VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Virtus operates in the investment management industry, providing services to individual and institutional clients through open-end mutual funds, closed-end funds, separately managed accounts, and institutional accounts. Harris Bankcorp, Inc. (a subsidiary of the Bank of Montreal) owns 100% of the Company's Series B Convertible Preferred Stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 17% ($5.2 million) for the three months and 24% ($20.0 million) for the nine months ended September 30, 2010, compared to the prior year periods. This was driven by a 10% and 14% increase in average fee-earning AUM, respectively.
• Profitability Turnaround: The Company reported a net income of $3.7 million for the quarter, a significant improvement from a net income of $0.1 million in the same period in 2009. For the nine-month period, the Company turned a net loss of $7.9 million in 2009 into a net income of $5.2 million in 2010.
• Operating Expenses: Total operating expenses increased by 5% ($1.7 million) for the quarter and 8% ($7.3 million) for the nine months. Employment expenses rose due to higher variable compensation linked to improved sales and profitability. However, intangible asset amortization decreased by 39% ($0.7 million) for the quarter as certain institutional contracts became fully amortized.
• Assets Under Management: Total AUM increased to $27.1 billion from $24.6 billion at September 30, 2009. This growth was primarily due to market appreciation and positive net flows, offset by a decline in money market assets as investors shifted away from low-yield products.

Guidance, Outlook, and Risks

• Market Environment: Management notes continued uncertainty in equity and debt markets, high unemployment, and global fiscal problems. While markets have rebounded from 2009 lows, volatility remains a risk to AUM and fee revenues.
• Debt Facility Amendment: On August 2, 2010, the Company amended its Credit Facility, extending maturity to September 2013, increasing borrowing capacity to $30.0 million, and reducing the minimum asset coverage requirement to 1.25. The Company was in compliance with all financial covenants as of September 30, 2010.
• Preferred Stock Conversion: In August 2010, the Company redeemed 9,783 shares of Series B Convertible Preferred Stock, which were converted into 378,446 shares of common stock. This reduced the annual dividend payment requirement by $0.8 million.
• Share Repurchase Program: On October 14, 2010, the Board authorized a program to repurchase up to 350,000 shares of common stock to return capital to shareholders and offset equity-based plan issuances.
• Risks: Key risks include adverse market developments, asset outflows, inability to attract/retain key personnel, and the potential impairment of goodwill or intangible assets.

Investor Verification Checklist

• AUM Composition: Verify the shift in asset mix, specifically the decline in money market assets (from 17% to 10% of total AUM) and its impact on fee rates.
• Revenue Recognition Changes: Confirm the impact of the new fund administration agreement effective January 1, 2010, which removed third-party service provider fees from both revenue and expense lines.
• Debt Covenants: Review the specific financial covenants of the amended Credit Facility, particularly the minimum consolidated net worth ($65.0 million) and minimum AUM ($15.0 billion through March 2012) requirements.
• Preferred Stock Obligations: Monitor the remaining Series B Convertible Preferred Stock balance ($35.9 million liquidation value) and associated dividend obligations.
• Intangible Assets: Assess the remaining amortization schedule for definite-lived intangible assets ($21.8 million net) and the potential for future impairment charges.