VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC. (Virtus)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Virtus is a multi-manager investment management firm providing products to individuals and institutions through open-end mutual funds, closed-end funds, separately managed accounts, and institutional mandates. The company operates as a standalone public entity following a spin-off from The Phoenix Companies, Inc. (PNX) on December 31, 2008. Post-spin-off, Harris Bankcorp (a subsidiary of Bank of Montreal) owns 100% of the Series B Convertible Preferred Stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 34% to $117.2 million in 2009 compared to $178.3 million in 2008. This was primarily driven by the exclusion of Goodwin Capital Advisers (spun off in late 2008) and lower average AUM due to market declines in late 2008/early 2009.
• Profitability Improvement: Operating loss narrowed significantly from $(581.8) million in 2008 to $(6.6) million in 2009. The 2008 loss included a non-cash goodwill and intangible asset impairment charge of $559.3 million, which did not recur in 2009.
• AUM Growth: Total AUM increased to $25.4 billion in 2009 from $22.6 billion in 2008. The $2.8 billion increase was driven by $3.1 billion in market appreciation and $0.2 billion in positive net flows, contrasting with the $8.3 billion net outflows in 2008.
• Debt Restructuring: In September 2009, the company entered a new $30 million senior secured revolving credit facility, repaying previous intercompany debt. Outstanding debt was $15.0 million at year-end.

Guidance, Outlook, and Risks

Management Commentary: Management notes that while markets rebounded in 2009 (S&P 500 up ~23%), volatility remains a concern. The company has successfully transitioned to a standalone entity, establishing its own infrastructure, insurance, and service providers previously handled by PNX.

Risks and Contingencies:

• Market Volatility: Continued volatility in equity and debt markets could lead to decreased inflows and increased redemptions, directly impacting fee revenues.
• Debt Covenants: The company must maintain specific financial covenants under its Credit Facility, including a minimum consolidated net worth of $55 million and minimum AUM of $15.0 billion (excluding money market funds). The company was in compliance as of December 31, 2009.
• Intangible Asset Impairment: While no impairment occurred in 2009, significant deterioration in markets or revenue could trigger future impairment charges on goodwill ($4.8 million) and intangible assets ($54.8 million).
• Series B Preferred Stock: Harris Bankcorp holds 100% of Series B Convertible Preferred Stock ($45.0 million liquidation value), which carries an 8.0% cumulative dividend and specific voting rights that could restrict future equity financing or M&A activity.

Key Facts for Investor Verification

• Standalone Viability: Verify the company's ability to sustain profitability without the historical cost allocations and revenue streams from PNX and Goodwin.
• Credit Facility Compliance: Monitor adherence to the minimum AUM ($15.0 billion) and net worth covenants, as failure could accelerate debt repayment.
• Preferred Stock Obligations: Confirm the impact of the 8.0% cumulative dividend on Series B Preferred Stock ($0.9 million per quarter) on cash flow and common stock dividend eligibility.
• Asset Flows: Track net flows in 2010 to ensure the positive trend of 2009 ($0.2 billion) continues despite potential market volatility.
• Valuation Allowance: Note the $108.8 million valuation allowance on deferred tax assets, indicating management does not expect to realize these tax benefits in the near term.