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 Period Ended June 30, 2002.	
 
¨	 	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.)	
 
300 CRESCENT COURT, SUITE 1300
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   ¨         No   x
 
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—5,394,522 shares as of August 5, 2002.

Table of Contents
WESTWOOD HOLDINGS GROUP, INC.
 
INDEX
 
 	 	 	  	Page

	
PART I	 	FINANCIAL INFORMATION	  	 	
 	 	 	 	 	
Item 1.	 	Financial Statements	  	 	
 	 	 	 	 	
 	 	Consolidated Balance Sheets at June 30, 2002 and December 31, 2001	  	1	
 	 	 	 	 	
 	 	Consolidated Statements of Income for the three and six months ended June 30, 2002 and June 30, 2001	  	2	
 	 	 	 	 	
 	 	Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and June 30, 2001	  	3	
 	 	 	 	 	
 	 	Notes to Interim Consolidated Financial Statements	  	4	
 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	9	
 	 	 	 	 	
Item 3.	 	Quantitative And Qualitative Disclosure About Market Risk	  	14	
 	 	 	 	 	
PART II	 	OTHER INFORMATION	  	 	
 	 	 	 	 	
Item 1.	 	Legal Proceedings	  	14	
 	 	 	 	 	
Item 2.	 	Changes in Securities and Use of Proceeds	  	14	
 	 	 	 	 	
Item 3.	 	Defaults Upon Senior Securities	  	14	
 	 	 	 	 	
Item 4.	 	Submission of Matters to a Vote of Security Holders	  	14	
 	 	 	 	 	
Item 5.	 	Other Information	  	14	
 	 	 	 	 	
Item 6.	 	Exhibits and Reports on Form 8-K	  	15	
 	 	 	 	 	
Signatures	  	15	

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PART I
 
FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001
(In thousands, except par value and share amounts)
 
 	  	June 30, 2002

	 	  	December 31, 2001

	 	
 	  	(unaudited)	 	  	 	 	
ASSETS	  	 	 	 	  	 	 	 	
Current Assets:	  	 	 	 	  	 	 	 	
Cash and cash equivalents	  	$	3,029	 	  	$	149	 	
Accounts receivable	  	 	2,272	 	  	 	2,397	 	
Investments, at market value	  	 	12,208	 	  	 	15,571	 	

	

	

	  	

	

	

	
Total current assets	  	 	17,509	 	  	 	18,117	 	

	

	

	  	

	

	

	
Goodwill, net of accumulated amortization of $640	  	 	2,302	 	  	 	2,302	 	
Other assets, net	  	 	712	 	  	 	634	 	

	

	

	  	

	

	

	
Total assets	  	$	20,523	 	  	$	21,053	 	

	

	

	  	

	

	

	
LIABILITIES AND STOCKHOLDERS' EQUITY	  	 	 	 	  	 	 	 	
Current Liabilities:	  	 	 	 	  	 	 	 	
Accounts payable and accrued liabilities	  	$	1,190	 	  	$	876	 	
Compensation and benefits payable	  	 	1,166	 	  	 	3,986	 	
Income taxes payable	  	 	1,411	 	  	 	2,028	 	

	

	

	  	

	

	

	
Total current liabilities	  	 	3,767	 	  	 	6,890	 	
Other liabilities	  	 	110	 	  	 	131	 	

	

	

	  	

	

	

	
Total liabilities	  	 	3,877	 	  	 	7,021	 	
Stockholders’ Equity:	  	 	 	 	  	 	 	 	
Common stock, $0.01 par value, authorized 10,000,000 shares, issued and outstanding 5,394,522 shares at June 30, 2002 and December 31, 2001	  	 	54	 	  	 	54	 	
Additional paid-in capital	  	 	9,415	 	  	 	9,415	 	
Notes receivable from stockholders	  	 	(3,567	)	  	 	(3,536	)	
Retained earnings	  	 	10,744	 	  	 	8,099	 	

	

	

	  	

	

	

	
Total stockholders’ equity	  	 	16,646	 	  	 	14,032	 	

	

	

	  	

	

	

	
Total liabilities and stockholders’ equity	  	$	20,523	 	  	$	21,053	 	

	

	

	  	

	

	

	
 
The accompanying notes are an integral part of these financial statements.
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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,

	
 	  	2002

	  	2001

	  	2002

	  	2001

	
REVENUES:	  	 	 	  	 	 	  	 	 	  	 	 	
Advisory fees	  	$	4,115	  	$	3,722	  	$	8,327	  	$	7,355	
Trust fees	  	 	1,171	  	 	883	  	 	2,304	  	 	1,763	
Other revenues	  	 	252	  	 	247	  	 	439	  	 	454	

	

	  	

	

	  	

	

	  	

	

	
Total revenues	  	 	5,538	  	 	4,852	  	 	11,070	  	 	9,572	

	

	  	

	

	  	

	

	  	

	

	
EXPENSES:	  	 	 	  	 	 	  	 	 	  	 	 	
Employee compensation and benefits	  	 	2,127	  	 	1,852	  	 	4,347	  	 	3,941	
Sales and marketing	  	 	160	  	 	107	  	 	280	  	 	238	
Information technology	  	 	238	  	 	190	  	 	460	  	 	431	
Professional services	  	 	439	  	 	157	  	 	806	  	 	246	
General and administrative	  	 	476	  	 	286	  	 	800	  	 	589	

	

	  	

	

	  	

	

	  	

	

	
Total expenses	  	 	3,440	  	 	2,592	  	 	6,693	  	 	5,445	

	

	  	

	

	  	

	

	  	

	

	
Income before income taxes	  	 	2,098	  	 	2,260	  	 	4,377	  	 	4,127	
Provision for income tax expense	  	 	839	  	 	903	  	 	1,732	  	 	1,630	

	

	  	

	

	  	

	

	  	

	

	
Net income	  	$	1,259	  	$	1,357	  	$	2,645	  	$	2,497	

	

	  	

	

	  	

	

	  	

	

	
Earnings per share:	  	 	 	  	 	 	  	 	 	  	 	 	
Earnings per share—basic	  	$	0.23	  	$	0.25	  	$	0.49	  	$	0.46	
Earnings per share—diluted	  	$	0.23	  	$	0.25	  	$	0.49	  	$	0.46	
 
The accompanying notes are an integral part of these financial statements.
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 	  	For the six months ended June 30,

	 	
 	  	2002

	 	    	2001

	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	  	 	 	 	    	 	 	 	
Net income	  	$	2,645	 	    	$	2,497	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	    	 	 	 	
Depreciation and amortization	  	 	35	 	    	 	82	 	
Accretion of discount on notes receivable from stockholders	  	 	(31	)	    	 	—  	 	
SWS expense allocations not reimbursed by the Company	  	 	—  	 	    	 	43	 	
Purchases of investments	  	 	(760	)	    	 	(1,369	)	
Sales of investments	  	 	1,107	 	    	 	477	 	
Change in operating assets and liabilities—  	  	 	 	 	    	 	 	 	
Decrease in accounts receivable	  	 	125	 	    	 	830	 	
(Increase) decrease in other assets	  	 	(97	)	    	 	236	 	
Increase in accounts payable and accrued liabilities	  	 	314	 	    	 	65	 	
Decrease in compensation and benefits payable	  	 	(2,820	)	    	 	(1,168	)	
(Decrease) increase in income taxes payable	  	 	(617	)	    	 	107	 	
(Decrease) increase in other liabilities	  	 	(21	)	    	 	20	 	

	

	

	    	

	

	

	
Net cash (used in) provided by operating activities	  	 	(120	)	    	 	1,820	 	

	

	

	    	

	

	

	
CASH FLOWS FROM INVESTING ACTIVITIES:	  	 	 	 	    	 	 	 	
Purchases of money market funds	  	 	(5,569	)	    	 	(7,724	)	
Sales of money market funds	  	 	8,585	 	    	 	3,554	 	
Purchase of fixed assets	  	 	(16	)	    	 	(41	)	

	

	

	    	

	

	

	
Net cash provided by (used in) investing activities	  	 	3,000	 	    	 	(4,211	)	

	

	

	    	

	

	

	
CASH FLOWS FROM FINANCING ACTIVITIES:	  	 	 	 	    	 	 	 	
Net cash provided by (used in) financing activities	  	 	—  	 	    	 	—  	 	

	

	

	    	

	

	

	
NET INCREASE (DECREASE) IN CASH	  	 	2,880	 	    	 	(2,391	)	
Cash, beginning of period	  	 	149	 	    	 	4,283	 	

	

	

	    	

	

	

	
Cash, end of period	  	$	3,029	 	    	$	1,892	 	

	

	

	    	

	

	

	
 
The accompanying notes are an integral part of these financial statements.
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2002 and June 30, 2001
(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 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 have been prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly our financial position as of June 30, 2002, and our results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements 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 our consolidated financial statements, and notes thereto, for the year ended December 31, 2001, included in our Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 6, 2002. Refer to our accounting policies described in the notes to our annual financial statements, which we consistently followed in preparing this interim financial information, except as discussed below under Goodwill. Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results for the year ending December 31, 2002 or any future period.
 
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.
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three and six months ended June 30, 2002 and June 30, 2001
(Unaudited)
 
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.
 
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. Goodwill amortization during the three months and six months ended June 30, 2001 was approximately $18,000 and $37,000, respectively. The adoption of SFAS 142 does 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 its initial impairment testing as of the date of adoption as required by SFAS 142. No impairment loss or transition adjustments were required. The Company has elected to perform its annual impairment assessment as of July 1.
 
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

	 	    	Gross Market Value

	
June 30, 2002:	    	 	 	    	 	 	    	 	 	 	    	 	 	
U.S. Government and Government agency obligations	    	$	1,295	    	$	24	    	$	—  	 	    	$	1,319	
Funds:	    	 	 	    	 	 	    	 	 	 	    	 	 	
Money market	    	 	9,146	    	 	—  	    	 	—  	 	    	 	9,146	
Equity	    	 	523	    	 	15	    	 	(92	)	    	 	446	
Bond	    	 	1,238	    	 	59	    	 	—  	 	    	 	1,297	

	

	    	

	

	    	

	

	

	    	

	

	
Marketable securities	    	$	12,202	    	$	98	    	$	(92	)	    	$	12,208	

	

	    	

	

	    	

	

	

	    	

	

	
December 31, 2001:	    	 	 	    	 	 	    	 	 	 	    	 	 	
U.S. Government and Government agency obligations	    	$	1,550	    	$	26	    	$	—  	 	    	$	1,576	
Funds:	    	 	 	    	 	 	    	 	 	 	    	 	 	
Money market	    	 	11,948	    	 	—  	    	 	—  	 	    	 	11,948	
Equity	    	 	901	    	 	—  	    	 	(106	)	    	 	795	
Bond	    	 	1,210	    	 	42	    	 	—  	 	    	 	1,252	

	

	    	

	

	    	

	

	

	    	

	

	
Marketable securities	    	$	15,609	    	$	68	    	$	(106	)	    	$	15,571	

	

	    	

	

	    	

	

	

	    	

	

	
 
All of these investments are carried at market value. The money market funds are available for sale securities. The other investments are trading securities.
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three and six months ended June 30, 2002 and June 30, 2001
(Unaudited)
 
4.    EQUITY
 
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 based on a formula that caused the Company’s common stock held by SWS to equal one-fourth the number of shares of SWS common stock outstanding on June 17, 2002, the record date of the spin-off. All data shown in the accompanying consolidated financial statements and notes has been retroactively adjusted to reflect the stock split.
 
5.    EARNINGS PER SHARE:
 
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. The Company had no options or other instruments that would be considered common stock equivalents outstanding during the three or six-month periods ended June 30, 2002 or 2001. Therefore, there is no difference between basic earnings per common share and diluted earnings per common share for the periods presented. The weighted average common shares outstanding used in computing basic and diluted earnings per common share for the three and six-month periods ended June, 2002 and 2001, were 5,394,522 shares for each period. The number of shares outstanding includes 19,093 shares, which are included in the stock split ratio, recently issued retroactive to June 28, 2002.
 
The following table sets forth the computation of basic and diluted earnings per share:
 
 	    	Three months ended
June 30,

	    	Six months ended
June 30,

	
 	    	2002

	    	2001

	    	2002

	    	2001

	
Net income	    	$	1,259	    	$	1,357	    	$	2,645	    	$	2,497	
Weighted average shares outstanding—basic and diluted	    	 	5,394,522	    	 	5,394,522	    	 	5,394,522	    	 	5,394,522	
Earnings per share—basic	    	$	0.23	    	$	0.25	    	$	0.49	    	$	0.46	
Earnings per share—diluted	    	$	0.23	    	$	0.25	    	$	0.49	    	$	0.46	
 
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.
 
6.    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 is composed of Management, which 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.
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three and six months ended June 30, 2002 and June 30, 2001
(Unaudited)
 
Trust
 
The Trust segment is composed of Trust, which provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that Trust sponsors.
 
All 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

	
Three months ending June 30, 2002	  	 	  	 	  	 	    	 	 	  	 	
Net revenues from external sources	  	4,250	  	1,232	  	56	    	—  	 	  	5,538	
Net intersegment revenues	  	419	  	—  	  	—  	    	(419	)	  	—  	
Income before income taxes	  	1,947	  	95	  	56	    	—  	 	  	2,098	
Segment assets	  	16,021	  	4,231	  	271	    	—  	 	  	20,523	
Segment goodwill	  	1,790	  	512	  	—  	    	—  	 	  	2,302	
Three months ending June 30, 2001	  	 	  	 	  	 	    	 	 	  	 	
Net revenues from external sources	  	3,930	  	922	  	—  	    	—  	 	  	4,852	
Net intersegment revenues	  	271	  	—  	  	—  	    	(271	)	  	—  	
Income before income taxes	  	2,129	  	131	  	—  	    	—  	 	  	2,260	
Segment assets	  	15,960	  	3,704	  	—  	    	—  	 	  	19,664	
Segment goodwill	  	1,818	  	521	  	—  	    	—  	 	  	2,339	
Six months ending June 30, 2002	  	 	  	 	  	 	    	 	 	  	 	
Net revenues from external sources	  	8,599	  	2,360	  	111	    	—  	 	  	11,070	
Net intersegment revenues	  	811	  	—  	  	—  	    	(811	)	  	—  	
Income before income taxes	  	4,044	  	222	  	111	    	—  	 	  	4,377	
Segment assets	  	16,021	  	4,231	  	271	    	—  	 	  	20,523	
Segment goodwill	  	1,790	  	512	  	—  	    	—  	 	  	2,302	
Six months ending June 30, 2001	  	 	  	 	  	 	    	 	 	  	 	
Net revenues from external sources	  	7,737	  	1,835	  	—  	    	—  	 	  	9,572	
Net intersegment revenues	  	548	  	—  	  	—  	    	(548	)	  	—  	
Income before income taxes	  	3,877	  	250	  	—  	    	—  	 	  	4,127	
Segment assets	  	15,960	  	3,704	  	—  	    	—  	 	  	19,664	
Segment goodwill	  	1,818	  	521	  	—  	    	—  	 	  	2,339	
 
7.    CONTINGENCIES
 
Trust has acted as corporate trustee for the Richard A. Boykin, Jr. Family Trust (the “Boykin Trust”) for several years. As corporate trustee, we recently filed a voluntary petition for bankruptcy on behalf of the Boykin Trust because it is subject to various pending legal actions, outstanding judgments and owes money to numerous creditors, including trustee fees and other amounts advanced by us that are owed to us in connection with our representation. The petition seeks the liquidation of the Boykin Trust’s assets and seeks to maximize the distribution to the Boykin Trust’s creditors on an equitable basis. SWS has agreed to indemnify us and parties related to us from and against any and all past and future liabilities or expenses in excess of $500,000 (other than unpaid trustee fees due to Trust for the period after the spin-off) arising from or in connection with the Boykin Trust, for which we currently serve as
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three and six months ended June 30, 2002 and June 30, 2001
(Unaudited)
 
trustee. As of June 30, 2002 the Company had almost reached the $500,000 ceiling. Once this ceiling is reached we expect that SWS will pay any future liabilities and expenses related to this matter.
 
8.    SUBSEQUENT EVENT
 
On July 2, 2002, under the Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”) the Company issued options to all employees as well as non-employee directors of the Company representing an aggregate of 222,500 shares of Westwood common stock. Options granted have a maximum ten-year term and vest over a period of four years. The exercise price for these options is $12.90, which was the closing price of Westwood common stock on the date of grant. The Company intends to adopt provisions for the expensing of stock options beginning in the third quarter of 2002.
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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 “Risk Factors” in Westwood’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 6, 2002. Such risks include, without limitation, risks related to our lack of operating history as an independent public company and our inability to operate profitably as a stand-alone company; risks related to our historical financial information not being indicative of our future performance; risks related to not having a market for our common stock prior to the spin-off, and the difficulty of predicting the prices at which our common stock might trade; risks related to the spin-off being taxable to us, our shareholders and SWS, for which we could be responsible under some circumstances; risks related to the indemnification obligations contained in the distribution agreement and the tax separation agreement for SWS and us that neither party may be able to satisfy; risks related to substantial sales of our common stock following the spin-off, or the perception that such sales might occur, which could depress the market price of our common stock; risks related to certain provisions in our charter documents discouraging a third party from acquiring control of us; 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 poor investment performance of the assets managed by us; 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 portfolio managers and employees; risks related to acquisitions, which are 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; and risks related to conflicts of interests of members of our Board of Directors and executive management due to their relationship with SWS.
 
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, our principal asset classes have consistently ranked above the median in performance within their peer groups.
 
Spin-off from SWS Group, Inc.
 
Westwood 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 us. 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
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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.
 
Revenues
 
Westwood derives its revenues from investment advisory fees, trust fees and other revenues. Our advisory fees are generated by Management, which manages our 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 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. Management recognizes revenues as services are rendered.
 
Our trust fees are generated by 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. Trust also provides trust services to a small number of clients on a fixed fee basis. Similar to advisory fees generated by 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 consulting fees paid to us by Gabelli Advisers, Inc.
 
Assets Under Management
 
Assets under management increased $1.0 billion, or 28.6%, to $4.6 billion at June 30, 2002, compared with $3.6 billion at June 30, 2001. The growth in assets under management was principally attributable to assets from new and existing clients. The following table sets forth Management’s and Trust’s assets under management as of June 30, 2002 and June 30, 2001:
 
 	  	As of June 30, (in millions) (1)

	    	% Change

	 	
 	  	2002

	    	2001

	    	June 30, 2002 vs. June 30, 2001

	 	
Westwood Management Corp.	  	 	 	    	 	 	    	 	 	
Separate Accounts	  	$	2,078	    	$	1,762	    	17.9	%	
Subadvisory	  	 	1,299	    	 	709	    	83.3	 	
Gabelli Westwood Funds	  	 	500	    	 	516	    	(3.1	)	
Managed Accounts	  	 	124	    	 	101	    	23.3	 	

	

	    	

	

	    	

	

	
Total	  	 	4,001	    	 	3,088	    	29.6	 	
Westwood Trust	  	 	 	    	 	 	    	 	 	
Commingled Funds	  	 	501	    	 	397	    	26.2	 	
Private Accounts	  	 	76	    	 	57	    	33.3	 	
Agency/Custody Accounts	  	 	69	    	 	72	    	(4.2	)	

	

	    	

	

	    	

	

	
Total	  	 	646	    	 	526	    	22.8	 	
Total Assets Under Management	  	$	4,647	    	$	3,614	    	28.6	%	

	

	    	

	

	    	

	

	

(1)	 	The above table excludes the SWS Cash Reserve Funds. Assets under management in these funds were $443 million and $335 million as of June 30, 2002 and 2001, respectively. The SWS Cash Reserve Funds are noted separately due to the unique nature of these accounts within our business and because they can experience significant fluctuations on a weekly basis.	
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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 Management provides investment management services for funds offered by other financial institutions. “Gabelli 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 above 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.
 
Results of Operations
 
The following table and discussion of our results of operations for the three months and six months ended June 30, 2002 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.
 
 	  	 	  	 	    	% Change

	 	 	
 	  	Three months ended June 30,

	  	Six months ended June 30,

	    	Three months ended June 30, 2002 vs. June 30, 2001

	 	    	Six months ended June 30, 2002 vs. June 30, 2001

	 	 	
 	  	2002

	    	2001

	  	2002

	    	2001

	    	 	 	    	 	 	 	
Revenues	  	 	 	    	 	 	  	 	 	    	 	 	    	 	 	    	 	 	 	
Advisory fees	  	$	4,115	    	$	3,722	  	$	8,327	    	$	7,355	    	10.6	%	    	13.2	%	 	
Trust fees	  	 	1,171	    	 	883	  	 	2,304	    	 	1,763	    	32.6	 	    	30.7	 	 	
Other revenues	  	 	252	    	 	247	  	 	439	    	 	454	    	2.0	 	    	(3.3	)	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
Total revenues	  	 	5,538	    	 	4,852	  	 	11,070	    	 	9,572	    	14.1	 	    	15.6	 	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
Expenses	  	 	 	    	 	 	  	 	 	    	 	 	    	 	 	    	 	 	 	
Employee compensation and benefits	  	 	2,127	    	 	1,852	  	 	4,347	    	 	3,941	    	14.8	 	    	10.3	 	 	
Sales and marketing	  	 	160	    	 	107	  	 	280	    	 	238	    	49.5	 	    	17.6	 	 	
Information technology	  	 	238	    	 	190	  	 	460	    	 	431	    	25.3	 	    	6.7	 	 	
Professional services	  	 	439	    	 	157	  	 	806	    	 	246	    	179.6	 	    	227.6	 	 	
General and administrative	  	 	476	    	 	286	  	 	800	    	 	589	    	66.4	 	    	35.8	 	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
Total expenses	  	 	3,440	    	 	2,592	  	 	6,693	    	 	5,445	    	32.7	 	    	22.9	 	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
Income before income taxes	  	 	2,098	    	 	2,260	  	 	4,377	    	 	4,127	    	(7.2	)	    	6.1	 	 	
Provision for income tax expense	  	 	839	    	 	903	  	 	1,732	    	 	1,630	    	(7.1	)	    	6.3	 	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
Net income	  	$	1,259	    	$	1,357	  	$	2,645	    	$	2,497	    	(7.2	)	    	5.9	 	 	

	

	    	

	

	  	

	

	    	

	

	    	

	

	    	

	

	 	
 
Three months ended June 30, 2002 compared to three months ended June 30, 2001
 
Total Revenues.    Our total revenues increased by 14.1% to $5.5 million for the three months ended June 30, 2002 compared with $4.9 million for the three months ended June 30, 2001. Advisory fees increased by 10.6% to $4.1 million for the three months ended June 30, 2002 compared with $3.7 million for the three months ended June 30, 2001 primarily as a result of increased assets under management from new and existing clients. Trust fees increased by 32.6% to $1.2 million for the three months ended June 30, 2002 compared with $883,000 for the three months ended June 30, 2001, primarily due to increased trust assets under management. Other revenues, which generally consists of interest and investment income and consulting fees, increased by 2.0% to $252,000 for the three months ended June 30, 2002 compared with $247,000 for the three months ended June 30, 2001. Other revenues increased primarily as a result of better mark-to-market performance on investments compared to the 2001 period, which was partially offset by lower interest income due to lower market interest rates.
 
Employee Compensation and Benefits.    Employee compensation and benefits costs generally consist of salaries, benefits and incentive compensation. Employee compensation and benefits increased by 14.8% to $2.1
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million for the three months ended June 30, 2002 compared with $1.9 million for the three months ended June 30, 2001. This increase resulted primarily from an accrual reversal in the 2001 period due to a reduced profit sharing contribution assumption by our former parent, SWS Group, Inc. as well as merit based salary increases for our professional staff.
 
Sales and Marketing.    Sales and marketing costs generally consist of costs associated with our marketing efforts, including travel and advertising costs. Sales and marketing costs increased by 49.5% to $160,000 for the three months ended June 30, 2002 compared with $107,000 for the three months ended June 30, 2001. The increase in these expenses is primarily the result of increased business development activities.
 
Information Technology.    Information technology expenses generally consist of costs associated with computing hardware and software licenses, maintenance and support, telecommunications, proprietary investment research tools and other related costs. Information technology costs increased by 25.3% to $238,000 for the three months ended June 30, 2002 compared with $190,000 for the three months ended June 30, 2001. The increase in these expenses is primarily due to the cost of redeveloping our website and increased software maintenance costs.
 
Professional Services.    Professional services expenses generally consist of costs associated with legal, audit and other professional services. Professional services expenses increased by 179.6% to $439,000 for the three months ended June 30, 2002 compared with $157,000 for the three months ended June 30, 2001. The increase in these expenses is primarily the result of legal and accounting costs associated with the spin-off from SWS, as well as legal expenses associated with the Boykin Trust litigation and bankruptcy proceedings. SWS has agreed to indemnify Westwood for any and all past and future liabilities, expenses or other damages in excess of $500,000 arising from or in connection with the Boykin Trust (other than unpaid trustee fees due to Trust for the period after the spin-off). See Note 7 in the Notes to Interim Consolidated Financial Statements included herewith.
 
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 increased by 66.4% to $476,000 for the three months ended June 30, 2002 compared with $286,000 for the three months ended June 30, 2001. The increase in these expenses is primarily the result of the initial listing fee paid to the New York Stock Exchange related to the listing of our common stock, as well as increased investor relations costs. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Upon adoption of SFAS 142 we discontinued our amortization of goodwill. Goodwill amortization during the three months ended June 30, 2001 was approximately $18,000. The adoption of SFAS 142 does not have a significant impact on the comparability of our earnings per share or net income.
 
Provision for Income Tax Expense.    Provision for income tax expense decreased by 7.1% to $839,000 for the three months ended June 30, 2002 compared with $903,000 for the three months ended June 30, 2001, reflecting an effective tax rate of 40.0% for the three months ended June 30, 2002 and June 30, 2001.
 
Six months ended June 30, 2002 compared to the six months ended June 30, 2001
 
Total Revenues.    Our total revenues increased by 15.6% to $11.1 million for the six months ended June 30, 2002 compared with $9.6 million for the six months ended June 30, 2001. Advisory fees increased by 13.2% to $8.3 million for the six months ended June 30, 2002 compared with $7.4 million for the six months ended June 30, 2001 primarily as a result of increased assets under management from new and existing clients. Trust fees increased by 30.7% to $2.3 million for the six months ended June 30, 2002 compared with $1.8 million for the six months ended June 30, 2001 primarily due to increased trust assets under management. Other revenues decreased by 3.3% to $439,000 for the six months ended June 30, 2002 compared with $454,000 for the six months ended June 30, 2001. Other revenues decreased primarily as a result of lower interest income due to lower market interest rates, which was partially offset by better mark-to-market performance on investments compared to the 2001 period.
 
Employee Compensation and Benefits.    Employee compensation and benefits increased by 10.3% to $4.3 million for the six months ended June 30, 2002 compared with $3.9 million for the six months ended June 30, 2001. This increase resulted primarily from increased incentive compensation, which increase was largely based on growth in income before income taxes and also merit based salary increases for our professional staff.
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Sales and Marketing.    Sales and marketing costs increased by 17.6% to $280,000 for the six months ended June 30, 2002 compared with $238,000 for the six months ended June 30, 2001. The increase in these expenses is primarily the result of increased business development activities.
 
Information Technology.    Information technology costs increased by 6.7% to $460,000 for the six months ended June 30, 2002 compared with $431,000 for the six months ended June 30, 2001. The increase in these expenses is primarily due to the cost of redeveloping our website and increased software maintenance costs.
 
Professional Services.    Professional services expenses increased by 227.6% to $806,000 for the six months ended June 30, 2002 compared with $246,000 for the six months ended June 30, 2001. The increase in these expenses is primarily the result of legal and accounting costs associated with the spin-off from SWS, as well as legal expenses associated with the Boykin Trust litigation and bankruptcy proceedings.
 
General and Administrative.    General and administrative expenses increased by 35.8% to $800,000 for the six months ended June 30, 2002 compared with $589,000 for the six months ended June 30, 2001. The increase in these expenses is primarily the result of the initial listing fee paid to the New York Stock Exchange related to the listing of our common stock, as well as increased investor relations costs.
 
Provision for Income Tax Expense.    Provision for income tax expense increased by 6.3% to $1.7 million for the six months ended June 30, 2002 compared with $1.6 million for the six months ended June 30, 2001, reflecting an effective tax rate of 39.6% and 39.5% for the six months ended June 30, 2002 and June 30, 2001, respectively.
 
Liquidity and Capital Resources
 
In general, we have not historically relied on SWS to provide us with capital to fund the operations of our business. We have funded our operations and cash requirements with cash generated from operating activities. As a result, we do not believe that the additional expenses associated with the spin-off and our being an independent public company will have a material effect on our liquidity and capital resources in the near term. However, had we been an independent public company in 2001, we estimate that our total annual expenses would have been approximately $800,000 higher than those reflected in the December 31, 2001 consolidated financial statements. The increase in expenses includes, without limitation, increased public company compliance costs, employee compensation, insurance costs, legal expenses, and accounting and payroll costs. The foregoing estimate of higher expenses is not necessarily an accurate measure of what our stand-alone expenses would have been in 2001 or will be in the future, and our expenses could be higher. The costs we actually incur in the future will depend on the market for these services when they are actually purchased and the size and nature of our future operations.
 
As of June 30, 2002, 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, 2002, cash flow used in operating activities, principally our investment advisory business, was $120,000. At June 30, 2002, we had working capital of $13.7 million.
 
Cash flow provided by investing activities during the six months ended June 30, 2002 was $3.0 million, and was primarily related to the sale of money market funds to make incentive compensation payments.
 
There were no financing activities during the six months ended June 30, 2002.
 
We had cash and money market funds of $12.2 million at June 30, 2002, as compared to $12.1 million at December 31, 2001. We had no liabilities for borrowed money at June 30, 2002, 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
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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.
 
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 Rate
 
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. However, the value of assets under management is affected by changes in interest rates. 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.
 
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.
 
ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS
 
None
 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
ITEM 5.    OTHER INFORMATION
 
None
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ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)  Exhibits
 
10.1	  	Distribution Agreement dated June 6, 2002, between Westwood Holdings Group, Inc. and SWS (incorporated by reference from Westwood’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 6, 2002).	
 	 	 	
10.2	  	Tax Separation Agreement dated June 6, 2002, between Westwood Holdings Group, Inc. and SWS (incorporated by reference from Westwood’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 6, 2002).	
 	 	 	
10.3	  	Transition Services Agreement dated June 6, 2002, between Westwood Management Corp., Westwood Trust and SWS (incorporated by reference from Westwood’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 6, 2002).	
 	 	 	
99.1	  	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.	
 	 	 	
99.2	  	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.	
 
(b)  Reports on Form 8-K
 
(i)  Current Report on Form 8-K filed on June 20, 2002 reporting a change in accountants.
 
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: August 5, 2002	 	 	 	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)	
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Exhibit 99.1
 
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, 2002 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.

/s/    SUSAN M. BYRNE

	
Susan M. Byrne
Chief Executive Officer	
 
August 5, 2002

Exhibit 99.2
 
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, 2002 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.

/s/    BRIAN O. CASEY

	
Brian O. Casey
President and Chief Operating Officer	
 
August 5, 2002