 2007  December 31, 2011   December 31, 2010   December 31, 2009 
  Underlying
Shares
 Weighted
Average
Exercise
Price
  Underlying
Shares
 Weighted
Average
Exercise
Price
  Underlying
Shares
 Weighted
Average
Exercise
Price
  Underlying
Shares
 Weighted
Average
Exercise
Price
   Underlying
Shares
 Weighted
Average
Exercise
Price
   Underlying
Shares
 Weighted
Average
Exercise
Price
 

Outstanding, beginning of period

   57,400   $12.93   77,300   $12.92   124,531   $12.92   38,400   $12.90     54,900   $12.90     57,400   $12.93  

Granted

   —      —     —      —     —      —     —      —       —      —       —      —    

Exercised

   (2,500  12.93   (19,900  12.90   (47,231  12.91   (22,150  12.90     (16,500  12.90     (2,500  12.93  

Forfeited

   —      —     —      —     —      —     —      —       —      —       —      —    
                 

 

    

 

    

 

  

Outstanding, end of period

   54,900    12.90   57,400    12.93   77,300    12.92

Outstanding and exercisable, end of period

   16,250    12.90     38,400    12.90     54,900    12.90  
                 

 

    

 

    

 

  

Exercisable, end of period

   54,900    12.90   57,400    12.93   77,300    12.92

Intrinsic value – outstanding and exercisable

  $1,286,000     $888,000     $1,907,000     $384,000     $1,039,000     $1,286,000   

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table displays information for Westwood stock options exercised for the periods presented (in thousands):

 

  For the years ended  For the years ended 
  2009  2008  2007  2011   2010   2009 

Total intrinsic value of options exercised

  $63  $605  $686  $542    $425    $63  

Cash received from the exercise of stock options

   33   257   609   287     213     33  

Westwood Holdings Group, Inc. Savings Plan

Westwood has a defined contribution 401(k) and profit sharing plan that was adopted in July 2002 and covers all of our employees. Discretionary employer profit sharing contributions become fully vested after six years of service by the participant. For the 401(k) portion of the plan, Westwood provided a match of up to 6% of eligible compensation. These 401(k) matching contributions vest immediately.

The following table displays our profit sharing and 401(k) contributions for the periods presented (in thousands):

 

  For the years ended  For the years ended 
  2009  2008  2007  2011   2010   2009 

Profit sharing expense

  $372  $575  $324

Profit sharing contributions

  $582    $477    $372  

401(k) matching contributions

   546   524   394   707     679     546  

10. EARNINGS PER SHARE:

Basic earnings per common share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the periods ended December 31, 2009, 2008 and 2007, respectively.outstanding. Diluted earnings per share for these periodsEPS is computed based on the weighted average number of shares outstanding plus the effect of the dilutive impactshares of restricted stock and stock options granted to employees and non-employee directors and contingently issuable shares.

Under FASB ASC No. 620, Earnings Per Share (“ASC 620”), shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities, which requires allocating a portion of net income to those shares as if they were a separate class of stock, optionswhich reduces net income available to common stockholders. Prior to the third quarter 2010, shares of unvested restricted stock contained non-forfeitable rights to dividends and accordingly were participating securities. In the third quarter of 2010, the Plan was modified such that dividends on unvested restricted stock. Diluted earnings per common share is computed usingshares no longer contain non-forfeitable rights to dividends, which removed the treasuryrequirements to treat such shares as a separate class of stock method.and to allocate a portion of net income to such shares for the third quarter of 2010 and future periods. There were no anti-dilutive restricted shares or options as of December 31, 2009, 20082011, 2010 or 2007.

2009.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

  2009  2008  2007  2011   2010 2009 

Net income

  $7,895  $10,543  $7,944  $14,686    $11,280   $7,895  

Less: Income allocated to participating restricted shares

   —       (576  (938
  

 

   

 

  

 

 

Net income available to common stockholders

  $14,686    $10,704   $6,957  
  

 

   

 

  

 

 

Weighted average shares outstanding – basic

   6,339,791   6,107,807   5,854,894   6,970,382     6,606,281    6,339,791  

Dilutive potential shares from unvested restricted shares

   204,957     121,110    —    

Dilutive contingently issuable shares

   17,607     46,610    —    

Dilutive potential shares from stock options

   27,197   33,379   43,421   15,569     21,350    27,197  

Dilutive potential shares from restricted shares

   297,922   310,282   301,354
           

 

   

 

  

 

 

Weighted average shares outstanding – diluted

   6,664,910   6,451,468   6,199,669   7,208,515     6,795,351    6,366,988  
  

 

   

 

  

 

 

Earnings per share – basic

  $1.25  $1.73  $1.36

Earnings per share – diluted

  $1.18  $1.63  $1.28

Earnings per share:

     

Basic

  $2.11    $1.62   $1.10  

Diluted

  $2.04    $1.58   $1.09  

11. 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 Management provides investment advisory services to the Westwood FundsTM, a family of mutual funds. Some clients of Westwood Management acquired in the McCarthy acquisition hold their investments in ten LLCs and one limited partnership that were formed and sponsored by McCarthy. The CTFs, Westwood FundsTM, LLCs and partnership (“Westwood VIEs”) are considered VIEs because we formed these entities, we areour clients, who hold the decision maker for most ofequity at risk, do not have direct or indirect ability through voting or similar rights to make decisions about the funds that may have a significant effect on their activities and we cannot be removed from our role as sponsor and investment advisor.success. We receive management fees for themanaging assets in these funds that areentities commensurate with market rates.

We evaluate all of our advisory relationships and CTFs to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of the expected losses or a right to receive the majority of the residual returns. Since all losses and returns are distributed to the shareholders of the CTFs,Westwood VIEs, we doare not qualify as the primary beneficiary for any of our CTFs as of December 31, 2009.beneficiary. Consequently, the CTFsWestwood VIEs are not part ofconsolidated into our consolidated financial statements.

As of December 31, 2009, we sponsored CTFs with assets totaling $1.5 billion and we hold a corporate investment of $219,000 in one CTF. We have not provided any financial support that we were not previously contractually obligated to provide and our risk of loss is limited to the investment of $219,000, which is part of “Investments” on our balance sheet. Therethere are no arrangements that would require us to provide additional financial support to any of the CTFs.these variable interest entities. Our investmentinvestments in the CTF isWestwood FundsTM and the CTFs are accounted for as an investmentinvestments in accordance with our other investments described in “Note. 4 INVESTMENTS”. We recognized fee revenue from the Westwood VIEs of these financial statements.

12. OTHER COMPREHENSIVE INCOME

Total other comprehensive income is reported inapproximately $24.3 million, $16.7 million and $12.1 million for the Consolidated Statement of Stockholder’s Equity on a net-of-tax basis. There were no elements of comprehensive income as oftwelve months ended December 31, 2008 or 2007.2011, 2010 and 2009, respectively. The componentsfollowing table displays the assets under management, amount of other comprehensive income ascorporate money invested and risk of December 31, 2009 are as followsloss in each vehicle (in thousands):millions).

 

   Gross
Amount
  Deferred
Tax
Expense
  Net
Amount

Unrealized gain on available-for-sale securities

  $2,399  $(840 $1,559

   As of December 31, 2011 
   Assets
Under
Management
   Corporate
Investment
   Risk
of
Loss
 

Westwood FundsTM

  $1,293    $3.6    $3.6  

Common Trust Funds

   1,675     1.3     1.3  

LLCs

   435     —       —    

Partnerships

   25     —       —    

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

13.12. COMMITMENTS AND CONTINGENCIES:

We lease our offices under a non-cancelable operating lease agreement.agreements. Rental expense for facilities and equipment leases for fiscal years 2009, 2008ended December 31, 2011, 2010 and 20072009 aggregated approximately $687,000, $729,000$979,000, $682,000 and $702,000,$687,000 respectively, and is included in general and administrative and information technology expenses in the accompanying consolidated statements of income.

At December 31, 2009,2011, the future contractual rental payments for non-cancelable operating leases for each of the following five years and thereafter follow (in thousands):

 

Year ending:

    

2010

  $680

2011

   287

2012

   6  $1,023  

2013

   —     1,021  

2014

   —     956  

2015

   870  

2016

   882  

Thereafter

   4,437  
     

 

 

Total payments due

  $973  $9,189  
     

 

 

14.13. SEGMENT REPORTING:

We operate two segments: Westwood Management and Westwood Trust. These segments are managed separately based on the types of products and services offered and their related client bases. We evaluate the performance of our segments based primarily on income before income taxes. The entity Westwood Holdings, the parent company of Westwood Management and Westwood Trust, does not have revenues or employees and is the entity in which we record stock-based compensation expense.

Westwood Management

Westwood Management provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals and the WHGWestwood FundsTM, as well as investment subadvisory services to mutual funds and clients of Westwood Trust.

Westwood Trust

Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals.

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.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

   Westwood
Management
  Westwood
Trust
  Westwood
Holdings
  Eliminations  Consolidated

2009

        

Net revenues from external sources

  $32,243  $10,310  $—     $—     $42,553

Net intersegment revenues

   3,476   12   —      (3,488  —  

Net interest and dividend revenue

   355   7   —      —      362

Depreciation and amortization

   196   58   —      —      254

Income (loss) before income taxes

   17,707   2,277   (7,666  —      12,318

Income tax expense (benefit)

   6,160   840   (2,577  —      4,423

Segment assets

   50,687   4,001   5,198    —      59,886

Segment goodwill

   3,403   512   —      —      3,915

Expenditures for long-lived assets

   62   24   —      —      86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

   Westwood
Management
   Westwood
Trust
   Westwood
Holdings
  Eliminations  Consolidated 

2011

        

Net revenues from external sources

  $55,450    $13,459    $—     $—     $68,909  

Net intersegment revenues

   4,624     17     —      (4,641  —    

Net interest and dividend revenue

   280     2     —      —      282  

Depreciation and amortization

   386     376     —      —      762  

Income (loss) before income taxes

   31,090     1,988     (9,969  —      23,109  

Income tax expense (benefit)

   11,112     765     (3,454  —      8,423  

Segment assets

   76,444     14,150     3    —      90,597  

Segment goodwill

   5,219     6,036     —      —      11,255  

Expenditures for long-lived assets

   1,069     362     —      —      1,431  

2010

        

Net revenues from external sources

  $43,253    $12,060    $—     $—     $55,313  

Net intersegment revenues

   4,183     17     —      (4,200  —    

Net interest and dividend revenue

   291     4     —      —      295  

Depreciation and amortization

   307     122     —      —      429  

Income (loss) before income taxes

   25,287     1,703     (9,269  —      17,721  

Income tax expense (benefit)

   8,931     665     (3,155  —      6,441  

Segment assets

   61,014     13,117     (1,503  —      72,628  

Segment goodwill

   5,245     6,036     —      —      11,281  

Expenditures for long-lived assets

   60     77     —      —      137  

2009

        

Net revenues from external sources

  $32,243    $10,310    $—     $—     $42,553  

Net intersegment revenues

   3,476     12     —      (3,488  —    

Net interest and dividend revenue

   355     7     —      —      362  

Depreciation and amortization

   196     58     —      —      254  

Income (loss) before income taxes

   17,707     2,277     (7,666  —      12,318  

Income tax expense (benefit)

   6,160     840     (2,577  —      4,423  

Segment assets

   50,687     4,001     5,198    —      59,886  

Segment goodwill

   3,403     512     —      —      3,915  

Expenditures for long-lived assets

   62     24     —      —      86  

14. CONCENTRATION:

For the years ended December 31, 2011, 2010 and 2009, our four largest clients accounted for 14.3%, 12.2% and 13.1% of our fee revenue, respectively. No single customer accounted for 10% or more of our revenues in any of these years.

   Years ended December 31, 
(in thousands)  2011  2010  2009 

Advisory fees from Westwood Management’s largest client*:

    

Asset-based fees

  $1,772   $1,764   $1,515  

Performance-based fees

   991    —      —    

Percent of fee revenue

   4.0  3.3  3.6

*This client was not our largest client in 2010 or 2009.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

   Westwood
Management
  Westwood
Trust
  Westwood
Holdings
  Eliminations  Consolidated

2008

        

Net revenues from external sources

  $35,367  $11,089  $—     $—     $46,456

Net intersegment revenues

   3,950   8   —      (3,958  —  

Net interest and dividend revenue

   689   71   —      —      760

Depreciation and amortization

   175   58   —      —      233

Income (loss) before income taxes

   20,983   2,287   (6,735  —      16,535

Income tax expense (benefit)

   7,445   871   (2,324  —      5,992

Segment assets

   41,740   4,821   4,286    —      50,847

Segment goodwill

   1,790   512   —      —      2,302

Expenditures for long-lived assets

   118   35   —      —      153

2007

        

Net revenues from external sources

  $25,851  $10,441  $—     $—     $36,292

Net intersegment revenues

   3,823   5   —      (3,828  —  

Net interest and dividend revenue

   841   166   —      —      1,007

Depreciation and amortization

   171   57   —      —      228

Income (loss) before income taxes

   14,910   2,613   (5,316  —      12,207

Income tax expense (benefit)

   5,129   940   (1,806  —      4,263

Segment assets

   30,354   4,755   3,915    —      39,024

Segment goodwill

   1,790   512   —      —      2,302

Expenditures for long-lived assets

   83   31   —      —      114

15. CONCENTRATION:

For the years ended December 31, 2009, 2008 and 2007, our four largest clients accounted for 13.1%, 31.0% and 25.9% of our fee revenue, respectively. For the years ended December 31, 2008 and 2007, our largest client accounted for 19.5% and 10.2% of our fee revenues, respectively. During the year ended December 31, 2009, no customer accounted for 10% or more of our revenues.

 

(in thousands)  Years ended December 31, 
  2009  2008  2007 

Advisory fees from Westwood Management’s largest client*:

    

Asset-based fees

  $267   $453   $541  

Performance-based fees

   —      8,645    3,021  

Percent of fee revenue

   0.6  19.5  10.2

*This client was not our largest client in 2009.

16.15. SUBSEQUENT EVENTS:

On February 4, 2010,2, 2012, we declared a quarterly cash dividend of $0.33$0.37 per share on common stock payable on April 1, 20102, 2012 to stockholders of record on March 15, 2010.2012.

On February 24, 2010,23, 2012, we issued 211,000200,780 shares of restricted stock to employees at a price of $39.22$39.38 per share. The shares are subject to vesting conditions described in “Note. 9 EMPLOYEE BENEFITS” of these financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES We also issued 200,000 shares of performance-based restricted stock to certain key employees at a price of $39.38 per share that will vest over a period of five years, provided that annual performance goals established by the Compensation Committee are met.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

17.16. QUARTERLY FINANCIAL DATA (Unaudited):

The following is a summary of unaudited quarterly results of operations for the years ended December 31, 20092011 and 20082010 (in thousands, except per share amounts):

 

   Quarter
   First  Second  Third  Fourth

2009

        

Revenues

  $8,217  $9,972  $11,641  $12,723

Income before income taxes

   1,929   2,504   3,598   4,287

Net income

   1,230   1,630   2,314   2,721

Basic earnings per common share

   0.20   0.26   0.36   0.42

Diluted earnings per common share

   0.19   0.25   0.35   0.41

2008

        

Revenues

  $9,127  $9,651  $10,092  $17,586

Income before income taxes

   3,013   2,598   2,764   8,160

Net income

   1,955   1,731   1,736   5,121

Basic earnings per common share

   0.32   0.29   0.28   0.83

Diluted earnings per common share

   0.31   0.27   0.27   0.79

   Quarter 
   First   Second   Third   Fourth 

2011

        

Revenues

  $17,009    $18,859    $16,048    $16,993  

Income before income taxes

   5,619     5,916     5,297     6,277  

Net income

   3,549     3,737     3,283     4,117  

Basic earnings per common share

   0.51     0.53     0.47     0.59  

Diluted earnings per common share

   0.50     0.52     0.46     0.57  

2010

        

Revenues

  $13,216    $13,194    $13,473    $15,430  

Income before income taxes

   4,553     3,940     4,111     5,117  

Net income

   2,933     2,493     2,599     3,255  

Basic earnings per common share

   0.40     0.34     0.39     0.48  

Diluted earnings per common share

   0.40     0.34     0.38     0.46  

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Exhibits

  3.1  Amended and Restated Certificate of Incorporation of Westwood Holdings Group, Inc. (9)(10)
  3.2  Amended and Restated Bylaws of Westwood Holdings Group, Inc. (6)
  4.1  Form of Common Stock Certificate of Westwood Holdings Group, Inc. (3)
10.1  Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (including related forms of Stock Option Agreement and Restricted Stock Agreement) (7)+
10.2  Amendment to Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (including related form of Restricted Stock Agreement) (11)+
10.3Tax Separation Agreement between SWS Group, Inc. and Westwood Holdings Group, Inc. (2)
10.310.4  Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, L.P., dated as of April 4, 1990, and amendment thereto (4)
10.410.5  Ninth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of November 25, 2003 (5)
10.510.6  Tenth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of February 23, 2004 (5)
10.610.7Eleventh Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of December 9, 2010 (12)
10.8  Software License Agreement between Infovisa and Westwood Trust, dated as of December 1, 2001 (4)
10.710.9  Software License and Support Agreement between Advent Software, Inc. and Westwood Management Corp., dated as of December 30, 1996 (4)
10.810.10  Form of Indemnification Agreement for Westwood Holdings Group, Inc. (5)+
10.910.11  Form of Indemnification Agreement for Westwood Management Corp. (5)+
10.1010.12  Form of Indemnification Agreement for Westwood Trust (5)+
10.1110.13  Executive Employment Agreement between Westwood Holdings Group, Inc. and Susan M. Byrne (8)+
10.1210.14  Executive Employment Agreement between Westwood Holdings Group, Inc. and Brian O. Casey (8)(9)+
10.1310.15Restricted Stock Agreement between Westwood Holdings Group, Inc. and Brian O. Casey (9)+
10.16  Schedule of Director Compensation (1)
21.1  Subsidiaries (4)
23.1  Consent of Grant Thornton (1)
24.1  Power of Attorney (included on first signature page) (1)
31.1  Certification of the Chief Executive Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2  Certification of the Chief Financial Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)#
32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)#

 

(1)Filed herewith.
(2)Incorporated by reference from Amendment No. 5 to Registration Statement on Form 10/A filed with the Securities and Exchange Commission on June 6, 2002.
(3)Incorporated by reference from Amendment No. 2 to Registration Statement on Form 10/A filed with the Securities and Exchange Commission on April 30, 2002.
(4)Incorporated by reference from the Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 8, 2002.
(5)Incorporated by reference from Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2003.
(6)Incorporated by reference from Form 8-K filed with the Securities and Exchange Commission on October 25, 2005.
(7)Incorporated by reference from Form S-8 filed with the Securities and Exchange Commission on July 1, 2009.
(8)Incorporated by reference from Form 8-K filed with the Securities and Exchange Commission on July 28, 2006.
(9)Incorporated by reference from Form 8-K filed with the Securities and Exchange Commission on April 23, 2010.
(10)Incorporated by reference from Form 8-K filed with the Securities and Exchange Commission on May 7, 2008.


(11)Incorporated by reference from Form 10-Q filed with the Securities and Exchange Commission on October 21, 2010.
(12)Incorporated by reference from Form 10-K filed with the Securities and Exchange Commission for fiscal year ended December 31, 2010.
+Indicates management contract or compensation plan, contract or arrangement.
#Pursuant to Item 601(b)(32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this Report.