Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549

 
FORM 10-Q

 
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
 
for the Quarterly Period Ended June 30, 2005.
 
¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
 
for the Transition Period from              to             .
 
Commission file number 1-31234

 
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)

 
 	 	 	
DELAWARE	 	75-2969997	
(State or Other Jurisdiction of
Incorporation or Organization)	 	(IRS Employer
Identification No.)	
 
200 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS 75201
(Address of Principal Executive Office)(Zip Code)
 
TELEPHONE NUMBER (214) 756-6900
(Registrant’s telephone number, including area code)

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

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).     Yes  x    No  ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $0.01 Par Value — 5,766,022 shares as of July 25, 2005.

Table of Contents
WESTWOOD HOLDINGS GROUP, INC.
 
INDEX

 	  	 	  	PAGE

	
PART I	  	FINANCIAL INFORMATION	  	 	
 	 	 	
Item 1.	  	Unaudited Condensed Financial Statements	  	 	
 	 	 	
 	  	Consolidated Balance Sheets at June 30, 2005 and December 31, 2004	  	1	
 	 	 	
 	  	Consolidated Statements of Income for the three and six months ended June 30, 2005 and June 30, 2004	  	2	
 	 	 	
 	  	Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2005	  	3	
 	 	 	
 	  	Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and June 30, 2004	  	4	
 	 	 	
 	  	Notes to Interim Consolidated Financial Statements	  	5	
 	 	 	
Item 2.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	10	
 	 	 	
Item 3.	  	Quantitative And Qualitative Disclosure About Market Risk	  	16	
 	 	 	
Item 4.	  	Controls and Procedures	  	16	
 	 	 	
PART II	  	OTHER INFORMATION	  	 	
 	 	 	
Item 1.	  	Legal Proceedings	  	16	
 	 	 	
Item 2.	  	Unregistered Sales of Equity Securities and Use of Proceeds	  	16	
 	 	 	
Item 3.	  	Defaults Upon Senior Securities	  	16	
 	 	 	
Item 4.	  	Submission of Matters to a Vote of Security Holders	  	17	
 	 	 	
Item 5.	  	Other Information	  	17	
 	 	 	
Item 6.	  	Exhibits	  	17	
 	 	 	
Signatures	  	 	  	18	

Table of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS
 
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2005 and December 31, 2004
(in thousands, except par value and share amounts)
(unaudited)

 	  	June 30,
2005

	 	 	December 31,
2004

	 	
ASSETS	  	 	 	 	 	 	 	 	
Current Assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	1,656	 	 	$	720	 	
Accounts receivable	  	 	1,966	 	 	 	1,832	 	
Investments, at market value	  	 	18,532	 	 	 	18,632	 	
Other current assets	  	 	221	 	 	 	414	 	

	

	

	 	

	

	

	
Total current assets	  	 	22,375	 	 	 	21,598	 	
Goodwill	  	 	2,302	 	 	 	2,302	 	
Deferred income taxes	  	 	818	 	 	 	517	 	
Property and equipment, net of accumulated depreciation of $385 and $250	  	 	1,723	 	 	 	1,860	 	

	

	

	 	

	

	

	
Total assets	  	$	27,218	 	 	$	26,277	 	

	

	

	 	

	

	

	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current Liabilities:	  	 	 	 	 	 	 	 	
Accounts payable and accrued liabilities	  	$	612	 	 	$	629	 	
Dividends payable	  	 	461	 	 	 	460	 	
Compensation and benefits payable	  	 	1,577	 	 	 	2,703	 	
Income taxes payable	  	 	87	 	 	 	—  	 	
Other current liabilities	  	 	6	 	 	 	17	 	

	

	

	 	

	

	

	
Total current liabilities	  	 	2,743	 	 	 	3,809	 	
Deferred rent	  	 	815	 	 	 	805	 	

	

	

	 	

	

	

	
Total liabilities	  	 	3,558	 	 	 	4,614	 	

	

	

	 	

	

	

	
Stockholders’ Equity:	  	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 10,000,000 shares, issued and outstanding 5,759,397 shares at June 30, 2005; issued and outstanding 5,754,147 shares at December 31, 2004	  	 	58	 	 	 	58	 	
Additional paid-in capital	  	 	17,128	 	 	 	16,962	 	
Unamortized stock compensation	  	 	(3,881	)	 	 	(4,821	)	
Retained earnings	  	 	10,355	 	 	 	9,464	 	

	

	

	 	

	

	

	
Total stockholders’ equity	  	 	23,660	 	 	 	21,663	 	

	

	

	 	

	

	

	
Total liabilities and stockholders’ equity	  	$	27,218	 	 	$	26,277	 	

	

	

	 	

	

	

	
 
See notes to consolidated financial statements.
 
1

Table of Contents
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

 	  	Three months ended
June 30,

	  	Six months ended
June 30,

	
 	  	2005

	  	2004

	  	2005

	  	2004

	
REVENUES:	  	 	 	  	 	 	  	 	 	  	 	 	
Advisory fees	  	$	3,309	  	$	3,249	  	$	6,500	  	$	6,669	
Trust fees	  	 	1,668	  	 	1,442	  	 	3,371	  	 	2,894	
Other revenues	  	 	276	  	 	249	  	 	464	  	 	420	

	

	  	

	

	  	

	

	  	

	

	
Total revenues	  	 	5,253	  	 	4,940	  	 	10,335	  	 	9,983	

	

	  	

	

	  	

	

	  	

	

	
EXPENSES:	  	 	 	  	 	 	  	 	 	  	 	 	
Employee compensation and benefits	  	 	2,681	  	 	2,347	  	 	5,279	  	 	4,684	
Sales and marketing	  	 	145	  	 	148	  	 	227	  	 	248	
Information technology	  	 	192	  	 	160	  	 	377	  	 	332	
Professional services	  	 	274	  	 	247	  	 	593	  	 	471	
General and administrative	  	 	435	  	 	439	  	 	912	  	 	820	

	

	  	

	

	  	

	

	  	

	

	
Total expenses	  	 	3,727	  	 	3,341	  	 	7,388	  	 	6,555	

	

	  	

	

	  	

	

	  	

	

	
Income before income taxes	  	 	1,526	  	 	1,599	  	 	2,947	  	 	3,428	
Provision for income taxes	  	 	589	  	 	611	  	 	1,135	  	 	1,323	

	

	  	

	

	  	

	

	  	

	

	
Net income	  	$	937	  	$	988	  	$	1,812	  	$	2,105	

	

	  	

	

	  	

	

	  	

	

	
Earnings per share:	  	 	 	  	 	 	  	 	 	  	 	 	
Basic	  	$	0.17	  	$	0.18	  	$	0.33	  	$	0.39	
Diluted	  	$	0.17	  	$	0.18	  	$	0.32	  	$	0.39	
 
See notes to consolidated financial statements.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2005
(in thousands)
(unaudited)

 	  	Westwood Holdings
Group, Inc.
Common Stock, Par

	  	Additional
Paid-In
Capital

	 	 	Unamortized
Stock
Compensation

	 	 	Retained
Earnings

	 	 	Total

	 	 	
 	  	Shares

	 	 	Amount

	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, January 1, 2005	  	5,754,147	 	 	$	58	  	$	16,962	 	 	$	(4,821	)	 	$	9,464	 	 	$	21,663	 	 	 	 	
Net income	  	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	1,812	 	 	 	1,812	 	 	 	 	
Cancellation of restricted stock	  	(7,500	)	 	 	—  	  	 	(140	)	 	 	140	 	 	 	 	 	 	 	—  	 	 	 	 	
Dividends declared ($0.16 per share)	  	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	(921	)	 	 	(921	)	 	 	 	
Amortization of stock compensation	  	 	 	 	 	 	  	 	 	 	 	 	800	 	 	 	 	 	 	 	800	 	 	 	 	
Stock options vested	  	 	 	 	 	 	  	 	125	 	 	 	 	 	 	 	 	 	 	 	125	 	 	 	 	
Tax benefit related to equity compensation	  	 	 	 	 	 	  	 	16	 	 	 	 	 	 	 	 	 	 	 	16	 	 	 	 	
Stock options exercised	  	12,750	 	 	 	—  	  	 	165	 	 	 	 	 	 	 	 	 	 	 	165	 	 	 	 	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	
BALANCE, June 30, 2005	  	5,759,397	 	 	$	58	  	$	17,128	 	 	$	(3,881	)	 	$	10,355	 	 	$	23,660	 	 	 	 	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	
 
See notes to consolidated financial statements.
 
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Table of Contents
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 	  	For the six months
ended June 30,

	 	
 	  	2005

	 	 	2004

	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	  	 	 	 	 	 	 	 	
Net income	  	$	1,812	 	 	$	2,105	 	
Adjustments to reconcile net income to net cash provided by (used in) operating activities:	  	 	 	 	 	 	 	 	
Depreciation and amortization	  	 	135	 	 	 	60	 	
Unrealized gains on investments	  	 	(99	)	 	 	(96	)	
Loss on sale of property and equipment	  	 	—  	 	 	 	4	 	
Stock option expense	  	 	125	 	 	 	124	 	
Restricted stock amortization	  	 	800	 	 	 	405	 	
Deferred income taxes	  	 	(301	)	 	 	90	 	
Purchases of investments – trading securities	  	 	(2,908	)	 	 	(6,398	)	
Sales of investments – trading securities	  	 	2,856	 	 	 	3,874	 	
Change in operating assets and liabilities:	  	 	 	 	 	 	 	 	
Increase in accounts receivable	  	 	(134	)	 	 	(268	)	
Decrease in other assets	  	 	170	 	 	 	119	 	
(Decrease) increase in accounts payable and accrued liabilities	  	 	(17	)	 	 	787	 	
Decrease in compensation and benefits payable	  	 	(1,126	)	 	 	(1,237	)	
Increase (decrease) in income taxes payable and decrease (increase) in prepaid taxes	  	 	126	 	 	 	(554	)	
Increase (decrease) in other liabilities	  	 	53	 	 	 	(51	)	

	

	

	 	

	

	

	
Net cash provided by (used in) operating activities	  	 	1,492	 	 	 	(1,036	)	

	

	

	 	

	

	

	
CASH FLOWS FROM INVESTING ACTIVITIES:	  	 	 	 	 	 	 	 	
Purchases of money market funds	  	 	(1,982	)	 	 	(3,460	)	
Sales of money market funds	  	 	2,233	 	 	 	3,233	 	
Purchase of property and equipment	  	 	(52	)	 	 	(992	)	
Sale of property and equipment	  	 	—  	 	 	 	25	 	

	

	

	 	

	

	

	
Net cash provided by (used in) investing activities	  	 	199	 	 	 	(1,194	)	

	

	

	 	

	

	

	
CASH FLOWS FROM FINANCING ACTIVITIES:	  	 	 	 	 	 	 	 	
Sale of treasury stock	  	 	—  	 	 	 	1	 	
Proceeds from exercise of stock options	  	 	165	 	 	 	—  	 	
Cash dividends	  	 	(920	)	 	 	(389	)	

	

	

	 	

	

	

	
Net cash used in financing activities	  	 	(755	)	 	 	(388	)	

	

	

	 	

	

	

	
NET INCREASE (DECREASE) IN CASH	  	 	936	 	 	 	(2,618	)	
Cash and cash equivalents, beginning of period	  	 	720	 	 	 	3,643	 	

	

	

	 	

	

	

	
Cash and cash equivalents, end of period	  	$	1,656	 	 	$	1,025	 	

	

	

	 	

	

	

	
Supplemental cash flow information:	  	 	 	 	 	 	 	 	
Cash paid during the period for income taxes	  	$	1,310	 	 	$	1,787	 	
Cancellation of restricted stock	  	 	(140	)	 	 	(20	)	
Tax benefit allocated directly to equity	  	 	16	 	 	 	4	 	
Assets acquired by recording liabilities	  	 	—  	 	 	 	827	 	
 
See notes to consolidated financial statements.
 
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Table of Contents
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 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 have been prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position as of June 30, 2005, and results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements are presented using the accrual basis of accounting and have been prepared in accordance with the instructions for the presentation of interim financial information as prescribed by the Securities and Exchange Commission (SEC) and, therefore, do not purport to contain all necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Refer to the accounting policies described in the notes to the Company’s annual financial statements, which were consistently followed in preparing this interim financial information. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results for the year ending December 31, 2005 or any future period.
 
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.
 
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.
 
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Table of Contents
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Revenue Recognition
 
Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between 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 quarterly 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 measures realized gains and losses on investments using the specific identification 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 third quarter of 2004, the Company completed its annual impairment assessment as required by SFAS 142. No impairment loss was required. The Company performs its annual impairment assessment as of July 1.
 
Reclassifications
 
Certain reclassifications of prior period amounts have been made to conform to the current period presentation.
 
Federal Income Taxes
 
The Company files a Federal income tax return as a consolidated group for the Company and its subsidiaries.
 
Deferred income tax assets and liabilities are determined based on the differences between the financial statement and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in the deferred tax assets and liabilities.
 
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.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
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 3 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 common trust fund shares, equals their fair value, which is equal to prices quoted in active markets and, with respect to 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 market values of the Company’s money market holdings generally do not fluctuate.
 
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 June 30, 2005 and 2004, 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 of restricted stock granted to employees and non-employee directors, as well as the dilutive impact of shares of the Company’s common stock that were held in the 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):

 	  	Three months ended
June 30,

	  	Six months ended
June 30,

	
 	  	2005

	  	2004

	  	2005

	  	2004

	
Net income	  	$	937	  	$	988	  	$	1,812	  	$	2,105	
 	 	 	 	 	
Weighted average shares outstanding – basic	  	 	5,422,040	  	 	5,398,654	  	 	5,418,484	  	 	5,398,637	
Dilutive potential shares from stock options	  	 	34,951	  	 	23,902	  	 	39,089	  	 	23,141	
Dilutive potential shares from restricted shares	  	 	111,757	  	 	25,102	  	 	123,168	  	 	24,445	
Dilutive potential shares from deferred compensation plan	  	 	—  	  	 	302	  	 	—  	  	 	302	

	

	  	

	

	  	

	

	  	

	

	
Weighted average shares outstanding – diluted	  	 	5,568,748	  	 	5,447,960	  	 	5,580,741	  	 	5,446,525	

	

	  	

	

	  	

	

	  	

	

	
Earnings per share – basic	  	$	0.17	  	$	0.18	  	$	0.33	  	$	0.39	
Earnings per share – diluted	  	$	0.17	  	$	0.18	  	$	0.32	  	$	0.39	
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
3. 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

	
June 30, 2005:	  	 	 	  	 	 	  	 	 	  	 	 	
U.S. Government and Government agency obligations	  	$	1,693	  	$	 —  	  	$	 —  	  	$	1,693	
Funds:	  	 	 	  	 	 	  	 	 	  	 	 	
Money Market	  	 	14,866	  	 	—  	  	 	—  	  	 	14,866	
Equity	  	 	1,749	  	 	224	  	 	—  	  	 	1,973	

	

	  	

	

	  	

	

	  	

	

	
Marketable securities	  	$	18,308	  	$	224	  	$	—  	  	$	18,532	

	

	  	

	

	  	

	

	  	

	

	
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	

	

	  	

	

	  	

	

	  	

	

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

	

	  	

	

	  	

	

	  	

	

	
 
All of these investments are carried at market value. The money market funds are available for sale securities. The other investments are trading securities.
 
4. EQUITY:
 
On April 26, 2005, the Company declared a quarterly cash dividend of $0.08 per share on common stock payable on July 1, 2005 for stockholders of record on June 15, 2005.
 
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.
 
5. 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.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	  	Management

	  	Trust

	  	Other

	 	 	Eliminations

	 	 	Consolidated

	
 	  	(in thousands)	
Three months ended June 30, 2005	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	3,564	  	$	1,689	  	$	—  	 	 	$	—  	 	 	$	5,253	
Net intersegment revenues	  	 	701	  	 	2	  	 	—  	 	 	 	(703	)	 	 	—  	
Income before income taxes	  	 	1,712	  	 	291	  	 	(477	)	 	 	—  	 	 	 	1,526	
Segment assets	  	 	21,291	  	 	4,208	  	 	1,719	 	 	 	—  	 	 	 	27,218	
Segment goodwill	  	 	1,790	  	 	512	  	 	—  	 	 	 	—  	 	 	 	2,302	
 	 	 	 	 	 	
Three months ended June 30, 2004	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	3,486	  	$	1,449	  	$	5	 	 	$	—  	 	 	$	4,940	
Net intersegment revenues	  	 	579	  	 	4	  	 	—  	 	 	 	(583	)	 	 	—  	
Income before income taxes	  	 	1,663	  	 	208	  	 	(272	)	 	 	—  	 	 	 	1,599	
Segment assets	  	 	22,714	  	 	4,168	  	 	1,459	 	 	 	—  	 	 	 	28,341	
Segment goodwill	  	 	1,790	  	 	512	  	 	—  	 	 	 	—  	 	 	 	2,302	
 	 	 	 	 	 	
 	  	Management

	  	Trust

	  	Other

	 	 	Eliminations

	 	 	Consolidated

	
 	  	(in thousands)	
Six months ended June 30, 2005	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	6,929	  	$	3,406	  	$	—  	 	 	$	—  	 	 	$	10,335	
Net intersegment revenues	  	 	1,346	  	 	3	  	 	—  	 	 	 	(1,349	)	 	 	—  	
Income before income taxes	  	 	3,216	  	 	656	  	 	(925	)	 	 	—  	 	 	 	2,947	
Segment assets	  	 	21,291	  	 	4,208	  	 	1,719	 	 	 	—  	 	 	 	27,218	
Segment goodwill	  	 	1,790	  	 	512	  	 	—  	 	 	 	—  	 	 	 	2,302	
 	 	 	 	 	 	
Six months ended June 30, 2004	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	7,047	  	$	2,906	  	$	30	 	 	$	—  	 	 	$	9,983	
Net intersegment revenues	  	 	1,190	  	 	4	  	 	—  	 	 	 	(1,194	)	 	 	—  	
Income before income taxes	  	 	3,497	  	 	470	  	 	(539	)	 	 	—  	 	 	 	3,428	
Segment assets	  	 	22,714	  	 	4,168	  	 	1,459	 	 	 	—  	 	 	 	28,341	
Segment goodwill	  	 	1,790	  	 	512	  	 	—  	 	 	 	—  	 	 	 	2,302	
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning our financial position and liquidity, results of operations, prospects for future growth, and other matters are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause our results to differ materially from the results discussed in, or contemplated by, such forward-looking statements include the risks described under “Business—Forward-Looking Statements and Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission. Such risks include, without limitation, risks related to poor investment performance of the assets managed by us; risks related to our inability 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; risks related to some members of our management being critical to our success and our inability to attract and retain key employees, which could compromise our future success; risks related to some of our executive officers having substantial influence over our investment policies; risks related to the negative performance of the securities markets; risks related to our business being dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal and the related risk of losing any of our clients on very short notice; risks related to having a small number of clients account for a substantial portion of our business; risks related to any event that negatively affects the asset management industry; risk related to the substantial cost and time required to introduce new asset classes in our industry; risks related to our inability to successfully and timely expand our asset classes; risks related to our business being subject to pervasive regulation with attendant costs of compliance and serious consequences for violations; risks related to potential misuse of assets and information in the possession of our investment professionals and employees; risks related to acquisitions, which may be part of our long-term business strategy and involve inherent risks that could compromise the success of the combined business and dilute the holdings of our stockholders; risks related to various factors hindering our ability to declare and pay dividends; risks related to our business being vulnerable to systems failures; risks related to our potential inability to fund our capital requirements; risks related to the indemnification obligations contained in the tax separation agreement that we entered into with SWS and that neither party may be able to satisfy; and risks related to certain provisions in our charter documents discouraging a third party from acquiring control of us.
 
Overview
 
Westwood Holdings Group, Inc. (“Westwood”) manages investment assets and provides services for its clients through its 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 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. 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 have consistently ranked above the median in performance within their peer groups.
 
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 a daily or monthly analysis of 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.
 
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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 consulting fees paid to us by Gabelli Advisers, Inc.
 
Assets Under Management
 
Assets under management increased $436 million, or 11.3%, to $4.3 billion at June 30, 2005, compared with $3.8 billion at June 30, 2004. Average assets under management for the first half of 2005 were $4.2 billion compared to $3.9 billion for the first half of 2004, an increase of 8.2%. The increase in period ending assets under management was principally attributable to market appreciation of assets under management and asset inflows from new clients, partially offset by the withdrawal of assets by certain clients. The following table sets forth Management’s and Trust’s assets under management as of June 30, 2005 and June 30, 2004:

 	  	As of June 30,
(1) (in millions)

	  	% Change

	 	
 	  	2005

	  	2004

	  	June 30, 2005 vs.
June 30, 2004

	 	
Westwood Management Corp.	  	 	 	  	 	 	  	 	 	
Separate Accounts	  	$	1,972	  	$	1,767	  	11.6	%	
Subadvisory	  	 	655	  	 	645	  	1.6	 	
Westwood Funds	  	 	358	  	 	367	  	(2.5	)	
Managed Accounts	  	 	158	  	 	153	  	3.3	 	

	

	  	

	

	  	

	

	
Total	  	 	3,143	  	 	2,932	  	7.2	 	
 	 	 	 	
Westwood Trust	  	 	 	  	 	 	  	 	 	
Commingled Funds	  	 	941	  	 	773	  	21.7	 	
Private Accounts	  	 	149	  	 	87	  	71.3	 	
Agency/Custody Accounts	  	 	48	  	 	53	  	(9.4	)	

	

	  	

	

	  	

	

	
Total	  	 	1,138	  	 	913	  	24.6	 	
 	 	 	 	
Total Assets Under Management	  	$	4,281	  	$	3,845	  	11.3	%	

	

	  	

	

	  	

	

	

(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 $166 million and $188 million as of June 30, 2005 and 2004, 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.	
 
Management. In the preceding 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 Management provides investment management services for funds offered by other financial institutions. “Westwood Funds” represent the family of mutual funds for which Management serves as subadvisor. “Managed Accounts” represent relationships with brokerage firms and other registered investment advisors who offer Management’s products to their customers.
 
Trust. In the preceding table, “Commingled Funds” represent funds that have been established to facilitate investment of fiduciary funds of multiple clients by combining assets into a single trust for taxable and tax-exempt entities. “Private Accounts” represent discretionary accounts where Trust acts as trustee or agent and has full investment discretion. “Agency/Custody Accounts” represent non-discretionary accounts in which Trust provides agent or custodial services for a fee, but does not act in an advisory capacity.
 
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Results of Operations
 
The following table (dollars in thousands) and discussion of our results of operations for the three and six months ended June 30, 2005 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 quarterly report.

 	  	Three months
ended June 30,

	  	Six months
ended June 30,

	  	% Change

	 	 	
 	  	 	  	 	  	Three months ended
June 30, 2005 vs.
June 30, 2004

	 	 	Six months ended
June 30, 2005 vs.
June 30, 2004

	 	 	 	 	 	 	 	 	
 	  	 	  	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	2005

	  	2004

	  	2005

	  	2004

	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Advisory fees	  	$	3,309	  	$	3,249	  	$	6,500	  	$	6,669	  	1.8	%	 	(2.5	)%	 	 	 	 	 	 	 	 	 	 	
Trust fees	  	 	1,668	  	 	1,442	  	 	3,371	  	 	2,894	  	15.7	 	 	16.5	 	 	 	 	 	 	 	 	 	 	 	
Other revenues	  	 	276	  	 	249	  	 	464	  	 	420	  	10.8	 	 	10.5	 	 	 	 	 	 	 	 	 	 	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	 	

	

	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	 	5,253	  	 	4,940	  	 	10,335	  	 	9,983	  	6.3	 	 	3.5	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Expenses	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	  	 	2,681	  	 	2,347	  	 	5,279	  	 	4,684	  	14.2	 	 	12.7	 	 	 	 	 	 	 	 	 	 	 	
Sales and marketing	  	 	145	  	 	148	  	 	227	  	 	248	  	(2.0	)	 	(8.5	)	 	 	 	 	 	 	 	 	 	 	
Information technology	  	 	192	  	 	160	  	 	377	  	 	332	  	20.0	 	 	13.6	 	 	 	 	 	 	 	 	 	 	 	
Professional services	  	 	274	  	 	247	  	 	593	  	 	471	  	10.9	 	 	25.9	 	 	 	 	 	 	 	 	 	 	 	
General and administrative	  	 	435	  	 	439	  	 	912	  	 	820	  	(0.9	)	 	11.2	 	 	 	 	 	 	 	 	 	 	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	 	

	

	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	 	3,727	  	 	3,341	  	 	7,388	  	 	6,555	  	11.6	 	 	12.7	 	 	 	 	 	 	 	 	 	 	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	 	

	

	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	  	 	1,526	  	 	1,599	  	 	2,947	  	 	3,428	  	(4.6	)	 	(14.0	)	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	  	 	589	  	 	611	  	 	1,135	  	 	1,323	  	(3.6	)	 	(14.2	)	 	 	 	 	 	 	 	 	 	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	 	

	

	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	937	  	$	988	  	$	1,812	  	$	2,105	  	(5.2	)%	 	(13.9	)%	 	 	 	 	 	 	 	 	 	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	 	

	

	 	 	 	 	 	 	 	 	 	 	
 
Three months ended June 30, 2005 compared to three months ended June 30, 2004
 
Total Revenues. Our total revenues increased by 6.3% to $5.3 million for the three months ended June 30, 2005 compared with $4.9 million for the three months ended June 30, 2004. Advisory fees increased by 1.8% to $3.3 million for the three months ended June 30, 2005 compared with $3.2 million for the three months ended June 30, 2004, primarily as a result of increased average assets under management by Management due to market appreciation of assets under management and inflows from new clients. These increases were offset somewhat by the withdrawal of assets by certain clients. Trust fees increased by 15.7% to $1.7 million for the three months ended June 30, 2005 compared with $1.4 million for the three months ended June 30, 2004, primarily due to increased average assets under management by Trust 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 10.8% to $276,000 for the three months ended June 30, 2005 compared with $249,000 for the three months ended June 30, 2004. Other revenues increased primarily as a result of increased interest and dividends from the Company’s investments and increased mark to market recorded on those investments. These increases were partially offset by a $32,000 decrease in realized gains related to the Company’s investments.
 
Employee Compensation and Benefits. Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity based compensation expense and benefits. Employee compensation and benefits increased by 14.2% to $2.7 million for the three months ended June 30, 2005 compared with $2.3 million for the three months ended June 30, 2004. This increase resulted primarily from increased restricted stock expense of approximately $415,000 due to additional restricted stock grants in July 2004 compared to an expense of approximately $203,000 in the second quarter of 2004, increased salary expense due to increased headcount and salary increases and a $65,000 profit sharing contribution in the 2005 period that did not occur in the 2004 period. We had 45 full-time employees as of June 30, 2005 compared to 44 full-time employees as of June 30, 2004. These increases were partially offset by lower incentive compensation expense and the absence of deferred compensation expense in 2005. The deferred compensation plan was terminated in the fourth quarter of 2004.
 
Sales and Marketing. Sales and marketing costs generally consist of costs associated with our marketing efforts, including travel and entertainment, direct and consultant marketing and advertising costs. Sales and marketing costs decreased by 2.0% to $145,000 for the three months ended June 30, 2005 compared with $148,000 for the three months ended June 30, 2004. The decrease is primarily the result of decreased travel and entertainment costs, offset in part by an increase in direct marketing activities.
 
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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 costs increased by 20.0% to $192,000 for the three months ended June 30, 2005 compared with $160,000 for the three months ended June 30, 2004. The increase is primarily due to increased software costs for applications not in place in the prior year period, including a new customer relationship management (“CRM”) system, the costs of deploying new computing equipment and increased depreciation from new computing equipment. These increases were partially offset by reduced equipment leasing costs.
 
Professional Services. Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services. Professional services expenses increased by 10.9% to $274,000 for the three months ended June 30, 2005 compared with $247,000 for the three months ended June 30, 2004. The increase is primarily the result of professional fees related to Sarbanes-Oxley compliance due to a lower accrual rate for such fees in the first half of 2004, an increase in external audit fees and higher advisory fees paid to external subadvisors due to increased assets under management in international equity common trust funds sponsored by Westwood Trust. These increases were partially offset by a decrease in legal expense.
 
General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, investor relations, licenses and fees, depreciation, insurance, office supplies and other miscellaneous expenses. General and administrative expenses decreased by 0.9% to $435,000 for the three months ended June 30, 2005 compared with $439,000 for the three months ended June 30, 2004. The decrease is primarily due to prior year period costs related to the Company’s move to new office space. These decreases were offset, in part, by higher depreciation expense due to fixed asset purchases and increased rent expense related to the Company’s new office space.
 
Provision for Income Tax Expense. Provision for income tax expense decreased by 3.6% to $589,000 for the three months ended June 30, 2005 compared with $611,000 for the three months ended June 30, 2004. The effective tax rate was 38.6% and 38.2% for the three months ended June 30, 2005 and June 30, 2004, respectively.
 
Six months ended June 30, 2005 compared to six months ended June 30, 2004
 
Total Revenues. Our total revenues increased by 3.5% to $10.3 million for the six months ended June 30, 2005 compared with $10.0 million for the six months ended June 30, 2004. Advisory fees decreased by 2.5% to $6.5 million for the six months ended June 30, 2005 compared with $6.7 million for the six months ended June 30, 2004, primarily as a result of a lower average fee partially offset by increased average assets under management by Management due to market appreciation of assets under management and inflows from new clients. Trust fees increased by 16.5% to $3.4 million for the six months ended June 30, 2005 compared with $2.9 million for the six months ended June 30, 2004, primarily due to increased average assets under management by Trust due to inflows from new and existing clients and market appreciation of assets. Other revenues increased by 10.5% to $464,000 for the six months ended June 30, 2005 compared with $420,000 for the six months ended June 30, 2004. Other revenues increased primarily as a result of increased interest and dividends from the Company’s investments. These increases were partially offset by a decrease in the amount of gains realized on the sale of the Company’s investments and a $28,000 decrease in consulting income due to decreased assets under management in the Westwood Funds.
 
Employee Compensation and Benefits. Employee compensation and benefits costs increased by 12.7% to $5.3 million for the six months ended June 30, 2005 compared with $4.7 million for the six months ended June 30, 2004. This increase resulted primarily from increased restricted stock expense of approximately $800,000 due to additional restricted stock grants in July 2004 compared to an expense of approximately $405,000 in the first two quarters of 2004, increased salary expense due to increased headcount and salary increases, a $130,000 profit sharing contribution in the 2005 period that did not occur in the 2004 period, and increases in other employee benefits. These increases were partially offset by lower incentive compensation expense and the absence of deferred compensation expense in 2005.
 
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Sales and Marketing. Sales and marketing costs decreased by 8.5% to $227,000 for the six months ended June 30, 2005 compared with $248,000 for the six months ended June 30, 2004. The decrease is primarily the result of decreased travel, direct marketing and advertising costs.
 
Information Technology. Information technology costs increased by 13.6% to $377,000 for the six months ended June 30, 2005 compared with $332,000 for the six months ended June 30, 2004. The increase is primarily due to increased software costs for applications not in place in the prior year period including a new CRM system, increased depreciation from new computing equipment and increased network maintenance costs. These increases were partially offset by lower costs associated with equipment leasing and investment research tools.
 
Professional Services. Professional services expenses increased by 25.9% to $593,000 for the six months ended June 30, 2005 compared with $471,000 for the six months ended June 30, 2004. The increase is primarily the result of higher advisory fees paid to external subadvisors due to the engagement of a subadvisor in the second quarter of 2004 to manage growth portfolios at Westwood Trust and increased assets under management in international equity and high yield bond common trust funds sponsored by Westwood Trust, increased fees related to Sarbanes-Oxley compliance due to a lower accrual rate for such fees in the first half of 2004 and an increase in external audit fees. These increases were partially offset by a decrease in legal and tax compliance expenses.
 
General and Administrative. General and administrative expenses increased by 11.2% to $912,000 for the six months ended June 30, 2005 compared with $820,000 for the six months ended June 30, 2004. The increase is primarily due to increased rent expense, higher depreciation expense due to fixed asset purchases related to the Company’s new office space, and increased custody expense. These increases were partially offset by a decrease in charitable contributions and costs incurred in the prior year period related to the Company’s move to new office space.
 
Provision for Income Tax Expense. Provision for income tax expense decreased by 14.2% to $1.1 million for the six months ended June 30, 2005 compared with $1.3 million for the six months ended June 30, 2004. The effective tax rate was 38.5% and 38.6% for the six months ended June 30, 2005 and June 30, 2004, respectively.
 
Liquidity and Capital Resources
 
We fund our operations and cash requirements with cash generated from operating activities. As of June 30, 2005, 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 the six months ended June 30, 2005, cash flow provided by operating activities, principally our investment advisory business, was $1.5 million. At June 30, 2005, we had working capital of $19.6 million. Cash flow provided by investing activities during the six months ended June 30, 2005 was $199,000. Cash flow used in financing activities during the six months ended June 30, 2005 of $755,000 was primarily due to cash dividends paid.
 
We had cash and investments, net of dividends payable, of $19.7 million at June 30, 2005, compared to $18.9 million at December 31, 2004. Dividends payable were $461,000 and $460,000 as of June 30, 2005 and December 31, 2004, respectively. We had no liabilities for borrowed money at June 30, 2005.
 
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.
 
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Contractual Obligations
 
There have been no significant changes in the Company’s contractual obligations since December 31, 2004.
 
Recent Accounting Pronouncements
 
In April 2005, the Securities and Exchange Commission (“SEC”) adopted a rule that amends the compliance date for the Financial Accounting Standards Board’s (“FASB”) revised Statement of Financial Accounting Standards No. 123 (“SFAS No. 123 (R)”), which requires 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. The SEC rule requires adoption of the revised statement for the Company’s fiscal year beginning January 1, 2006 instead of the Company’s third quarter beginning July 1, 2005, as described in SFAS No. 123 (R). 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 January 1, 2006 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.
 
Critical Accounting Policies and Estimates
 
There have been no significant changes in the Company’s critical accounting policies and estimates since December 31, 2004.
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Westwood utilizes 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 fluctuation in interest rates, which may affect our interest income. These instruments are not entered into for speculative trading purposes. We do not expect our interest income to be significantly affected by a sudden change in market interest rates.
 
The value of our assets under management is affected by changes in interest rates and fluctuations in securities markets. Since we derive a substantial portion of our revenues from investment advisory and trust fees based on the value of assets under management, our revenues may be adversely affected by changing interest rates or a decline in the prices of securities generally.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Westwood’s management evaluated, with the participation of Westwood’s Chief Executive Officer and Chief Operating Officer (performing functions similar to a Chief Financial Officer), the effectiveness of Westwood’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Operating Officer have concluded that Westwood’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in Westwood’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, Westwood’s internal control over financial reporting.
 
PART II
OTHER INFORMATION
 
ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The Annual Meeting of Stockholders of Westwood Holdings Group, Inc. was held on April 28, 2005 in Dallas, Texas, for the purpose of considering and acting upon the following:
 
 	(a)	Election of Directors. The stockholders elected the following directors to hold office until the next annual meeting or until their respective successors shall have been duly elected and qualified.	

Nominee

	    	For

	    	Withheld

	
Susan M. Byrne	    	5,579,098	    	7,957	
Brian O. Casey	    	5,578,889	    	8,166	
Tom C. Davis	    	5,571,469	    	15,586	
Frederick R. Meyer	    	5,570,864	    	16,191	
Jon L. Mosle, Jr.	    	5,569,988	    	17,067	
Leonard Riggs, Jr., M.D.	    	5,578,779	    	8,276	
Raymond E. Wooldridge	    	5,571,026	    	16,029	
 
 	(b)	The ratification of Deloitte & Touche LLP as the Company’s independent auditors for the year ending December 31, 2005.	

For

	    	Against

	    	Abstain

	
5,582,866	    	2,063	    	2,127	
 
ITEM 5. OTHER INFORMATION
 
None
 
ITEM 6. EXHIBITS

31.1	  	Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14	
 	 	
31.2	  	Certification of President and Chief Operating Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14	
 	 	
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 President and Chief Operating Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	

*	Pursuant to Item 601(b)(32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this report.	
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: July 26, 2005	 	WESTWOOD HOLDINGS GROUP, INC.	
 	 	 	
 	 	By:	 	/s/ Susan M. Byrne

	
 	 	 	 	Susan M. Byrne	
 	 	 	 	Chief Executive Officer	
 	 	 	 	(Principal Executive Officer)	
 	 	 	
 	 	By:	 	/s/ Brian O. Casey

	
 	 	 	 	Brian O. Casey	
 	 	 	 	President and Chief Operating Officer	
 	 	 	 	(Principal Financial and Accounting Officer)	
 
18

Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
 
I, Susan M. Byrne, certify that:
 
1.	I have reviewed this quarterly report on Form 10-Q of Westwood Holdings Group, Inc.;	
 
2.	Based on my knowledge, this quarterly 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 quarterly report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;	
 
4.	The registrant’s other certifying officer(s) 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 the registrant 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 the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly 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 the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’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 registrant’s internal control over financial reporting.
 
Dated: July 26, 2005

/s/ Susan M. Byrne

	
Susan M. Byrne	
Chief Executive Officer	

Exhibit 31.2
 
CERTIFICATION OF PRESIDENT AND CHIEF OPERATING OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
 
I, Brian O. Casey, certify that:
 
1.	I have reviewed this quarterly report on Form 10-Q of Westwood Holdings Group, Inc.;	
 
2.	Based on my knowledge, this quarterly 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 quarterly report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;	
 
4.	The registrant’s other certifying officer(s) 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 the registrant 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 the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly 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 the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’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 registrant’s internal control over financial reporting.
 
Dated: July 26, 2005

/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 Quarterly Report of Westwood Holdings Group, Inc. (the Company) on Form 10-Q for the period ending June 30, 2005 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 (15 U.S.C.78m or 78o(d)); and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
July 26, 2005

/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 Quarterly Report of Westwood Holdings Group, Inc. (the Company) on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Brian O. Casey, President and Chief Operating Officer of the Company (performing similar functions as a chief financial officer), 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 (15U.S.C. 78m or 78o(d)); and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
July 26, 2005

/s/ Brian O. Casey

	
Brian O. Casey	
President and Chief Operating Officer