Business Context and Reporting Period
Company: Virtus Investment Partners, Inc. (Virtus)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Virtus is a multi-manager asset management firm providing investment products to individuals and institutions. The reporting period is defined by a major corporate event: the spin-off from its former parent, The Phoenix Companies, Inc. (PNX), which was completed on December 31, 2008. Following the spin-off, Virtus became a standalone public company, and PNX retained no ownership interest. The company operates through affiliated managers (e.g., Duff & Phelps, Zweig Advisors) and unaffiliated sub-advisors, offering open-end mutual funds, closed-end funds, separately managed accounts, and institutional mandates.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $178.3 million | $226.2 million |
| Net Loss | $(529.1) million | $(14.2) million |
| Operating Loss | $(581.8) million | $5.3 million (Income) |
| Goodwill & Intangible Impairments | $559.3 million | $0.3 million |
| Assets Under Management (AUM) | $22.6 billion | $40.4 billion (excl. Goodwin) |
| Cash and Cash Equivalents | $51.1 million | $36.8 million |
| Total Debt (Notes Payable) | $20.0 million | $42.0 million |
| Working Capital | $33.2 million | $(3.2) million |
| EBITDA (Non-GAAP) | $(2.4) million | $38.1 million |
Material Changes vs. Prior Period
- Significant Impairment Charges: The 2008 net loss was primarily driven by $559.3 million in non-cash pre-tax impairment charges ($449.0 million for goodwill and $110.3 million for intangible assets). These charges resulted from severe declines in equity markets, reduced credit liquidity, and lower valuation multiples for asset managers.
- Revenue Decline: Total revenues decreased by $47.9 million (21%) compared to 2007. This was caused by a $12.8 billion decrease in average AUM due to market depreciation and net outflows.
- AUM Reduction: Total AUM dropped from $40.4 billion in 2007 to $22.6 billion in 2008. The decline was driven by $7.4 billion in market depreciation and $8.3 billion in net outflows. Notably, $3.7 billion of outflows related to the termination of a single large institutional client relationship.
- Spin-Off Impact: The company separated from PNX, distributing 100% of its common stock to PNX shareholders. Goodwin Capital Advisors, Inc., a subsidiary, was distributed back to PNX and is no longer part of Virtus's operations.
- Debt Restructuring: In connection with the spin-off, Virtus refinanced its debt with Phoenix Life Insurance Company. The outstanding balance was reduced to $20.0 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates that the difficult economic environment and capital market volatility will continue to impact the business in 2009. Due to the significant decline in AUM in the latter half of 2008, the company expects a material decrease in revenue for 2009 absent significant market improvement. The company is actively seeking to refinance its $20.0 million secured loan with Phoenix Life to retire the debt and secure future liquidity.
Risks and Contingencies
- Internal Control Weaknesses: The company identified material weaknesses in internal controls over financial reporting related to finance resources, non-standard corporate transactions, and income tax accounting processes due to the transition to a standalone entity.
- Debt Covenants: Virtus initially failed to meet a minimum net worth covenant of $135.0 million due to the impairment charges. On March 31, 2009, the loan agreement was amended to reduce the minimum net worth requirement to $50.0 million, effective December 31, 2008.
- Liquidity: While the company believes current cash and operating cash flows are sufficient for the next 12 months, there is no assurance it can obtain additional financing on satisfactory terms given the credit market environment.
- Series B Preferred Stock: Harris Bankcorp acquired $45.0 million of Series B Convertible Preferred Stock, representing approximately 23% of fully diluted common equity. This stock carries an 8.0% cumulative dividend and specific voting rights.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the status of the amended loan agreement with Phoenix Life and ensure the company remains in compliance with the reduced net worth covenant and other financial ratios.
- Refinancing Progress: Monitor the company's ability to secure new financing to replace the $20.0 million Phoenix Life loan, which matures in December 2010.
- AUM Trends: Track net flows and market performance to assess if the revenue decline stabilizes, as fee revenue is directly tied to AUM levels.
- Internal Controls Remediation: Review subsequent filings (10-Q) for updates on the remediation of identified material weaknesses in internal controls over financial reporting.
- Goodwill Valuation: Assess the risk of further impairment charges if market conditions or AUM levels deteriorate further, given the remaining goodwill balance of $4.8 million.