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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
Form 10-K

 
(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the fiscal year ended December 31, 2004
 
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’s telephone number, including area code: (214) 756-6900

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of class)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

 
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 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’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.   x
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨
 
The aggregate market value on June 30, 2004 of the voting and non-voting common equity held by non-affiliates of the registrant was $80,515,206. 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’s Common Stock, par value $0.01 per share, outstanding as of February 24, 2005: 5,746,897.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Selected portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

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WESTWOOD HOLDINGS GROUP, INC.
 
Index

 	  	 	  	PAGE

	
PART 1:	  	 	  	 	
Item 1.	  	Business	  	1	
Item 2.	  	Properties	  	13	
Item 3.	  	Legal Proceedings	  	13	
Item 4.	  	Submission of Matters to A Vote of Security Holders	  	13	
 	 	 	
PART II:	  	 	  	 	
Item 5.	  	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	  	14	
Item 6.	  	Selected Consolidated Financial Data	  	15	
Item 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	16	
Item 7A.	  	Quantitative and Qualitative Disclosures about Market Risk	  	22	
Item 8.	  	Financial Statements and Supplementary Data	  	23	
Item 9.	  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	23	
Item 9A.	  	Controls and Procedures	  	23	
Item 9B.	  	Other Information	  	23	
 	 	 	
PART III:	  	 	  	 	
Item 10.	  	Directors and Executive Officers of the Company	  	23	
Item 11.	  	Executive Compensation	  	24	
Item 12.	  	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	  	24	
Item 13.	  	Certain Relationships and Related Transactions	  	24	
Item 14.	  	Principal Accountant Fees and Services	  	24	
 	 	 	
PART IV:	  	 	  	 	
Item 15.	  	Exhibits and Financial Statement Schedules	  	24	
 
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PART I
 
Item 1. Business.
 
Unless the context otherwise requires, the term “we,” “us,” “our,” “Company,” “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. 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 “—Forward-Looking Statements and Risk Factors” below.
 
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 pension funds, public retirement plans, endowments and foundations, mutual funds and clients of Westwood Trust. Westwood Trust provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors. Our revenues are generally derived from fees based on a percentage of assets under management, and at December 31, 2004, Westwood Management and Westwood Trust collectively managed assets valued at approximately $4.0 billion. We have been providing investment advisory services since 1983 and, according to recognized industry sources, including Morningstar, Inc., when measured over multi-year periods ten years and longer, our principal asset classes rank above the median in performance within their peer groups.
 
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, a major focus of our business strategy is to continue building strong relationships with clients to better enable us to anticipate their needs and to satisfy their investment objectives. Our team approach ensures efficient, responsive service for our clients. Our future success will depend to a significant degree on both investment performance and our ability to provide responsive client service.
 
Our Common Stock is listed on the New York Stock Exchange under the ticker symbol “WHG.” We maintain a website at www.westwoodgroup.com. Information found on our website is not a part of this Report. All filings made by Westwood with the Securities and Exchange Commission (“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 without charge on our website. Additionally, our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, our Audit Committee Charter, our Compensation Committee Charter and our Governance/Nominating Committee Charter 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 Company.
 
Westwood Management
 
General
 
Westwood Management Corp. provides investment advisory services to large institutions, including corporate pension funds, public retirement plans, endowments, foundations and mutual funds, having at least $10 – $25 million in investable assets, depending on the asset class. Our overall investment philosophy is determined by our chief executive officer and chief investment officer, Susan M. Byrne, and, with respect to the bulk of assets under management, is a value-oriented approach, which is focused on achieving a superior, risk-adjusted return by investing in companies that are positioned for growth but are not fully recognized as such in the marketplace. This investment approach is designed to preserve capital in unfavorable periods and to provide superior real returns over the long term. Ms. Byrne has over 30 years of investment experience. Westwood Management’s investment advisory team also possesses substantial investment management experience, including a number of investment management, research and trading professionals. The continuity of the team and its years of experience are critical elements in successfully managing investments.
 
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Managed Asset Classes
 
Asset Management. We provide clients with a broad range of investment asset classes designed to meet varying investment objectives. This affords our clients the opportunity to meet their investment objectives through the use of one investment advisor. More than half of our assets under management are invested in our LargeCap Value asset class. The following sets forth the principal asset classes currently managed by Westwood Management:
 
LargeCap Value: Investments in equity securities of approximately 40-60 well-seasoned companies with market capitalizations generally over $1 billion. Our strategy for this portfolio is to invest in companies where we expect future profitability, driven by operational improvements, will be higher than expectations reflected in current share prices.
 
SMidCap Value: Investments in equity securities of approximately 40-60 companies with market capitalizations between $100 million and $10 billion. Similar to the LargeCap Value asset class, we seek to discover the same kinds of operational improvements that are driving earnings growth, but within small to mid-size companies that can be purchased inexpensively.
 
SmallCap Value: Investments in equity securities of approximately 40-70 companies with market capitalizations between $100 million and $2.5 billion. Similar to the LargeCap Value and SMidCap Value classes, we seek to invest in high quality companies where earnings growth is driven by operational improvements that are not fully recognized by the market.
 
Real Estate Investment Trusts (or REITs): Investments in the publicly traded equity securities of approximately 50 real estate investment trusts. Our investment process involves making investment selections based on qualitative research of high quality REITs.
 
Balanced: Investments in a combination of equity and fixed income securities, which are designed to provide both growth opportunities and income, while also placing emphasis upon asset preservation in “down” markets. Westwood Management applies its expertise in dynamic asset allocation and security selection in carrying out this balanced strategy approach.
 
Alternative Real Income: Investments in dividend-paying common stocks, straight and convertible preferred stock, master limited partnerships, REITs and selected debt instruments. The portfolio strategy focuses on companies with strong and improving cash flow sufficient to support a sustainable or rising dividend. This asset class is targeted towards investors seeking high current income through dividend-paying and/or interest-bearing securities.
 
Fixed Income Core/Intermediate Bonds: Investments in high-grade, intermediate term, corporate and government bonds. We seek to add value to client portfolios through yield curve positioning and investment in improving credit quality.
 
Each asset class is a portfolio of equity and/or fixed income securities selected by Westwood Management’s portfolio teams to best provide the long term returns consistent with Westwood Management’s investment philosophy. Our portfolio teams make decisions for all of Westwood Management’s asset classes in accordance with the investment objectives and policies of such asset classes, including determining when and which securities to purchase and sell.
 
We primarily employ a value-oriented approach in managing the bulk of our equity asset classes. The common thread that permeates throughout our investment strategies is our focus on a disciplined approach to controlling risk and preserving the core value of the assets under management whenever possible. Our value oriented asset classes have a greater emphasis on identifying companies where earnings result from actual operational improvements and not manufactured improvements occurring through financial statement adjustments. Our desire to prevent the loss of the core value of the assets under management is the overriding objective of this strategy, even if the cost is the loss of opportunity for potentially higher returns. Whether through investments in industry leaders or in companies that provide steady and stable growth, Westwood Management seeks to consistently demonstrate superior performance relative to industry peers and the broad market.
 
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More than two-thirds of our assets under management are invested in equity securities of companies with a large market capitalization. When measured over multi-year periods, ten years and longer, Westwood Management’s principal asset classes rank above the median within their peer groups in performance according to recognized industry sources, including Morningstar, Inc. For the ten-year period ended on December 31, 2004, our LargeCap Value and Balanced asset classes rank in the top quartile in their peer groups.
 
Our assets under management have grown 68.4% from December 31, 1999 through December 31, 2004. Our ability to realize such growth is a result of our competitive long-term performance record and our strong relationships with investment consulting firms throughout the nation. We are continually looking for opportunities to expand our asset classes in terms of growing our existing asset classes and developing new portfolios focusing on investment areas that are not currently part of our asset classes under management. We primarily intend to grow our asset classes internally, but may also consider acquiring new asset classes from third parties, as discussed under “—Growth Strategy” below. Our growth strategy not only provides our clients more investment opportunities, but also diversifies our assets under management, thereby reducing our risk in any one area of investment and increasing our competitive ability to attract new clients.
 
Cash Management. Westwood Management also provides cash management and custodial services for the cash reserve funds of SWS Group, Inc. (“SWS”). We were spun-off from SWS in 2002. The SWS cash reserve funds totaled $194 million at December 31, 2004. Westwood Management charges a fee based on the total amount of cash assets under management.
 
Advisory and Subadvisory Service Agreements
 
Westwood Management manages accounts of its clients under investment advisory and subadvisory agreements. As is common in the asset management industry, these agreements are usually terminable upon short notice and provide for compensation based on the market value of the client’s assets under management. Our fees are generally payable in advance on a calendar quarterly basis. 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 the investment objectives and restrictions imposed by the clients. Unless otherwise directed in writing by our client, Westwood Management has the authority to vote all proxies with respect to a client’s assets.
 
Westwood Management is also a party to subadvisory agreements with other investment companies 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 computed based upon the daily net assets of the client and are payable on a monthly basis. As with our advisory agreements, these agreements are terminable upon short notice.
 
Under our subadvisory agreement with Gabelli Advisers, Inc., Westwood Management provides investment advisory services to the Westwood Funds family of mutual funds. The Westwood Equity Fund is a large cap value fund with assets consisting of securities valued at approximately $182 million as of December 31, 2004. For the ten-year period ended on December 31, 2004, the Westwood Equity Fund ranked in the top quartile in the Large Value category according to Morningstar, Inc. Westwood Management owns shares of Class A Common Stock representing an 18.8% economic interest in Gabelli Advisers, Inc., a subsidiary of Gabelli Asset Management Inc. Based on SEC filings, we believe that Gabelli Asset Management Inc. owned 16.1% of our Common Stock as of December 31, 2004.
 
Our three largest clients accounted for approximately 19.3% of total revenues for the twelve months ended December 31, 2004.
 
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Westwood Trust
 
General
 
Westwood Trust provides to institutions and high net worth individuals generally having at least $1 million in assets under management trust and custodial services and participation in common trust funds that it sponsors. Westwood Trust seeks to define and improve the risk/return profile of the client’s investment portfolio by complementing or enhancing existing investment strategies. Westwood Trust also provides back office services to its clients, including tax reporting, distribution of income to beneficiaries, preparation of trust and account statements and attending to the special needs of particular trusts. Westwood Trust serves as trustee for tax and estate-planning purposes, as well as 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 as defined contribution plans, pensions and 401(k) plans. Westwood Trust may be appointed trustee and 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 these trusts and assists in developing tax efficient trust portfolios for them. The fees charged by Westwood Trust are separately negotiated with each client and are 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 Trust examining the client’s financial situation, including the client’s portfolio of investments, and advising the client on ways in which it can enhance its investment returns and 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 we commingle clients’ assets to achieve economies of scale. Our common trust funds fall within two basic categories: personal trust and employee benefit trust. We sponsor common trust funds for most of the asset classes managed by Westwood Management. We also engage third party subadvisors for some of our 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. We offer our clients the ability to diversify among eleven different asset classes. Westwood Trust Enhanced Balanced portfolios seek to combine these asset classes into a unique 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 portfolios based on historical return, risk and correlation data, as well as an analysis of our 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 provide us the ability to leverage the existing distribution infrastructure and capabilities of other financial services firms and intermediaries and focus on our core competency of developing outstanding investment asset classes.
 
Institutional Investment Consultants
 
Investment management consulting firms serve as gatekeepers to an overwhelming percentage of corporate pension plans, endowments and foundations, which represent Westwood’s primary client markets. Consultants provide
 
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guidance and expertise in setting a client’s asset allocation strategy, as well as the establishment of an investment policy. In addition, consultants make recommendations of best in class investment firms that they believe will allow their client’s investment objectives to best be met. Westwood has established strong relationships with many national and regional investment consulting firms, which has resulted in Westwood 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 the underlying institutional client base.
 
Subadvisory Relationships
 
Westwood’s sub-advisory relationships allow Westwood to extend the reach of its investment management services to the clients of other investment companies that have broad, established distribution capabilities. In sub-advisory arrangements, Westwood’s client is typically the investment company through which our services are offered to investors. In these sub-advisory arrangements, Westwood’s investment advisory services are typically made available through retail-based mutual fund offerings. The investment company that sponsors the mutual fund is responsible for marketing, distribution, operations and accounting related to these funds.
 
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 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 assembling this focused, stable team has contributed in large part to our solid investment performance, superior client service and a growing array of available asset classes. Opportunities for our future growth are expected to come from existing and new clients and consultant relationships, growth of assets in our emerging asset classes, continued growth of the Westwood Trust platform, strategic acquisitions and alliances and the continued strengthening of 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 a high level of quality service to these existing relationships. Additionally, we will pursue growth through targeted sales and marketing efforts that emphasize our investment performance and superior client service. New institutional client accounts are generally derived via investment consultants. We have been successful in developing solid long-term relationships with many national and regional investment consultants. The familiarity with our firm, our people and our processes that we have built in these relationships is one of the key factors in being considered for new client investment mandates.
 
Attract and retain key employees. In order to achieve our 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 so that the success of our employees will be closely tied to the success of our clients. We believe these factors are critical ingredients in maintaining a stable, client-focused environment. As a result, we have built a firm that we believe can support significant future growth.
 
Grow assets in our additional asset classes. LargeCap Value is our flagship product; however, we have continued to develop additional asset classes in response to client needs and opportunities we see in the marketplace. Westwood Management has managed our SMidCap Value asset class with solid results for clients at Westwood Trust for several years. We now believe we have the team in place to fully support this product in the institutional marketplace and as such we have begun marketing this asset class to institutional investment consultants. We have also recently launched our SmallCap Value and Alternative Real Income asset classes and have generated strong investment returns in these products as well. If we continue to deliver strong performance, we believe the demand for these asset classes can provide meaningful growth in our assets under management in the future.
 
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Continued growth of the Westwood Trust platform. Westwood Trust has experienced solid growth in serving small- to medium-sized institutions and high net worth individuals. We are seeing a growing level of interest from our clients in the diversified, highly attentive service model that we have developed. We believe the continued acceptance of our Enhanced Balanced product, which offers diversified exposure to multiple asset classes in a tax efficient, comprehensive solution for clients, provides us with opportunities for future growth.
 
Pursue strategic acquisitions and alliances. We will evaluate strategic acquisition, joint venture and alliance opportunities carefully. We may, in time, have an interest in pursuing asset management firms or trust companies that have assets with respect to which we have expertise or those that appear appropriate as a means of expanding the range of asset classes we offer or expanding our distribution capabilities. By acquiring investment firms that successfully manage asset classes in which we do not specialize, we could attract new clients and provide our existing clients with a more diversified range of asset classes. We may also consider entering into alliances with other financial services firms that would allow us to leverage our core competency of developing superior investment products in combination with alliance partners that could provide us with enhanced distribution capabilities.
 
Continue strengthening our brand name. We believe that the strength of our brand name has been a key component to our long-term tenure in the investment industry and will continue to be instrumental to our future success. We have developed our strong brand name largely through high profile coverage in various investment publications and electronic media. A number of our investment professionals, including Ms. Byrne and David S. Spika, enjoy a visible presence in print and electronic media, which also enhances our brand name. We will continue to look for creative ways to strengthen our brand name and reputation in all of 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 our management anticipates that we will 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 we do.
 
Further, we compete with other asset management firms on the basis of asset classes offered, the investment performance of those asset classes in absolute terms and relative to peer group performance, quality of service, fees charged, the level and type of compensation offered to key employees, and the manner in which asset classes are marketed. Many of our competitors have more asset classes and services and may also have substantially greater assets under management.
 
We compete against an ever-increasing number of investment dealers, banks, insurance companies and others that sell equity funds, taxable income funds, tax-free investments and other investment products. Also, the allocation by many investors of assets away 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 effectively compete with us. In short, the competitive landscape in which we operate is both intense and dynamic, and there can be no assurance that we will 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 degree of success in competing successfully for new clients, it is a process to which we must dedicate significant resources over an extended period, with no certainty of success.
 
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Regulation
 
Westwood Management
 
Virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and stockholders of registered investment companies. Under such laws and regulations, agencies that regulate investment advisers, such as ourselves, have broad administrative powers, including the power to limit, restrict or prohibit such an adviser from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible 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 level 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. Under the rules and regulations of the SEC promulgated pursuant to the federal securities laws, we are subject to periodic examination by the SEC. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act, ranging from censure to termination of an investment adviser’s registration. The failure of Westwood Management to comply with the requirements of the SEC could have a material adverse effect on Westwood. We believe that we are in substantial compliance with the requirements of the regulations under the Investment Advisers Act.
 
Westwood Trust
 
Westwood Trust also 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; and 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 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 the law defines that term).
 
Westwood Trust is limited by the Finance Code in the payment of dividends to undivided profits: 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 the Company out of its undivided profits.
 
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 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.
 
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Employees
 
At December 31, 2004, we had 45 full-time employees, 20 of whom are investment management, research and trading professionals, 11 of whom are marketing and client service professionals and 14 of whom are operations and business management professionals. None of our employees are represented by a labor union, and we consider our employee relations to be good.
 
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Forward-Looking Statements and Risk Factors
 
Forward-Looking Statements
 
Statements in this Report and the Annual Report to Stockholders that are not purely historical facts, including statements about our expected future financial position, results of operations or cash flows, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “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. 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 below and elsewhere in this Report. Readers are cautioned not to place undue reliance on forward-looking statements, for no assurances can be given with respect to any forward-looking statements. In addition to the other information in this Report, the following factors, which may affect our current position and future prospects, should be considered carefully in evaluating us and an investment in our common stock.
 
Risk Factors
 
Poor investment performance of the assets managed by us could adversely affect our results of operations.
 
Because we compete with many other asset management firms on the basis of asset classes offered and the investment performance of those asset classes, our success is dependent to a significant extent on the investment performance of the assets that we manage. Underperformance relative to peer groups for our various asset classes could adversely affect our results of operations, especially if such underperformance is sustained for a lengthy period of time. Strong performance stimulates new client accounts, which results in higher revenues for us. Conversely, poor performance tends to result in the loss or reduction of client accounts, with corresponding decreases in revenues.
 
If we are unable to capitalize on the costs we have recently incurred and are continuing to incur to develop some new asset classes and otherwise broaden Westwood’s capabilities, our results of operations may be adversely affected.
 
We have incurred significant costs over the last several years to develop some new asset classes, including SMidCap Value, SmallCap Value and Alternative Real Income, and also to upgrade our business infrastructure. Some of the costs associated with these improvements will continue to be incurred in future periods and are relatively fixed. While we believe that these investments enhance our future business prospects, no assurance can be given that we will be able to capitalize on these investments and, in the event we are not able to do so, our results of operations may be adversely affected.
 
Some members of our management are 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, particularly Susan M. Byrne, our Chairman of the Board and Chief Executive Officer, and Brian O. Casey, our President and Chief Operating Officer. We do not have employment agreements with any of our key employees, including Ms. Byrne or Mr. Casey. The loss of the services 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. As with other asset management businesses, our future performance depends to a significant degree upon the continued contributions of certain officers, investment professionals and other key marketing, client service and management personnel. There is substantial competition for these types of skilled personnel.
 
Some executive officers have substantial influence over our investment policies.
 
Susan M. Byrne, our chief investment officer, establishes and implements policy with respect to our investment advisory activity. Ms. Byrne and Mr. Casey decide on any changes in management philosophy, style or approach with respect to our investment advisory policies.
 
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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 in the securities markets or certain segments of those markets or short-term volatility in the securities markets or segments thereof could result in investors withdrawing assets from the markets or decreasing their rate of investment, either 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 two-thirds of our assets under management are invested in equity securities of companies with a large market capitalization. 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 Westwood 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 and/or the election by clients to select other firms to manage their assets, either of which events would result in decreased assets under management and therefore reduced revenues and a decline in results of operations.
 
Our business is dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal; therefore, 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 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 an adverse impact on our business, financial condition and results of operations.
 
Our largest three clients accounted for 19.3% of total revenues for the twelve months ended December 31, 2004, and 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 our existing client relationships or in securing additional clients. Any failure by us to retain one or more of our large clients or establish profitable relationships with additional clients could have a material adverse effect on our business, financial condition and results of operations.
 
Any event that negatively affects the asset management industry 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.
 
Due to the substantial cost and time required to introduce new asset classes in our industry, we may not be able to successfully introduce new asset classes in a timely manner, or at all.
 
The development and marketing of new asset classes in our industry is extremely costly and requires a substantial amount of time. Our ability to successfully market and sell a new asset class depends on our financial resources, the performance results of the asset class, the timing of the offering and our marketing strategies. Once an asset class is developed, whether through acquisition or internal development, we need to be able to effectively market the asset class to our existing and prospective clients. This entails incurring significant financial expenses 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, our ability to sell new asset classes to our existing and prospective
 
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clients depends on our ability to meet or exceed the performance of our competitors who offer the same or similar asset classes. We may not be able to profitably manage the assets within a given asset class. 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 capitalize on the costs and expenses incurred in developing new asset classes, we may experience losses as a result of our management of these asset classes, and our ability to introduce further new asset classes and compete in our industry may be hampered.
 
If we are unable to successfully and timely expand our asset classes, we may not be able to maintain our competitive position in the asset management industry.
 
Our ability to remain competitive will depend, in part, on our ability to expand our asset classes under management. We are continually looking for opportunities to expand our asset classes, both in terms of growing our existing asset classes and developing new asset classes focusing on investment areas that we do not currently cover. We intend to grow our asset classes either internally or by acquiring asset classes from third parties. It may be costly and time consuming for us to develop these new assets internally. Moreover, we may not be able to find asset classes that are consistent with our growth strategies or acquire asset classes from third parties on terms acceptable to us, if at all. If we are unable to expand our asset classes or unable to do so in a timely manner, we may lose clients to other asset management firms, which would have an adverse effect on our business, financial condition and results of operations.
 
Our business is subject to pervasive regulation with attendant costs of compliance and serious consequences for violations.
 
Virtually all aspects of our business are subject to various laws and regulations. Violations of such laws or regulations could subject us and/or our employees to disciplinary proceedings or civil or criminal liability, including revocation of licenses, censures, fines or temporary suspension, permanent bar 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. These laws and regulations generally grant regulatory agencies and bodies broad administrative powers, including, in some cases, the power to limit or restrict us from operating our business and, in other cases, the powers to place us under conservatorship or closure, in the event we fail to comply with such laws and regulations. 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 “ — Regulation.”
 
Potential 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 amount of assets, financial and personal information for our clients. Although we have implemented a system of controls to minimize the risk of fraudulent taking or misuse of assets and information, there can be no assurance that our controls will be adequate to prevent taking or misuse 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 our resources and distract our management from the operation of Westwood and could also result in regulatory sanctions. Additionally, any such fraudulent actions could adversely affect some of our clients in other ways, and these clients could seek redress against us.
 
Acquisitions, which may be part of our long-term business strategy, 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 acquisitions of similar or complementary businesses. See “ — Growth Strategy.” If we are not correct when we assess the value, strengths, weaknesses, liabilities and potential profitability of acquisition candidates or if we are not successful in integrating the operations of the acquired businesses, the success of the combined business could be compromised. Any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include, among others, potential exposure to unknown liabilities of acquired companies and to acquisition costs and expenses, the difficulty and expense of integrating the
 
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operations and personnel of the acquired companies, the potential disruption 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 future 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, technologies or businesses of acquired companies may not be effectively assimilated into our business or have a positive 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 classes 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.
 
Various factors may hinder the declaration and payment of dividends.
 
We have historically paid a quarterly dividend. However, the payment of dividends in the future 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, any loan agreement restrictions, 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 time our primary source of cash is 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 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 sufficient 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 will vary greatly from quarter to quarter depending on, among other things, capital expenditures, fluctuations in our operating results and financing activities. We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to satisfy our cash requirements for the foreseeable future. However, if future financing is 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, and any future debt financings could involve restrictive covenants that limit our ability to take certain actions.
 
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The tax separation agreement that we entered into with SWS contains indemnification obligations for SWS and us that neither party may be able to satisfy, which could result in increased expenses and liabilities for us.
 
The tax separation agreement that we entered into with SWS allocates responsibility between SWS and us for various liabilities and obligations. However, the availability of such indemnities will depend upon the future financial strength of SWS and us. SWS or we may not be in a financial position to fund such indemnities if they should arise, which could result in increased expenses and liabilities for us. The tax separation agreement provides that each party will indemnify the other with respect to some taxes attributable to their respective businesses arising before or after the spin-off.
 
Some provisions may discourage a third party from acquiring control of Westwood.
 
It could be difficult for a potential bidder to acquire us because our Certificate of Incorporation and Bylaws contain provisions that may discourage takeover attempts. In particular, our Certificate of Incorporation and Bylaws permit our Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board may determine. Additionally, our directors may only be removed for cause by a vote of the holders of at least two-thirds of the shares of stock entitled to vote, and stockholders cannot act by written consent. We have also elected to not exclude ourselves from the restrictions of Section 203 of the Delaware General Corporation Law, which makes it more difficult for a person who is an “interested stockholder” to effect various business combinations with a corporation for a three-year period. These provisions may increase the cost or difficulty for a third party to acquire control of us or may discourage acquisition bids altogether.
 
Item 2. Properties.
 
We conduct our principal operations through a leased property with approximately 21,600 square feet located in Dallas, Texas. The lease agreement expires in May 2011. 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.
 
Item 4. Submission of Matters to A Vote of Security Holders.
 
No matter was submitted to a vote of our stockholders during the quarterly period ended December 31, 2004.
 
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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 under the symbol “WHG” since July 1, 2002, the first trading day after SWS completed the spin-off of Westwood by effecting a dividend distribution of all of the Westwood common stock held by SWS to all of its stockholders. At December 31, 2004, there were approximately 160 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 New York Stock Exchange for the periods indicated.

 	  	High

	  	Low

	
2004	  	 	 	  	 	 	
Fourth Quarter	  	$	19.98	  	$	17.75	
Third Quarter	  	 	19.70	  	 	17.00	
Second Quarter	  	 	18.00	  	 	16.75	
First Quarter	  	 	17.88	  	 	16.50	
 	 	 	
2003	  	 	 	  	 	 	
Fourth Quarter	  	$	18.18	  	$	16.65	
Third Quarter	  	 	21.70	  	 	15.20	
Second Quarter	  	 	19.40	  	 	13.15	
First Quarter	  	 	15.20	  	 	13.01	
 
Dividends
 
We have declared a cash dividend on our Common Stock for each quarter since the date of our spin-off. In 2003, we declared quarterly dividends of $0.02 per share for each of the first two quarters of the year, and quarterly dividends of $0.03 per share for each of the latter two quarters of the year. We also declared special dividends aggregating $1.08 per share in 2003. In 2004, we declared quarterly dividends of $0.04 per share for each of the first two quarters of the year, and quarterly dividends of $0.08 per share for each of the latter two quarters of the year. We also declared a special dividend of $0.75 per share in 2004. In addition, on February 9, 2005 we declared a quarterly cash dividend of $0.08 per share on our Common Stock payable on April 1, 2005 to stockholders of record on March 15, 2005. We currently intend to continue paying quarterly cash dividends in such amounts as our board of directors determines is appropriate. Any payment 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 undivided profits: 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 of director resolutions.
 
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Item 6. Selected Financial Data.
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
The selected consolidated financial data of Westwood with respect to each of the five years in the period ended December 31, 2004, and as of December 31, 2004, 2003, 2002, 2001 and 2000, except Assets Under Management, is derived from the audited consolidated financial statements of Westwood and should be read in conjunction with those statements. The data below for a portion of the year ended December 31, 2002 and for all of the years ended on or prior to December 31, 2001 reflects Westwood’s results as it has historically been operated as a part of SWS, and these results may not be indicative of Westwood’s performance as an independent company. 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.

 	  	Years ended December 31,
(in thousands, except per share amounts)

	
 	  	2004

	  	2003

	  	2002

	  	2001(1)

	  	2000

	
Statements of Income Data:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total revenues	  	$	19,980	  	$	20,078	  	$	21,624	  	$	19,587	  	$	16,136	
Total expenses	  	 	13,995	  	 	12,198	  	 	12,960	  	 	15,229	  	 	9,524	
Income before income taxes	  	 	5,985	  	 	7,880	  	 	8,664	  	 	4,358	  	 	6,612	
Provision for income taxes	  	 	2,299	  	 	2,996	  	 	3,453	  	 	3,097	  	 	2,628	
Net income	  	 	3,686	  	 	4,884	  	 	5,211	  	 	1,261	  	 	3,984	
Earnings per share – basic	  	$	0.68	  	$	0.91	  	$	0.97	  	$	0.23	  	$	0.74	
Earnings per share – diluted (2)	  	$	0.68	  	$	0.90	  	$	0.97	  	$	0.23	  	$	0.74	
Cash dividends declared per common share	  	$	0.99	  	$	1.18	  	$	0.04	  	 	—  	  	 	—  	
 	 	
 	  	As of December 31,
(in thousands)

	
 	  	2004

	  	2003

	  	2002

	  	2001(1)

	  	2000

	
Balance Sheet Data:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Cash and investments	  	$	19,352	  	$	21,056	  	$	18,589	  	$	15,720	  	$	12,519	
Total assets	  	 	26,277	  	 	26,237	  	 	24,120	  	 	21,053	  	 	18,100	
Stockholders’ equity	  	 	21,663	  	 	21,853	  	 	19,123	  	 	14,032	  	 	12,802	
 	 	 	 	 	 	
Assets Under Management (in millions)	  	$	3,996	  	$	3,954	  	$	4,078	  	$	4,120	  	$	3,601	

(1)	In 2001, total expenses include a $4.0 million equity based compensation charge, reflecting (i) the difference in value of $3.4 million between the amount paid by our executive officers to SWS for shares of our common stock purchased by them and the value for financial reporting purposes of the shares on December 14, 2001 and (ii) the below market interest rate associated with the loans made by Westwood to the executive officers to enable them to purchase such shares (these loans were fully repaid by the executive officers in 2003). Total expenses would have been approximately $11,253,000 and net income would have been approximately $5,027,000 without the compensation charge.	
(2)	Earnings per share figures reflect a 1,003.8-for-1 stock split in the form of a stock dividend effective as of June 21, 2002. All amounts have been restated to reflect the impact of this stock split.	
 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward looking statements as a result of various factors, including those set forth under “Business – Forward-Looking Statements and Risk Factors,” elsewhere in this Report or in the information incorporated by reference in this Report. 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.
 
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 pension funds, public retirement plans, endowments and foundations, mutual funds and clients of Westwood Trust. Westwood Trust provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors. Our revenues are generally derived from fees based on a percentage of assets under management, and at December 31, 2004 Westwood Management and Westwood Trust collectively managed assets valued at approximately $4.0 billion. We have been providing investment advisory services since 1983 and, according to recognized industry sources, including Morningstar, Inc., when measured over multi-year periods 6 years and longer, our principal asset classes have consistently ranked above the median in performance within their peer groups.
 
One of the priorities on which we have focused since our spin-off in 2002 is building a foundation in terms of personnel and infrastructure to support a potentially much larger business. We have also developed products that we believe will be desirable within our target institutional marketplace. The cost of developing new products and the organization as a whole has resulted in us incurring expenses that do not currently have material offsetting revenue. Now that we believe the foundation and the products are in place we are taking these new products to the institutional marketplace and are hopeful that institutional investors will recognize the value in these products and generate new revenue streams for us.
 
Revenues
 
We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management, which manages its clients’ 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. Most of Westwood Management’s advisory fees are paid quarterly in advance based on the assets under management on the last day of the preceding quarter. However, some fees are paid quarterly in arrears or are based on daily or monthly average assets under management for the stated period. Westwood Management recognizes revenues as services are rendered.
 
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, which in turn is influenced by the complexity of the operations of the trust and the services provided. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Similar to advisory fees generated by Westwood Management, most trust fees are paid quarterly in advance and are recognized as services are rendered.
 
Our other revenues generally consist of interest income, investment income and consulting fees. We invest most of our cash in money market funds, although we do invest smaller amounts in bonds and equity instruments. The most significant component of our other revenues is investment income and to a lesser extent, consulting fees paid to us by Gabelli Advisers, Inc.
 
Assets Under Management
 
Assets under management increased $42 million, or 1.1%, to $4.0 billion at December 31, 2004 compared to $4.0 billion at December 31, 2003. The increase in assets under management was primarily due to the market
 
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appreciation of assets under management and inflows of assets from new clients, partially offset by the withdrawal of assets by certain clients. Quarterly average assets under management decreased $75 million, or 1.9%, to $3.9 billion for 2004 compared with $4.0 billion for 2003.
 
Assets under management decreased $124 million, or 3.0%, to $4.0 billion at December 31, 2003 compared to $4.1 billion at December 31, 2002. The decline in assets under management was primarily due to the withdrawal of assets by certain clients, partially offset by the market appreciation of assets under management and inflows of assets from new clients. Quarterly average assets under management decreased $183 million, or 4.4%, to $4.0 billion for 2003 compared with $4.2 billion for 2002.

 	  	As of December 31, (1)
(in millions)

	  	% Change

	 	
 	  	2004

	  	2003

	  	2002

	  	2004 vs. 2003

	 	 	2003 vs. 2002

	 	
Westwood Management Corp.	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Separate Accounts	  	$	1,853	  	$	1,832	  	$	1,786	  	1.1	%	 	2.6	%	
Subadvisory	  	 	577	  	 	614	  	 	1,108	  	(6.0	)	 	(44.6	)	
Westwood Funds	  	 	372	  	 	420	  	 	428	  	(11.4	)	 	(1.9	)	
Managed Accounts	  	 	169	  	 	155	  	 	108	  	9.0	 	 	43.5	 	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Total	  	 	2,971	  	 	3,021	  	 	3,430	  	(1.7	)	 	(11.9	)	
 	 	 	 	 	 	
Westwood Trust	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Commingled Funds	  	 	856	  	 	759	  	 	528	  	12.8	 	 	43.8	 	
Private Accounts	  	 	122	  	 	121	  	 	74	  	0.8	 	 	63.5	 	
Agency/Custody Accounts	  	 	47	  	 	53	  	 	46	  	(11.3	)	 	15.2	 	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Total	  	 	1,025	  	 	933	  	 	648	  	9.9	 	 	44.0	 	
 	 	 	 	 	 	
Total Assets Under Management	  	$	3,996	  	$	3,954	  	$	4,078	  	1.1	%	 	(3.0	)%	

	

	  	

	

	  	

	

	  	

	

	 	

	

	

(1)	The above table excludes the SWS cash reserve funds for which Westwood Management serves as investment advisor and Westwood Trust serves as custodian. The SWS cash reserve funds were $194 million, $178 million and $490 million as of December 31, 2004, 2003 and 2002, respectively. These accounts are noted separately due to their unique nature within our business and because they can experience significant fluctuations on a weekly basis.	
 
Westwood Management. In the above table, “Separate Accounts” represent corporate pension and profit sharing plans, public employee retirement accounts, Taft Hartley plans, endowments, foundations and individuals. “Subadvisory” represents relationships where Westwood Management provides investment management services for funds offered by other financial institutions. “Westwood Funds” represent a 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.
 
Westwood Trust. In the above table, “Commingled Funds” represent funds established to facilitate investment of fiduciary assets 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 for a fee, but does not act in an advisory capacity.
 
Matters Involving Our Spin-Off From SWS Group, Inc.
 
We were incorporated under the laws of the State of Delaware on December 12, 2001 as a subsidiary of SWS. Our principal assets consist of the capital stock of Westwood Management and Westwood Trust. On June 28, 2002, SWS completed the spin-off of Westwood by effecting a dividend distribution of all of our common stock held by SWS to all of its stockholders on a pro rata basis. We are now an independent public company, with SWS having no continuing ownership interest in us.
 
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Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and reflect our historical financial position, results of operations and cash flows both as an independent public company and, prior to the completion of the spin-off, as a part of SWS. The financial information included in this Report that relates to periods up to and including the period in which our spin-off from SWS was completed (2002) is not necessarily indicative of what our financial position, results of operations or cash flows would have been had we operated as an independent public company during such periods, nor is it necessarily indicative of our future performance. Up to and including the period in which our spin-off from SWS was completed, our expenses were allocated by SWS on the basis of our relative number of employees, relative revenues and other allocation bases. These allocated expenses represent services provided by SWS, including human resources, accounting, internal audit, income tax, legal, insurance and information technology. In the period since the completion of the spin-off, we have obtained from third parties many of the services previously provided by SWS, and have found, in some cases, that the cost of these third party services is higher than those provided by SWS. We also now incur the additional expenses associated with being a publicly-held company. As a result, our pre-spin-off expense levels are generally lower than our post-spin-off expense levels.
 
Results of Operations
 
The following table and discussion of our results of operations is based upon data derived from the 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

	 	
 	  	2004

	  	2003

	  	2002

	  	2004 vs. 2003

	 	 	2003 vs. 2002

	 	
Revenues	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Advisory fees	  	$	13,069	  	$	14,008	  	$	16,223	  	(6.7	)%	 	(13.7	)%	
Trust fees	  	 	5,818	  	 	4,794	  	 	4,508	  	21.4	 	 	6.3	 	
Other revenues	  	 	1,093	  	 	1,276	  	 	893	  	(14.3	)	 	42.9	 	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Total revenues	  	 	19,980	  	 	20,078	  	 	21,624	  	(0.5	)	 	(7.1	)	
 	 	 	 	 	 	
Expenses	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Employee compensation and benefits	  	 	9,799	  	 	8,492	  	 	9,149	  	15.4	 	 	(7.2	)	
Sales and marketing	  	 	473	  	 	563	  	 	442	  	(16.0	)	 	27.4	 	
Information technology	  	 	692	  	 	779	  	 	850	  	(11.2	)	 	(8.4	)	
Professional services	  	 	1,248	  	 	892	  	 	1,075	  	39.9	 	 	(17.0	)	
General and administrative	  	 	1,783	  	 	1,472	  	 	1,444	  	21.1	 	 	1.9	 	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Total expenses	  	 	13,995	  	 	12,198	  	 	12,960	  	14.7	 	 	(5.9	)	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Income before income taxes	  	 	5,985	  	 	7,880	  	 	8,664	  	(24.0	)	 	(9.0	)	
Provision for income taxes	  	 	2,299	  	 	2,996	  	 	3,453	  	(23.3	)	 	(13.2	)	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
Net income	  	$	3,686	  	$	4,884	  	$	5,211	  	(24.5	)%	 	(6.3	)%	

	

	  	

	

	  	

	

	  	

	

	 	

	

	
 
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
 
Total Revenue. Our total revenues decreased by 0.5% to $20.0 million in 2004 compared with $20.1 million in 2003. Advisory fees decreased by 6.7% to $13.1 million in 2004 compared with $14.0 million in 2003 primarily due to the withdrawal of assets by certain clients. This decrease in assets was offset to some extent by the market appreciation of assets under management. Trust fees increased by 21.4% to $5.8 million in 2004 compared with $4.8 million in 2003 primarily due to increased average assets under management due to inflows from new and existing clients and market appreciation of assets under management, as well as a higher average fee resulting from a change in the mix of Trust assets under management. Other revenues, which generally consist of interest and investment income and consulting fees, decreased by 14.3% to $1.1 million in 2004 compared with $1.3 million in 2003. Other revenues decreased primarily as a result of a reduction in interest income of $577,000 due to accrued interest and accretion of discount on notes receivable from stockholders that occurred in 2003 but did not occur in 2004, a $101,000 reduction in mark to market provisions on investments and a reduction in consulting income of $19,000 due to decreased assets under management in the Westwood Funds. These decreases were partially offset by increases in realized gains of $402,000, investment income of $80,000 and other miscellaneous, non-recurring income of $32,000.
 
18

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Index to Financial Statements
Employee Compensation and Benefits. Employee compensation and benefits, which generally consist of salaries, incentive compensation, equity based compensation expense and benefits, increased by 15.4% to $9.8 million compared with $8.5 million in 2003. This increase resulted primarily from an increase in restricted stock expense of approximately $858,000 recognized in 2004 related to prior year and current year grants of restricted stock compared to six month’s worth of amortization in the prior year, an increase in salary expense of $274,000, $242,000 of expense related to the initiation of a broad-based profit sharing contribution in 2004, deferred compensation expense increases of $67,000 primarily associated with the termination of our deferred compensation plan and an increase of $62,000 in other payroll related expenses. These increases were partially offset by a decrease of $196,000 in incentive compensation expense in 2004 compared to 2003, resulting from decreased income before taxes and an increased emphasis on equity-based compensation. At December 31, 2004 we had 45 full-time employees compared to 43 at December 31, 2003.
 
Sales and Marketing. Sales and marketing costs consist of expenses associated with our marketing efforts, including travel entertainment, direct and consultant marketing and advertising costs. Sales and marketing costs decreased by 16.0% to $473,000 in 2004 compared with $563,000 in 2003. The decrease is primarily the result of a decrease in travel and entertainment costs of $129,000 partially offset by an increase of $39,000 in direct marketing costs.
 
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 decreased by 11.2% to $692,000 in 2004 compared with $779,000 in 2003. The decrease is primarily due to a $61,000 reduction in costs associated with investment research tools, a $23,000 decrease in infrastructure maintenance costs, a decrease of $15,000 in telecommunications costs and a $9,000 reduction in software maintenance costs. These decreases were partially offset by an increase of $21,000 in other information technology related costs.
 
Professional Services. Professional services expenses generally consist of audit, external subadvisor expense, legal and other professional fees. Professional services expense increased by 39.9% to $1.2 million in 2004 compared with $892,000 in 2003. The increase is primarily due to an increase of $281,000 in professional fees related to Sarbanes-Oxley compliance and a $186,000 increase in advisory fees paid to external subadvisors due to the engagement of a subadvisor in 2004 to manage growth portfolios at Westwood Trust and increased assets under management in high yield and international common trust funds sponsored by Westwood Trust. These increases were partially offset by a decrease of $86,000 in legal expense and a decrease of $25,000 in other professional fees.
 
General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, insurance, office supplies, custody expense, investor relations, charitable contributions and other miscellaneous expenses. General and administrative expenses increased by 21.1% to $1.8 million in 2004 compared with $1.5 million in 2003. The increase is primarily due to approximately $110,000 in costs incurred in 2004 associated with moving and furnishing the Company’s corporate office, an increase of $76,000 in rent expense, increases totaling $61,000 in other administrative expenses, an increase of $27,000 in custody expense due to costs associated with the transition to a new subadvisor for the International Equity product at Westwood Trust as well as increased assets under management at Westwood Trust, an increase of $20,000 in director’s fees primarily due to an increase in the number of outside directors and an increase of $17,000 in corporate insurance costs.
 
Provision for Income Taxes. Provision for income taxes decreased by 23.3% to $2.3 million in 2004 compared with $3.0 million in 2003 primarily due to lower income before taxes. The effective tax rate was 38.4% in 2004 compared to 38.0% in 2003.
 
19

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Index to Financial Statements
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
 
Total Revenue. Our total revenues decreased by 7.1% to $20.1 million in 2003 compared with $21.6 million in 2002. Advisory fees decreased by 13.7% to $14.0 million in 2003 compared with $16.2 million in 2002 primarily as a result of the withdrawal of assets by certain clients offset by the market appreciation of assets under management and inflows of assets from new clients. Trust fees increased by 6.3% to $4.8 million in 2003 compared with $4.5 million in 2002 primarily due to a higher average fee resulting from a change in the mix of Trust assets under management as well as increased average assets under management due to inflows from new and existing clients and market appreciation of assets. Other revenues, which generally consist of interest and investment income and consulting fees, increased by 42.9% to $1.3 million in 2003 compared with $893,000 in 2002. Other revenues increased primarily as a result of increased interest income due to accretion of discount on notes receivable from stockholders created by the repayment of those notes by some stockholders.
 
Employee Compensation and Benefits. Employee compensation and benefits decreased by 7.2% to $8.5 million in 2003 compared with $9.1 million in 2002. This decrease resulted primarily from lower incentive compensation expense due to lower income before income taxes as well as an increased emphasis on equity-based compensation. The decrease in incentive compensation was offset to some extent by restricted stock expense that was recognized in 2003 but not in 2002, as well as a full year of stock option expense in 2003 compared to 2002 in which stock option expense began being recognized in the third quarter. At December 31, 2003 we had 43 full-time employees compared with 44 full-time employees at December 31, 2002.
 
Sales and Marketing. Sales and marketing costs increased by 27.4% to $563,000 in 2003 compared with $442,000 in 2002. The increase is primarily the result of increased expenditures for marketing to institutional investment consultants as well as increased travel and entertainment costs.
 
Information Technology. Information technology costs decreased by 8.4% to $779,000 in 2003 compared with $850,000 in 2002. The decrease is primarily due to costs related to redeveloping our website, which were incurred in 2002 but not in 2003.
 
Professional Services. Professional services expenses decreased by 17.0% to $892,000 in 2003 compared with $1.1 million in 2002. The decrease in these expenses is primarily the result of the absence in 2003 of spin-off related legal and accounting expenses, as well as legal expenses related to litigation that were incurred in 2002 but not in 2003. This decline was partially offset by increased legal and accounting costs associated with being an independent public company.
 
General and Administrative. General and administrative expenses increased by 1.9% to $1.5 million in 2003 compared with $1.4 million in 2002. The increase is primarily due to increased corporate insurance costs offset to some extent by lower listing fees paid to the New York Stock Exchange (we incurred ongoing listing fees in 2003 compared to the higher initial listing fee in 2002).
 
Provision for Income Taxes. Provision for income taxes decreased by 13.2% to $3.0 million in 2003 compared with $3.5 million in 2002 due to lower income before income taxes as well as an effective tax rate of 38.0% in 2003 compared to 39.9% in 2002. The decrease in the effective tax rate was primarily due to a reduction in the Company’s effective franchise tax rate and the effect of a franchise tax refund related to prior years.
 
Liquidity and Capital Resources
 
Historically, we have funded our operations and cash requirements with cash generated from operating activities. As of December 31, 2004, 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 2004, cash flow provided by operating activities, principally our investment advisory business, was $2.4 million. We generated cash flow from operating activities of $3.9 million and $4.8 million during 2003 and 2002, respectively. At December 31, 2004 and 2003, we had working capital of $17.8 million and $19.0 million, respectively.
 
20

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Index to Financial Statements
Cash flow used in investing activities during 2004 was $112,000, and was primarily related to expenditures of $1.2 million to build-out and furnish the Company’s new office space, offset in part by $1.1 million in net sales of available-for-sale investments. Cash used in investing activities during 2003 and 2002 was $2.3 million and $521,000, respectively, and was primarily related to the investment of excess cash balances.
 
Cash used in financing activities during 2004 of $5.2 million was primarily related to the payment of cash dividends on our common stock of $5.4 million, offset by $144,000 in proceeds received from stock option exercises. Cash used in financing activities during 2003 and 2002 was $2.3 million and $114,000, respectively, and was related to the payment of cash dividends on our common stock.
 
We had cash and investments of $19.4 million at December 31, 2004, compared to $21.1 million at December 31, 2003. As required by the Texas Finance Code, Westwood Trust maintains 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, 2004 or December 31, 2003, 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. 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. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The 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 the Company’s known contractual obligations as of December 31, 2004 (in thousands).

 	  	Payments due in:

	
Contractual Obligations

	  	Total

	  	Less than
1 year

	  	1-3
years

	  	4-5
years

	  	More than
5 years

	
Non-cancelable operating leases	  	$	3,919	  	$	498	  	$	1,218	  	$	1,264	  	$	939	
 
Recent Accounting Pronouncements
 
In March 2004, the Financial Accounting Standards Board (“FASB”) ratified the consensus of the Emerging Issues Task Force (“EITF”) regarding the recognition and measurement of other-than temporary impairments of certain investments. The effective date of the recognition and measurement guidance in EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” has been delayed until the implementation guidance provided by a FASB staff position on the issue has been finalized. The disclosure guidance was unaffected by the delay and is effective for fiscal years ending after June 15, 2004. The Company implemented the disclosure provisions of EITF 03-01 in its annual financial statements for the fiscal year ended December 31, 2004 and does not anticipate that the implementation of the recognition and measurement guidance, when released, will have a material effect on the Company’s financial statements.
 
In December 2004, the FASB revised Statement of Financial Accounting Standards No. 123 (“SFAS No. 123 (R)”), requiring public companies to recognize the cost resulting from all share-based payment transactions in their financial statements. The standard requires us to estimate the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. Adoption of the revised statement is required for the Company’s third quarter beginning July 1, 2005. We have commenced our analysis of the impact of SFAS No. 123 (R) and will adopt the provisions of SFAS No. 123 (R) by the July 1, 2005 deadline. The Company has applied the fair value provisions of the original SFAS No. 123 for all options and restricted shares it has issued. The Company expects SFAS 123 (R) to have an impact on its financial statements, but has not determined the extent of the impact.
 
21

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Index to Financial Statements
Critical Accounting Policies and Estimates
 
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.
 
Accounting for Investments
 
We record our investments in accordance with the provisions of SFAS No. 115. We have designated our investments other than money market holdings as “trading” securities, which are recorded at market value with the related unrealized gains and losses reflected in “Other revenues” in the consolidated statements of income. Our “trading” securities, primarily U.S. Government and Government agency obligations as well as mutual fund shares, are valued based upon quoted market prices and, with respect to mutual funds, the net asset value of the shares held as reported by the fund. We have designated our investments in money market accounts as “available for sale.” The market values of our money market holdings generally do not fluctuate. Dividends and interest on all of our investments are accrued as earned.
 
Goodwill
 
Effective January 1, 2002, we adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Upon adoption of SFAS 142 the Company discontinued its amortization of goodwill. The adoption of SFAS 142 did not have a significant impact on the comparability of the Company’s earnings per share or net income. During the second quarter of 2002, the Company completed an impairment analysis of goodwill as of January 1, 2002, the date of adoption of SFAS 142. During the third quarters of 2004, 2003 and 2002, the Company completed its annual impairment assessment as required by SFAS 142. No impairment loss or transition adjustments were required. The Company performs its annual impairment assessment as of July 1.
 
Stock Options
 
Effective January 1, 2002, we elected to begin expensing the cost associated with stock options granted subsequent to January 1, 2002 to employees as well as non-employee directors under the SFAS 123, “Accounting for Stock Based Compensation” fair value model. We value stock options issued based upon the Black-Scholes option-pricing model and recognize this value as an expense over the periods in which the options vest. Implementation of the Black-Scholes option-pricing model requires us to make certain assumptions, including expected volatility, 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.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
 
We utilize various financial instruments, 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 have 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 change in market interest rates.
 
22

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Index to Financial Statements
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 auditors’ reports and financial statements listed in the accompanying index are included in Item 15 of this report. See Index to Financial Statements on page F-1.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not applicable.
 
Item 9A. Controls and Procedures.
 
As of December 31, 2004, we carried out an evaluation, under the supervision and with the participation of Westwood management, including Westwood’s Chief Executive Officer and Chief Operating Officer (performing functions similar to a Chief Financial Officer), of the effectiveness of the design and operation of Westwood’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Operating Officer have concluded that these disclosure controls and procedures were effective as of December 31, 2004 to provide reasonable assurance that information required to be disclosed by Westwood in reports filed or submitted by it under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and to provide reasonable assurance that information required to be disclosed by Westwood is accumulated and communicated to Westwood management, including Westwood’s Chief Executive Officer and Chief Operating Officer, as appropriate to allow timely decisions regarding disclosure. Westwood management has issued a report on its assessment of the effectiveness of the Company’s internal control over financial reporting. This report can be found on page F-4 of the financial statements and supplementary data.
 
Our independent auditor has issued an audit report on (1) Westwood management’s assessment of the effectiveness of our internal control over financial reporting and (2) the effectiveness of our internal control over financial reporting. See the financial statements and supplementary data page F-3.
 
There were no changes in Westwood’s internal controls over financial reporting that occurred during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, Westwood’s internal controls over financial reporting.
 
Item 9B. Other Information.
 
Not applicable.
 
PART III
 
Item 10. Directors and Executive Officers of the Company.
 
Information regarding Executive Officers and Directors is hereby incorporated by reference from the sections entitled “Election of Directors” and “Executive Officers” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on April 28, 2005 (the “Proxy Statement”).
 
23

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Index to Financial Statements
Item 11. Executive Compensation.
 
Information regarding Executive Compensation is hereby incorporated by reference from the section entitled “Executive Compensation” in the Proxy Statement.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Information regarding Security Ownership of Certain Beneficial Owners and Management is hereby incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
 
Information regarding Equity Compensation Plan Information is hereby incorporated by reference from the section entitled “Equity Compensation Plan Information” in the Proxy Statement.
 
Item 13. Certain Relationships and Related Transactions.
 
Information regarding Certain Relationships and Related Transactions is hereby incorporated by reference from the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.
 
Item 14. Principal Accountant Fees and Services.
 
Information regarding Principal Accountant Fees and Services is hereby incorporated by reference from the section entitled “Fees Paid to Deloitte & Touche LLP” in the Proxy Statement.
 
PART IV
 
Item 15. Exhibits and Financial Statement Schedules.

(a)	  	1.	  	The following financial statements are filed as part of this Report:	
 	 	 	
 	  	 	  	Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm	
 	  	 	  	Consolidated Balance Sheets as of December 31, 2004 and 2003	
 	  	 	  	Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002	
 	  	 	  	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002	
 	  	 	  	Consolidated Statements of Cash Flows for the year ended December 31, 2004, 2003 and 2002	
 	  	 	  	Notes to Consolidated Financial Statements	
 	 	 	
 	  	2.	  	Consolidated Financial Statement Schedules	
 	 	 	
 	  	 	  	Financial Statement Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been excluded, as they are not required under the related instructions or the information required has been included in the Company’s Consolidated Financial Statements.	
 	 	 	
 	  	3.	  	The following documents are filed or incorporated by reference as exhibits to this report:	
 
24

Table of Contents

Index to Financial Statements
 	 	 	
Exhibit
Number

	  	Description of Exhibits

	
2.1	  	Distribution Agreement between SWS Group, Inc. and Westwood Holdings Group, Inc. **	
 	 	
3.1	  	Amended and Restated Certificate of Incorporation of Westwood Holdings Group, Inc. ***	
 	 	
3.2	  	Amended and Restated Bylaws of Westwood Holdings Group, Inc. ***	
 	 	
4.1	  	Form of Common Stock Certificate of Westwood Holdings Group, Inc. ***	
 	 	
10.1	  	Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (including related forms of Stock Option Agreement and Restricted Stock Agreement) *+	
 	 	
10.2	  	Tax Separation Agreement between SWS Group, Inc. and Westwood Holdings Group, Inc. **	
 	 	
10.3	  	Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, L.P., dated as of April 4, 1990, and amendment thereto*****	
 	 	
10.4	  	Ninth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of November 25, 2003 ******	
 	 	
10.5	  	Tenth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of February 23, 2004 ******	
 	 	
10.6	  	Software License Agreement between Infovisa and Westwood Trust, dated as of December 1, 2001 *****	
 	 	
10.7	  	Software License and Support Agreement between Advent Software, Inc. and Westwood Management Corp., dated as of December 30, 1996 *****	
 	 	
10.8	  	Form of Indemnification Agreement for Westwood Holdings Group, Inc. ******+	
 	 	
10.9	  	Form of Indemnification Agreement for Westwood Management Corp. ******+	
 	 	
10.10	  	Form of Indemnification Agreement for Westwood Trust ******+	
 	 	
21.1	  	Subsidiaries *****	
 	 	
24.1	  	Power of Attorney (included on first signature page) *	
 	 	
31.1	  	Certification of the Chief Executive Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 *	
 	 	
31.2	  	Certification of the President and Chief Operating Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 *	
 	 	
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*#	
 	 	
32.2	  	Certification of Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*#	

*	Filed herewith.	
**	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.	
***	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.	
****	Incorporated by reference from Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2002.	
*****	Incorporated by reference from the Registration Statement on Form 10 filed with the Securities and Exchange Commission on February 8, 2002.	
******	Incorporated by reference from Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2003.	
+	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.	
 
(b)	The Index to Exhibits filed or incorporated by reference pursuant to Item 601 of Regulation S-K and the Exhibits being filed with this Report are included following the signature pages to this Report.	
 
(c)	Not applicable.	
 
25

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Index to Financial Statements
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 Susan M. Byrne and Brian O. Casey, 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 Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

WESTWOOD HOLDINGS GROUP, INC.	
 	 	
By:	 	/s/ Susan M. Byrne

	
 	 	Susan M. Byrne
Chairman of the Board and
Chief Executive Officer	
 
Dated: February 24, 2005
 
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 Company in the capacities indicated on February 24, 2005.

Signatures

	  	Title

	
/s/ Susan M. Byrne

Susan M. Byrne	  	Chairman of the Board of Directors and Chief
Executive Officer (Principal Executive Officer)	
 	 	
/s/ Brian O. Casey

Brian O. Casey	  	Director, President and Chief Operating Officer
(Principal Financial and Accounting Officer)	
 	 	
/s/ Tom C. Davis

Tom C. Davis	  	Director	
 	 	
/s/ Frederick R. Meyer

Frederick R. Meyer	  	Director	
 	 	
/s/ Jon L. Mosle, Jr.

Jon L. Mosle, Jr.	  	Director	
 	 	
/s/ Leonard M. Riggs, Jr., M.D.

Leonard M. Riggs, Jr., M.D.	  	Director	
 	 	
/s/ Raymond E. Wooldridge

Raymond E. Wooldridge	  	Director	
 
26

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Index to Financial Statements
INDEX TO FINANCIAL STATEMENTS

 	  	 	  	Page

	
I.	  	Audited Consolidated Financial Statements of Westwood Holdings Group, Inc.	  	 	
 	  	Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP on the financial statements of Westwood Holdings Group, Inc. as of and for the years ended December 31, 2004, 2003 and 2002	  	F-2	
 	  	Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP – audit of (1) management’s assessment of the effectiveness of internal control over financial reporting and (2) 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, 2004 and 2003	  	F-5	
 	  	Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002	  	F-6	
 	  	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002	  	F-7	
 	  	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002	  	F-8	
 	  	Notes to Consolidated Financial Statements	  	F-9	
 
F-1

Table of Contents

Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
    Westwood Holdings Group, Inc.:
 
We have audited the accompanying consolidated balance sheets of Westwood Holdings Group, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Westwood Holdings Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ Deloitte & Touche LLP
February 22, 2005
Dallas, Texas
 
F-2

Table of Contents

Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
    Westwood Holdings Group, Inc.:
 
We have audited management’s assessment, included in the accompanying Report of Westwood Holdings Group, Inc.’s Management Assessment of Internal Control over Financial Reporting, that Westwood Holdings Group, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. 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.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated February 22, 2005 expressed an unqualified opinion on those financial statements.
 
/s/ Deloitte & Touche LLP
February 22, 2005
Dallas, Texas
 
F-3

Table of Contents

Index to Financial Statements
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, have inherent limitations. Therefore, even those systems determined to be effective can 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 the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in  Internal Control – Integrated Framework . Based on our assessment, we believe that, as of December 31, 2004, the Company’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 the Company’s internal control over financial reporting. This report appears on page F-3.

By:	 	/s/ Susan M. Byrne

	
 	 	Susan M. Byrne, Chief Executive Officer	
 	 	
 	 	/s/ Brian O. Casey

	
 	 	Brian O. Casey, President and Chief Operating Officer	
 
February 22, 2005
Dallas, Texas
 
F-4

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
As of December 31, 2004 and 2003
(in thousands, except par values and share amounts)

 	  	2004

	 	 	2003

	 	
ASSETS	  	 	 	 	 	 	 	 	
Current Assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	720	 	 	$	3,643	 	
Accounts receivable	  	 	1,832	 	 	 	1,931	 	
Investments, at market value	  	 	18,632	 	 	 	17,413	 	
Other current assets	  	 	414	 	 	 	385	 	

	

	

	 	

	

	

	
Total current assets	  	 	21,598	 	 	 	23,372	 	
Goodwill	  	 	2,302	 	 	 	2,302	 	
Deferred income taxes	  	 	517	 	 	 	364	 	
Property and equipment, net of accumulated depreciation of $250 and $620	  	 	1,860	 	 	 	199	 	

	

	

	 	

	

	

	
Total assets	  	$	26,277	 	 	$	26,237	 	

	

	

	 	

	

	

	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current Liabilities:	  	 	 	 	 	 	 	 	
Accounts payable and accrued liabilities	  	$	629	 	 	$	935	 	
Dividends payable	  	 	460	 	 	 	167	 	
Compensation and benefits payable	  	 	2,703	 	 	 	2,776	 	
Income taxes payable	  	 	—  	 	 	 	472	 	
Other current liabilities	  	 	17	 	 	 	19	 	

	

	

	 	

	

	

	
Total current liabilities	  	 	3,809	 	 	 	4,369	 	
Deferred rent	  	 	805	 	 	 	15	 	

	

	

	 	

	

	

	
Total liabilities	  	 	4,614	 	 	 	4,384	 	

	

	

	 	

	

	

	
Stockholders’ Equity:	  	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 10,000,000 shares, issued and outstanding 5,754,147 shares at December 31, 2004; issued 5,550,472 and outstanding 5,550,119 shares at December 31, 2003	  	 	58	 	 	 	56	 	
Additional paid-in capital	  	 	16,962	 	 	 	12,952	 	
Treasury stock, at cost – 353 shares at December 31, 2003	  	 	—  	 	 	 	(6	)	
Unamortized stock compensation	  	 	(4,821	)	 	 	(2,609	)	
Retained earnings	  	 	9,464	 	 	 	11,460	 	

	

	

	 	

	

	

	
Total stockholders’ equity	  	 	21,663	 	 	 	21,853	 	

	

	

	 	

	

	

	
Total liabilities and stockholders’ equity	  	$	26,277	 	 	$	26,237	 	

	

	

	 	

	

	

	
 
See notes to consolidated financial statements.
 
F-5

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except per share data)

 	  	2004

	  	2003

	  	2002

	
REVENUES:	  	 	 	  	 	 	  	 	 	
Advisory fees	  	$	13,069	  	$	14,008	  	$	16,223	
Trust fees	  	 	5,818	  	 	4,794	  	 	4,508	
Other revenues	  	 	1,093	  	 	1,276	  	 	893	

	

	  	

	

	  	

	

	
Total revenues	  	 	19,980	  	 	20,078	  	 	21,624	

	

	  	

	

	  	

	

	
EXPENSES:	  	 	 	  	 	 	  	 	 	
Employee compensation and benefits	  	 	9,799	  	 	8,492	  	 	9,149	
Sales and marketing	  	 	473	  	 	563	  	 	442	
Information technology	  	 	692	  	 	779	  	 	850	
Professional services	  	 	1,248	  	 	892	  	 	1,075	
General and administrative	  	 	1,783	  	 	1,472	  	 	1,444	

	

	  	

	

	  	

	

	
Total expenses	  	 	13,995	  	 	12,198	  	 	12,960	

	

	  	

	

	  	

	

	
Income before income taxes	  	 	5,985	  	 	7,880	  	 	8,664	
Provision for income taxes	  	 	2,299	  	 	2,996	  	 	3,453	

	

	  	

	

	  	

	

	
Net income	  	$	3,686	  	$	4,884	  	$	5,211	

	

	  	

	

	  	

	

	
Earnings per share:	  	 	 	  	 	 	  	 	 	
Basic	  	$	0.68	  	$	0.91	  	$	0.97	
Diluted	  	$	0.68	  	$	0.90	  	$	0.97	
 
See notes to consolidated financial statements.
 
F-6

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except share and per share data)

 	  	Westwood Holdings
Group, Inc.
Common Stock, Par

	  	Additional
Paid-In
Capital

	  	Treasury
Stock

	 	 	Unamortized
Stock
Compensation

	 	 	Notes
Receivable
from
Stock-
holders

	 	 	Retained
Earnings

	 	 	Total

	 	 	
 	  	Shares

	 	 	Amount

	  	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, January 1, 2002	  	5,395,522	 	 	$	54	  	$	9,415	  	$	—  	 	 	$	—  	 	 	$	(3,536	)	 	$	8,099	 	 	$	14,032	 	 	 	 	 	
Net income	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	5,211	 	 	 	5,211	 	 	 	 	 	
Purchase of Treasury Stock	  	(377	)	 	 	—  	  	 	 	  	 	(6	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(6	)	 	 	 	 	
Dividends declared ($0.04 per share)	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	(216	)	 	 	(216	)	 	 	 	 	
Stock options vested	  	 	 	 	 	 	  	 	164	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	164	 	 	 	 	 	
Accretion of discount on Notes	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	(62	)	 	 	 	 	 	 	(62	)	 	 	 	 	

	

	 	

	

	  	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
BALANCE, December 31, 2002	  	5,394,145	 	 	 	54	  	 	9,579	  	 	(6	)	 	 	—  	 	 	 	(3,598	)	 	 	13,094	 	 	 	19,123	 	 	 	 	 	
Net income	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	4,884	 	 	 	4,884	 	 	 	 	 	
Sale of treasury stock – 24 shares	  	24	 	 	 	—  	  	 	 	  	 	—  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—  	 	 	 	 	 	
Issuance of restricted stock	  	151,500	 	 	 	2	  	 	3,000	  	 	 	 	 	 	(3,002	)	 	 	 	 	 	 	 	 	 	 	—  	 	 	 	 	 	
Amortization of stock compensation	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	393	 	 	 	 	 	 	 	 	 	 	 	393	 	 	 	 	 	
Tax benefit related to restricted stock	  	 	 	 	 	 	  	 	52	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	52	 	 	 	 	 	
Dividends declared ($1.18 per share)	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	(6,518	)	 	 	(6,518	)	 	 	 	 	
Stock options vested	  	 	 	 	 	 	  	 	264	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	264	 	 	 	 	 	
Stock options exercised	  	4,450	 	 	 	—  	  	 	57	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	57	 	 	 	 	 	
Accretion of discount on Notes	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	(495	)	 	 	 	 	 	 	(495	)	 	 	 	 	
Repayment of notes receivable from stockholders	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	4,093	 	 	 	 	 	 	 	4,093	 	 	 	 	 	

	

	 	

	

	  	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
BALANCE, December 31, 2003	  	5,550,119	 	 	$	56	  	$	12,952	  	$	(6	)	 	$	(2,609	)	 	$	—  	 	 	$	11,460	 	 	$	21,853	 	 	 	 	 	
Net income	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	3,686	 	 	 	3,686	 	 	 	 	 	
Sale of treasury stock – 353 shares	  	353	 	 	 	—  	  	 	 	  	 	6	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6	 	 	 	 	 	
Issuance of restricted stock	  	192,500	 	 	 	2	  	 	3,460	  	 	 	 	 	 	(3,462	)	 	 	 	 	 	 	 	 	 	 	—  	 	 	 	 	 	
Amortization of stock compensation	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	1,250	 	 	 	 	 	 	 	 	 	 	 	1,250	 	 	 	 	 	
Tax benefit related to equity compensation	  	 	 	 	 	 	  	 	157	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	157	 	 	 	 	 	
Dividends declared ($0.99 per share)	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	(5,682	)	 	 	(5,682	)	 	 	 	 	
Stock options vested	  	 	 	 	 	 	  	 	249	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	249	 	 	 	 	 	
Stock options exercised	  	11,175	 	 	 	—  	  	 	144	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	144	 	 	 	 	 	

	

	 	

	

	  	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
BALANCE, December 31, 2004	  	5,754,147	 	 	$	58	  	$	16,962	  	$	—  	 	 	$	(4,821	)	 	$	—  	 	 	$	9,464	 	 	$	21,663	 	 	 	 	 	

	

	 	

	

	  	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
 
See notes to consolidated financial statements.

F-7

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)

 	  	2004

	 	 	2003

	 	 	2002

	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	3,686	 	 	$	4,884	 	 	$	5,211	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	  	 	191	 	 	 	108	 	 	 	88	 	
Loss on sale of other assets	  	 	4	 	 	 	—  	 	 	 	—  	 	
Unrealized gains on investments	  	 	(21	)	 	 	(116	)	 	 	(31	)	
Stock option expense	  	 	249	 	 	 	264	 	 	 	164	 	
Restricted stock amortization	  	 	1,250	 	 	 	393	 	 	 	—  	 	
Deferred income taxes	  	 	(153	)	 	 	8	 	 	 	(293	)	
Accretion of discount on notes receivable from stockholders	  	 	—  	 	 	 	(495	)	 	 	(62	)	
Purchases of investments – trading securities	  	 	(17,510	)	 	 	(8,696	)	 	 	(2,156	)	
Sales of investments – trading securities	  	 	15,262	 	 	 	7,779	 	 	 	3,960	 	
Change in operating assets and liabilities:	  	 	 	 	 	 	 	 	 	 	 	 	
Decrease in accounts receivable	  	 	99	 	 	 	255	 	 	 	211	 	
(Increase) decrease in other assets	  	 	(7	)	 	 	97	 	 	 	(115	)	
(Decrease) increase in accounts payable and accrued liabilities	  	 	(307	)	 	 	234	 	 	 	(175	)	
Decrease in compensation and benefits payable	  	 	(73	)	 	 	(747	)	 	 	(463	)	
Decrease in income taxes payable	  	 	(338	)	 	 	(80	)	 	 	(1,424	)	
Increase (decrease) in other liabilities	  	 	95	 	 	 	(27	)	 	 	(70	)	

	

	

	 	

	

	

	 	

	

	

	
Net cash provided by operating activities	  	 	2,427	 	 	 	3,861	 	 	 	4,845	 	

	

	

	 	

	

	

	 	

	

	

	
CASH FLOWS FROM INVESTING ACTIVITIES:	  	 	 	 	 	 	 	 	 	 	 	 	
Purchases of money market funds	  	 	(21,755	)	 	 	(5,817	)	 	 	(9,190	)	
Sales of money market funds	  	 	22,805	 	 	 	3,667	 	 	 	8,757	 	
Purchase of property and equipment	  	 	(1,189	)	 	 	(118	)	 	 	(88	)	
Sale of property and equipment	  	 	27	 	 	 	—  	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	
Net cash used in investing activities	  	 	(112	)	 	 	(2,268	)	 	 	(521	)	

	

	

	 	

	

	

	 	

	

	

	
CASH FLOWS FROM FINANCING ACTIVITIES:	  	 	 	 	 	 	 	 	 	 	 	 	
Sale (purchase) of treasury stock	  	 	6	 	 	 	—  	 	 	 	(6	)	
Proceeds from exercise of stock options	  	 	144	 	 	 	57	 	 	 	—  	 	
Cash dividends	  	 	(5,388	)	 	 	(6,459	)	 	 	(108	)	
Notes receivable from stockholders	  	 	—  	 	 	 	4,093	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	
Net cash used in financing activities	  	 	(5,238	)	 	 	(2,309	)	 	 	(114	)	

	

	

	 	

	

	

	 	

	

	

	
NET (DECREASE) INCREASE IN CASH	  	 	(2,923	)	 	 	(716	)	 	 	4,210	 	
Cash, beginning of year	  	 	3,643	 	 	 	4,359	 	 	 	149	 	

	

	

	 	

	

	

	 	

	

	

	
Cash, end of year	  	$	720	 	 	$	3,643	 	 	$	4,359	 	

	

	

	 	

	

	

	 	

	

	

	
Supplemental cash flow information:	  	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the year for income taxes	  	$	2,790	 	 	$	3,063	 	 	$	5,652	 	
Issuance of restricted stock	  	 	3,462	 	 	 	3,002	 	 	 	—  	 	
Tax benefit allocated directly to equity	  	 	157	 	 	 	52	 	 	 	—  	 	
Assets acquired by recording liabilities	  	 	693	 	 	 	—  	 	 	 	—  	 	
 
See notes to consolidated financial statements.
 
F-8

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2004, 2003 and 2002
 
1. DESCRIPTION OF THE BUSINESS:
 
Westwood Holdings Group, Inc. (“Westwood”, the “Company”, “we” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001, as a subsidiary of SWS Group, Inc. (“SWS”). On June 28, 2002, SWS completed the spin-off of Westwood by effecting a dividend distribution of all of the Westwood common stock held by SWS to all of its stockholders on a pro rata basis. Westwood is now an independent public company, with SWS having no continuing ownership interest in the Company. As part of the spin-off, we entered into various agreements with SWS that address the allocation of certain rights and obligations and that define our relationship with SWS after the spin-off, including a distribution agreement, a tax separation agreement and a transition services agreement. For a more detailed discussion of the spin-off and the various agreements entered into by Westwood and SWS, see the Registration Statement on Form 10 filed by Westwood with the Securities and Exchange Commission on June 6, 2002.
 
Westwood manages investment assets and provides services for its clients through two subsidiaries, Westwood Management Corp. (“Management”) and Westwood Trust (“Trust”). Management provides investment advisory services to corporate pension funds, public retirement plans, endowments and foundations, mutual funds and also clients of Trust. Trust provides to institutions and high net worth individuals 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 revenue and results of operations.
 
Management is a registered investment advisor under the Investment Advisers Act of 1940. 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 are presented using the accrual basis of accounting and include the accounts of the Company and its wholly-owned subsidiaries, Management and Trust. All significant intercompany balances and transactions have been eliminated.
 
Since the Company was operated as a part of SWS until June 28, 2002, the date of the spin-off, the accompanying financial information may not necessarily reflect what the results of operations, financial position, or cash flows of the Company would have been if the Company had been a separate, independent company during this time. Within these consolidated financial statements and accompanying notes, historical transactions and events involving Management and Trust are discussed as if the Company were the entity involved in the transaction or event unless the context indicates otherwise.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.
 
F-9

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
Revenue Recognition
 
Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between the Company’s subsidiaries and their clients and are generally based on a percentage of AUM. Advisory and trust fees are generally payable in advance on a calendar quarter basis. Advance payments are deferred and recognized over the periods services are performed. Other revenues generally consist of interest and investment income and consulting fees. These revenues are recognized as earned or as the services are performed.
 
Cash and Cash Equivalents
 
Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less.
 
Investments
 
Money market securities are classified as available for sale securities and have no significant fluctuating values. All other marketable securities are classified as trading securities. All securities are carried at quoted market value on the accompanying balance sheet. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. The Company realized $455,000 and $67,000 of gross investment gains and $3,000 and $17,000 of gross investment losses for the years 2004 and 2003, respectively. The Company measures 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 7 years), and depreciation on leasehold improvements is provided over the lease term, using the straight-line method.
 
Goodwill
 
Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Upon adoption of SFAS 142 the Company discontinued its amortization of goodwill. During the second quarter of 2002, the Company completed an impairment analysis of goodwill as of January 1, 2002, the date of adoption of SFAS 142. During the third quarters of 2004, 2003 and 2002, the Company completed its annual impairment assessment as required by SFAS 142. No impairment loss or transition adjustments were required. The Company performs its annual impairment assessment as of July 1.
 
Stock Split
 
On June 14, 2002 our Board of Directors approved a 1,003.8-for-1 stock split in the form of a stock dividend effective as of June 21, 2002. Per share and capital accounts shown in the accompanying consolidated financial statements and notes have been retroactively adjusted to reflect the stock split.
 
Reclassifications
 
Certain reclassifications of prior period amounts have been made to conform to the 2004 presentation.
 
Federal Income Taxes
 
The Company files a Federal income tax return as a consolidated group for the Company and its subsidiaries. For periods prior to the spin-off, the Company joined with SWS and its other subsidiaries in filing a consolidated Federal
 
F-10

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
income tax return. SWS’s consolidated Federal income tax expense was allocated to the Company as if the Company filed a separate consolidated Federal income tax return, assuming the utilization of tax-planning strategies consistent with those utilized by SWS.
 
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.
 
Stock Options
 
Effective January 1, 2002, the Company elected to begin expensing the cost associated with stock options granted subsequent to January 1, 2002 to employees as well as non-employee directors under the SFAS No. 123, “Accounting for Stock Based Compensation” fair value model. The Company values stock options issued based upon an option pricing model and recognizes this value as an expense over the periods in which the options vest. Prior to January 1, 2002, the Company accounted for its option plan under the APB 25 intrinsic value model, which resulted in no compensation cost being recognized. If the Company had continued to account for option grants under APB 25 during 2004, 2003 and 2002, reported net income would have been $3,848,000, $5,056,000 and $5,318,000 for the twelve months ended December 31, 2003 and 2002, respectively. SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123” requires certain transition disclosures, which are provided in the table below. Had compensation cost been determined valuing the options using the Black-Scholes option pricing model as provided in SFAS No. 123 prior to January 1, 2002, the Company’s net income and earnings per share would have been the pro forma amounts indicated below for the years ended December 31, 2004, 2003 and 2002 (the 2002 pro forma adjustment reflects the remaining fair value of previously unvested outstanding SWS options granted to our employees that became fully vested as of June 28, 2002):

 	  	2004

	 	 	2003

	 	 	2002

	 	
Net income (in thousands)	  	 	 	 	 	 	 	 	 	 	 	 	
As reported	  	$	3,686	 	 	$	4,884	 	 	$	5,211	 	
Add: stock-based employee compensation expense included in reported net income, net of tax	  	 	974	 	 	 	427	 	 	 	107	 	
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of tax	  	 	(974	)	 	 	(427	)	 	 	(1,152	)	

	

	

	 	

	

	

	 	

	

	

	
Pro forma	  	$	3,686	 	 	$	4,884	 	 	$	4,166	 	

	

	

	 	

	

	

	 	

	

	

	
Earnings per share	  	 	 	 	 	 	 	 	 	 	 	 	
As reported – basic	  	$	0.68	 	 	$	0.91	 	 	$	0.97	 	
As reported – diluted	  	 	0.68	 	 	 	0.90	 	 	 	0.97	 	
Pro forma – basic	  	 	0.68	 	 	 	0.91	 	 	 	0.77	 	
Pro forma – diluted	  	 	0.68	 	 	 	0.90	 	 	 	0.77	 	
 
New Accounting Standards
 
In March 2004, the FASB ratified the consensus of the EITF regarding the recognition and measurement of other-than temporary impairments of certain investments. The effective date of the recognition and measurement guidance in EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” has been delayed until the implementation guidance provided by a FASB staff position on the issue has been finalized. The disclosure guidance was unaffected by the delay and is effective for fiscal years ending after June 15, 2004. The Company implemented the disclosure provisions of EITF 03-01 in its annual financial statements for the fiscal year ended December 31, 2004 and does not anticipate that the implementation of the recognition and measurement guidance, when released, will have a material effect on the Company’s financial statements.
 
F-11

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
In December 2004, the FASB revised Statement of Financial Accounting Standards No. 123 (“SFAS No. 123 (R)”), requiring public companies to recognize the cost resulting from all share-based payment transactions in their financial statements. The Company has applied the fair value provisions of the original SFAS No. 123 for all options and restricted shares it has issued. The revised standard requires us to estimate the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. Adoption of the revised statement is required for the Company’s third quarter beginning July 1, 2005. We have commenced our analysis of the impact of SFAS No. 123 (R) and will adopt the provisions of SFAS No. 123 by the July 1, 2005 deadline. The Company expects SFAS 123 (R) to have an impact on its financial statements, but has not determined the extent of the impact.
 
Fair Value of Financial Instruments
 
The estimated fair values of the Company’s financial instruments have been determined by the Company using available information. The fair value amounts discussed in Note 4 are not necessarily indicative of either the amounts the Company would realize upon disposition of these instruments or the Company’s intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, as well as 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 mutual fund shares, equals their fair value, which is equal to prices quoted in active markets and, with respect to mutual funds, the net asset value of the shares held as reported by the fund. The carrying amount of investments designated as “available for sale” securities, primarily money market accounts, equals their fair value which is equal to the net asset value of the shares held as reported by the fund. The net assets of our money market holdings generally do not fluctuate.
 
3. ACCOUNTS RECEIVABLE:
 
The Company’s 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, 2002 through 2004. The majority of the balances are advisory and trust fees receivable from customers and are believed to be fully collectable by us.
 
F-12

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
4. INVESTMENTS:
 
Investments held as trading securities and investments held as available for sale securities are as follows (in thousands):

 	  	Cost

	  	Gross
Unrealized
Gains

	  	Gross
Unrealized
Losses

	 	 	Estimated
Market
Value

	
December 31, 2004:	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Government and Government agency obligations	  	$	1,639	  	$	4	  	$	—  	 	 	$	1,643	
Funds:	  	 	 	  	 	 	  	 	 	 	 	 	 	
Money Market	  	 	15,864	  	 	—  	  	 	—  	 	 	 	15,864	
Equity	  	 	999	  	 	126	  	 	—  	 	 	 	1,125	
Bond	  	 	—  	  	 	—  	  	 	—  	 	 	 	—  	

	

	  	

	

	  	

	

	

	 	

	

	
Marketable securities	  	$	18,502	  	$	130	  	$	—  	 	 	$	18,632	

	

	  	

	

	  	

	

	

	 	

	

	
December 31, 2003:	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Government and Government agency obligations	  	$	1,601	  	$	1	  	$	—  	 	 	$	1,602	
Funds:	  	 	 	  	 	 	  	 	 	 	 	 	 	
Money Market	  	 	15,137	  	 	—  	  	 	—  	 	 	 	15,137	
Equity	  	 	485	  	 	109	  	 	(4	)	 	 	590	
Bond	  	 	81	  	 	3	  	 	—  	 	 	 	84	

	

	  	

	

	  	

	

	

	 	

	

	
Marketable securities	  	$	17,304	  	$	113	  	$	(4	)	 	$	17,413	

	

	  	

	

	  	

	

	

	 	

	

	
 
All of these investments are carried at market value. The money market funds are available for sale securities. The other investments are trading securities.
 
5. INCOME TAXES:
 
Income tax expense for the years ended December 31, 2004, 2003 and 2002 (effective rate of 38.4% in 2004, 38.0% in 2003 and 39.9% in 2002) differs from the amount that would otherwise have been calculated by applying the Federal corporate tax rate (34%) to income before income taxes. The difference between the Federal corporate tax rate of 34% and the effective tax rate is comprised of the following (in thousands):

 	  	2004

	 	 	2003

	  	2002

	
Income tax expense at the statutory rate	  	$	2,035	 	 	$	2,679	  	$	2,946	
State franchise and income taxes	  	 	272	 	 	 	302	  	 	423	
Other, net	  	 	(8	)	 	 	15	  	 	84	

	

	

	 	

	

	  	

	

	
Total income tax expense	  	$	2,299	 	 	$	2,996	  	$	3,453	

	

	

	 	

	

	  	

	

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

 	  	2004

	 	 	2003

	 	 	2002

	 	
State – current	  	$	369	 	 	$	427	 	 	$	663	 	
State – deferred	  	 	22	 	 	 	38	 	 	 	(13	)	
Federal – current	  	 	2,083	 	 	 	2,559	 	 	 	2,906	 	
Federal – deferred	  	 	(175	)	 	 	(28	)	 	 	(103	)	

	

	

	 	

	

	

	 	

	

	

	
Total income tax expense	  	$	2,299	 	 	$	2,996	 	 	$	3,453	 	

	

	

	 	

	

	

	 	

	

	

	
 
F-13

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2004 and 2003 are presented below (in thousands):

 	  	2004

	 	 	2003

	 	
Depreciation at rates different for tax than for financial reporting	  	$	(233	)	 	$	26	 	
Restricted stock amortization	  	 	544	 	 	 	137	 	
Stock option expense	  	 	205	 	 	 	140	 	
Deferred compensation liability	  	 	—  	 	 	 	84	 	
Other	  	 	1	 	 	 	(23	)	

	

	

	 	

	

	

	
Total deferred tax assets	  	$	517	 	 	$	364	 	

	

	

	 	

	

	

	
 
As a result of the Company’s 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 the Company will realize the benefit of the deferred tax assets.
 
6. REGULATORY CAPITAL REQUIREMENTS:
 
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, 2004, Trust had total stockholders’ equity of approximately $3.4 million, which is $2.4 million in excess of its minimum capital requirement.
 
Trust is limited under applicable Texas law in the payment of dividends to undivided profits: 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 the Company out of its undivided profits.
 
7. EMPLOYEE BENEFITS:
 
The Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”) reserves shares of Westwood common stock for issuance to eligible employees and directors 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 may not exceed 948,100 shares. At December 31, 2004, approximately 412,000 shares remain available for issuance under the Plan.
 
Restricted Stock Plan
 
For the years ended December 31, 2004 and December 31, 2003, the Company granted restricted stock to employees and non-employee directors. The employees’ shares vest over four years and the directors’ shares vest over one year. 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. The Company records compensation cost for restricted stock grants based on the fair market value of its common stock at the date of grant and amortizes this cost over the applicable vesting period. Unamortized stock compensation is shown as a separate component of stockholders’ equity. The following table details the shares issued, weighted-average grant date fair values and approximate compensation expense recorded, all net of actual forfeitures:

 	  	2004

	  	2003

	
Restricted shares granted, net of actual forfeitures:	  	 	 	  	 	 	
Employees	  	 	185,000	  	 	147,000	
Non-employee directors	  	 	7,500	  	 	4,500	
Weighted-average grant-date fair value	  	$	17.98	  	$	19.81	
Restricted stock compensation expense	  	$	1,250,000	  	$	393,000	
 	 	 	
Stock option expense	  	 	249,000	  	 	264,000	

	

	  	

	

	
Total stock based compensation expense	  	$	1,499,000	  	$	657,000	

	

	  	

	

	
 
F-14

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
Stock Option Plan – Westwood options
 
Options granted under the Stock Incentive Plan have a maximum ten-year term and vest over a period of four years.
 
A summary of the status of Westwood’s outstanding stock options issued to employees of the Company as of December 31, 2004, 2003 and 2002 is presented below. There were no stock options granted during 2004.

 	  	December 31, 2004

	  	December 31, 2003

	  	December 31, 2002

	
 	  	Underlying
Shares

	 	 	Weighted
Average
Exercise
Price

	  	Underlying
Shares

	 	 	Weighted
Average
Exercise
Price

	  	Underlying
Shares

	 	 	Weighted
Average
Exercise
Price

	
Outstanding, beginning of period	  	189,175	 	 	$	12.92	  	 	218,500	 	 	$	12.92	  	 	—  	 	 	 	—  	
Granted	  	—  	 	 	 	—  	  	 	7,500	 	 	 	14.29	  	 	226,000	 	 	$	12.92	
Exercised	  	(11,175	)	 	 	12.90	  	 	(4,450	)	 	 	12.90	  	 	—  	 	 	 	—  	
Forfeited	  	(1,375	)	 	 	12.90	  	 	(32,375	)	 	 	13.22	  	 	(7,500	)	 	 	12.90	

	

	 	 	 	  	

	

	

	 	 	 	  	

	

	

	 	 	 	
Outstanding, end of period	  	176,625	 	 	 	12.92	  	 	189,175	 	 	 	12.92	  	 	218,500	 	 	 	12.92	

	

	 	 	 	  	

	

	

	 	 	 	  	

	

	

	 	 	 	
Exercisable, end of period	  	85,250	 	 	 	12.92	  	 	50,800	 	 	 	12.92	  	 	—  	 	 	 	 	
Weighted-average fair value of options granted during period	  	—  	 	 	 	 	  	$	5.41	 	 	 	 	  	$	5.48	 	 	 	 	
 
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 	  	2003

	 	 	2002

	 	
Expected volatility	  	35	%	 	35	%	
Risk-free interest rate	  	3.47	%	 	4.46	%	
Expected dividend yield	  	1.12	%	 	0.62	%	
Expected life	  	7 years	 	 	7 years	 	

F-15

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
The following table summarizes information for Westwood stock options outstanding at December 31, 2004:

 	  	Westwood Options Outstanding

	  	Westwood Options
Exercisable

	
Range of Exercise Prices

	  	Number
Outstanding

	  	Weighted-
Average
Remaining
Contractual
Life

	  	Weighted-
Average
Exercise Price

	  	Number
Exercisable

	  	Weighted-
Average
Exercise Price

	
$12.90 – 14.80	  	176,625	  	7.5 years	  	$	12.92	  	85,250	  	$	12.92	
 
Stock Option Plan – SWS options
 
Prior to June 28, 2002, the Company’s employees participated in the SWS Stock Option Plan (the “1996 Plan”). The 1996 Plan reserves shares of SWS common stock for issuance to eligible employees of SWS or its subsidiaries. Shares reserved under this option plan reflect all stock dividends issued by SWS. Options granted under the 1996 Plan have a maximum ten-year term, and the vesting period is determined on an individual basis by the Stock Option Committee of SWS’s Board of Directors.
 
Options granted under the 1996 Plan to Westwood employees became fully vested as of June 28, 2002, the date of the spin-off, and Westwood was substituted for SWS as the employer of these employees. There were no grants of SWS options to Westwood employees during the year 2002.
 
A summary of the status of SWS’s outstanding stock options (reflecting adjustments as a result of the spin-off) issued to employees of the Company as of June 28, 2002 (the date of the spin-off) is presented below:

 	  	June 28, 2002

	
 	  	Underlying
Shares

	 	 	Weighted Average
Exercise Price

	
Outstanding, beginning of period	  	117,590	 	 	$	22.92	
Granted	  	—  	 	 	 	—  	
Exercised	  	(1,497	)	 	 	12.41	
Forfeited	  	(1,366	)	 	 	24.98	
Adjustment for stock dividends/spin-off	  	26,277	 	 	 	—  	

	

	 	 	 	
Outstanding, end of period	  	141,004	 	 	 	18.65	

	

	 	 	 	
Exercisable, end of period	  	141,004	 	 	 	 	
Weighted-average fair value of options granted during period	  	—  	 	 	 	 	
 
The following table summarizes information for SWS stock options outstanding at June 28, 2002 issued to employees of the Company:

 	  	SWS Options Outstanding

	  	SWS Options Exercisable

	
Range of Exercise Prices

	  	Number
Outstanding

	  	Weighted-
Average
Remaining
Contractual
Life

	  	Weighted-
Average
Exercise
Price

	  	Number
Exercisable

	  	Weighted-
Average
Exercise Price

	
$12.41-$15.45	  	80,113	  	7.4 years	  	$	14.18	  	80,113	  	$	14.18	
$23.39-$26.05	  	60,891	  	7.7 years	  	 	24.53	  	60,891	  	 	24.53	
 
F-16

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
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 the Company’s employees. Westwood provided profit sharing plan benefits become fully vested after six years of service by the participant. Profit sharing expense related to the Company’s employees for 2004, 2003 and 2002 was approximately $242,000, $0 and $0, respectively. For the 401(k) portion of the plan, Westwood provided a match of up to 4% of eligible compensation. Westwood’s matching contributions vest immediately and the expense totaled approximately $200,000, $150,000 and $66,000 in 2004, 2003 and 2002, respectively.
 
Prior to the spin-off, Westwood employees participated in SWS’ defined contribution profit sharing/401(k) plan. SWS provided profit sharing plan benefits became fully vested for Westwood employees at the time of the spin-off. Profit sharing contributions were accrued and funded at SWS’s discretion. There was no profit sharing expense related to the Company’s employees for 2002. The 401(k) portion of the plan provided a match of up to 4% of eligible compensation. SWS’s matching contributions vest immediately and the expense totaled approximately $85,000 in 2002.
 
8. EARNINGS PER SHARE:
 
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the periods ended December 31, 2004, 2003 and 2002, respectively. Diluted earnings per share for these periods is computed based on the weighted average number of shares outstanding plus the effect of the dilutive impact of stock options and shares held in the Westwood Holdings Group, Inc. Deferred Compensation Plan. Diluted earnings per common share is computed using the treasury stock method.
 
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share amounts):

 	  	2004

	  	2003

	  	2002

	
Net income	  	$	3,686	  	$	4,884	  	$	5,211	
 	 	 	 	
Weighted average shares outstanding – basic	  	 	5,405,133	  	 	5,395,868	  	 	5,394,145	
Dilutive potential shares from stock options	  	 	33,087	  	 	9,529	  	 	—  	
Dilutive potential shares from deferred compensation plan	  	 	271	  	 	353	  	 	377	
Weighted average shares outstanding – diluted	  	 	5,438,491	  	 	5,405,750	  	 	5,394,522	
 	 	 	 	
Earnings per share – basic	  	$	0.68	  	$	0.91	  	$	0.97	
Earnings per share – diluted	  	$	0.68	  	$	0.90	  	$	0.97	
 
Earnings per share have been retroactively adjusted to give effect to the stock split effected in the form of a stock dividend on June 21, 2002.
 
9. COMMITMENTS AND CONTINGENCIES:
 
The Company leases its offices under a non-cancelable operating lease agreement. Rental expense for facilities and equipment leases for fiscal years 2004, 2003 and 2002 aggregated approximately $629,000, $593,000 and $594,000, respectively, and is included in general and administrative and information technology expenses in the accompanying consolidated statements of income.

F-17

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
At December 31, 2004, the future contractual rental payments for non-cancelable operating leases for each of the following five years and thereafter follow (in thousands):

Year ending:	  	 	 	
2005	  	$	498	
2006	  	 	606	
2007	  	 	612	
2008	  	 	625	
2009	  	 	639	
Thereafter	  	 	939	

	

	
Total payments due	  	$	3,919	

	

	
 
10. AFFILIATE TRANSACTIONS:
 
SWS, through its principal subsidiary, SWS Securities, Inc., provided accounting, technology and administrative services for the Company in 2002 up until June 28, 2002, the date of the spin-off. Management serves as investment advisor for the SWS cash reserve funds, and Trust serves as custodian for the SWS cash reserve funds and as trustee for the assets of the SWS Deferred Compensation Plan.
 
The accompanying financial statements include the following revenues (in thousands) from transactions with SWS and its subsidiaries other than Management and Trust:

 	  	2002
(through
June 28)

	
Advisory fees	  	$	241	
Trust fees	  	 	136	
 
The accompanying financial statements include the following expenses (in thousands) for charges from SWS and its subsidiaries other than Management and Trust.

 	  	2002
(through
June 28)

	
Employee benefits	  	$	58	
Information technology	  	 	113	
Professional services	  	 	—  	
General and administrative	  	 	36	

	

	
Total	  	$	207	

	

	
 
These expenses were allocated from SWS on the basis of the Company’s relative number of employees, relative revenues, or other allocation bases. These allocated expenses represent services provided by SWS prior to the spin-off including human resources, accounting, internal audit, income tax, legal, insurance, and information technology. Including the allocation of SWS expenses, the expenses in these consolidated financial statements include all of the costs attributable to the Company’s operations. However, because the Company operated as a subsidiary of SWS and because the expenses included in these consolidated financial statements include allocations of SWS’s expenses, the expenses included in these consolidated statements do not purport to be the expenses that the Company would have incurred had it been an independent company.
 
F-18

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
11. SEGMENT REPORTING:
 
The Company operates two segments: the Management segment and the Trust segment. Such segments are managed separately based on types of products and services offered and their related client bases. The Company evaluates the performance of its segments based primarily on income before income taxes.
 
Management
 
The Management segment provides investment advisory services to corporate pension funds, public retirement plans, endowments and foundations, and investment subadvisory services to mutual funds and clients of Trust.
 
Trust
 
The Trust segment provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that Trust sponsors.
 
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.

 	  	Management

	  	Trust

	  	Other

	 	 	Eliminations

	 	 	Consolidated

	
2004	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	14,055	  	$	5,887	  	$	38	 	 	$	—  	 	 	$	19,980	
Net intersegment revenues	  	 	2,344	  	 	8	  	 	—  	 	 	 	(2,352	)	 	 	—  	
Net interest and dividend revenue	  	 	231	  	 	19	  	 	8	 	 	 	—  	 	 	 	258	
Depreciation and amortization	  	 	149	  	 	42	  	 	—  	 	 	 	—  	 	 	 	191	
Income (loss) before income taxes	  	 	6,706	  	 	857	  	 	(1,578	)	 	 	—  	 	 	 	5,985	
Segment assets	  	 	20,756	  	 	3,844	  	 	1,677	 	 	 	—  	 	 	 	26,277	
Expenditures for long-lived assets	  	 	894	  	 	295	  	 	—  	 	 	 	—  	 	 	 	1,189	
 	 	 	 	 	 	
2003	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	14,581	  	$	4,826	  	$	671	 	 	$	—  	 	 	$	20,078	
Net intersegment revenues	  	 	1,811	  	 	—  	  	 	—  	 	 	 	(1,811	)	 	 	—  	
Net interest and dividend revenue	  	 	126	  	 	42	  	 	587	 	 	 	—  	 	 	 	755	
Depreciation and amortization	  	 	96	  	 	12	  	 	—  	 	 	 	—  	 	 	 	108	
Income (loss) before income taxes	  	 	7,248	  	 	713	  	 	(81	)	 	 	—  	 	 	 	7,880	
Segment assets	  	 	21,513	  	 	3,714	  	 	1,010	 	 	 	—  	 	 	 	26,237	
Expenditures for long-lived assets	  	 	95	  	 	23	  	 	—  	 	 	 	—  	 	 	 	118	
 	 	 	 	 	 	
2002	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	16,784	  	$	4,638	  	$	202	 	 	$	—  	 	 	$	21,624	
Net intersegment revenues	  	 	1,584	  	 	—  	  	 	—  	 	 	 	(1,584	)	 	 	—  	
Net interest revenue	  	 	141	  	 	128	  	 	225	 	 	 	—  	 	 	 	494	
Depreciation and amortization	  	 	81	  	 	7	  	 	—  	 	 	 	—  	 	 	 	88	
Income before income taxes	  	 	7,884	  	 	718	  	 	62	 	 	 	—  	 	 	 	8,664	
Segment assets	  	 	19,142	  	 	4,330	  	 	648	 	 	 	—  	 	 	 	24,120	
Expenditures for long-lived assets	  	 	74	  	 	14	  	 	—  	 	 	 	—  	 	 	 	88	
 
F-19

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
12. EQUITY-BASED COMPENSATION IN 2001:
 
On December 14, 2001, SWS sold shares of the Company’s common stock, constituting 19.82% of the Company’s outstanding common stock, to five of the Company’s executive officers for cash consideration of $4,093,000, a price premised upon an understanding reached in October 2001 that SWS would sell the shares of the Company’s common stock based on their value at September 30, 2001, after applying appropriate valuation discounts. The Company loaned the executive officers $4,093,000 on a full-recourse basis, evidenced by notes secured by the stock, payable in nine years and bearing interest at 3.93%.
 
Because the notes are receivable in connection with the sale of the Company’s common stock, they were recorded at their fair value of $3,536,000 as an offset to stockholders’ equity. The difference between the face amount of the notes and their fair value is due to the difference between the stated interest rate and an estimated market interest rate of 6.0%.
 
The difference between the fair value for financial reporting purposes of the stock on December 14, 2001, $7,512,000, and the fair value of the note, $3,536,000, was recorded as an equity-based compensation charge of $3,976,000. The difference between the value of the stock, $7,512,000, and the cash consideration paid to SWS of $4,093,000, is an expense incurred by SWS for the Company and is reflected as an equity-based compensation expense with the offset as a contribution to the Company’s additional paid-in capital. The remainder of the equity-based compensation expense is the difference between the face and fair value of the notes, $557,000.
 
The difference between the $4,093,000 paid for the stock and the fair value of the stock for financial reporting purposes on December 14, 2001, is attributable to an increase in assets under management and the common stock prices of comparable public companies between September 30, 2001 and December 14, 2001. The amount of assets under management, which is a factor in determining the Company’s revenues, and the common stock prices of comparable public companies are significant considerations in estimating the value of the Company. In addition, the $4,093,000 valuation included a 35% discount for lack of marketability. For financial accounting purposes, no discount for lack of marketability was recorded, which accounts for $2,204,000 of the difference between $7,512,000 and $4,093,000.
 
On February 1, April 7 and August 26, 2003 the executive officers made principal payments of approximately $965,000, $39,000 and $3,089,000, respectively, on these notes. A proportionate share of the discount on the notes receivable from stockholders was accreted through the income statement. As of December 31, 2003, notes receivable from stockholders had been fully repaid.
 
13. CONCENTRATION:
 
During the years ended December 31, 2004, 2003 and 2002, no customer accounted for 10% or more of the Company’s revenues. For the twelve months ended December 31, 2004, our largest three clients accounted for 19.3% of total revenues.
 
14. SUBSEQUENT EVENT:
 
On February 9, 2005, the Company declared a quarterly cash dividend of $0.08 per share on common stock payable on April 1, 2005 for stockholders of record on March 15, 2005.
 
F-20

Table of Contents

Index to Financial Statements
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)
 
15. QUARTERLY FINANCIAL DATA (Unaudited):
 
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 (in thousands, except per share amounts):

 	  	Quarter

	
2004

	  	First

	  	Second

	  	Third

	  	Fourth

	
Revenues	  	$	5,043	  	$	4,940	  	$	4,934	  	$	5,063	
Income before income taxes	  	 	1,829	  	 	1,599	  	 	1,166	  	 	1,391	
Net income	  	 	1,117	  	 	988	  	 	685	  	 	896	
Basic earnings per common share	  	 	0.21	  	 	0.18	  	 	0.13	  	 	0.17	
Diluted earnings per common share	  	 	0.21	  	 	0.18	  	 	0.13	  	 	0.16	
 	 	
 	  	Quarter

	
2003

	  	First

	  	Second

	  	Third

	  	Fourth

	
Revenues	  	$	5,012	  	$	5,070	  	$	5,290	  	$	4,706	
Income before income taxes	  	 	1,967	  	 	1,960	  	 	2,144	  	 	1,809	
Net income	  	 	1,250	  	 	1,199	  	 	1,319	  	 	1,116	
Basic earnings per common share	  	 	0.23	  	 	0.22	  	 	0.24	  	 	0.21	
Diluted earnings per common share	  	 	0.23	  	 	0.22	  	 	0.24	  	 	0.21	
 
Note: Quarterly numbers may not add to total year numbers due to rounding.
 
F-21

EXHIBIT 10.1
 
SECOND AMENDED AND RESTATED WESTWOOD HOLDINGS GROUP, INC.
STOCK INCENTIVE PLAN
 
1.	ESTABLISHMENT, PURPOSE AND TERM OF PLAN.	
 
 	1.1	Establishment. This Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”) is hereby established effective as of January 1, 2005.	
 
 	1.2	Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract and retain persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group.	
 
 	1.3	Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares (if any) under the terms of the Plan and the agreements evidencing the Awards granted under the Plan have lapsed. However, all Awards shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company.	
 
2.	DEFINITIONS AND CONSTRUCTION.	
 
 	2.1	Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:	
 
 	(a)	“Acquiring Corporation” has the meaning given to it in Section 14.2.	
 
 	(b)	“Annual Incentive Award” has the meaning given to it in Section 11.1.	
 
 	(c)	“Award” means any form of incentive or performance award granted under the Plan, whether singly or in combination, to a Participant by the Board pursuant to such terms, conditions, restrictions and/or limitations (if any) as the Board may establish. Awards granted under the Plan may include:	
 
 	(i)	Options awarded pursuant to Sections 6-8;	
 
 	(ii)	Restricted Stock awarded pursuant to Section 9;	
 
 	(iii)	Purchase Rights awarded pursuant to Section 10;	
 
 	(iv)	Annual Incentive Awards awarded pursuant to Section 11;	
 
 	(v)	Performance-Based Awards awarded pursuant to Section 12; and	
 
 	(vi)	Discretionary Bonus Awards awarded pursuant to Section 13.	
 
 	(d)	“Award Certificate” has the meaning given to it in Section 12.3.	
 
-1-

 	(e)	“Board” means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan,  “Board”  also means such Committee(s).	
 
 	(f)	“Cashless Exercise” has the meaning given to it in Section 6.3(a).	
 
 	(g)	“Cause” shall mean any of the following: (i) the Participant’s theft of a Participating Company’s property or falsification of any Participating Company documents or records; (ii) the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary information; (iii) any action by the Participant which has a detrimental effect on a Participating Company’s reputation or business; (iv) the Participant’s failure or inability to perform any reasonable assigned duties after written notice from the Participating Company Group or any Participating Company of, and a reasonable opportunity to cure, such failure or inability; (v) any material breach by the Participant of any employment agreement between the Participant and the Participating Company Group or any Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vi) the Participant’s conviction (including any plea of guilty or  nolo contendere ) of any felony or any other criminal act which impairs the Participant’s ability to perform his or her duties with the Participating Company Group or any Participating Company.	
 
 	(h)	“Change in Control” has the meaning given to it in Section 14.1.	
 
 	(i)	“Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.	
 
 	(j)	“Committee” means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law.	
 
 	(k)	“Company” means Westwood Holdings Group, Inc., a Delaware corporation, or any successor corporation thereto.	
 
 	(l)	“Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on either the exemption from registration provided by Rule 701 under the Securities Act or, if the Company is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, registration on a Form S-8 Registration Statement under the Securities Act.	
 
 	(m)	“Director” means a member of the Board or of the board of directors of any other Participating Company.	
 
 	(n)	“Disability” means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code.	
 
 	(o)	“Employee” means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan.	
 
-2-

 	(p)	“Exchange Act” means the Securities Exchange Act of 1934, as amended.	
 
 	(q)	“Exercise Period” has the meaning given to it in Section 10.1.	
 
 	(r)	“Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:	
 
 	(i)	If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in  T HE W ALL  S TREET  J OURNAL  or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion.	
 
 	(ii)	If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.	
 
 	(s)	“Good Reason” means (i) a resignation occurring within ninety (90) days following a Change in Control; (ii) the relocation of the principal place of business of the Participating Company for which the Participant renders Service to a location more than 100 miles from its location as of the date of the Change in Control without the Participant’s consent; or (iii) a material reduction in the Participant’s salary or bonus opportunity, or the Participant’s responsibilities.	
 
 	(t)	“Incentive Stock Option” means an Option intended to be (as set forth in the Option Agreement), and which qualifies as, an incentive stock option within the meaning of Section 422(b) of the Code.	
 
 	(u)	“Insider” means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act.	
 
 	(v)	“Non-Employee Director” has the meaning given to it in Article 8.	
 
 	(w)	“Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Option Agreement), or which does not qualify as, an Incentive Stock Option.	
 
 	(x)	“Option” means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.	
 
 	(y)	“Option Agreement” means a written agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Option granted to the Participant and any shares acquired upon the exercise thereof. An Option Agreement may consist of	
 
-3-

a form of “Notice of Grant of Stock Option” and a form of “Stock Option Agreement” incorporated therein by reference, or such other form or forms as the Board may approve from time to time
 
 	(z)	“Option Expiration Date” has the meaning given to it in Section 6.6(a)(i).	
 
 	(aa)	“Ownership Change Event” has the meaning given to it in Section 14.1.	
 
 	(bb)	“Parent” means (i) any “parent corporation” as defined in Section 424(e) of the Code and any successor provisions; (ii) any other entity that is taxed as a corporation under Section 7701(a)(3) of the Code and is a member of the “affiliated group” as defined in Section 1504(a) of the Code of which the Company is a common subsidiary corporation, and (iii) any other entity as may be permitted from time to time by the Code or the Internal Revenue Service to be an employer of employees to whom Options may be granted; provided, however, that in each case the Company must be consolidated in the Parent’s financial statements.	
 
 	(cc)	“Participant” means a person who has been granted one or more awards pursuant to the terms and conditions of the Plan.	
 
 	(dd)	“Participating Company” means the Company or any Parent or Subsidiary.	
 
 	(ee)	“Participating Company Group” means, at any point in time, all corporations or other entities collectively which are then Participating Companies.	
 
 	(ff)	“Performance Cycle” means (i) with respect to any Annual Incentive Award, the twelve (12) month period beginning on January 1, 2005 and each January 1 thereafter, and (ii) with respect to any Performance-Based Award, the period determined by the Committee over which the Company’s level of attainment of a Performance Measure shall be determined.	
 
 	(gg)	“Performance Goals” means, with respect to any Annual Incentive Award or Performance-Based Award, one or more targets, goals or levels of attainment required to be achieved in terms of the specified Performance Measure during a fiscal year or specified Performance Cycle, as applicable.	
 
 	(hh)	“Performance Measure” means, with respect to any Annual Incentive Award or Performance-Based Award, the business criteria established by the Committee to measure the level of performance of the Company during the fiscal year or Performance Cycle, as applicable. The Committee may select as the Performance Measure any one or combination of financial measures, as interpreted by the Committee, which (to the extent applicable) can be determined either on a pro forma or GAAP basis, and either pre-tax or after-tax, such as: earnings per share, return on equity, return on invested capital, relative total shareholder return, revenue growth, Stock performance, net income, return on sales, return on assets, economic value added, cash flow and net operating income.	
 
 	(ii)	“Performance-Based Award” has the meaning given to it in Section 12.1.	
 
 	(jj)	“Permitted Transferees” has the meaning given to it in Section 6.7.	
 
 	(kk)	“Plan” has the meaning given to it in Section 1.1.	
 
 	(ll)	“Purchase Right” means the right to purchase Stock in accordance with the provisions of Section 10.	
 
 	(mm)	“Restricted Period” has the meaning given to it in Section 9.1.	
 
-4-

 	(nn)	“Restricted Stock” means an award of Stock made under Section 9, which is subject to vesting provisions.	
 
 	(oo)	“Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.	
 
 	(pp)	“Securities Act” means the Securities Act of 1933, as amended.	
 
 	(qq)	“Service” means a Participant’s employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. A Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service to the Participating Company Group or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service with the Participating Company Group shall not be deemed to have terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Participant’s Service shall be deemed to have terminated unless the Participant’s right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under any Option Agreement. The Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.	
 
 	(rr)	“Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2.	
 
 	(ss)	“Subsidiary” means (i) any “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code and any successor provisions, (ii) any other entity that is taxed as a corporation under Section 7701(a)(3) of the Code and is a member of the “affiliated group” as defined in Section 1504(a) of the Code of which the Company is a common parent corporation, and (iii) any other entity as may be permitted from time to time by the Code or the Internal Revenue Service to be an employer of employees to whom Options may be granted; provided, however, that in each case the subsidiary corporation must be consolidated in the Company’s financial statements.	
 
 	(tt)	“Ten Percent Owner Participant” means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code.	
 
 	2.2	Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.	
 
3.	ADMINISTRATION.	
 
 	3.1	Administration by the Board. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Award shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan.	
 
-5-

 	3.2	Authority of Officers. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election.	
 
 	3.3	Powers of the Board. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion:	
 
 	(a)	to determine the persons to whom, and the time or times at which, Awards shall be granted and, if applicable, the number of shares of Stock to be subject thereto;	
 
 	(b)	to designate Options as Incentive Stock Options or Nonstatutory Stock Options;	
 
 	(c)	to determine the Fair Market Value of shares of Stock or other property;	
 
 	(d)	to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and, if applicable, any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of an Option or Purchase Right, (ii) the method of payment for shares purchased upon the exercise of the Option or Purchase Right, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Award or such shares of Stock issued or cash provided thereunder, including by the withholding or delivery of shares of Stock or cash, (iv) the timing, terms and conditions of the exercisability of the Award or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Award, (vi) the effect of the Participant’s termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Award not inconsistent with the terms of the Plan;	
 
 	(e)	to approve one or more forms of Option Agreement or Award Certificate;	
 
 	(f)	to amend, modify, extend, cancel or renew any Award, or to waive any restrictions or conditions applicable to any Award or any shares of Stock acquired upon the exercise thereof, provided, however, the Board shall not have the right to (i) lower the Exercise Price of an existing Option or (ii) take any action which would be treated as a “repricing” under generally accepted accounting principles;	
 
 	(g)	to accelerate, continue, extend or defer the exercisability of any Award or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following a Participant’s termination of Service with the Participating Company Group;	
 
 	(h)	to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and	
 
 	(i)	to correct any defect, supply any omission or reconcile any inconsistency in the Plan, any Option Agreement or any Award Certificate and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.	
 
 	3.4	Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.	
 
-6-

 	3.5	Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.	
 
4.	SHARES SUBJECT TO PLAN.	
 
 	4.1	Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be 948,100 shares, and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Award for any reason expires or is terminated or canceled or if shares of Stock are acquired upon the exercise of an Award or otherwise subject to a Company repurchase option and are repurchased by the Company at the Participant’s exercise price, or if shares of Restricted Stock are forfeited unvested, the shares of Stock shall again be available for issuance under the Plan. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of Options for shares of Stock that may be awarded in any year to any Participant may not exceed 316,033 shares.	
 
 	4.2	Adjustments for Changes in Capital Structure. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards (if applicable) and in the exercise price per share of any outstanding Awards (if applicable). If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 14.1) shares of another corporation (the “New Shares”), the Board may unilaterally amend the outstanding Awards to provide that such Awards are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Award be decreased to an amount less than the par value, if any, of the stock subject to the Award. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive.	
 
5.	ELIGIBILITY AND OPTION LIMITATIONS.	
 
 	5.1	Persons Eligible for Awards. Awards may be granted pursuant to this Plan only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, “Employees,” “Consultants” and “Directors” shall include prospective Employees, prospective Consultants and prospective Directors to whom Awards are granted in connection with written offers of an employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Award.	
 
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 	5.2	Option Grant Restrictions. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1.	
 
 	5.3	Fair Market Value Limitation. To the extent that Options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for Stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such Options which exceed such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of Stock shall be determined as of the time the Option with respect to such Stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option.	
 
6.	TERMS AND CONDITIONS OF OPTIONS.	
 
Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
 
 	6.1	Exercise Price. The exercise price for each Option shall be established in the discretion of the Board; provided, however, that (a) the exercise price per share for an Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (b) no Incentive Stock Option granted to a Ten Percent Owner Participant shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.	
 
 	6.2	Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Participant shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.	
 
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 	6.3	Payment of Exercise Price.	
 
 	(a)	Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by delivery of a properly executed notice together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a  “Cashless Exercise” ), (iv) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (v) by any combination thereof. In no event shall the Company accept a promissory note in payment of the exercise price, or make a loan to a Participant to enable the Participant to exercise an Option. The Board may at any time or from time to time, by approval of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.	
 
 	(b)	Limitations on Forms of Consideration.	
 
 	(i)	Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for more than six (6) months or were not acquired, directly or indirectly, from the Company.	
 
 	(ii)	Cashless Exercise. The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise.	
 
 	6.4	Tax Withholding. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its discretion, the Company shall have the right to require the Participant, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof the Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates, the Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.	
 
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 	6.5	Repurchase Rights. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board in its discretion at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.	
 
 	6.6	Effect of Termination of Service.	
 
 	(a)	Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after a Participant’s termination of Service only during the applicable time period determined in accordance with this Section 6.6 and thereafter shall terminate:	
 
 	(i)	Disability. If the Participant’s Service with the Participating Company Group terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of one (1) year (or such other period of time as determined by the Board, in its discretion) after the date on which the Participant’s Service terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Option Agreement evidencing such Option (the  “Option Expiration Date” ).	
 
 	(ii)	Death. If the Participant’s Service with the Participating Company Group terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of one (1) year (or such other period of time as determined by the Board, in its discretion) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months (or such other period of time as determined by the Board, in its discretion) after the Participant’s termination of Service.	
 
 	(iii)	Cause. If the Participant’s Service with the Participating Company Group is terminated for Cause, the Option shall terminate and cease to be exercisable immediately upon such termination of Service.	
 
 	(iv)	Termination of Service. If the Participant’s Service with the Participating Company Group terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable by the Participant on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months (or such other period of time as determined by the Board, in its discretion) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.	
 
 	(b)	Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is	
 
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 	prevented by the provisions of Section 17 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.	
 
 	(c)	Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190 th ) day after the Participant’s termination of Service, or (iii) the Option Expiration Date.	
 
 	6.7	Transferability of Options. Incentive Stock Options granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. Incentive Stock Options shall be exercisable during the lifetime of the Participant only by the Participant or by the Participant’s guardian or legal representative (unless such exercise would disqualify an Option as an Incentive Stock Option). With the approval of the Board, the Option Agreement (other than an Incentive Stock Option) may provide that such Option may be transferred without consideration to one or more Permitted Transferees. Any attempted assignment, transfer, pledge, hypothecation or other disposition of an Option or other award contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon an Option or other award shall be null and void and without effect. As used herein,  “Permitted Transferees”  means a member of a Participant’s immediate family, trusts for the exclusive benefit of such Participant and/or such Participant’s immediate family members, and partnerships or other entities in which the Participant and/or such immediate family members are the only partners, provided that no consideration is provided for the transfer. Immediate family members shall include a Participant’s spouse, descendants (children, grandchildren and more remote descendants), spouses of descendants, and shall include step-children and relationships arising from legal adoption.	
 
7.	STANDARD FORMS OF OPTION AGREEMENT.	
 
 	7.1	Option Agreement. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of Option Agreement approved by the Board concurrently with its adoption of the Plan and as amended from time to time.	
 
 	7.2	Authority to Vary Terms. The Board shall have the authority from time to time to vary the terms of any standard form of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan.	
 
8.	AWARDS TO NON-EMPLOYEE DIRECTORS	
 
Each Non-Employee Director shall, upon each date of election and annually thereafter, be awarded 1,500 shares of Restricted Stock. The Compensation Committee shall make the award each year and shall determine the date of grant for each award. The Restricted Stock shall fully vest at the expiration of twelve (12) months from the date of the grant. The Restricted Stock is not transferable until vested, and shall be forfeited if the Non-Employee Director’s service as a Director ceases before the vesting date.
 
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9.	AWARD AND DELIVERY OF RESTRICTED STOCK	
 
 	9.1	Restricted Period. At the time an award of Restricted Stock is made, the Committee shall establish a period or periods of time (each a “Restricted Period” ) or such other restrictions on the vesting of the Restricted Stock as it shall deem appropriate or applicable to such award. Each award of Restricted Stock may have a different Restricted Period or Restricted Periods. The Committee may, in its sole discretion, at the time an award is made, provide for the incremental lapse of Restricted Periods with respect to a portion or portions of the Restricted Stock awarded, and for the lapse or termination of restrictions upon all or any portion of the Restricted Stock upon the satisfaction of other conditions in addition to or other than the expiration of the applicable Restricted Period. The Committee may also, in its sole discretion, shorten or terminate a Restricted Period or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the Restricted Stock.	
 
 	9.2	Rights and Privileges. At the time a grant of Restricted Stock is made to a Participant, a stock certificate representing a number of shares of the Company’s common stock equal to the number of shares of such Restricted Stock shall be registered in the Participant’s name but shall be held in custody by the Company for such Participant’s account. The Participant shall generally have the rights and privileges of a stockholder as to such Restricted Stock, including, without limitation, the right to vote the Restricted Stock, except that, subject to the earlier lapse or termination of restrictions as herein provided, the following restrictions shall apply: (i) the Participant shall not be entitled to delivery of the stock certificate evidencing Restricted Stock until the expiration or termination of the Restricted Period applicable to such shares and the satisfaction of any other conditions prescribed by the Committee; (ii) none of the shares then subject to a Restricted Period shall be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period applicable to such shares and until the satisfaction of any other conditions prescribed by the Committee; and (iii) all of the shares then subject to a Restricted Period shall be forfeited and all rights of the Participant to such Restricted Stock shall terminate without further obligation on the part of the Company if the Participant ceases to be an Employee, Consultant or Director of the Company or any of its subsidiaries before the expiration or termination of such Restricted Period and the satisfaction of any other conditions prescribed by the Committee applicable to such Restricted Stock. Dividends on Restricted Stock shall be currently paid;  provided ,  however , that in lieu of paying currently a dividend of shares of Common Stock in respect of Restricted Stock, the Committee may, in its sole discretion, register in the name of a Participant a stock certificate representing such shares of Common Stock issued as a dividend on Restricted Stock, and may cause the Company to hold such certificate in custody for the Participant’s account subject to the same terms and conditions as such Restricted Stock. Upon the forfeiture of any Restricted Stock, such forfeited Restricted Stock shall be transferred to the Company without further action by the Participant.	
 
 	9.3	Expiration of Restricted Period. Upon the expiration or termination of the Restricted Period applicable to Restricted Stock and the satisfaction of any other conditions prescribed by the Committee or at such earlier time as provided for herein, the restrictions applicable to the Restricted Stock to such Restricted Period shall lapse and a certificate for a number of shares of Common Stock equal to the number of shares of Restricted Stock with respect to which the restrictions have expired or terminated shall be delivered, free of all such restrictions, except any that may be imposed by law, to the Participant. The Company shall not be required to deliver any fractional share of Common Stock but shall pay to the Participant, in lieu thereof, the product of (i) the Fair Market Value per share (determined as of the date the restrictions expire or terminate) and (ii) the fraction of a share to which such Participant would otherwise be entitled.	
 
 	9.4	Tax Withholding. Upon termination of the Restricted Period with respect to an award of Restricted Stock (or such earlier time, if any, as an election is made by the employee under Code Section 83(b), or any successor provisions thereto, to include the value of such shares in taxable income), the Company shall have the right to require the Participant to pay to the Company the amount of taxes that the Company is required to withhold with respect to such shares of Stock or, in lieu thereof, to retain or sell without notice a sufficient number of shares of Stock held by it to cover the amount required to be withheld.	
 
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10.	AWARD AND DELIVERY OF PURCHASE RIGHTS	
 
 	10.1	Purchase Rights. At the time an award of Purchase Rights is made, the Committee shall establish a period or periods of time during which the Purchase Right may be exercised (each an  “Exercise Period” ) or such other restrictions as it shall deem appropriate and applicable to such award. Each award of Purchase Rights may have a different Exercise Period or Exercise Periods. Each award shall specify the method of payment (which shall not permit payment with promissory notes) to purchase Stock and shall set forth any repurchase rights or calls applicable to the purchased Stock.	
 
11.	ANNUAL INCENTIVE AWARDS.	
 
 	11.1	Annual Incentive Awards. The Committee may grant annual incentive awards of Stock or cash (each an “Annual Incentive Award” ) to such Participants as the Committee may from time to time recommend, in such amounts and subject to such terms and conditions as the Committee in its discretion may determine. The Committee shall establish the maximum amount of Annual Incentive Awards that may be granted for each Performance Cycle. Notwithstanding the foregoing, all Annual Incentive Awards shall be subject to the provisions of paragraphs (a) through (d) below:	
 
 	(a)	Annual Incentive Awards shall be granted in connection with a 12-month Performance Cycle, which shall be the fiscal year of the Company.	
 
 	(b)	Subject to Section 4.1, the Committee shall determine the Participants who shall be eligible to receive an Annual Incentive Award for such Performance Cycle.	
 
 	(c)	The Committee shall fix and establish, in writing, (A) the Performance Measure(s) that shall apply to such Performance Cycle, (B) an objective formula for computing the amount of the Annual Incentive Awards for such Performance Cycle, where the amount shall be based upon the attainment of various Performance Goals for the applicable Performance Measure(s).	
 
 	(d)	Annual Incentive Awards shall be paid in the form of cash, Stock (including Restricted Stock) or any combination thereof, in the discretion of the Committee.	
 
12.	PERFORMANCE-BASED AWARDS.	
 
12.1 Performance-Based Awards. The Committee may grant to officers and other key Employees of either the Company or any Subsidiary the prospective contingent right, expressed in Units, to receive payments of Stock, cash or any combination thereof, with each Unit equivalent in value to one share of Stock, or equivalent to such other value or monetary amount as may be designated or established by the Committee ( “Performance-Based Awards” ). Performance-Based Awards shall be earned by Participants only if specified Performance Goals are satisfied in the applicable Performance Cycle. The Committee shall, in its sole discretion, determine the officers and other key Employees eligible to receive Performance-Based Awards. At the time each grant of a Performance-Based Award is made, the Committee shall establish the applicable Performance Cycle, the Performance Measure and Performance Goals in respect of such Performance-Based Award. The number of shares of Stock and/or the amount of cash earned and payable in settlement of a Performance-Based Award shall be determined by the Committee at the end of the Performance Cycle.
 
12.2 The Committee may grant Performance-Based Awards to a Participant in such amounts as the Committee may determine, subject to the limitations set forth in Section 4.1.
 
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12.3 A certificate (an “Award Certificate”) for each Performance-Based Award shall provide that, in order for a Participant to earn all or a portion of the Units subject to such Performance-Based Award, the Company must achieve certain Performance Goals over a designated Performance Cycle having a minimum duration of one year. The Performance Goals and Performance Cycle shall be established by the Committee in its sole discretion. The Committee shall establish a Performance Measure for each Performance Cycle for determining the portion of the Performance-Based Award, which will be earned or forfeited, based on the extent to which the Performance Goals are achieved or exceeded. Performance Goals may include minimum, maximum and target levels of performance, with the size of the Performance-Based Award based on the level attained. Once established by the Committee and specified in the Award Certificate, and if and to the extent provided in or required by the Award Certificate, the Performance Goals and the Performance Measure in respect of any Performance-Based Award shall not be changed. The Committee may, in its discretion, eliminate or reduce (but not increase) the amount of any Performance-Based Award that otherwise would be payable to a Participant upon attainment of the Performance Goal(s) unless the Participant has a vested right under applicable employment law to receive the full Performance-Based Award.
 
12.4 Performance-Based Awards may be made on such terms and conditions not inconsistent with the Plan, and in such form or forms, as the Committee may from time to time approve. Performance-Based Awards may be made alone, in addition to in tandem with, or independent of other grants and awards under the Plan. Subject to the terms of the Plan, the Committee shall, in its discretion, determine the number of Units subject to each Performance Grant made to a Participant and the Committee may impose different terms and conditions on any particular Performance–Based Award made to any Participant. The Performance Goals, the Performance Cycle and the Performance Measure applicable to a Performance Grant shall be set forth in the relevant Award Certificate.
 
12.5 Each Participant shall be entitled to receive payment in an amount equal to the aggregate Fair Market Value (if the Unit is equivalent to a share of Stock), or such other value as the Committee shall specify, of the Units earned in respect of such Performance Award. Payment in settlement of a Performance-Based Award may be made in Stock, in cash, or in any combination of Stock and cash, and at such time or times, as the Committee, in its discretion, shall determine.
 
13.	DISCRETIONARY BONUS AWARDS.	
 
13.1 Discretionary Bonus Awards. The Committee may grant discretionary bonus awards of Stock or cash (each a “Discretionary Bonus Award”)  to officers and other key Employees of either the Company or any Subsidiary, in such amounts and subject to such terms and conditions as the Committee in its discretion may determine.
 
13.2 The Committee may grant Discretionary Bonus Awards to eligible Participants in such amounts as the Committee may determine, subject to the limitations set forth in Section 4.1.
 
13.3 Discretionary Bonus Awards shall be paid in the form of cash, Stock (including Restricted Stock) or any combination thereof, in the discretion of the Committee.
 
14.	CHANGE IN CONTROL.	
 
 	14.1	Definitions.	
 
 	(a)	An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 	
 
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 	(b)	A “Change in Control” shall mean (i) a merger or consolidation of the Company with or into another corporation in which the Company shall not be the surviving corporation (other than a merger undertaken solely in order to reincorporate in another state) (for purposes hereof, the Company shall not be deemed the surviving corporation in any such transaction if, as the result thereof, it becomes a wholly-owned subsidiary of another corporation), (ii) a dissolution of the Company, (iii) a transfer of all or substantially all of the assets of the Company in one transaction or a series of related transactions to one or more other persons or entities, (iv) a transaction or series of transactions that results in any entity, “Person” or “Group” (as defined below), becoming the beneficial owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities, or (v) during any period of two (2) consecutive years commencing on or after January 1, 2005, individuals who at the beginning of the period constituted the Company’s Board of Directors cease for any reason to constitute at least a majority, unless the election of each director who was not a director at the beginning of the period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period;  provided ,  however , that a “Change in Control” shall not be deemed to have occurred if the ownership of 50% or more of the combined voting power of the surviving corporation, asset transferee or Company (as the case may be), after giving effect to the transaction or series of transactions, is directly or indirectly held by (A) a trustee or other fiduciary under an employee benefit plan maintained by the Company, (B) one or more of the “executive officers” of the Company that held such positions prior to the transaction or series of transactions, or any entity, Person or Group under their control. As used herein, “Person” and “Group” shall have the meanings set forth in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended, and “executive officer” shall have the meaning set forth in Rule 3b-7 promulgated under such Act .	
 
 	14.2	Effect of Change in Control on Awards. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or Parent thereof, as the case may be (the  “Acquiring Corporation” ),  may either assume the Company’s rights and obligations under outstanding Awards or substitute for outstanding Awards substantially equivalent awards, including awards for the Acquiring Corporation’s stock, if applicable. For purposes of this Section 14.2, an Award shall be deemed assumed if, following the Change in Control, the Award confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. Upon a Change in Control, each outstanding Award shall become 100% vested and exercisable as of the date ten (10) days prior to the date of the Change in Control, provided that the Participant’s Service has not terminated prior to such date. The exercise or vesting of any Award that was permissible solely by reason of this Section 14.2 shall be conditioned upon the consummation of the Change in Control. Any Award which is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Award prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the applicable Option Agreement, Award Certificate or Stock Purchase Agreement, except as otherwise provided therein. Furthermore, notwithstanding the foregoing, if the Change in Control results from an Ownership Change Event described in Section 14.1(a)(i) and the Company is the surviving or continuing corporation and immediately after such Change in Control less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Awards shall not terminate unless the Board otherwise provides in its discretion.	
 
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15.	PROVISION OF INFORMATION.	
 
Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common stockholders.
 
16.	COMPLIANCE WITH SECURITIES LAW.	
 
The grant of an Award and the issuance of shares of Stock upon exercise of an Award, if applicable, shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. An Award may not be exercised for shares of Stock if the issuance of such shares would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised for shares of Stock unless (a) a registration statement under the Securities Act shall at the time of exercise of the Award be in effect with respect to the shares of Stock issuable upon exercise of the Award or (b) in the opinion of legal counsel to the Company, the shares of Stock issuable upon exercise of the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares of Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares of Stock as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Award, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
 
17.	TERMINATION OR AMENDMENT OF PLAN.	
 
The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule. No termination or amendment of the Plan shall affect any then outstanding Award unless expressly provided by the Board. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award without the consent of the Participant, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule.
 
18.	STOCKHOLDER APPROVAL.	
 
Any increase in the maximum aggregate number of shares of Stock issuable under the Plan as provided in Section 4.1 (the “Authorized Shares”) shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board. Awards granted in excess of the Authorized Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of such increase in the Authorized Shares.
 
-16-

PLAN HISTORY

February 1, 2002	  	Board adopts Plan, with an initial reserve of 948.35 shares.	
 	 	
February 8, 2002	  	Stockholders approve Plan, with an initial reserve of 948.35 shares.	
 	 	
May 21, 2002	  	Board adopts amended Plan, with a reserve of 948,100 shares.	
 	 	
May 24, 2002	  	Stockholders approve amended Plan, with a reserve of 948,100 shares.	
 	 	
July 1, 2002	  	Board adopts amended Plan; including discretionary bonus awards	
 	 	
February 8, 2005	  	Compensation Committee adopts Second Amended and Restated Plan	
 
-17-

RESTRICTED STOCK AGREEMENT
UNDER THE SECOND AMENDED AND RESTATED
WESTWOOD HOLDINGS GROUP, INC. STOCK INCENTIVE PLAN
 
WHEREAS, WESTWOOD HOLDINGS GROUP, INC., a Delaware corporation (the “Company”) previously established the Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”); and
 
WHEREAS, this RESTRICTED STOCK AGREEMENT (the “Agreement”), is made as of the      day of                     , 200  , between the Company and                                (the “Employee”), and sets forth the terms of the Restricted Shares (as defined below) issued to Employee pursuant to the Plan’s terms; and
 
WHEREAS, all of the terms and provisions of the Plan are incorporated herein by reference and made a part hereof, and all capitalized terms used but not defined in this Agreement have the meanings set forth in the Plan.
 
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows:
 
1.	Grant of Restricted Stock. The Company hereby grants to Employee, on the terms and conditions hereinafter set forth,              shares of the presently authorized but unissued Common Stock, $.01 par value per share, of the Company (the “Restricted Stock”).	
 
2.	Issue Date and Vesting.	
 
 	A.	The Issue Date of the Restricted Stock shall be                             , 200  .	
 
 	B.	The Restricted Stock granted to Employee hereunder, subject to the other terms and conditions set forth herein, shall become vested in accordance with the following schedule:	

VESTING DATE

	 	CUMULATIVE PERCENTAGE
OF STOCK VESTED

	
Issue Date	 	       0%	
_________________________	 	        %	
_________________________	 	        %	
_________________________	 	        %	
_________________________	 	        %	
 
 	C.	Upon termination of employment of Employee, any shares of Restricted Stock that have not vested shall be forfeited to the Company without consideration.	
 
3.	Employment of Employee. As an inducement to the Company to issue the Restricted Stock to Employee, and as a condition thereto, Employee acknowledges and agrees that, without limitation of his or her rights under his or her employment agreement with the Company, if any, neither the issuance of the Restricted Stock to Employee nor any provision contained herein shall entitle Employee to remain in the employment of the Company or its affiliates or affect the right of the Company to terminate Employee’s employment at any time.	
 
4.	Restrictions on Transfer.	
 
 	A.	Any shares of Restricted Stock granted hereunder, whether vested or unvested, shall not be sold, assigned, transferred, pledged or otherwise encumbered for a period of one (1) year from the Issue Date, except to a Permitted Transferee (as defined in the Plan) with the written consent of the Committee.	
 
 	B.	Under no circumstances shall any sale or other transfer of any shares of Restricted Stock be valid unless and until the shares proposed to be sold or transferred are fully vested.	

 	C.	The spouse of Employee shall execute a signature page to this Agreement as of the date hereof and agree to be bound in all respects by the terms hereof to the same extent as Employee. The spouse further agrees that should he/she predecease Employee or become divorced from Employee, any of the shares of Restricted Stock which such spouse may own or in which he/she may have an interest shall remain subject to this Agreement.	
 
5.	Notices; Deliveries. Any notice or delivery required to be given under the terms of this Agreement shall be addressed to the Company at its principal office, and any notice or delivery to be given to Employee shall be addressed to him or her at the address given by him or her beneath his or her signature hereto or such other address as either party hereto may hereafter designate in writing to the other. Any such notice or delivery shall be deemed to have been duly given when addressed as aforesaid, registered or certified mail, and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States.	
 
6.	Disputes. As a condition of the granting of the Restricted Stock hereby, Employee and his or her heirs and successors agree that any dispute or disagreement which may arise hereunder shall be determined by the Company’s Board of Directors in its sole discretion and judgment, and that any such determination and any interpretation by the Board of Directors of the terms of this grant of Restricted Stock shall be final and shall be binding and conclusive, for all purposes, upon the Company, Employee, his or her heirs and personal representatives.	
 
7.	Certificates.	
 
 	A.	The certificate(s) representing the shares of Restricted Stock granted hereby will be stamped or otherwise imprinted with the legend required by the Plan with respect to any applicable restrictions on the sale or transfer of such shares, and the stock transfer records of the Company will reflect stop transfer instructions with respect to such shares.	
 
 	B.	At the election of the Company, the Company may retain the certificate(s) representing the shares of Restricted Stock granted to Employee pursuant to this Agreement until such time as the vesting restrictions set forth in Section 2 have lapsed and the restrictions on the transfer of such Restricted Stock set forth in Section 4 have terminated or are removed by the Board of Directors. Within a reasonable time thereafter, the Company will deliver to Employee a new certificate representing such shares, free of the legend referred to in paragraph A above. The issuance of such certificate shall not affect any restrictions upon the transferability of such shares pursuant to applicable law or otherwise.	
 
 	C.	If the Company elects to issue the certificate(s) representing the shares of Restricted Stock granted hereunder prior to the termination or lapse of the restrictions on vesting and transfer, the legend referred to in paragraph A above shall remain on such certificate(s) until such time as the vesting and transfer restrictions have terminated or lapsed or are removed by the Board of Directors.	
 
8.	Restricted Stock Subject to Plan. The Restricted Stock granted hereby is subject to the Plan. If a conflict exists between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.	
 
9.	Miscellaneous.	
 
 	A.	Employee hereby agrees that (i) Employee is acquiring the Restricted Stock for investment purposes and not with a view to the resale or distribution thereof; (ii) the Company may withhold from Employee any payment or consideration to be paid to Employee by the Company, any tax which the Company believes is required to be withheld with respect to any benefit under the Plan or this Restricted Stock Agreement, and to hold as security for the amount to be withheld any property otherwise distributable to Employee under the Plan until the amounts required to be withheld have been so withheld; and (iii) Employee will make appropriate arrangements with the Company for satisfaction of any applicable federal, state or local income tax, withholding requirements or like requirements.	
 
-2-

 	B.	If any party to this Agreement so required under this Agreement falls or refuses to comply with the provisions of this Agreement, then in addition to any other remedies provided by law or this Agreement, the party affected thereby may institute and maintain a proceeding to compel the specific performance of this Agreement by the party so defaulting.	
 
 	C.	Within 30 days after the date of this Agreement, Employee may make an election with the Internal Revenue Service under Section 83(b) of the Internal Revenue Code and the regulations promulgated thereunder.	
 
 	D.	This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company.	
 
 	E.	The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Texas.	
 
 	F.	This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which collectively shall constitute a single instrument.	
 
 	G.	If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or any other jurisdiction, but this Agreement shall be reformed and construed in any such jurisdiction as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provision or part shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted in such jurisdiction.	
 
IN WITNESS WHEREOF, the Company has, as of the date and place first above written, caused this Agreement to be executed on its behalf by its authorized officer and Employee has hereunto set his or her hand as of the date and place first above written.

WESTWOOD HOLDINGS GROUP, INC.	
 	 	
By:	 	 

	
Name:	 	Brian O. Casey	
Its:	 	President and Chief Operating Officer	
 
-3-

EMPLOYEE SIGNATURE PAGE
TO RESTRICTED STOCK AGREEMENT

Employee Name:	 	 

	
 	 	
Signature	 	 

	
Address:	 	 

	

	
 
I, the undersigned, being the spouse of the above-named Employee, hereby acknowledge that I have read and understand the foregoing Restricted Stock Agreement under the Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, and I agree to be bound by the terms thereof.

Spouse Name:	 	 

	
 	 	
Signature	 	 

	
Address:	 	 

	
 
-4-

NON-QUALIFIED STOCK OPTION AGREEMENT
UNDERTHE SECOND AMENDEDAND RESTATED WESTWOOD HOLDINGS GROUP, INC.
STOCK INCENTIVE PLAN

DATE OF GRANT:	 	                    , 20xx	
 	 	 	
NAME OF OPTIONEE:	 	 	  	 	
 	 	 	
NUMBER OF SHARES:	 	 	  	 	
 	 	 	
PRICE PER SHARE:	 	 	  	$xx.xx per share, 100% of the Fair Market Value per Share of the Shares as of the date of grant as determined in accordance with the Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan.	
 	 	 	
TERM/EXPIRATION DATE:	 	 	  	10 years/                    , 20xx	
 
Westwood Holdings Group, Inc., a Delaware corporation (the “Company”), hereby grants to the above-named optionee (the “Optionee”) an option (the “Option”) to purchase from the Company, for the price per share set forth above, the number of shares of Common Stock (the “Stock”), of the Company set forth above pursuant to the Second Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”). This Option is not intended to constitute an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).
 
The terms and conditions of the Option granted hereby, to the extent not controlled by the terms and conditions contained in the Plan, are as follows:
 
 	1.	PRICE. The price at which each share of Stock subject to this Option may be purchased shall be the price set forth above, subject to any adjustments that may be made pursuant to the terms of the Plan.	
 
 	2.	VESTING. The Option shall become vested as follows:                                                                                  .	
 
 	3.	EMPLOYMENT REQUIRED. Except as provided in the Plan, this Option may not be exercised unless the Optionee is an employee of the Company, a Parent or any Subsidiary at the time of such exercise. Section 6.6 of the Plan shall govern in determining the exercisability of this Option following termination of the Optionee’s employment.	
 
 	4.	TERMSOF EXERCISE. The Optionee (or his representative, guardian, devisee or heir, as applicable) may exercise any portion of this Option that has become exercisable in accordance with the terms hereof as to all or any of the shares of Stock then available for purchase by delivering to the Company written notice specifying:	
 
 	(i)	the number of whole shares of Stock to be purchased together with payment in full of the aggregate option price of such shares, provided that this Option may not be exercised for less than one hundred (100) shares of Stock or the number of shares of Stock remaining subject to this Option, whichever is smaller;	
 
 	(ii)	the address to which dividends, notices, reports, etc. are to be sent; and	
 
 	(iii)	the Optionee’s social security number.	

Payment shall be in cash, by certified or cashier’s check payable to the order of the Company, free from all collection charges, by tender or attestation to the ownership of shares of Common Stock already owned by the Optionee and having a fair market value equal to the aggregate Option Price (provided, however, that such shares have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company), or by a combination of cash and shares of Common Stock. Payment may also be made by delivery to the Company of a properly executed exercise notice together with irrevocable instructions to a broker approved by the Company that upon such broker’s sale of shares of Stock with respect to which the Option is exercised, it is to deliver promptly to the Company the amount of sale proceeds necessary to satisfy the Exercise Price and any required withholding taxes. The Optionee shall not be entitled to any rights and privileges as a shareholder of the Company in respect of any shares of Stock covered by this Option until such shares of Stock shall have been paid for in full and issued to the Optionee.
 
 	(a)	Stock Restrictions and Agreements. As soon as practicable after the Company receives payment for shares of Stock covered by this Option, it shall deliver a certificate or certificates representing the shares of Stock so purchased to the Optionee. Such certificate shall be registered in the name of the Optionee. As a condition to issuance of Shares, the Company may place legends on Shares, issue stop transfer orders and require such agreements or undertakings as the Company may deem necessary or advisable to assure compliance with applicable federal or state securities laws or regulations.	
 
 	(b)	Restrictions on Transfer of Options. Except as expressly permitted by the Plan, this Option is personal to the Optionee and during the Optionee’s lifetime may be exercised only by the Optionee or his guardian or representative upon the events and in accordance with the terms and conditions set forth in the Plan. This Option shall not be transferable other than by will or the laws of descent and distribution.	
 
 	5.	NO RIGHTTO EMPLOYMENT. This Option does not confer on the Optionee any right to continue in the employ of the Company, the Parent or any Subsidiary or interfere in any way with the right of the Company, the Parent or any Subsidiary to determine the terms of the Optionee’s employment.	
 
 	6.	PLANTO CONTROL. This Option and the terms and conditions herein set forth are subject in all respects to the terms and conditions of the Plan, which shall be controlling and are incorporated herein by reference. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan. All interpretations or determinations of the Board of Directors with respect to the Plan and this Option shall be binding and conclusive upon the Optionee and his legal representatives with respect to any question arising hereunder.	
 
 	7.	BOARDAND COMMITTEE. Optionee acknowledges and agrees that any powers, rights or responsibilities of the Company’s Board of Directors set forth herein may be delegated to and exercised by the Committee as defined in and as permitted under the Plan.	
 
 	8.	NOTICES. All notices hereunder to the parties to this Non-Qualified Stock Option Agreement shall be delivered or mailed to the following addresses:	
 
 	(a)	If to the Company, to its headquarters address, to the attention of the Chief Financial Officer, and	
 
 	(b)	if to the Optionee, at the address set forth with the Optionee’s signature below.	
 
Such addresses for the service of notices may be changed at any time provide notice of such change is furnished in advance to the other party.
 
-2-

 	9.	GOVERNING LAW. This Non-Qualified Stock Option Agreement shall be governed by and construed in accordance with the laws of the State of Texas without application of the conflict of laws principles thereof, except to the extent preempted by federal law, which shall govern to such extent .	
 
[The remainder of this page is intentionally left blank.]
 
-3-

IN WITNESS WHEREOF, the undersigned have caused this Non-Qualified Stock Option Agreement to be duly executed as of the date first above written.

WESTWOOD HOLDINGS GROUP, INC.	
 	 	
By:	 	 

	
Name:	 	 

	
Title:	 	 

	
 	
OPTIONEE:	
 	 	
Printed Name:	 	 

	
Address:	 	 

	

	
Social Security No:	 	 

	
 
-4-

Exhibit 31.1
 
CERTIFICATIONS
 
I, Susan M. Byrne, Chief Executive Officer, certify that:
 
1. I have reviewed this annual report on Form 10-K of Westwood Holdings Group, Inc.;
 
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Westwood as of, and for, the periods presented in this annual report;
 
4. Westwood’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Westwood and have:
 
 	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Westwood, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;	
 
 	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;	
 
 	c.	Evaluated the effectiveness of Westwood’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and	
 
 	d.	Disclosed in this report any change in the Westwood’s internal control over financial reporting that occurred during the Westwood’s most recent fiscal quarter (Westwood’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, Westwood’s internal control over financial reporting; and	
 
5. Westwood’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Westwood’s auditors and the audit committee of Westwood’s board of directors (or persons performing the equivalent functions):
 
 	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Westwood’s ability to record, process, summarize and report financial information; and	
 
 	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Westwood’s internal control over financial reporting.	

Date: February 24, 2005	 	By:	 	/s/ Susan M. Byrne

	
 	 	 	 	Susan M. Byrne, Chief Executive Officer	

Exhibit 31.2
 
CERTIFICATIONS
 
I, Brian O. Casey, President and Chief Operating Officer (principal financial officer), certify that:
 
1. I have reviewed this annual report on Form 10-K of Westwood Holdings Group, Inc.;
 
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Westwood as of, and for, the periods presented in this annual report;
 
4. Westwood’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Westwood and have:
 
 	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Westwood, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;	
 
 	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;	
 
 	c.	Evaluated the effectiveness of Westwood’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and	
 
 	d.	Disclosed in this report any change in the Westwood’s internal control over financial reporting that occurred during the Westwood’s most recent fiscal quarter (Westwood’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, Westwood’s internal control over financial reporting; and	
 
5. Westwood’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Westwood’s auditors and the audit committee of Westwood’s board of directors (or persons performing the equivalent functions):
 
 	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Westwood’s ability to record, process, summarize and report financial information; and	
 
 	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Westwood’s internal control over financial reporting.	

Date: February 24, 2005	 	By:	 	/s/ Brian O. Casey

	
 	 	 	 	Brian O. Casey, President and Chief Operating Officer	

Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Westwood Holdings Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Susan M. Byrne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: February 24, 2005	 	By:	 	/s/ Susan M. Byrne

	
 	 	 	 	Susan M. Byrne, Chief Executive Officer	

Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Westwood Holdings Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian O. Casey, President and Chief Operating Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: February 24, 2005	 	By:	 	/s/ Brian O. Casey

	
 	 	 	 	Brian O. Casey, President and Chief Operating Officer