10-Q


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, 2015
OR
¨
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: 001-10994
 
 
 
 
 
 

 
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 

 
 
 
Delaware
 
95-4191764
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)

 
 
 
 
 

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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
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
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
 ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
The number of shares outstanding of the registrant’s common stock was 8,667,666 as of October 22, 2015.
 
 
 
 
 

Table of Contents

VIRTUS INVESTMENT PARTNERS, INC.
INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
“We,” “us,” “our,” the “Company” and “Virtus” as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.


Table of Contents

PART I – FINANCIAL INFORMATION
 
Item 1.    Financial Statements


1
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 30,
2015
 
December 31,
2014
($ in thousands, except share data)
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
126,470

 
$
202,847

Investments
55,225

 
63,448

Accounts receivable, net
40,107

 
49,721

Assets of consolidated sponsored investment products
 
 
 
Cash of consolidated sponsored investment products
2,257

 
457

Cash pledged or on deposit of consolidated sponsored investment products
14,475

 
8,230

Investments of consolidated sponsored investment products
311,429

 
236,652

Other assets of consolidated sponsored investment products
10,494

 
6,960

Assets of consolidated investment product
 
 
 
Cash equivalents of consolidated investment product
120

 
—

Investments and other assets of consolidated investment product
131,882

 
—

Furniture, equipment, and leasehold improvements, net
9,042

 
7,193

Intangible assets, net
41,672

 
41,783

Goodwill
6,649

 
5,260

Deferred taxes, net
59,700

 
60,162

Other assets
17,241

 
16,060

Total assets
$
826,763

 
$
698,773

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accrued compensation and benefits
$
38,206

 
$
54,815

Accounts payable and accrued liabilities
39,739

 
31,627

Dividends payable
4,258

 
4,270

Other liabilities
12,805

 
9,082

Liabilities of consolidated sponsored investment products
29,849

 
12,556

Liabilities of consolidated investment product
 
 
 
Debt of consolidated investment product
9,140

 
—

Securities purchased payable of consolidated investment product
103,541

 
—

Total liabilities
237,538

 
112,350

Commitments and Contingencies (Note 12)

 

Redeemable noncontrolling interests
49,895

 
23,071

Equity:
 
 
 
Equity attributable to stockholders:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 9,611,575 shares issued and 8,667,666 shares outstanding at September 30, 2015 and 9,551,274 shares issued and 8,975,833 shares outstanding at December 31, 2014
96

 
96

Additional paid-in capital
1,142,182

 
1,148,908

Accumulated deficit
(479,051
)
 
(507,521
)
Accumulated other comprehensive loss
(902
)
 
(242
)
Treasury stock, at cost, 943,909 and 575,441 shares at September 30, 2015 and December 31, 2014, respectively
(122,699
)
 
(77,699
)
Total equity attributable to stockholders
539,626

 
563,542

Noncontrolling interests
(296
)
 
(190
)
Total equity
539,330

 
563,352

Total liabilities and equity
$
826,763

 
$
698,773

The accompanying notes are an integral part of these condensed consolidated financial statements.

2
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
($ in thousands, except per share data)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Investment management fees
$
64,891

 
$
78,960

 
$
204,254

 
$
225,289

Distribution and service fees
15,587

 
23,671

 
52,820

 
70,049

Administration and transfer agent fees
11,614

 
14,804

 
37,233

 
41,819

Other income and fees
283

 
406

 
1,555

 
1,304

Total revenues
92,375

 
117,841

 
295,862

 
338,461

Operating Expenses
 
 
 
 
 
 
 
Employment expenses
33,504

 
35,246

 
102,719

 
105,756

Distribution and other asset-based expenses
21,717

 
29,180

 
69,900

 
96,139

Other operating expenses
11,165

 
11,288

 
51,403

 
34,952

Other operating expenses of consolidated sponsored investment products
1,120

 
1,246

 
2,895

 
2,374

Restructuring and severance
—

 
294

 
—

 
294

Depreciation and other amortization
910

 
713

 
2,562

 
2,040

Amortization expense
837

 
947

 
2,511

 
2,851

Total operating expenses
69,253

 
78,914

 
231,990

 
244,406

Operating Income
23,122

 
38,927

 
63,872

 
94,055

Other Income (Expense)
 
 
 
 
 
 
 
Realized and unrealized (loss) gain on investments, net
(2,082
)
 
(1,039
)
 
(1,194
)
 
1,712

Realized and unrealized (loss) gain on investments of consolidated sponsored investment products, net
(17,619
)
 
(5,330
)
 
(18,271
)
 
1,150

Realized and unrealized loss on investments of consolidated investment product, net
(764
)
 
—

 
(764
)
 
—

Other income of consolidated investment product, net
43

 
—

 
43

 
—

Other income, net
141

 
233

 
823

 
573

Total other (expense) income, net
(20,281
)
 
(6,136
)
 
(19,363
)
 
3,435

Interest Income (Expense)
 
 
 
 
 
 
 
Interest expense
(138
)
 
(149
)
 
(382
)
 
(412
)
Interest and dividend income
324

 
326

 
906

 
1,053

Interest and dividend income of investments of consolidated sponsored investment products
2,898

 
2,222

 
8,320

 
4,734

Interest income of investments of consolidated investment product
41

 
—

 
41

 
—

Total interest income, net
3,125

 
2,399

 
8,885

 
5,375

Income Before Income Taxes
5,966

 
35,190

 
53,394

 
102,865

Income tax expense (benefit)
9,669

 
(1,805
)
 
28,360

 
24,311

Net (Loss) Income
(3,703
)
 
36,995

 
25,034

 
78,554

Noncontrolling interests
3,054

 
345

 
3,436

 
267

Net (Loss) Income Attributable to Common Stockholders
$
(649
)
 
$
37,340

 
$
28,470

 
$
78,821

(Loss) Earnings per Share—Basic
$
(0.07
)
 
$
4.10

 
$
3.21

 
$
8.65

(Loss) Earnings per Share—Diluted
$
(0.07
)
 
$
4.02

 
$
3.15

 
$
8.46

Cash Dividends Declared per Share
$
0.45

 
$
0.45

 
$
1.35

 
$
0.90

Weighted Average Shares Outstanding—Basic (in thousands)
8,775

 
9,096

 
8,876

 
9,115

Weighted Average Shares Outstanding—Diluted (in thousands)
8,775

 
9,279

 
9,039

 
9,322

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
($ in thousands)
 
 
 
 
 
 
 
Net (Loss) Income
$
(3,703
)
 
$
36,995

 
$
25,034

 
$
78,554

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of ($28) and $56 for the three months ended September 30, 2015 and 2014, respectively and $167 and $49 for the nine months ended September 30, 2015 and 2014, respectively
49

 
(93
)
 
(271
)
 
(80
)
Unrealized (loss) gain on available-for-sale securities, net of tax of ($35) and $60 for the three months ended September 30, 2015 and 2014, respectively and $26 and $(55) for the nine months ended September 30, 2015 and 2014, respectively
(290
)
 
(95
)
 
(389
)
 
90

Other comprehensive (loss) income
(241
)
 
(188
)
 
(660
)
 
10

Comprehensive (loss) income
(3,944
)
 
36,807

 
24,374

 
78,564

Comprehensive loss attributable to noncontrolling interests
3,054

 
345

 
3,436

 
267

Comprehensive (Loss) Income Attributable to Common Stockholders
$
(890
)
 
$
37,152

 
$
27,810

 
$
78,831

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents



Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
 
2015
 
2014
($ in thousands)
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
25,034

 
$
78,554

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense, intangible asset and other amortization
5,241

 
5,055

Stock-based compensation
9,166

 
7,021

Excess tax benefits from stock-based compensation
(1,515
)
 
(25,089
)
Amortization of deferred commissions
6,903

 
14,032

Payments of deferred commissions
(2,585
)
 
(11,761
)
Equity in earnings of equity method investments, net
(804
)
 
(295
)
Realized and unrealized losses (gains) on trading securities, net
1,490

 
(1,712
)
Realized and unrealized losses (gains) on investments of consolidated sponsored investment products, net
21,611

 
(1,247
)
Realized and unrealized losses on investments of consolidated investment product, net
764

 
—

Sales of trading securities, net
9,945

 
24,996

Purchases of investments by consolidated sponsored investment products, net
(96,222
)
 
(184,584
)
Sales of securities sold short by consolidated sponsored investment products, net
3,534

 
10,461

Purchases of investments by consolidated investment product, net
(29,085
)
 
—

Deferred taxes, net
655

 
4,826

Changes in operating assets and liabilities:
 
 
 
Cash pledged or on deposit of consolidated sponsored investment products
(6,912
)
 
(12,492
)
Accounts receivable, net and other assets
4,101

 
(17,776
)
Other assets of consolidated sponsored investment products
(1,649
)
 
(1,502
)
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
(8,102
)
 
8,424

Liabilities of consolidated sponsored investment products
1,499

 
801

Liabilities and other assets of consolidated investment product, net
(20
)
 
—

Net cash used in operating activities
(56,951
)
 
(102,288
)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(3,723
)
 
(1,814
)
Change in cash and cash equivalents of consolidated sponsored investment products due to deconsolidation
—

 
(366
)
Asset acquisitions and purchases of other investments
(1,617
)
 
(5,000
)
Cash acquired in business combination
89

 
—

Purchases of available-for-sale securities
(168
)
 
(260
)
Net cash used in investing activities
(5,419
)
 
(7,440
)
Cash Flows from Financing Activities:
 
 
 
Borrowings of proceeds from short sales by consolidated sponsored investment products
831

 
1,200

Payments on borrowings by consolidated sponsored investment products
(164
)
 
—

Borrowings of debt of consolidated investment product
9,140

 
—

Dividends paid
(12,146
)
 
(4,104
)
Repurchases of common shares
(45,000
)
 
(26,257
)
Proceeds from exercise of stock options
70

 
660

Taxes paid related to net share settlement of restricted stock units
(5,080
)
 
(9,512
)
Excess tax benefits from stock-based compensation
1,515

 
25,089

Contributions of noncontrolling interests, net
38,747

 
24,871

Net cash (used in) provided by financing activities
(12,087
)
 
11,947

Net decrease in cash and cash equivalents
(74,457
)
 
(97,781
)
Cash and cash equivalents, beginning of period
203,304

 
271,545

Cash and Cash Equivalents, End of Period
$
128,847

 
$
173,764

Non-Cash Investing Activities:
 
 
 
Change in accrual for capital expenditures
$
(313
)
 
$
97

Investment in acquired business
$
4,800

 
$
—

Non-Cash Financing Activities:
 
 
 
Decrease to noncontrolling interest due to consolidation (deconsolidation) of consolidated sponsored investment products, net
$
(8,640
)
 
$
(44,613
)
Dividends payable
$
4,258

 
$
4,229

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Attributed To
Stockholders
 
Non-
controlling
Interests
 
Total
Equity
 
Redeemable
Non-
controlling
Interests
($ in thousands except per share data)
Shares
 
Par Value
 
Shares
 
Amount
 
Balances at December 31, 2013
9,105,521

 
$
95

 
$
1,135,644

 
$
(605,221
)
 
$
(150
)
 
350,000

 
$
(37,438
)
 
$
492,930

 
$
(62
)
 
$
492,868

 
$
42,186

Net income (loss)
—

 
—

 
—

 
78,821

 
—

 
—

 
—

 
78,821

 
(84
)
 
78,737

 
(183
)
Net unrealized gain on securities available-for-sale
—

 
—

 
—

 
—

 
90

 
—

 
—

 
90

 
—

 
90

 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
(80
)
 
—

 
—

 
(80
)
 
—

 
(80
)
 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(19,738
)
Cash dividends declared ($0.90 per common share)
—

 
—

 
(8,333
)
 
—

 
—

 
—

 
—

 
(8,333
)
 
 
 
(8,333
)
 
—

Repurchases of common shares
(136,874
)
 
—

 
—

 
—

 
—

 
136,874

 
(26,257
)
 
(26,257
)
 
—

 
(26,257
)
 
—

Issuance of common shares related to employee stock transactions
90,731

 
—

 
1,224

 
—

 
—

 
—

 
—

 
1,224

 
—

 
1,224

 
—

Taxes paid on stock-based compensation
—

 
—

 
(9,512
)
 
—

 
—

 
—

 
—

 
(9,512
)
 
—

 
(9,512
)
 
—

Stock-based compensation
—

 
—

 
6,604

 
—

 
—

 
—

 
—

 
6,604

 
—

 
6,604

 
—

Excess tax benefits from stock-based compensation
—

 
—

 
25,089

 
—

 
—

 
—

 
—

 
25,089

 
—

 
25,089

 
—

Balances at September 30, 2014
9,059,378

 
$
95

 
$
1,150,716

 
$
(526,400
)
 
$
(140
)
 
486,874

 
$
(63,695
)
 
$
560,576

 
$
(146
)
 
$
560,430

 
$
22,265

Balances at December 31, 2014
8,975,833

 
$
96

 
$
1,148,908

 
$
(507,521
)
 
$
(242
)
 
575,441

 
$
(77,699
)
 
$
563,542

 
$
(190
)
 
$
563,352

 
$
23,071

Net income (loss)
—

 
—

 
—

 
28,470

 
—

 
—

 
—

 
28,470

 
(106
)
 
28,364

 
(3,330
)
Net unrealized loss on securities available-for-sale
—

 
—

 
—

 
—

 
(389
)
 
—

 
—

 
(389
)
 
—

 
(389
)
 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
(271
)
 
—

 
—

 
(271
)
 
—

 
(271
)
 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
30,154

Cash dividends declared ($1.35 per common share)
—

 
—

 
(12,136
)
 
—

 
—

 
—

 
—

 
(12,136
)
 
—

 
(12,136
)
 
—

Repurchases of common shares
(368,468
)
 
—

 
—

 
—

 
—

 
368,468

 
(45,000
)
 
(45,000
)
 
—

 
(45,000
)
 
—

Issuance of common shares related to employee stock transactions
60,301

 
—

 
796

 
—

 
—

 
—

 
—

 
796

 
—

 
796

 
—

Taxes paid on stock-based compensation
—

 
—

 
(5,080
)
 
—

 
—

 
—

 
—

 
(5,080
)
 
 
 
(5,080
)
 
—

Stock-based compensation
—

 
—

 
8,656

 
—

 
—

 
—

 
—

 
8,656

 
—

 
8,656

 
—

Excess tax benefits from stock-based compensation
—

 
—

 
1,038

 
—

 
—

 
—

 
—

 
1,038

 
—

 
1,038

 
—

Balances at September 30, 2015
8,667,666

 
$
96

 
$
1,142,182

 
$
(479,051
)
 
$
(902
)
 
943,909

 
$
(122,699
)
 
$
539,626

 
$
(296
)
 
$
539,330

 
$
49,895

The accompanying notes are an integral part of these condensed consolidated financial statements.

6
Table of Contents

Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. (the “Company,” “we,” “us,” “our” or “Virtus”), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to individuals and institutions throughout the United States of America. The Company’s retail investment management services are provided to individuals through products consisting of open-end mutual funds, closed-end funds, variable insurance funds, exchange traded funds (“ETFs”) and separately managed accounts. Institutional investment management services are provided primarily to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments and subadvisory accounts.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation.
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and sponsored investment products in which it has a controlling financial interest, referred to as consolidated sponsored investment products or consolidated investment product. The Company is generally considered to have a controlling financial interest when it owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the subsidiary. See Notes 13, 14 and 15 for additional information related to the consolidation of sponsored investment products and the investment product. Intercompany accounts and transactions have been eliminated.
The Company also evaluates any variable interest entities (“VIEs”) in which the Company has a variable interest for consolidation. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power to direct the activities that most significantly impact the entity’s performance; (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity; or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of the equity holders. If any entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in the 2014 Annual Report on Form 10-K.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU2015-3"), which changes the presentation of debt issuance costs in the balance sheet. The new guidance requires that debt issuance costs be presented as a deduction from the carrying amount of the related debt rather than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15 to amend ASU 2015-03 to address line-of-credit agreements. ASU 2015-15 allows entities to present debt issuance costs related to line-of-credit agreements as an asset and amortize deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any

7
Table of Contents

outstanding borrowings. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires retrospective application for each prior period presented. Early adoption is permitted for financial statements that have not been previously issued. This standard is not expected to have a material impact on the Company's financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its financial statements, as well as the available transition methods.
In August 2014, the FASB issued ASU No. 2014-13, Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity (“CFE”) (“ASU 2014-13”). This new guidance requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure the financial assets and the financial liabilities of a CFE when a CFE is initially consolidated. It permits entities to make an accounting policy election to apply this same measurement approach after initial consolidation or to apply other GAAP to account for the consolidated CFE’s financial assets and financial liabilities. It also prohibits all entities from electing to use the fair value option in ASC 825, Financial Instruments, to measure either the financial assets or financial liabilities of a consolidated CFE that is within the scope of this issue. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods therein. Early adoption is permitted using a modified retrospective transition approach as described in the pronouncement. The Company has not yet adopted ASU 2014-13 and is currently evaluating the impact ASU 2014-13 is expected to have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach. In July 2015, the FASB confirmed a deferral of the effective date by one year, with early adoption on the original effective date permitted. As deferred, ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company has not yet adopted ASU 2014-09 and is currently evaluating the impact ASU 2014-09 is expected to have on its consolidated financial statements.

3. Intangible Assets, Net
Intangible assets, net are summarized as follows:
 
 
September 30, 2015
 
December 31, 2014
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Investment contracts
$
158,747

 
$
158,747

Accumulated amortization
(151,891
)
 
(149,380
)
Definite-lived intangible assets, net
6,856

 
9,367

Indefinite-lived intangible assets
34,816

 
32,416

Total intangible assets, net
$
41,672

 
$
41,783



8
Table of Contents

Activity in intangible assets, net is as follows:
 
 
Nine Months Ended September 30,
 
2015
 
2014
($ in thousands)
 
 
 
Intangible assets, net
 
 
 
Balance, beginning of period
$
41,783

 
$
44,633

Additions
2,400

 
1,075

Amortization
(2,511
)
 
(2,998
)
Balance, end of period
$
41,672

 
$
42,710

4. Investments
Investments consist primarily of investments in our sponsored mutual funds. The Company’s investments, excluding the assets of consolidated sponsored investment products discussed in Note 13 and the assets of the consolidated investment product discussed in Note 14, at September 30, 2015 and December 31, 2014 were as follows:
 
September 30,
2015
 
December 31,
2014
($ in thousands)
 
 
 
Marketable securities
$
40,136

 
$
50,251

Equity method investments
9,194

 
7,209

Nonqualified retirement plan assets
4,970

 
5,063

Other investments
925

 
925

Total investments
$
55,225

 
$
63,448

Marketable Securities
The Company’s marketable securities consist of both trading (including securities held by a broker-dealer affiliate) and available-for-sale securities. The composition of the Company’s marketable securities is summarized as follows:
September 30, 2015
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
32,079

 
$
(1,829
)
 
$
288

 
$
30,538

Equity securities
7,236

 
(648
)
 
57

 
6,645

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,297

 
(344
)
 
—

 
2,953

Total marketable securities
$
42,612

 
$
(2,821
)
 
$
345

 
$
40,136


9
Table of Contents

December 31, 2014
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
39,079

 
$
(1,190
)
 
$
423

 
$
38,312

Equity securities
8,421

 
—

 
319

 
8,740

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,129

 
(163
)
 
233

 
3,199

Total marketable securities
$
50,629

 
$
(1,353
)
 
$
975

 
$
50,251


For the three and nine months ended September 30, 2015, the Company recognized a net realized loss of $0.5 million and a net realized gain of $0.4 million, respectively, on trading securities, and for the three and nine months ended September 30, 2014, the Company recognized a net realized gain of $1.7 million and $6.2 million, respectively.
5. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated sponsored investment products and the consolidated investment product discussed in Notes 13 and 14, respectively as of September 30, 2015 and December 31, 2014 by fair value hierarchy level were as follows:
September 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
80,950

 
$
—

 
$
—

 
$
80,950

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
30,538

 
—

 
—

 
30,538

Equity securities
6,645

 
—

 
—

 
6,645

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
2,953

 
—

 
—

 
2,953

Other investments:
 
 
 
 
 
 
 
Nonqualified retirement plan assets
4,970

 
—

 
—

 
4,970

Total assets measured at fair value
$
126,056

 
$
—

 
$
—

 
$
126,056


10
Table of Contents

December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
202,054

 
$
—

 
$
—

 
$
202,054

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
38,312

 
—

 
—

 
38,312

Equity securities
8,740

 
—

 
—

 
8,740

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,199

 
—

 
—

 
3,199

Other investments
 
 
 
 
 
 
 
Nonqualified retirement plan assets
5,063

 
—

 
—

 
5,063

Total assets measured at fair value
$
257,368

 
$
—

 
$
—

 
$
257,368

The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value.
Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Sponsored funds represent investments in open-end mutual funds, variable insurance funds and closed-end funds for which the Company acts as the investment manager. The fair value of open-end mutual funds and variable insurance funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds is determined based on the official closing price on the exchange they are traded on and are categorized as Level 1.
Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Nonqualified retirement plan assets represent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
Transfers into and out of levels are reflected when significant inputs used for the fair value measurement, including market inputs or performance attributes, become observable or unobservable or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a net asset value, or if the book value no longer represents fair value. There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.
6. Equity Transactions
During the nine months ended September 30, 2015 and 2014, the Company repurchased 368,468 and 136,874 common shares, respectively, at a weighted average price of $122.09 and $191.79 per share, respectively, plus transaction costs for a total cost of approximately $45.0 million and $26.3 million, respectively. The Company has repurchased a total of 943,909 shares of common stock at a weighted average price of $129.95 per share plus transaction costs for a total cost of $122.7 million under its share repurchase program. At September 30, 2015, there were 256,091 shares of common stock available to repurchase under the Company’s current share repurchase program.
The Board of Directors declared cash dividends of $0.45 per share in each of the first three quarters of 2015 and the second and third quarters of 2014. Total dividends declared were $12.1 million and $8.3 million for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, dividends payable of $4.3 million represented the third quarter dividend to be paid on November 13, 2015 to all shareholders of record on October 30, 2015.

11
Table of Contents

7. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2015 and 2014 were as follows:
 
 
Unrealized 
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2014
$
(107
)
 
$
(135
)
Unrealized net losses on securities available-for-sale, net of tax of $26
(389
)
 
—

Foreign currency translation adjustments, net of tax of $167
—

 
(271
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

Net current-period other comprehensive loss
(389
)
 
(271
)
Balance September 30, 2015
$
(496
)
 
$
(406
)
 
 
 
 
 
Unrealized
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2013
$
(231
)
 
$
81

Unrealized net gains on securities available-for-sale, net of tax of ($55)
90

 
—

Foreign currency translation adjustments, net of tax of $49
—

 
(80
)
Amounts reclassified from accumulated other comprehensive income
—

 
—

Net current-period other comprehensive income (loss)
90

 
(80
)
Balance September 30, 2014
$
(141
)
 
$
1


8. Stock-based Compensation
The Company has an Omnibus Incentive and Equity Plan (the “Plan”) under which officers, employees and directors may be granted equity-based awards, including restricted stock units (“RSUs”), stock options and unrestricted shares of common stock. At September 30, 2015, 306,275 shares of common stock remained available for issuance of the 1,800,000 shares that were reserved for issuance under the Plan. Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. Stock options generally cliff vest after three years and have a contractual life of ten years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant. The fair value of each RSU is estimated using the intrinsic value method, which is based on the fair market value price on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market condition are valued using a simulation valuation model. Shares that are issued upon exercise of stock options and vesting of RSUs are newly issued shares from the Plan and are not issued from treasury stock.
Restricted Stock Units
RSU activity for the nine months ended September 30, 2015 is summarized as follows:
 

12
Table of Contents

 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2014
179,936

 
$
143.25

Granted
116,295

 
$
134.46

Forfeited
(493
)
 
$
175.16

Settled
(87,410
)
 
$
102.00

Outstanding at September 30, 2015
208,328

 
$
155.57

For the nine months ended September 30, 2015 and 2014, a total of 37,488 and 50,952 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $5.1 million and $9.5 million for the nine months ended September 30, 2015 and 2014, respectively, in minimum employee tax withholding obligations related to RSUs withheld. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.
During the nine months ended September 30, 2015 and 2014, the Company granted 33,632 and 30,101 RSUs, respectively, each of which contains two performance based metrics in addition to a service condition. The two performance metrics are based on the Company’s growth in operating income, as adjusted, relative to peers, over a one-year period and total shareholder return (“TSR”) relative to peers over a three-year period. For the nine months ended September 30, 2015 and 2014, total stock-based compensation expense included $1.8 million and $0.9 million for these performance contingent RSUs, respectively.
The Company recognized total stock compensation expense of $2.7 million and $2.5 million, respectively, and $9.2 million and $7.0 million, respectively, for the three and nine months ended September 30, 2015 and 2014. As of September 30, 2015, unamortized stock-based compensation expense for unvested RSUs was $19.3 million, with a weighted-average remaining amortization period of 1.9 years.
Stock Options
Stock option activity for the nine months ended September 30, 2015 is summarized as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise Price
Outstanding at December 31, 2014
162,824

 
$
18.79

Granted
—

 
$
—

Exercised
(4,675
)
 
$
15.27

Forfeited
—

 
$
—

Outstanding at September 30, 2015
158,149

 
$
18.89


9. Earnings per Share
Basic earnings per share (“EPS”) excludes dilution for potential common stock issuances and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted EPS, the basic weighted-average number of shares is increased by the dilutive effect of RSUs and common stock options using the treasury stock method.

13
Table of Contents

The computation of basic and diluted EPS is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
($ in thousands, except per share amounts)
 
 
 
 
 
 
 
Net (Loss) Income
$
(3,703
)
 
$
36,995

 
$
25,034

 
$
78,554

Noncontrolling interests
3,054

 
345

 
3,436

 
267

Net (Loss) Income Attributable to Common Stockholders
$
(649
)
 
$
37,340

 
$
28,470

 
$
78,821

Shares (in thousands):

 

 

 

Basic: Weighted-average number of shares outstanding
8,775

 
9,096

 
8,876

 
9,115

Plus: Incremental shares from assumed conversion of dilutive instruments
—

 
183

 
163

 
207

Diluted: Weighted-average number of shares outstanding
8,775

 
9,279

 
9,039

 
9,322

(Loss) Earnings per Share—Basic
$
(0.07
)
 
$
4.10

 
$
3.21

 
$
8.65

(Loss) Earnings per Share—Diluted
$
(0.07
)
 
$
4.02

 
$
3.15

 
$
8.46

For the three and nine months ended September 30, 2015, there were 323,570 and 2,028 instruments, respectively, excluded from the above computations of weighted-average shares for diluted EPS, because the effect would be anti-dilutive. For each of the three and nine months ended September 30, 2014, there were zero instruments excluded from the above computation of weighted-average shares for diluted EPS.
10. Business Combination
On April 10, 2015, the Company made an investment of approximately $4.8 million for a majority ownership position in Virtus ETF Solutions (“VES”), formerly known as ETF Issuer Solutions. VES is a New York City-based company that operates a platform for listing, operating, and distributing exchange-traded funds. The transaction was accounted for under Accounting Standards Codification (“ASC”) 805 “Business Combinations.” Goodwill of $1.4 million and other intangible assets of $2.4 million were recorded as a result of this transaction. The impact of this transaction was not material to the Company’s condensed consolidated financial statements.
11. Income Taxes
In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 53.1% and 23.6% for the nine months ended September 30, 2015 and 2014, respectively. The year-over-year increase in the estimated effective tax rate was primarily due to changes in the valuation allowance related to the unrealized loss position on the Company’s marketable securities, as well as a tax benefit recognized during the period ended September 30, 2014 related to the settlement of an audit of the Company's 2011 federal corporate income tax return.

12. Commitments and Contingencies
Legal Matters
The Company is regularly involved in litigation and arbitration as well as examinations, inquiries and investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the

14
Table of Contents

Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.
The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Other than as described herein, based on information currently available, available insurance coverage and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
Regulatory Matter
As previously disclosed, in December 2014 the SEC announced a settlement with F-Squared Investments (“F-Squared”), an unaffiliated former subadviser, which settled charges that F-Squared had violated the federal securities laws as described in Investment Advisers Act Release No. 3988. The settlement related to F-Squared’s inaccurate performance information for the period of April 2001 through September 2008, including indices that certain Virtus mutual funds tracked beginning in September 2009 and January 2011. As part of the SEC’s non-public, confidential investigation of this matter, the SEC staff informed the Company that it was inquiring into whether the Company had violated securities laws or regulations with respect to F-Squared’s historical performance information. Although the Company has not received a Wells Notice in connection with the investigation, the Company has been in active discussions with the SEC staff and has reached an agreement in principle with the SEC staff to settle this matter. Under the terms of the proposed settlement, the Company would pay a total of $16.5 million, which is consistent with the loss contingency previously recorded and disclosed by the Company. This agreement in principle is subject to review and approval by the Commission.
As referenced above, pursuant to ASC 450 - Loss Contingencies, the Company had previously recorded a total pre-tax loss contingency of $16.5 million and a related potential income tax benefit of $5.5 million for a net impact of $11.0 million related to this matter; however, the Company cannot assure you that the Commission will approve the proposed settlement agreement, that any final settlement will not have different or additional material terms, that any associated loss will not exceed the aggregate loss contingency recorded or that a final resolution of this matter will be reached.
In re Virtus Investment Partners, Inc. Securities Litigation; formerly styled as Tom Cummins v. Virtus Investment Partners Inc. et al
On February 20, 2015, a putative class action complaint alleging violation of the federal securities laws was filed by an individual shareholder against the Company and certain of the Company’s current officers (the “defendants”) in the United States District Court for the Southern District of New York.   On April 21, 2015, three plaintiffs, including the original plaintiff, filed motions to be appointed lead plaintiff. On June 9, 2015, the court entered an order appointing Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, plaintiff filed a Consolidated Class Action Complaint (the “Consolidated Complaint”) amending the originally filed complaint. The Consolidated Complaint was purportedly filed on behalf of all purchasers of the Company’s common stock between January 25, 2013 and May 11, 2015 (the “Class Period”). The Consolidated Complaint alleges that during the Class Period, the defendants disseminated materially false and misleading statements and concealed material adverse facts relating to certain funds subadvised by F-Squared. The Consolidated Complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5. The plaintiff seeks to recover unspecified damages. The Company believes that the suit is without merit and intends to defend it vigorously. A motion to dismiss the Consolidated Complaint was filed on behalf of the Company and the other defendants on October 21, 2015. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.


15
Table of Contents

Mark Youngers v. Virtus Investment Partners, Inc. et al
On May 8, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed in the United States District Court for the Central District of California by an individual who alleges he is a former shareholder of one of the Virtus mutual funds formerly subadvised by F-Squared and formerly known as the AlphaSector Funds. The complaint purports to allege claims against the Company, certain of the Company’s officers and affiliates, and certain other parties (the “defendants”). The complaint was purportedly filed on behalf of purchasers of the AlphaSector Funds between May 8, 2010 and December 22, 2014, inclusive (the “Class Period”). The complaint alleges that during the Class Period the defendants disseminated materially false and misleading statements and concealed or omitted material facts necessary to make the statements made not misleading. On June 7, 2015, a group of three individuals, including the original plaintiff, filed a motion to be appointed lead plaintiff. No other motions to be appointed lead plaintiff were filed. On July 27, 2015, the court granted the motion, appointing movants as lead plaintiff. Also, on July 27, 2015, the court issued an order to show cause requiring lead plaintiff to explain no later than July 31, 2015, why his claims should not be transferred and consolidated with the In re Virtus Investment Partners, Inc. Securities Litigation action discussed above. On October 1, 2015, plaintiff filed a First Amended Class Action Complaint which, among other things, added a derivative claim for breach of fiduciary duty on behalf of Virtus Opportunities Trust. On October 19, 2015, The United States District Court for the Central District of California entered an order transferring the action to the Southern District of New York. The Company believes the plaintiff’s claims asserted in the complaint are frivolous and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.

13. Consolidated Sponsored Investment Products
In the normal course of its business, the Company sponsors various investment products. The Company consolidates an investment product when it owns a majority of the voting interest in the entity or it is the primary beneficiary of an investment product that is a VIE, as a consolidated sponsored investment product. The consolidation and deconsolidation of these investment products has no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its investment in these products. The Company has no right to the benefits from, and does not bear the risks associated with these investment products, beyond the Company’s investments in, and fees generated from these products. The Company does not consider cash and investments held by consolidated sponsored investment products or any other VIE to be assets of the Company other than its direct investment in these products.
As of September 30, 2015 and December 31, 2014, the Company consolidated 14 and 12 sponsored investment products, respectively. During the nine months ended September 30, 2015, the Company consolidated three additional sponsored investment products and deconsolidated one sponsored investment product because it no longer had a majority voting interest.
The following table presents the balances of the consolidated sponsored investment products that were reflected in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014:
 
 
As of
 
September 30, 2015
 
December 31, 2014
($ in thousands)
 
 
 

Total cash and cash equivalents
$
16,732

 
$
8,687

Total investments
311,429

 
236,652

All other assets
10,494

 
6,960

Total liabilities
(29,849
)
 
(12,556
)
Redeemable noncontrolling interests
(49,895
)
 
(23,071
)
The Company’s net interests in consolidated sponsored investment products
$
258,911

 
$
216,672

The Company's net interest as a percentage of total investments of consolidated sponsored investment products
83.1
%
 
91.6
%





16
Table of Contents

Fair Value Measurements
The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 by fair value hierarchy level were as follows:

As of September 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
147,663

 
$
926

 
$
148,589

Equity securities
155,763

 
7,077

 
—

 
162,840

Derivatives
125

 
633

 
—

 
758

Total assets measured at fair value
$
155,888

 
$
155,373

 
$
926

 
$
312,187

Liabilities

 

 

 

Derivatives
$
403

 
$
917

 
$
—

 
$
1,320

Short sales
9,432

 
423

 
—

 
9,855

Total liabilities measured at fair value
$
9,835

 
$
1,340

 
$
—

 
$
11,175

As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
135,050

 
$
1,065

 
$
136,115

Equity securities
82,417

 
18,120

 
—

 
100,537

Derivatives
154

 
227

 
—

 
381

Total assets measured at fair value
$
82,571

 
$
153,397

 
$
1,065

 
$
237,033

Liabilities

 

 

 

Derivatives
$
191

 
$
—

 
$
—

 
$
191

Short sales
7,491

 
674

 
—

 
8,165

Total liabilities measured at fair value
$
7,682

 
$
674

 
$
—

 
$
8,356


The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.
Investments of consolidated sponsored investment products represent the underlying debt, equity and other securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities and certain equity securities, including non-US securities, for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service. Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.


17
Table of Contents

The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.
 
 
Nine Months Ended
September 30,
 ($ in thousands)
2015
 
2014
Level 3 Debt securities (a)
 
 
 
Balance at beginning of period
$
1,065

 
$
—

Purchases
135

 
450

Paydowns
(14
)
 
(2
)
Sales
(13
)
 
—

Transferred to Level 2
(126
)
 
—

Change in unrealized gain/(loss), net
(121
)
 
(1
)
Balance at end of period
$
926

 
$
447

 
(a)
None of the securities reflected in the above table were internally fair valued at September 30, 2015.
For the nine months ended September 30, 2015, securities held by consolidated sponsored investment products with an end of period value of $8.9 million were transferred from Level 2 to Level 1 because certain non-US securities quoted market prices were no longer adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. For the nine months ended September 30, 2015, securities held by consolidated sponsored investment products with an end of period value of $0.3 million were transferred from Level 1 to Level 2 because certain non-US securities quoted market prices were adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2014.
Derivatives
The Company has certain consolidated sponsored investment products which include derivative instruments as part of their investment strategies to contribute to the achievement of defined investment objectives. These derivatives may include futures contracts, options contracts and forward contracts. Derivative instruments in an asset position are classified as other assets of consolidated sponsored investment products in the Condensed Consolidated Balance Sheets. Derivative instruments in a liability position are classified as liabilities of consolidated sponsored investment products within the Condensed Consolidated Balance Sheets. The change in fair value of such derivatives is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, in the Condensed Consolidated Statements of Operations. In connection with entering into these derivative contracts, these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheets of the Company as Cash pledged or on deposit of consolidated sponsored investment products. The fair value of such derivatives at September 30, 2014 and December 31, 2014 was immaterial.











18
Table of Contents

The Company's consolidated sponsored investment products were party to the following derivative instruments for the period ended September 30, 2015:
($ in thousands)
 
 
Volume
Purchased options
$
3,527

 
(a)
Written options
2,499

 
(b)
Futures contracts long/short
109,286

 
(c)
Forward foreign currency exchange purchase contracts
2,294

 
(d)
Forward foreign currency exchange sale contracts
26,565

 
(e)
Interest rate swaps
31,603

 
(a)
Other swaps
27,956

 
(f)

(a)    Represents cost of holdings as of the end of the period.
(b)    Represents aggregate premiums received for the period.
(c)    Represents cost at trade date for holdings as of the end of the period.
(d)    Represents value of trade date payable for holdings as of the end of the period.
(e)    Represents value at settlement date receivable for holdings as of the end of the period.
(f)
Includes credit default, total return, inflation and variance swaps. Represents notional value of holdings as of the end of the period.

The following is a summary of the consolidated sponsored investment products' derivative instruments as of September 30, 2015. For financial reporting purposes the Company does not offset derivative assets and derivative liabilities that are subject to netting arrangements in its Condensed Consolidated Balance Sheet.
 
Fair Value
($ in thousands)
Assets
 
Liabilities
Futures contracts
$
119

 
$
33

Forward foreign currency exchange contracts
228

 
117

Swaps
1,226

 
1,002

Purchased options
1,005

 
—

Purchased swaptions
701

 
—

Written options
—

 
691

Total derivative assets and liabilities in the Condensed Consolidated Balance Sheets
3,279

 
1,843

Derivatives not subject to a master netting agreement
(654
)
 
(207
)
Total assets and liabilities subject to a master netting agreement
2,625

 
1,636


The Company's consolidated sponsored investment products have counterparty risk associated with these derivative assets and liabilities. Multiple counterparties are utilized to mitigate this risk, and the maximum exposure to a single bank does not exceed 34.4% of the total derivative assets or 40.9% of the total derivative liabilities.

The following is a summary of the net gains (losses) recognized in income by primary risk exposure, for the three and nine months ended September 30, 2015:

19
Table of Contents

($ in thousands)
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
Interest rate contracts
$
(217
)
 
$
(75
)
Foreign currency exchange contracts
263

 
666

Equity contracts
633

 
1,414

Commodity contracts
212

 
126

Credit contracts
(13
)
 
(100
)
Total
$
878

 
$
2,031

Short Sales
Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a security is sold which is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheets within other liabilities of consolidated sponsored investment products.
Borrowings
One of the Company’s consolidated sponsored investment products employs leverage in the form of using proceeds from short sales, which allows it to use its long positions as collateral in order to purchase additional securities. The use of these proceeds from short sales is secured by the assets of the consolidated sponsored investment product, which are held with the custodian in a separate account. This consolidated sponsored investment product is permitted to borrow up to 33.33% of its total assets.

14. Consolidated Investment Product

During the third quarter of 2015, the Company contributed $20.0 million to a special purpose entity ("SPE") that was created specifically to accumulate bank loan assets for securitization as a potential CLO that will be managed by its Newfleet affiliate. The special purpose entity is a VIE and the Company consolidates the SPE's assets and liabilities within its financial statements as it is the primary beneficiary of the VIE.
The following table presents the balances of the consolidated investment product that were reflected in the Condensed Consolidated Balance Sheets as of September 30, 2015. There was no consolidated investment product at December 31, 2014.
 
 
As of
September 30, 2015
($ in thousands)
 
Total cash equivalents
$
120

Total investments
131,862

Other assets
20

Debt
(9,140
)
Securities purchased payable
(103,541
)
The Company’s net interests in consolidated investment product
$
19,321

The Company’s net interests as a percentage of total investments of consolidated investment product
14.7
%
Fair Value Measurements of Consolidated Investment Product
The assets and liabilities of the consolidated investment product measured at fair value on a recurring basis as of September 30, 2015 by fair value hierarchy level were as follows:

20
Table of Contents

 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
120

 
$
—

 
$
—

 
$
120

Bank loans
—

 
131,862

 
—

 
131,862

Total Assets Measured at Fair Value
$
120

 
$
131,862

 
$
—

 
$
131,982

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment product measured at fair value.
Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Bank loans represent the underlying debt securities held in the sponsored product which are consolidated by the Company. Bank loan investments include debt securities, which are valued based on quotations received from an independent pricing service.  Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2.
The estimated fair value of debt at September 30, 2015, which has a variable interest rate, approximates its carrying value and is classified as Level 2. The securities purchase payable at September 30, 2015 approximates fair value due to the short-term nature of the instruments.

Debt of Consolidated Investment Product

On August 17, 2015, the SPE, entered into a three-year term $160.0 million financing transaction with a bank lending counterparty (the “Financing Facility”).  The proceeds of the Financing Facility are intended to be used to purchase and warehouse commercial bank loan assets pending the securitization of such assets as a CLO.   The size of the Financing Facility may be increased subject to the occurrence of certain events and the mutual consent of the parties.  The Financing Facility is secured by all the assets of the SPV and initially bears interest at a rate of three-month LIBOR plus 1.25% per annum (with such interest rate, upon completion of the initial nine-month ramp-up period, increasing to three-month LIBOR plus 2.0% per annum).  The Financing Facility contains standard covenant and event of default provisions (including loan-to-value ratio triggers) and foreclosure remedies upon such default in favor of the lender thereunder.  The $20.0 million the Company contributed to the SPE serves as first loss protection for the bank lending counterparty under the Financing Facility. In the event of default, the recourse to the Company is limited to its investment. At September 30, 2015 $9.1 million was outstanding under the Financing Facility.


15. Consolidation
As of September 30, 2015, 15 products were consolidated by the Company including 14 consolidated sponsored investment products and one consolidated investment product. As of December 31, 2014, 12 products were consolidated by the Company, comprised entirely of sponsored investment products.
The following tables reflect the impact of the consolidated sponsored investment products and consolidated investment product in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively:

21
Table of Contents


As of September 30, 2015
 
 
Balance Before
Consolidation of
Investment 
Products
 
Consolidated
Sponsored
Investment
Products
 
Consolidated Investment Product
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Balance Sheet
($ in thousands)
 
 
 
 
 
 
 
 
 
Total cash
$
126,470

 
$
16,732

 
$
120

 
$
—

 
$
143,322

Total investments
333,307

 
311,429

 
131,862

 
(278,082
)
 
498,516

All other assets
174,563

 
10,494

 
20

 
(152
)
 
184,925

Total assets
$
634,340

 
$
338,655

 
$
132,002

 
$
(278,234
)
 
$
826,763

Total liabilities
$
95,010

 
$
29,999

 
$
112,681

 
$
(152
)
 
$
237,538

Redeemable noncontrolling interest
—

 
—

 
—

 
49,895

 
49,895

Equity attributable to stockholders of the Company
539,626

 
308,656

 
19,321

 
(327,977
)
 
539,626

Non-redeemable noncontrolling interest
(296
)
 
—

 
—

 
—

 
(296
)
Total liabilities and equity
$
634,340

 
$
338,655

 
$
132,002

 
$
(278,234
)
 
$
826,763

As of December 31, 2014
 
 
Balance Before
Consolidation of
Investment 
Products
 
Consolidated
Sponsored
Investment
Products
 
Consolidated Investment Product
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Balance Sheet
($ in thousands)
 
 
 
 
 
 
 
 
 
Total cash
$
202,847

 
$
8,687

 
$
—

 
$
—

 
$
211,534

Total investments
279,863

 
236,652

 
—

 
(216,415
)
 
300,100

All other assets
180,436

 
6,960

 
—

 
(257
)
 
187,139

Total assets
$
663,146

 
$
252,299

 
$
—

 
$
(216,672
)
 
$
698,773

Total liabilities
$
99,794

 
$
12,813

 
$
—

 
$
(257
)
 
$
112,350

Redeemable noncontrolling interest
—

 
—

 
—

 
23,071

 
23,071

Equity attributable to stockholders of the Company
563,542