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Section 1: 10-Q (10-Q)

pzn-10q_20190331.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2019

Or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______to______

Commission file number 001-33761

PZENA INVESTMENT MANAGEMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

20-8999751

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

320 Park Avenue

New York, New York 10022

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (212) 355-1600

Not Applicable

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

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

PZN

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 2, 2019, there were 17,874,842 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.

As of May 2, 2019, there were 52,199,324 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.

 

 

 


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition of Pzena Investment Management, Inc.as of March 31, 2019 (unaudited) and December 31, 2018

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2019 and 2018

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.

 

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

 

24

 

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 6.

 

Exhibits

 

42

 

 

 

 

 

SIGNATURES

 

43

 

 

i


Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on our views, plans, estimates, and expectations.  Potentially inaccurate assumptions could cause actual results to differ materially from those expected or implied by the forward-looking statements.  Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in Item 1A, “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2018.  Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date they are made.  We undertake no obligation to publicly revise any forward-looking statements included in this Quarterly Report to reflect circumstances or events after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events.  You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission ("SEC"), after the date of this Quarterly Report on Form 10-Q.

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

 

our ability to respond to global economic, market, business and geopolitical conditions;

 

our anticipated future results of operations and operating cash flows;

 

our successful formulation and execution of business strategies and investment policies;

 

our financing plans and the availability of short- or long-term borrowing, or equity financing;

 

our competitive position and the effects of competition on our business;

 

our ability to identify and capture potential growth opportunities available to us;

 

the effective recruitment and retention of our key executives and employees;

 

our expected levels of compensation for our employees;

 

expectations relating to dividend payments and our ability to make such payments;

 

our potential operating performance, achievements, efficiency, and cost reduction efforts;

 

our expected tax rate;

 

changes in interest rates;

 

our expectations with respect to the economy, capital markets, the market for asset management services, and other industry trends; and

 

the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.

The reports that we file with the SEC, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements.

 

 

 

ii


Table of Contents

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

PZENA INVESTMENT MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per-share amounts)

 

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and Cash Equivalents ($3,723 and $3,733)1

 

$

14,731

 

 

$

38,099

 

Restricted Cash

 

 

1,029

 

 

 

1,028

 

Due from Broker ($101 and $16)1

 

 

177

 

 

 

64

 

Advisory Fees Receivable

 

 

32,866

 

 

 

32,590

 

Investments ($4,115 and $3,295)1

 

 

39,033

 

 

 

50,470

 

Receivable from Related Parties

 

 

1,816

 

 

 

4,239

 

Other Receivables ($12 and $13)1

 

 

431

 

 

 

474

 

Prepaid Expenses and Other Assets

 

 

1,494

 

 

 

1,386

 

Right-of-use Assets

 

 

14,704

 

 

 

 

Deferred Tax Asset

 

 

35,631

 

 

 

37,232

 

Property and Equipment, Net of Accumulated Depreciation of $3,974 and $3,724, respectively

 

 

5,658

 

 

 

5,394

 

TOTAL ASSETS

 

$

147,570

 

 

$

170,976

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Expenses ($18 and $15)1

 

$

18,018

 

 

$

37,266

 

Due to Broker ($0 and $4)1

 

 

74

 

 

 

360

 

Liability to Selling and Converting Shareholders

 

 

32,389

 

 

 

32,389

 

Lease Liabilities

 

 

15,066

 

 

 

 

Deferred Compensation Liability

 

 

1,190

 

 

 

1,845

 

Other Liabilities

 

 

 

 

 

108

 

TOTAL LIABILITIES

 

 

66,737

 

 

 

71,968

 

Commitments and Contingencies (see Note 12)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Class A Common Stock (Par Value $0.01; 750,000,000 Shares Authorized; 17,874,842 and 18,398,211 Shares Issued and Outstanding in 2019 and 2018, respectively)

 

 

178

 

 

 

183

 

Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 52,126,056 and 51,253,526 Shares Issued and Outstanding in 2019 and 2018, respectively)

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

3,913

 

Retained Earnings

 

 

22,684

 

 

 

28,871

 

Accumulated Other Comprehensive Income

 

 

18

 

 

 

35

 

Total Pzena Investment Management, Inc.'s Equity

 

 

22,880

 

 

 

33,002

 

Non-Controlling Interests

 

 

57,953

 

 

 

66,006

 

TOTAL EQUITY

 

 

80,833

 

 

 

99,008

 

TOTAL LIABILITIES AND EQUITY

 

$

147,570

 

 

$

170,976

 

 

1

Asset and liability amounts in parentheses represent the aggregated balances at March 31, 2019 and December 31, 2018 attributable to Pzena International Value Service (a series of Pzena Investment Management, LLC), Pzena Investment Management Special Situations, LLC, Pzena U.S. Best Ideas (GP), LLC, and Pzena Global Best Ideas (GP), LLC which were variable interest entities as of March 31, 2019 and December 31, 2018, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

1


Table of Contents

 

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per-share amounts)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2019

 

 

2018

 

REVENUE

 

$

37,410

 

 

$

39,252

 

EXPENSES

 

 

 

 

 

 

 

 

Compensation and Benefits Expense

 

 

17,189

 

 

 

16,174

 

General and Administrative Expense

 

 

4,027

 

 

 

3,155

 

Total Operating Expenses

 

 

21,216

 

 

 

19,329

 

Operating Income

 

 

16,194

 

 

 

19,923

 

OTHER INCOME

 

 

 

 

 

 

 

 

Interest Income

 

 

217

 

 

 

62

 

Dividend Income

 

 

62

 

 

 

36

 

Net Realized and Unrealized Gains/ (Losses) from Investments

 

 

837

 

 

 

(34

)

Equity in Earnings/ (Losses) of Affiliates

 

 

758

 

 

 

(129

)

Other (Expense)/ Income

 

 

(55

)

 

 

15

 

Total Other Income/ (Expense)

 

 

1,819

 

 

 

(50

)

Income Before Income Taxes

 

 

18,013

 

 

 

19,873

 

Income Tax Expense

 

 

2,071

 

 

 

2,207

 

Net Income

 

 

15,942

 

 

 

17,666

 

Less: Net Income Attributable to Non-Controlling Interests

 

 

12,840

 

 

 

14,143

 

Net Income Attributable to Pzena Investment Management, Inc.

 

$

3,102

 

 

$

3,523

 

 

 

 

 

 

 

 

 

 

Net Income for Basic Earnings per Share

 

$

3,102

 

 

$

3,523

 

Basic Earnings per Share

 

$

0.17

 

 

$

0.20

 

Basic Weighted Average Shares Outstanding1

 

 

18,278,773

 

 

 

18,015,368

 

 

 

 

 

 

 

 

 

 

Net Income for Diluted Earnings per Share

 

$

12,808

 

 

$

14,226

 

Diluted Earnings per Share

 

$

0.17

 

 

$

0.20

 

Diluted Weighted Average Shares Outstanding1

 

 

74,258,120

 

 

 

72,285,962

 

 

 

 

 

 

 

 

 

 

Cash Dividends per Share of Class A Common Stock

 

$

0.49

 

 

$

0.42

 

 

1

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

2


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2019

 

 

2018

 

NET INCOME

 

$

15,942

 

 

$

17,666

 

OTHER COMPREHENSIVE GAIN

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustment

 

 

63

 

 

 

68

 

Total Other Comprehensive Gain

 

 

63

 

 

 

68

 

Comprehensive Income

 

 

16,005

 

 

 

17,734

 

Less: Comprehensive Income Attributable to Non-Controlling Interests

 

 

12,920

 

 

 

14,229

 

Total Comprehensive Income Attributable to Pzena Investment Management, Inc.

 

$

3,085

 

 

$

3,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands, except share and per-share amounts)

 

 

Shares of

Class A

Common Stock

 

 

Shares of

Class B

Common Stock

 

 

Class A

Common Stock

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other

Comprehensive

Income

 

 

Retained

Earnings

 

 

Non-Controlling

Interests

 

 

Total Equity

 

Balance at December 31, 2018

 

 

18,398,211

 

 

 

51,253,526

 

 

$

183

 

 

$

3,913

 

 

$

35

 

 

$

28,871

 

 

$

66,006

 

 

$

99,008

 

Amortization of Non-Cash Compensation

 

 

10,000

 

 

 

241,996

 

 

 

 

 

 

414

 

 

 

 

 

 

 

 

 

1,140

 

 

 

1,554

 

Issuance of Shares under Equity Incentive Plan

 

 

 

 

 

715,874

 

 

 

 

 

 

1,065

 

 

 

 

 

 

 

 

 

3,022

 

 

 

4,087

 

Sale of Shares under Equity Incentive Plan

 

 

 

 

 

10,399

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

48

 

 

 

65

 

Directors' Share Grants

 

 

 

 

 

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

223

 

 

 

301

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,102

 

 

 

12,840

 

 

 

15,942

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

80

 

 

 

63

 

Repurchase and Retirement of Class A Common Stock

 

 

(533,369

)

 

 

 

 

 

(5

)

 

 

(4,369

)

 

 

 

 

 

(338

)

 

 

 

 

 

(4,712

)

Repurchase and Retirement of Class B Units

 

 

 

 

 

(95,739

)

 

 

 

 

 

(176

)

 

 

 

 

 

 

 

 

(499

)

 

 

(675

)

Class A Cash Dividends Declared and Paid ($0.49 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,951

)

 

 

 

 

 

(8,951

)

Tax Impact of Transactions with Non-Controlling Shareholders

 

 

 

 

 

 

 

 

 

 

 

(207

)

 

 

 

 

 

 

 

 

 

 

 

(207

)

Contributions from Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

23

 

Distributions to Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,665

)

 

 

(25,665

)

Other

 

 

 

 

 

 

 

 

 

 

 

(735

)

 

 

 

 

 

 

 

 

735

 

 

 

 

Balance at March 31, 2019

 

 

17,874,842

 

 

 

52,126,056

 

 

$

178

 

 

$

 

 

$

18

 

 

$

22,684

 

 

$

57,953

 

 

$

80,833

 

 

 

 

Shares of

Class A

Common Stock

 

 

Shares of

Class B

Common Stock

 

 

Class A

Common Stock

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Non-Controlling

Interests

 

 

Total Equity

 

Balance at December 31, 2017

 

 

18,096,554

 

 

 

50,709,673

 

 

 

180

 

 

 

7,915

 

 

 

(5

)

 

 

24,214

 

 

 

66,985

 

 

 

99,289

 

Amortization of Non-Cash Compensation

 

 

10,000

 

 

 

26,178

 

 

 

 

 

 

339

 

 

 

 

 

 

 

 

 

921

 

 

 

1,260

 

Issuance of Shares under Equity Incentive Plan

 

 

 

 

 

300,931

 

 

 

 

 

 

1,096

 

 

 

 

 

 

 

 

 

3,095

 

 

 

4,191

 

Sale of Shares under Equity Incentive Plan

 

 

 

 

 

547

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

3

 

 

 

4

 

Directors' Share Grants

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

181

 

 

 

245

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,523

 

 

 

14,143

 

 

 

17,666

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

86

 

 

 

68

 

Repurchase and Retirement of Class A Common Stock

 

 

(293,130

)

 

 

 

 

 

(3

)

 

 

(3,200

)

 

 

 

 

 

 

 

 

 

 

 

(3,203

)

Repurchase and Retirement of Class B Units

 

 

 

 

 

(3,870

)

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(30

)

 

 

(41

)

Class A Cash Dividends Declared and Paid ($0.42 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,560

)

 

 

 

 

 

(7,560

)

Distributions to Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,719

)

 

 

(29,719

)

Other

 

 

 

 

 

 

 

 

 

 

 

(404

)

 

 

 

 

 

 

 

 

404

 

 

 

 

Balance at March 31, 2018

 

 

17,813,424

 

 

 

51,033,459

 

 

$

177

 

 

$

5,800

 

 

$

(23

)

 

$

20,177

 

 

$

56,069

 

 

$

82,200

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Income

 

$

15,942

 

 

$

17,666

 

Adjustments to Reconcile Net Income to Cash

 

 

 

 

 

 

 

 

Provided by Operating Activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

250

 

 

 

255

 

Non-Cash Compensation

 

 

2,744

 

 

 

2,460

 

Directors' Share Grants

 

 

301

 

 

 

245

 

Net Realized and Unrealized (Gains)/ Losses from Investments

 

 

(837

)

 

 

34

 

Equity in (Earnings)/ Losses of Affiliates

 

 

(758

)

 

 

129

 

Accretion of Discount

 

 

(50

)

 

 

 

Non-Cash Lease Expense

 

 

455

 

 

 

 

Foreign Currency Translation Adjustments

 

 

63

 

 

 

68

 

Deferred Income Taxes

 

 

1,394

 

 

 

1,344

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Advisory Fees Receivable

 

 

(276

)

 

 

(5,158

)

Due from Broker

 

 

(101

)

 

 

461

 

Prepaid Expenses and Other Assets

 

 

(65

)

 

 

(135

)

Due to Broker

 

 

(286

)

 

 

1,021

 

Accounts Payable, Accrued Expenses, and Other Liabilities

 

 

(16,841

)

 

 

(13,815

)

Lease Liabilities

 

 

(366

)

 

 

 

Purchases of Equity Securities

 

 

(3,912

)

 

 

(6,605

)

Proceeds from Equity Securities

 

 

3,437

 

 

 

7,039

 

Net Cash Provided by Operating Activities

 

 

1,094

 

 

 

5,009

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of Investments

 

 

(12,123

)

 

 

(218

)

Proceeds from Sale of Investments

 

 

25,668

 

 

 

265

 

Payments from/ (to) Related Parties

 

 

2,423

 

 

 

(600

)

Purchases of Property and Equipment

 

 

(514

)

 

 

 

Net Cash Provided/ (Used in) by Investing Activities

 

 

15,454

 

 

 

(553

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repurchase and Retirement of Class A Common Stock

 

 

(4,712

)

 

 

(3,203

)

Repurchase and Retirement of Class B Units

 

 

(675

)

 

 

(41

)

Sale of Shares under Equity Incentive Plan

 

 

65

 

 

 

4

 

Distributions to Non-Controlling Interests

 

 

(25,665

)

 

 

(29,719

)

Contributions from Non-Controlling Interests

 

 

23

 

 

 

 

Dividends

 

 

(8,951

)

 

 

(7,560

)

Net Cash Used in Financing Activities

 

 

(39,915

)

 

 

(40,519

)

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

$

(23,367

)

 

$

(36,063

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of Period

 

$

39,127

 

 

$

64,431

 

Net Change in Cash, Cash Equivalents and Restricted Cash

 

 

(23,367

)

 

 

(36,063

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of Period

 

$

15,760

 

 

$

28,368

 

Supplementary Cash Flow Information:

 

 

 

 

 

 

 

 

Issuances of Shares under Equity Incentive Plan

 

$

4,087

 

 

$

4,191

 

Income Taxes Paid

 

$

72

 

 

$

415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Pzena Investment Management, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 1—Organization

Pzena Investment Management, Inc. (the “Company”) is the sole managing member of its operating company, Pzena Investment Management, LLC (the “operating company”).  As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interests in the operating company that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.

The operating company is an investment adviser registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York.  As of March 31, 2019, the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.

The Company also serves as the general partner of Pzena Investment Management, LP, a partnership formed with the objective of aggregating employee ownership in the operating company into one entity.

The Company, through its interest in the operating company, has consolidated the results of operations and financial condition of the following entities as of March 31, 2019: 

 

 

 

 

Ownership at

 

Legal Entity

 

Type of Entity (Date of Formation)

 

March 31, 2019

 

Pzena Investment Management, Pty

 

Australian Proprietary Limited Company (12/16/2009)

 

100.0%

 

Pzena Financial Services, LLC

 

Delaware Limited Liability Company (10/15/2013)

 

100.0%

 

Pzena Investment Management, LTD

 

England and Wales Private Limited Company (01/08/2015)

 

100.0%

 

Pzena U.S. Best Ideas (GP), LLC

 

Delaware Limited Liability Company (11/16/2017)

 

100.0%

 

Pzena Global Best Ideas (GP), LLC

 

Delaware Limited Liability Company (2/15/2018)

 

100.0%

 

Pzena Investment Management Special Situations, LLC

 

Delaware Limited Liability Company (12/01/2010)

 

99.9%

 

Pzena International Small Cap Value Fund, a series of Advisors Series Trust

 

Open-end Management Investment Company, series of Delaware Statutory Trust (6/28/2018)

 

95.9%

 

Pzena International Value Service, a series of Pzena Investment Management International, LLC

 

Delaware Limited Liability Company (12/22/2003)

 

57.9%

 

 

Note 2—Significant Accounting Policies

Basis of Presentation:

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations.  

Principles of Consolidation:

The Company’s policy is to consolidate those entities in which it has a direct or indirect controlling financial interest based on either the voting interest model or the variable interest model.  As such, the Company consolidates majority-owned subsidiaries in which it has a controlling financial interest, and certain investment vehicles the operating company sponsors for which it is the investment adviser that are considered to be variable-interest entities (“VIEs”), and for which the Company is deemed to be the primary beneficiary.

Pursuant to the Consolidation Topic of the FASB Accounting Standards Codification (“FASB ASC”), for legal entities evaluated for consolidation, the Company determines whether interests it holds and fees paid to the entity qualify as a variable interest.  If it is determined that the Company does not have a variable interest in the entity, no further analysis is required and the Company does not consolidate the entity.  If it is determined that the Company has a variable interest, it considers its direct

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economic interests and the proportionate indirect interests through related parties to determine if it is the primary beneficiary of the VIE.

For equity investments where the Company does not control the investee, and where it is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting.  The evaluation of whether the Company exerts control or significant influence over the financial and operating policies of the investee requires significant judgment based on the facts and circumstances surrounding each investment.  Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms of the investment agreement, or other agreements with the investee.

The Company analyzes entities structured as series funds which comply with the requirements included in the Investment Company Act of 1940 for registered mutual funds as voting interest entities because the shareholders are deemed to have the ability to direct the activities of the fund that most significantly impact the fund's economic performance.

Consolidated Entities

The Company consolidates the financial results of the operating company and records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including unit and option issuances, repurchases, and retirements.  The operating company’s pro-rata share of such transactions are recorded as an adjustment to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial condition.

The majority-owned subsidiaries in which the Company, through its interest in the operating company, has a controlling financial interest and the VIEs for which the Company is deemed to be the primary beneficiary are collectively referred to as “consolidated subsidiaries.”  Non-controlling interests recorded on the consolidated financial statements of the Company include the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company.  All significant inter-company transactions and balances have been eliminated through consolidation.

During 2018, the Company provided the initial cash investment for a Pzena-branded mutual fund, Pzena International Small Cap Value Fund, in an effort to generate an investment performance track record to attract third-party investors. Due to its series fund structure, registration, and compliance with the requirements of the Investment Company Act of 1940, this fund is analyzed for consolidation under the voting interest model.  As a result of the Company's initial interests, it consolidated the Pzena International Small Cap Value Fund.

The operating company is the managing member of Pzena International Value Service, a series of Pzena Investment Management International, LLC.  The operating company is considered the primary beneficiary of this entity.  At March 31, 2019, Pzena International Value Service’s $3.8 million in net assets was included in the Company’s consolidated statements of financial condition.

These consolidated investment partnerships are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these investment partnerships pursuant to U.S. GAAP.

Non-Consolidated Variable Interest Entities

VIEs that are not consolidated receive investment management services from the operating company and are generally private investment partnerships sponsored by the operating company.  The total net assets of these VIEs was approximately $253.6 million and $205.4 million at March 31, 2019 and December 31, 2018, respectively.  

As of March 31, 2019 and December 31, 2018, the operating company had $0.5 million and $2.4 million in investments in certain of these firm-sponsored vehicles, the majority of which are primarily held to satisfy certain of the Company’s obligations under its deferred compensation programs, for which the Company was not deemed to be the primary beneficiary.  The Company's exposure to risk in the non-consolidated VIEs is generally limited to any equity investment and any uncollected management fees. As of March 31, 2019 and December 31, 2018, the Company's maximum exposure to loss as a result of its involvement with the non-consolidated VIEs was $0.8 million and $2.7 million, respectively.

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Accounting Pronouncements Adopted in 2019:

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This amended standard was written to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASU No. 2016-02 as of January 1, 2019, using a modified retrospective approach. The Company elected to apply the guidance to each lease that had previously commenced as of the application date of January 1, 2019. Prior comparative periods are not adjusted under the method elected. The Company will provide the required disclosures under ASC 840 for comparative periods to which ASC 840 is applied. Adoption of the new standard resulted in the recognition of a right-of-use asset of $11.7 million and a lease liability of $11.9 million on the consolidated statement of financial condition as of January 1, 2019.  The initial recognition of the right-of-use asset and lease liability represented a non-cash activity. The adoption did have a material impact on the consolidated statements of operations or cash flows. The Company has included additional disclosures required by the new standard.

Management’s Use of Estimates:

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the period.  Actual results could materially differ from those estimates.

Revenue Recognition:

Revenue, comprised of advisory fee income, is recognized over the period in which advisory services are provided. Advisory fee income includes management fees that are calculated based on percentages of assets under management (“AUM”), generally billed quarterly, either in arrears or advance, depending on the applicable contractual terms. Advisory fee income also includes performance fees that may be earned by the Company depending on the investment return of the AUM, as well as fulcrum fee arrangements. Performance fee arrangements generally entitle the Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark. The Company’s participation percentage in such return differentials is then multiplied by AUM to determine the performance fees earned. In general, returns are calculated on an annualized basis over the contract’s measurement period, which usually extends to three years. Performance fees are generally payable annually or quarterly. Fulcrum fee arrangements require a reduction in the base fee, or allow for a performance fee if the relevant investment strategy underperforms or outperforms, respectively, the agreed-upon benchmark over the contract's measurement period, which extends to three years. Fulcrum fees are generally payable quarterly. Following the Revenue Recognition Topic of the FASB ASC, performance fee income is recorded at the conclusion of the contractual performance period, when it is probable that significant reversal of the performance fee will not occur. Upon adoption of ASU No. 2014-09 on January 1, 2018, advisory fee income also includes fund expense cap reimbursements which are required to be presented net against Revenue rather than as a component of General and Administrative Expense.

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Revenue from advisory fees is disaggregated into categories based on the composition of the Company's client base and advisory fee structure for the three months ended March 31, 2019 and 2018:

 

 

For the Three Months

Ended March 31,

 

Revenue

 

2019

 

 

2018

 

 

 

(in thousands)

 

Separately Managed Accounts

 

 

 

 

 

 

 

 

Asset-Based Fees

 

$

18,596

 

 

$

20,082

 

Total Separately Managed Fees

 

 

18,596

 

 

 

20,082

 

 

 

 

 

 

 

 

 

 

Sub-Advised Accounts

 

 

 

 

 

 

 

 

Asset-Based Fees

 

$

14,890

 

 

$

15,565

 

Decrease in Asset-Based Fees

 

 

(335

)

 

 

 

Performance-Based Fees

 

 

452

 

 

 

886

 

Total Sub-Advised Fees

 

 

15,007

 

 

 

16,451

 

 

 

 

 

 

 

 

 

 

Pzena Funds

 

 

 

 

 

 

 

 

Asset-Based Fees

 

$

3,989

 

 

$

2,986

 

Expense Cap Reimbursements

 

 

(182

)

 

 

(279

)

Performance-Based Fees

 

 

 

 

 

12

 

Total Pzena Funds Fees

 

 

3,807

 

 

 

2,719

 

Total

 

$

37,410

 

 

$

39,252

 

 

Cash and Cash Equivalents:

At March 31, 2019 and December 31, 2018, Cash and Cash Equivalents was $14.7 million and $38.1 million, respectively.  The Company considers all money market funds and highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains its cash in bank deposits, other accounts whose balances often exceed federally insured limits and treasury money market funds. Cash is stated at cost, which approximates fair value.

Interest on cash and cash equivalents is recorded as Interest Income on an accrual basis in the consolidated statements of operations.

Restricted Cash:

At both March 31, 2019 and December 31, 2018, the Company had $1.0 million of compensating balances recorded in Restricted Cash in the consolidated statements of financial condition. These balances reflect a letter of credit issued by a third party in lieu of a cash security deposit, as required by the Company’s lease for its corporate headquarters.

The following table reconciles cash, cash equivalents, and restricted cash per the consolidated statements of cash flows to the consolidated statements of financial condition.

 

 

 

March 31,

2019

 

 

December 31, 2018

 

 

March 31,

2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

Cash and Cash Equivalents

 

$

14,731

 

 

$

38,099