Pzena Investment Management, Inc. - Quarter Report: 2009 September (Form 10-Q)

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 September 30, 2009
Or
o	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)

 

 

120 West 45th Street

New York, New York 10036

(Address of Principal Executive Offices) (Zip Code)

 

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

 

Not Applicable
(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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

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

 

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

 

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

 

As of November 9, 2009, there were 8,633,041 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.

 

As of November 9, 2009, there were 55,607,962 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.	Consolidated Statements of Financial Condition of Pzena Investment Management, Inc. as of September 30, 2009 (unaudited) and December 31, 2008		1
	Consolidated Statements of Operations (unaudited) of Pzena Investment Management, Inc. for the Three and Nine Months Ended September 30, 2009 and September 30, 2008		2
	Consolidated Statements of Cash Flows (unaudited) of Pzena Investment Management, Inc. for the Three and Nine Months Ended September 30, 2009 and September 30, 2008		3
	Consolidated Statements of Changes in Equity (unaudited) of Pzena Investment Management, Inc. for the Nine Months Ended September 30, 2009 and September 30, 2008		4
	Notes to the Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4	Controls and Procedures		35
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 1A	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Submission of Matters to a Vote of Security Holders		47
Item 5.	Other Information		47
Item 6	Exhibits		47

 

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 potentially inaccurate assumptions that 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 herein, in “Part II - Item 1A - Risk Factors.”  Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Quarterly Report on Form 10-Q, 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, or SEC, after the date of this Quarterly Report on Form 10-Q.

 

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

 

·                  our anticipated future results of operations and operating cash flows;

 

·                  our 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;

 

·                  potential growth opportunities available to us;

 

·                  the recruitment and retention of our employees;

 

·                  our expected levels of compensation for our employees;

 

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

 

·                  our expected tax rate;

 

·                  changes in interest rates;

 

·                  our expectation 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
		September 30, 2009			December 31, 2008
		(unaudited)
ASSETS
Cash and Cash Equivalents		$	19,147		$	27,421
Due from Broker		54			41
Advisory Fees Receivable		12,681			13,606
Investments in Equity Securities, at Fair Value		18,373			14,045
Receivable from Related Parties		170			191
Other Receivables		103			74
Prepaid Expenses and Other Assets		2,227			949
Deferred Tax Asset, net		7,234			3,444
Property and Equipment, Net of Accumulated Depreciation of $2,265 and $1,913, respectively		2,392			2,748
TOTAL ASSETS		$	62,381		$	62,519
LIABILITIES AND EQUITY
Liabilities:
Accounts Payable and Accrued Expenses		$	10,472		$	4,338
Due to Broker		29			47
Term Loan		—			22,000
Senior Subordinated Notes		16,000			16,000
Liability to Selling and Converting Shareholders		5,503			1,787
Other Liabilities		1,082			2,007
TOTAL LIABILITIES		33,086			46,179
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; 8,633,041and 6,187,068 Shares Issued and Outstanding in 2009 and 2008, respectively)		86			61
Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 55,607,962 and 57,975,724 Shares Issued and Outstanding in 2009 and 2008, respectively)		—			—
Additional Paid-In Capital		9,836			9,749
Accumulated Deficit		(2,554		)	(5,289		)
Total Pzena Investment Management, Inc.’s Equity		7,368			4,521
Non-Controlling Interests		21,927			11,819
TOTAL EQUITY		29,295			16,340
TOTAL LIABILITIES AND EQUITY		$	62,381		$	62,519

 

See accompanying notes to 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 September 30,						For the Nine Months Ended September 30,
		2009			2008			2009			2008
REVENUE		$	16,813		$	25,072		$	44,717		$	83,389
EXPENSES
Compensation and Benefits Expense		6,232			8,160			18,255			25,773
General and Administrative Expenses		1,904			2,626			6,330			8,321
TOTAL OPERATING EXPENSES		8,136			10,786			24,585			34,094
Operating Income		8,677			14,286			20,132			49,295
OTHER INCOME/(EXPENSE)
Interest and Dividend Income		116			473			363			1,510
Interest Expense		(376		)	(777		)	(1,231		)	(2,814		)
Realized and Unrealized Gain/(Loss), Net on Equity Securities and Securities Sold Short		4,152			(4,075		)	6,061			(10,955		)
Other Income/(Expense)		(2,341		)	53,704			(3,437		)	53,716
Total Other Income		1,551			49,325			1,756			41,457
Income Before Income Taxes		10,228			63,611			21,888			90,752
Income Tax Provision/(Benefit)		(2,040		)	63,964			(2,379		)	66,962
Consolidated Net Income/(Loss)		12,268			(353		)	24,267			23,790
Less: Net Income Attributable to Non-Controlling Interests		10,836			8,357			21,531			30,900
Net Income/(Loss) Attributable to Pzena Investment Management, Inc.		$	1,432		$	(8,710	)	$	2,736		$	(7,110	)

 

Earnings Per Share — Basic and Diluted Attributable to Pzena Investment Management, Inc. Common Stockholders:

 

Net Income/(Loss) for Basic Earnings per Share		$	1,432		$	(8,710	)	$	2,736		$	(7,110	)
Basic Earnings per Share		$	0.17		$	(1.42	)	$	0.34		$	(1.16	)
Basic Weighted Average Shares Outstanding		8,633,041			6,123,494			8,077,545			6,122,229
Net Income/(Loss) for Diluted Earnings per Share		$	6,051		$	(8,710	)	$	12,889		$	(7,110	)
Diluted Earnings per Share		$	0.09		$	(1.42	)	$	0.20		$	(1.16	)
Diluted Weighted Average Shares Outstanding		64,994,278			6,123,494			64,756,331			6,122,229

 

See accompanying notes to consolidated financial statements

 

2

Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2009			2008			2009			2008
OPERATING ACTIVITIES
Consolidated Net Income/(Loss)		$	12,268		$	(353	)	$	24,266		$	23,790
Adjustments to Reconcile Net Income/(Loss) to Cash Provided by Operating Activities:
Depreciation		121			135			362			368
Non-Cash Compensation		255			272			816			905
Director Share Grant		—			—			280			140
Realized and Unrealized (Gain)/Loss, Net on Equity Securities and Securities Sold Short		(4,152		)	4,075			(6,061		)	10,955
Increase/(Decrease) in Liability to Selling and Converting Shareholders		2,382			(53,337		)	3,586			(53,337		)
Deferred Income Taxes		(2,611		)	63,165			(3,804		)	64,229
Changes in Operating Assets and Liabilities:
Advisory Fees Receivable		(2,113		)	(115		)	881			5,449
Due from Broker		(19		)	58			(13		)	237
Prepaid Expenses and Other Assets		(1,550		)	(588		)	(1,544		)	569
Due to Broker		(1		)	1,844			(18		)	1,199
Accounts Payable, Accrued Expenses, and Other Liabilities		2,790			2,969			5,115			6,253
Due to Principals		(653		)	—			—			—
Purchases of Equity Securities and Securities Sold Short		(2,913		)	(5,990		)	(7,771		)	(28,133		)
Proceeds from Sale of Equity Securities and Securities Sold Short		3,891			4,211			9,506			16,067
Net Cash Provided by Operating Activities		7,695			16,346			25,601			48,691
INVESTING ACTIVITIES
Receivable from Related Parties		(43		)	(87		)	6			(55		)
Purchases of Property and Equipment		—			(76		)	(6		)	(160		)
Net Cash Used in Investing Activities		(43		)	(163		)	—			(215		)
FINANCING ACTIVITIES
Contributions from Non-Controlling Interests		322			149			322			7,082
Distributions to Non-Controlling Members		(4,719		)	(11,277		)	(12,199		)	(36,136		)
Contributions from Shareholder		—			172			—			172
Term Loan Repayment		(10,000		)	(10,000		)	(22,000		)	(13,000		)
Dividends		—			(674		)	—			(2,018		)
Net Cash Used in Financing Activities		(14,397		)	(21,630		)	(33,877		)	(43,900		)
NET CHANGE IN CASH		$	(6,745	)	$	(5,447	)	$	(8,276	)	$	4,576
CASH AND CASH EQUIVALENTS—Beginning of Period		$	25,892		$	37,207		$	27,421		$	27,184
Net Change in Cash		(6,745		)	(5,447		)	(8,274		)	4,576
CASH AND CASH EQUIVALENTS—End of Period		$	19,147		$	31,760		$	19,147		$	31,760
Supplementary Cash Flow Information:
Interest Paid		$	332		$	1,450		$	1,191		$	3,464
Income Taxes Paid		$	535		$	805		$	1,907		$	3,847

 

See accompanying notes to consolidated financial statements

 

3

 

Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS 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			Retained Earnings/ (Accumulated Deficit)			Non- Controlling Interests			Total
Balance at December 31, 2008		6,187,068		57,975,724		$	61		$	9,749		$	(5,289	)	$	11,819		$	16,340
Unit Conversion		2,445,973		(2,445,973	)	25			107			—			(108		)	24
Amortization of Non-Cash Compensation		—		—		—			67			—			475			542
Option Exercise		—		78,211		—			—			—			—			—
Net Income		—		—		—			—			2,735			21,531			24,266
Capital Contribution		—		—		—			—			—			322			322
Capital Distribution		—		—		—			(87		)	—			(12,112		)	(12,199		)
Balance at September 30, 2009		8,633,041		55,607,962		$	86		$	9,836		$	(2,554	)	$	21,927		$	29,295
Balance at December 31, 2007		6,111,118		57,937,910		$	61		$	(2,043	)	$	61		$	16,355		$	14,434
Issuance of Class A Common Stock		12,376		—		—			11			—			126			137
Issuance of Class B Common Stock and Amortization of Non-Cash Compensation		—		13,000		—			42			—			398			440
Net Income/(Loss)		—		—		—			—			(7,110		)	30,900			23,790
Capital Contributions		—		—		—			172			—			5,908			6,080
Equity Effect of Operating Company Net Deficit on Non-Controlling Interests		—		—		—			8,941			—			(8,941		)	—
Capital Distribution		—		—		—			—			—			(28,585		)	(28,585		)
Class A Cash Dividends Paid ($0.22 per share)		—		—		—			—			(1,347		)	—			(1,347		)
Class A Cash Dividends Declared ($0.05 per share)		—		—		—			—			(306		)	—			(306		)
Balance at September 30, 2008		6,123,494		57,950,910		$	61		$	7,123		$	(8,702	)	$	16,161		$	14,643

 

See accompanying notes to consolidated financial statements

 

4

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements

 

Note 1—Organization

 

Pzena Investment Management, Inc. (the “Company”) functions as the holding company through which the business of its operating company, Pzena Investment Management, LLC, is conducted. The Company was incorporated in the State of Delaware on May 8, 2007.  Concurrently with the consummation of the Company’s initial public offering, on October 30, 2007, the Operating Agreement of Pzena Investment Management, LLC (the “operating agreement”) was amended and restated such that, among other things, the Company became the sole managing member of Pzena Investment Management, LLC.  The acquisition of the operating company’s membership interests by the Company was treated as a reorganization of entities under common control.  As a result of these transactions, as of and subsequent to October 30, 2007, (i) the Company has consolidated the financial results of Pzena Investment Management, LLC with its own and reflected the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements, and (ii) the Company recognizes income generated from its economic interest in Pzena Investment Management, LLC’s net income.

 

Pzena Investment Management, LLC is an investment adviser which is registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York.  As of September 30, 2009, the 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, through its investment in its operating company, has consolidated the results of operations and financial condition of the following private investment partnerships as of September 30, 2009:

 

Entity		Type of Entity (Date of Formation)		Ownership at September 30, 2009
Pzena Large Cap Value Fund		Massachusetts Trust (11/01/2002)		99.6%
Pzena International Value Service		Delaware Limited Liability Company (12/22/2003)		16.7%
Pzena Global Value Service		Delaware Limited Liability Company (12/22/2003)		0.8%
Pzena Emerging Markets Country Value Service		Delaware Limited Liability Company (12/28/2007)		99.9%
Pzena Emerging Markets Focused Value Service		Delaware Limited Liability Company (12/28/2007)		99.9%

 

Pursuant to its operating agreement, the operating company will continue until December 31, 2026, unless a terminating event, as defined in the operating agreement, occurs prior to this date. Operating company members are not liable for repayment, satisfaction or discharge of any debts, liabilities or obligations of the operating company, except to the extent of their capital accounts.

 

Note 2—Significant Accounting Policies

 

Basis of Presentation:

 

The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations.  The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.”  The FASB sets GAAP that the Company follows to ensure the Company consistently report its financial condition, results of operations, and cash flows.  Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, Emerging Issues Task Force consensuses, American Institute of Certified Public Accountants Statements of Position, etc.   The FASB recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards Codification, (“ASC”), sometimes referred to as the Codification.  To the Company, this means the accounting literature that the Company will refer to in its fair value accounting disclosures, for example, will be disclosed as the Fair Value Measurements and Disclosures Topic of the FASB ASC.  The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made; however, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than specific statement numbers.  The change was made effective by the FASB for periods ending on or after September 15, 2009.  The Company has updated references to GAAP in its notes throughout the consolidated financial statements to reflect the guidance in the Codification.

 

The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable interest entities where the Company is deemed to be the primary beneficiary (“Consolidated Subsidiaries”).  As required by the Consolidation Topic of the FASB ASC, the Company also consolidates non-variable-interest entities in which it acts as the general partner or managing member.  All of these entities represent private investment partnerships over which the Company exercises or exercised control.  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.

 

5

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

The Pzena Global Value Service and the Pzena International Value Service are limited liability companies whose managing members are omembers of the executive committee of the operating company or the operating company itself.  Neither of these entities are considered variable-interest entities, as the managing members have substantive interests in the partnerships.  Each of these limited liability companies are considered entities “similar” to limited partnerships and thus subject to the guidance of the Consolidation Topic of the FASB ASC.  Under each of their respective operating agreements, none of these entities’ non-managing members have the ability to remove the managing member under any circumstance, nor do they have any participating rights.  As a result, nothing substantive exists to overcome the presumption of control by the managing member as required by the Consolidation Topic of the FASB ASC.  As the managing members of these entities are, or were, either the operating company or one of the controlling persons of the operating company, their results of operations and financial position have been consolidated.

 

During the fourth quarter of 2008, the decision was made to close the Pzena Large Cap Value Fund II, the Pzena Emerging Markets Value Service, the Pzena Mega Cap Value Fund, and Pzena Value Partners.  The results of operations and financial position of each of these entities were consolidated until the dates of their respective liquidations.

 

All of the consolidated investment partnerships are, or were, investment companies under the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies.  The Company has retained the specialized accounting for these partnerships pursuant to the Consolidation Topic of the FASB ASC.  Thus, the Company reports the investment partnerships’ investments in equity securities and securities sold short at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

 

The Company records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including equity and option issuances and adjustments to accumulated other comprehensive income.  The operating company’s pro-rata share of such transactions are recorded as adjustments to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial position.  As discussed further in Note 13, Non-Controlling Interests, the Company did not initially record a non-controlling interest associated with the acquisition of its operating company, as the post-offering net equity of the operating company was less than zero.  As required by the Consolidation Topic of the FASB ASC, a non-controlling interest in the equity of the operating company was recorded after the initial deficit that existed at acquisition was extinguished in 2008.

 

The Company acts as the investment manager for four trusts and one offshore investment company, each of which are considered variable-interest entities.  All of these entities are vehicles through which the Company offers its Global Value strategies and/or its Europe, Australasia, and Far East (“EAFE”) Value strategies.  The Company is not considered the primary beneficiary of any of these entities.  Correspondingly, their results of operations and financial condition are not consolidated by the Company.  The total net assets of these variable-interest entities was approximately $528.7 million and $446.0 million at September 30, 2009 and December 31, 2008, respectively.  The Company is not exposed to losses as a result of its involvement with these entities because it has no direct investment in them.

 

Management’s Use of Estimates:

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 financial statements, and the reported amounts of revenues and expenses for the period.  Actual results could differ from those estimates.

 

Fair Values of Financial Instruments:

 

The carrying amounts of all financial instruments in the consolidated statements of financial condition, including investments in equity securities, approximate their fair value.

 

Revenue Recognition:

 

Revenue, comprised of advisory fee income, is recognized over the period in which investment management 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 their contractual terms.  Advisory fee income also includes incentive fees that may be earned by the Company depending on the investment return of the assets under management.

 

6

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

Incentive 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 assets under management to determine the incentive fees earned.  Returns are calculated on an annualized basis over the contract’s measurement period, which may extend up to three years.  Incentive fees are generally payable annually.  As required by the Revenue Recognition Topic of the FASB ASC, such incentive fee income is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.  The Company recognized no such incentive fees for the three and nine months ended September 30, 2009 and 2008.

 

Earnings per Share:

 

Basic earnings per share is computed by dividing the Company’s net income or loss attributable to the Company’s common stockholders by the weighted average number of shares outstanding during the reporting period.  Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding operating company membership units, as well as outstanding operating company options and phantom units, to the extent they would have a dilutive effect on net income per share for the reporting period.  Net income for diluted earnings per share generally assumes all operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate.

 

For the three and nine months ended September 30, 2009, the Company’s diluted net income was determined as follows (in thousands):

 

		For the Three Months Ended September 30, 2009
Non-Controlling Interests of Pzena Investment Management, LLC		$	8,082
Less: Assumed Corporate Income Taxes		3,463
Assumed After-Tax Income of Pzena Investment Management, LLC		$	4,619
Assumed After-Tax Income of Pzena Investment Management, LLC		$	4,619
Net Income of Pzena Investment Management, Inc.		1,432
Diluted Net Income		$	6,051

 

		For the Nine Months Ended September 30, 2009
Non-Controlling Interests of Pzena Investment Management, LLC		$	17,767
Less: Assumed Corporate Income Taxes		7,613
Assumed After-Tax Income of Pzena Investment Management, LLC		$	10,154
Assumed After-Tax Income of Pzena Investment Management, LLC		$	10,154
Net Income of Pzena Investment Management, Inc.		2,735
Diluted Net Income		$	12,889

 

For each of the three and nine months ended September 30, 2009, 954,310 options to purchase operating company units were excluded from the calculation of diluted net income per share, as their inclusion would have had an antidilutive effect for the period.  For each of the three and nine months ended September 30, 2008, 57,950,910 operating company units, 954,310 options to purchase operating company units, and 89,826 phantom units were excluded from the calculation of diluted net income per share, as their inclusion would have had an antidilutive effect for both periods.

 

7

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

For the three and nine months ended September 30, 2009, the Company’s basic and diluted earnings per share were determined as follows (in thousands, except for share and per-share amounts):

 

		For the Three Months Ended September 30, 2009
Net Income for Basic Earnings per Share		$	1,432
Basic Weighted Average Shares Outstanding		8,633,041
Basic Earnings per Share		$	0.17
Net Income for Diluted Earnings per Share		$	6,051
Basic Weighted Average Shares Outstanding		8,633,041
Dilutive Effect of Operating Company Units		55,606,508
Dilutive Effect of Phantom Units		754,729
Diluted Weighted Average Shares Outstanding		64,994,278
Diluted Earnings per Share		$	0.09

 

		For the Nine Months Ended September 30, 2009
Net Income for Basic Earnings per Share		$	2,736
Basic Weighted Average Shares Outstanding		8,077,545
Basic Earnings per Share		$	0.34
Net Income for Diluted Earnings per Share		$	12,889
Basic Weighted Average Shares Outstanding		8,077,545
Dilutive Effect of Operating Company Units		56,131,004
Dilutive Effect of Phantom Units		547,782
Diluted Weighted Average Shares Outstanding		64,756,331
Diluted Earnings per Share		$	0.20

 

For the three and nine months ended September 30, 2008, the Company generated net losses of $8.7 million and $7.1 million, respectively.  Consequently, basic and diluted net loss, net loss per share, and weighted average shares outstanding are identical for each of these periods.

 

Cash and Cash Equivalents:

 

The Company considers all 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 and other accounts, the majority of which are held at two financial institutions.  These balances, at times, exceed federally insured limits.

 

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

 

Investments in Equity Securities, at Fair Value:

 

Investments in equity securities represent primarily the securities held by the Company’s consolidated investment partnerships.  All such securities are recorded at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

 

8

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.  The Fair Value Measurements and Disclosures Topic of the FASB ASC also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability.  Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The valuation hierarchy contains three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3).  Additionally, entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value and define assets and liabilities measured at fair value by major category.

 

The Company’s fair value measurements relate to its interest rate swap, as well as its investments in equity securities, which are primarily exchange-traded securities with quoted prices in active markets.  The fair value measurement of the interest rate swap was determined primarily based upon the market prices for interest rate swaps with similar provisions and the use of forward interest rate curves.  Prior to its termination in September 2009, the interest rate swap was classified as Level 2 and recorded in other liabilities on the consolidated statement of financial condition.  The fair value measurements of the securities have been classified as Level 1.

 

The following table presents these instruments’ fair value at September 30, 2009 (in thousands):

 

		Level 1			Level 2			Level 3
Assets:
Equity Securities		$	18,373		$	—		$	—
Total Fair Value		$	18,373		$	—		$	—

 

The following table presents these instruments’ fair value at December 31, 2008 (in thousands):

 

		Level 1			Level 2			Level 3
Assets:
Equity Securities		$	14,045		$	—		$	—
Liabilities:
Interest Rate Swap		—			(628		)	—
Total Fair Value		$	14,045		$	(628	)	$	—

 

Securities Valuation:

 

Investments in equity securities which are traded on a national securities exchange are carried at fair value based on the last reported sales price on the valuation date.  If no reported sales occurred on the valuation date, investments in securities are valued at the bid price.  Securities transactions are recorded on the trade date.

 

The net realized gain or loss on sales of securities is determined on a specific identification basis and is included in realized and unrealized loss, net on equity securities and securities sold short in the consolidated statements of operations.

 

Concentrations of Credit Risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers and advisory fees receivable.  The Company maintains its cash and temporary cash investments in bank deposits and other accounts whose balances, at times, exceed federally insured limits.

 

The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company.  On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs and collections and current credit conditions.  For the three months ended September 30, 2009 and 2008, approximately 10.6% and 13.1%, respectively, of the Company’s advisory fees were generated from an advisory agreement with one client.  For the nine months ended September 30, 2009 and 2008, fees generated from this agreement comprised 11.4% and 14.4%, respectively, of the Company’s total advisory fees.  At September 30, 2009 and December 31, 2008, no allowance for doubtful accounts was deemed necessary.

 

9

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

Financial Instruments:

 

On February 28, 2008, the operating company entered into an interest rate swap agreement to manage its exposure to changes in interest rates associated with the Credit Agreement (the “Credit Agreement”) discussed in Note 9, Debt.  This interest rate swap was subsequently unwound in conjunction with the termination of the Credit Agreement in September 2009.  The counterparty to this agreement was a major financial institution.  The Company originally designated the interest rate swap agreement as a cash flow hedge of the Credit Agreement, effective February 28, 2008.  As required by the Derivatives and Hedging Topic of the FASB ASC, the Company recorded the cash flow hedge at fair value on the consolidated statement of financial condition.  Additionally, the Company’s pro-rata share of the changes in the fair value of this agreement were recorded as a component of accumulated other comprehensive income.

 

During the quarter ended September 30, 2008, the Company changed the designation of its swap agreement from a cash flow hedge to a trading derivative, as a significant portion of the cash flows associated with the originally forecasted transaction were probable not to occur due to amortization payments required to be made pursuant to the terms of its amended Credit Agreement.  Accordingly, the Company reclassified the cumulative changes in fair value related to this swap from accumulated other comprehensive income to other income/(expense).  The Company recorded all subsequent changes to the swap’s fair value as a component of other income/(expense).  The Company recognized less than $0.1 million in other income for the three months ended September 30, 2009 related to such changes.  For the nine months ended September 30, 2009, the Company recognized approximately $0.1 million in other income related to such changes.  For each of the three and nine months ended September 30, 2008, the Company recognized approximately $0.3 million in other income associated with the change in fair value of the swap agreement.

 

At December 31, 2008, the approximate fair value of the liability associated with the swap agreement was $0.6 million, and has been included in other liabilities on the consolidated statements of financial condition.

 

The following table summarizes the impact of the Company’s derivative financial instruments on its results of operations for the three months ended September 30, 2009 and 2008 (in thousands):

 

Derivatives Not Accounted For As Hedging				Amount of Income Recognized
Instruments Under the Derivatives and		Statement of		In Income on Derivative
Hedging Topic of the FASB ASC		Operations Account		2009			2008
Interest Rate Contracts		Other Income		$	20		$	342
Total				$	20		$	342

 

The following table summarizes the impact of the Company’s derivative financial instruments on its results of operations for the nine months ended September 30, 2009 and 2008 (in thousands):

 

Derivatives Not Accounted For As Hedging Instruments Under the Derivatives and		Statement of		Amount of Income Recognized In Income on Derivative
Hedging Topic of the FASB ASC		Operations Account		2009			2008
Interest Rate Contracts		Other Income		$	88		$	342
Total				$	88		$	342

 

The following table summarizes the impact of the Company’s derivative financial instruments on its financial position as of December 31, 2008 (in thousands):

 

		Asset Derivatives					Liability Derivatives
Derivatives Not Accounted For As Hedging Instruments Under the Derivatives and Hedging Topic of the FASB ASC		Statement of Financial Condition Account		Fair Value			Statement of Financial Condition Account		Fair Value
Interest Rate Contracts		—		$	—		Other Liabilities		$	628
Total				$	—				$	628

 

10

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

Property and Equipment:

 

Property and equipment is carried at cost, less accumulated depreciation and amortization.  Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, which range from three to seven years.

 

Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.

 

Business Segments:

 

The Company views its operations as comprising one operating segment.

 

Income Taxes:

 

The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company.  The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss.  Similarly, the income of the Company’s consolidated investment partnerships is not subject to income taxes, as it is allocated to each partnership’s individual partners.  The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”).

 

The Company and its consolidated subsidiaries account for all federal, state, and local taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized.  At September 30, 2009 and December 31, 2008, the Company had a $60.3 million and a $62.7 million valuation allowance, respectively, recorded against the deferred tax asset associated with the Company’s acquisition of operating company units in conjunction with the offering.  The income tax provision, or credit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities.  The Company records its deferred tax liabilities as a component of other liabilities on the consolidated statements of financial condition.

 

Foreign Currency:

 

Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. dollar amounts at the date of valuation.  Purchases and sales of investment securities and income and expense items denominated in foreign currencies are remeasured into U.S. dollar amounts on the respective dates of such transactions.

 

The Company does not isolate that portion of the results of its operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held.  Such fluctuations are included in the net realized and unrealized loss, net on equity securities and securities sold short in the consolidated statements of operations.

 

Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Company’s books and the U.S. dollar equivalent of the amounts actually received or paid.  Net realized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.

 

New Accounting Pronouncements:

 

In June 2009, the FASB issued an accounting standard for variable interest entities (“VIEs”) which changes the approach to determining the primary beneficiary of a VIE and requires companies to assess more frequently whether they must consolidate VIEs.  Under the new accounting standard, an enterprise has a controlling financial interest when it has: a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.  The new accounting standard also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining

 

11

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 2—Significant Accounting Policies (continued)

 

whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance.  The new accounting standard also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities.  The new accounting standard is effective for interim and annual periods beginning after November 15, 2009.  Earlier application is prohibited.  The Company is currently evaluating the impact that the adoption of the new accounting standard will have on its consolidated financial statements.

 

Note 3—Property and Equipment

 

Property and equipment, net, is comprised of the following:

 

		As of
		September 30, 2009			December 31, 2008
		(in thousands)
Computer Hardware		$	917		$	921
Computer Software		191			191
Furniture and Fixtures		1,161			1,161
Office Equipment		243			243
Leasehold Improvements		2,145			2,145
Total		4,657			4,661
Less: Accumulated Depreciation and Amortization		(2,265		)	(1,913		)
Total		$	2,392		$	2,748

 

Depreciation is included in general and administrative expenses and totaled $0.1 million for each of the three months ended September 30, 2009 and 2008.  Such expenses totaled $0.4 million for each of the nine months ended September 30, 2009 and 2008.

 

Note 4—Related Party Transactions

 

For the three and nine months ended September 30, 2009, the Company earned $1.1 million and $2.7 million, respectively, in investment advisory fees from unconsolidated entities for which it acts as the investment manager.  For the three and nine months ended September 30, 2008, such advisory fees totaled $1.6 million and $5.3 million, respectively.

 

At September 30, 2009 and December 31, 2008, the Company had advanced $0.1 million to an international investment company for organization and start-up costs, which are included in receivable from related parties on the consolidated statements of financial condition. The Company is the sponsor and investment manager of this entity.

 

At September 30, 2009, and December 31, 2008, loans to employees included in receivables from related parties were each $0.1 million.  These loans are in the form of forgivable promissory notes which are amortized through compensation expense pursuant to their terms.

 

Certain qualified employees of the Company have the ability to open individual accounts, or invest in certain of the Company’s consolidated investment partnerships, without being assessed advisory fees.  Investments by employees in individual accounts are permitted only at the discretion of the Executive Committee of the Company, but are generally not subject to the same minimum investment levels that are required of outside investors.

 

During the quarter ended September 30, 2008, an unaffiliated shareholder who held more than 10% of the Company’s outstanding shares sold shares in transactions deemed to be short-swing sales.  Under Section 16(b) of the Securities Exchange Act of 1934, the shareholder was required to disgorge to the Company the $0.2 million in profits realized from these stock sales.  The Company recognized these proceeds as a capital contribution and reflected a corresponding increase to additional paid-in capital in its consolidated statements of changes in equity.  Proceeds from these transactions did not affect the Company’s consolidated statements of operations.

 

As discussed in Note 9, Debt, on October 28, 2008, the operating company issued an aggregate of $16.0 million principal amount of Senior Subordinated Notes to entities established by Richard S. Pzena, the Company’s Chief Executive Officer, for the benefit of certain of his family members, to an entity controlled by a Company director, and to a former employee.

 

12

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 5—Commitments and Contingencies

 

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants.  In certain cases, the Company may have recourse against third parties with respect to these indemnities.  The Company maintains insurance policies that may provide coverage against certain claims under these indemnities.  The Guarantees Topic of the FASB ASC provides accounting and disclosure requirements for certain guarantees.  The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote.  Utilizing the methodology in the Guarantees Topic of the FASB ASC, the Company’s estimate of the value of such guarantees is de minimis, and, therefore, an accrual has not been made in the consolidated financial statements.

 

In the normal course of business, the Company may be subject to various legal and administrative proceedings.  On November 21, 2007 and January 16, 2008, respectively, substantively identical putative class action lawsuits were commenced in the United States District Court for the Southern District of New York against the Company and Richard S. Pzena, the Company’s chief executive officer, seeking remedies under Section 11 of the Securities Act of 1933, as amended.  The Court consolidated the lawsuits and appointed co-lead plaintiffs, who filed a consolidated amended complaint.  The consolidated amended complaint named as defendants the Company, Richard S. Pzena, and two of the underwriters of the Company’s initial public offering, Goldman Sachs & Co., Inc. and UBS Securities LLC.  Plaintiffs sought to represent a class of all persons who purchased or otherwise acquired Class A common stock issued pursuant or traceable to the Company’s initial public offering.  The consolidated amended complaint alleged that the registration statement and prospectus relating to the initial public offering of the Company’s Class A common stock contained material misstatements and omissions and wrongfully failed to disclose net redemptions in the John Hancock Classic Value Fund for which the Company acts as sub-investment advisor.  The consolidated amended complaint sought damages in an unspecified amount including rescission or rescissory damages. The Court granted the Company’s and the other defendants’ motions to dismiss the consolidated amended complaint, and on September 4, 2008, entered a Judgment in favor of defendants.  Plaintiffs appealed the Court’s judgment to the United States Court of Appeals for the Second Circuit, which, on August 13, 2009, affirmed the judgment of the United States District Court for the Southern District of New York dismissing the putative class action lawsuits.  Plaintiffs did not seek rehearing of the Court of Appeals’ decision and, to date, have not petitioned the Supreme Court of the United States for a writ of certiorari.  The Company believes that the allegations and claims are without merit and will continue to contest these claims vigorously.

 

The Company leases office space under two non-cancelable operating lease agreements which expire on October 31, 2015.  The Company reflects lease expense on a straight-line basis over the lease term in general and administrative expenses.  Lease expenses totaled $0.5 million for each of the three months ended September 30, 2009 and 2008.  Such expenses totaled $1.6 million and $1.5 million for the nine months ended September 30, 2009 and 2008, respectively.

 

After terminating the Credit Agreement and related Revolving Credit Facility in September 2009, the Company deposited approximately $1.6 million with its landlord as security in case of default or failure to comply with lease requirements.  This security deposit is included in prepaid expenses and other assets on the consolidated statements of financial condition.

 

Note 6—Retirement Plan

 

Prior to 2009, the Company maintained a defined contribution pension plan which covered substantially all members and employees.  The Company made contributions to the plan at the discretion of management.  Under the terms of the plan, all such contributions vested immediately.  Company contributions for the three and nine months ended September 30, 2008 were $0.4 million and $1.4 million, respectively.  These expenses are included in compensation and benefits expense in the consolidated statements of operations.

 

Note 7—Compensation and Benefits

 

For the three months ended September 30, 2009 and 2008, compensation and benefits expense to employees and members is comprised of the following:

 

		For the Three Months Ended September 30,
		2009			2008
		(in thousands)
Cash Compensation and Other Benefits		$	5,977		$	7,888
Other Non-Cash Compensation		255			272
Total Compensation and Benefits Expense		$	6,232		$	8,160

 

13

Table of Contents

 

Pzena Investment Management, Inc.

Unaudited Notes to the Consolidated Financial Statements (Continued)

 

Note 7—Compensation and Benefits (continued)

 

For the nine months ended September 30, 2009 and 2008, compensation and benefits expense to employees and members is comprised of the following:

 

		For the Nine Months Ended September 30,
		2009			2008
		(in thousands)
Cash Compensation and Other Benefits		$	17,439		$	24,868
Other Non-Cash Compensation		816			905
Total Compensation and Benefits Expense		$	18,255		$	25,773

 

For the three and nine months ended September 30, 2009, the operating company granted no options to purchase capital units pursuant to the Pzena Investment Management, LLC 2006 Equity Incentive Plan (the “Plan”).  Similarly, no such grants occurred during the three months ended September 30, 2008.  For the nine months ended September 30, 2008, the operating company granted 446,000 options to purchase capital units. The options granted in 2008 had varying vesting schedules and were issued at strike prices equal to the assessed fair market value per unit at the time of award issuance.  The Company determined that the total grant-date fair value of the options awarded in 2008 was approximately $1.2 million, using the Black-Scholes option pricing model.  For the three and nine months ended September 30, 2009 and 2008, the Company recognized approximately $0.1 million and $0.2 million, respectively, in compensation and benefits expense associated with the amortization of the awards.

 

On January 1, 2009 and 2008, the operating company granted 30,000 and 13,000, respectively, restricted Class B units to certain members pursuant to the Plan.  These unit grants each vest ratably over four-year periods commencing January 1, 2009 and 2008, respectively.  The amortization of these awards was less than $0.1 million for each of the three and nine months ended September 30, 2009 and 2008.

 

Pursuant to the operating company’s Bonus Plan, which became effective January 1, 2007, eligible employees whose cash compensation is in excess of certain thresholds have a portion of that excess mandatorily deferred.  Amounts deferred may be credited to an investment account, take the form of phantom Class B units, or be invested in money market funds at the employee’s discretion, and vest ratably over four years.  On January 1, 2008, the operating company issued 86,458 phantom Class B units as part of its Bonus Plan.  In December 2008, participants in the Company’s deferred compensation program converted a portion of their holdings in investment accounts into an aggregate of 89,826 phantom Class B units.  No such phantom units were granted for the three and nine months ended September 30, 2009.  All outstanding phantom units vest ratably over a four-year period that commenced January 1, 2008.  At September 30, 2009 and December 31, 2008, the liability associated with deferred compensation investment accounts was approximately $0.3 million, and has been included as a component of other liabilities on the consolidated statements of financial condition.  For the three and nine months ended September 30, 2009, the Company recognized approximately $0.3 million and $0.6 million, respectively, in compensation and benefits expense associated with the amortization of all deferred compensation awards.  For the three and nine months ended September 30, 2008, the Company recognized approximately $0.2 million and $0.7 million, respectively, in compensation and benefits expense associated with the amortization of all deferred compensation awards.

 

Note 8—Short Term Borrowings

 

Simultaneously with the Credit Agreement described below, on July 23, 2007, the operating company obtained a $20.0 million revolving credit facility, expiring on July 23, 2010, in order to finance its short term working capital needs.  This facility carried a commitment fee of 0.2% on any unused amounts, and the operating company’s approximately $1.8 million letter of credit

 

14