VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 by $14.8 million (28%) compared to the prior year, driven primarily by a 16% increase in average fee-earning assets under management and a shift in product mix toward higher-fee equity products.
• Profitability Turnaround: The Company reported a net income of $1.5 million for the six months ended June 30, 2010, a significant improvement from a net loss of $8.0 million in the same period in 2009. Operating income improved by $9.2 million.
• Asset Flows: Total AUM increased by $2.7 billion year-over-year. While market depreciation negatively impacted assets in the current quarter, positive net flows of $575.3 million over the six-month period offset declines in money market assets.
• Expense Management: Operating expenses increased by $5.6 million, largely due to higher variable compensation tied to improved sales and profitability. However, intangible asset amortization decreased by $0.9 million as certain assets became fully amortized.
• Cash Flow: Operating cash flow improved by $26.8 million year-over-year, turning from a significant use of cash to a provider of cash, aided by lower annual incentive payments in the first quarter of 2010.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the financial improvement to market appreciation, positive net flows, and a favorable shift in product mix. The Company notes that market volatility remains a concern, which could impact investor confidence and asset flows.

Subsequent Events & Capital Structure:

• Credit Facility Amendment: On August 2, 2010, the Company amended its Credit Facility, extending the maturity to September 30, 2013, increasing borrowing capacity to $30.0 million, and reducing the minimum asset coverage requirement to 1.25.
• Preferred Stock Conversion: On August 2, 2010, the Company exercised its call option to redeem approximately $9.8 million of Series B Convertible Preferred Stock. Harris Bankcorp elected to convert these shares into 378,446 shares of common stock effective August 7, 2010.

Risks and Contingencies:

• Market Risk: Revenue is directly tied to the market value of AUM; declines in securities prices reduce revenue and may trigger asset outflows.
• Liquidity: Future cash needs depend on operating performance and AUM levels. The Company must maintain specific financial covenants under its Credit Facility, including minimum net worth and AUM thresholds.
• Legal: The Company is subject to ongoing litigation and regulatory examinations, though management does not currently expect a material adverse effect.

Investor Verification Checklist

• Preferred Stock Conversion: Verify the impact of the August 2010 conversion of Series B Preferred Stock on common share count and dilution.
• Credit Facility Covenants: Confirm continued compliance with the new minimum AUM ($15.0 billion through March 2012, $18.0 billion thereafter) and net worth covenants.
• Asset Flows vs. Market Performance: Monitor the sustainability of positive net flows given the volatility in equity and fixed income markets.
• Compensation Costs: Assess the variability of employment expenses, which are heavily weighted toward performance-based incentives.
• Intangible Assets: Review the amortization schedule and potential impairment risks for the $52.4 million in intangible assets.