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 March 31, 2016
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 8,263,443 as of April 25, 2016.
 
 
 
 
 

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)
 
March 31,
2016
 
December 31,
2015
($ in thousands, except share data)
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
50,402

 
$
87,574

Investments
95,894

 
56,738

Accounts receivable, net
37,939

 
38,757

Assets of consolidated sponsored investment products
 
 
 
Cash of consolidated sponsored investment products
1,409

 
1,513

Cash pledged or on deposit of consolidated sponsored investment products
7,639

 
10,353

Investments of consolidated sponsored investment products
199,630

 
323,335

Other assets of consolidated sponsored investment products
63,929

 
8,549

Assets of consolidated investment product
 
 
 
Cash equivalents of consolidated investment product
7,440

 
8,297

Investments of consolidated investment product
193,663

 
199,485

Other assets of consolidated investment product
1,585

 
1,467

Furniture, equipment and leasehold improvements, net
8,692

 
9,116

Intangible assets, net
40,236

 
40,887

Goodwill
6,703

 
6,701

Deferred taxes, net
49,085

 
54,143

Other assets
17,058

 
12,814

Total assets
$
781,304

 
$
859,729

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accrued compensation and benefits
$
15,035

 
$
49,617

Accounts payable and accrued liabilities
20,563

 
23,036

Dividends payable
4,173

 
4,233

Other liabilities
13,493

 
13,051

Liabilities of consolidated sponsored investment products
20,211

 
15,387

Liabilities of consolidated investment product
 
 
 
Debt of consolidated investment product
155,464

 
152,597

Securities purchased payable and other liabilities of consolidated investment product
6,554

 
18,487

Total liabilities
235,493

 
276,408

Commitments and Contingencies (Note 11)

 

Redeemable noncontrolling interests
40,425

 
73,864

Equity:
 
 
 
Equity attributable to stockholders:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 9,650,179 shares issued and 8,259,831 shares outstanding at March 31, 2016 and 9,613,088 shares issued and 8,398,944 shares outstanding at December 31, 2015
97

 
96

Additional paid-in capital
1,139,181

 
1,140,875

Accumulated deficit
(460,251
)
 
(472,614
)
Accumulated other comprehensive loss
(775
)
 
(1,034
)
Treasury stock, at cost, 1,390,348 and 1,214,144 shares at March 31, 2016 and December 31, 2015, respectively
(172,699
)
 
(157,699
)
Total equity attributable to stockholders
505,553

 
509,624

Noncontrolling interests
(167
)
 
(167
)
Total equity
505,386

 
509,457

Total liabilities and equity
$
781,304

 
$
859,729

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
March 31,
 
2016
 
2015
($ in thousands, except per share data)
 
 
 
Revenues
 
 
 
Investment management fees
$
57,644

 
$
70,496

Distribution and service fees
12,478

 
19,598

Administration and transfer agent fees
9,998

 
13,042

Other income and fees
175

 
695

Total revenues
80,295

 
103,831

Operating Expenses
 
 
 
Employment expenses
35,977

 
35,622

Distribution and other asset-based expenses
18,101

 
24,507

Other operating expenses
10,765

 
16,726

Other operating expenses of consolidated sponsored investment products
1,133

 
818

Other operating expenses of consolidated investment product
56

 
—

Depreciation and other amortization
862

 
779

Amortization expense
651

 
837

Total operating expenses
67,545

 
79,289

Operating Income
12,750

 
24,542

Other Income (Expense)
 
 
 
Realized and unrealized (loss) gain on investments, net
(658
)
 
545

Realized and unrealized gain on investments of consolidated sponsored investment products, net
295

 
2,590

Realized and unrealized gain on investments of consolidated investment product, net
2,235

 
—

Other income, net
228

 
435

Total other income, net
2,100

 
3,570

Interest Income (Expense)
 
 
 
Interest expense
(132
)
 
(123
)
Interest and dividend income
273

 
280

Interest and dividend income of investments of consolidated sponsored investment products
2,961

 
2,324

Interest income of investments of consolidated investment product
1,474

 
—

Total interest income, net
4,576

 
2,481

Income Before Income Taxes
19,426

 
30,593

Income tax expense
7,556

 
10,868

Net Income
11,870

 
19,725

Noncontrolling interests
493

 
(383
)
Net Income Attributable to Common Stockholders
$
12,363

 
$
19,342

Earnings per Share—Basic
$
1.48

 
$
2.16

Earnings per Share—Diluted
$
1.45

 
$
2.11

Cash Dividends Declared per Share
$
0.45

 
$
0.45

Weighted Average Shares Outstanding—Basic (in thousands)
8,344

 
8,964

Weighted Average Shares Outstanding—Diluted (in thousands)
8,506

 
9,151


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
March 31,
 
2016
 
2015
($ in thousands)
 
 
 
Net Income
$
11,870

 
$
19,725

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment, net of tax of ($61) and $165 for the three months ended March 31, 2016 and 2015, respectively
99

 
(271
)
Unrealized gain on available-for-sale securities, net of tax of ($97) and ($1) for the three months ended March 31, 2016 and 2015, respectively
160

 
4

Other comprehensive income (loss)
259

 
(267
)
Comprehensive income
12,129

 
19,458

Comprehensive loss (income) attributable to noncontrolling interests
493

 
(383
)
Comprehensive Income Attributable to Common Stockholders
$
12,622

 
$
19,075

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)
 
Three Months Ended
March 31,
 
2016
 
2015
($ in thousands)
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
11,870

 
$
19,725

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation expense, intangible asset and other amortization
1,573

 
1,671

Stock-based compensation
3,270

 
3,063

Excess tax benefits from stock-based compensation
(130
)
 
(1,314
)
Amortization of deferred commissions
763

 
3,064

Payments of deferred commissions
(500
)
 
(1,168
)
Equity in earnings of equity method investments
(218
)
 
(425
)
Realized and unrealized losses (gains) on trading securities, net
658

 
(545
)
Realized and unrealized gains on investments of consolidated sponsored investment products, net
(683
)
 
(1,659
)
Realized and unrealized gains on investments of consolidated investment product, net
(2,235
)
 
—

Sales of trading securities, net
11,197

 
8,710

Purchases of investments by consolidated sponsored investment products, net
(21,545
)
 
(16,583
)
(Purchases) sales of securities sold short by consolidated sponsored investment products, net
(3,655
)
 
1,533

Purchases of investments by consolidated investment product, net
(4,079
)
 
—

Deferred taxes, net
4,900

 
2,368

Changes in operating assets and liabilities:
 
 
 
Cash pledged or on deposit of consolidated sponsored investment products
1,682

 
(2,245
)
Accounts receivable, net and other assets
(4,944
)
 
(6,054
)
Other assets of consolidated sponsored investment products
(1,292
)
 
(81
)
Other assets of consolidated investment product
(163
)
 
—

Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
(35,710
)
 
(35,020
)
Liabilities of consolidated sponsored investment products
618

 
108

Liabilities of consolidated investment product, net
248

 
—

Net cash used in operating activities
(38,375
)
 
(24,852
)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(591
)
 
(1,397
)
Change in cash and cash equivalents of consolidated sponsored investment products due to deconsolidation
103

 
—

Purchases of other investments
(759
)
 
—

Purchases of available-for-sale securities
(60
)
 
(43
)
Net cash used in investing activities
(1,307
)
 
(1,440
)
Cash Flows from Financing Activities:
 
 
 
Borrowings of proceeds from short sales by consolidated sponsored investment products
—

 
921

Payments on borrowings by consolidated sponsored investment products
(1,839
)
 
—

Borrowings of debt of consolidated investment product
2,867

 
—

Dividends paid
(3,911
)
 
(4,129
)
Repurchases of common shares
(15,000
)
 
(14,000
)
Proceeds from exercise of stock options
375

 
54

Taxes paid related to net share settlement of restricted stock units
(1,001
)
 
(4,122
)
Excess tax benefits from stock-based compensation
130

 
1,314

Contributions of noncontrolling interests, net
19,928

 
11,039

Net cash provided by (used in) financing activities
1,549

 
(8,923
)
Net decrease in cash and cash equivalents
(38,133
)
 
(35,215
)
Cash and cash equivalents, beginning of period
97,384

 
203,304

Cash and Cash Equivalents, End of Period
$
59,251

 
$
168,089

Non-Cash Investing Activities:
 
 
 
Change in accrual for capital expenditures
$
(153
)
 
$
458

Non-Cash Financing Activities:
 
 
 
(Decrease) increase to noncontrolling interest due to (deconsolidation) consolidation of consolidated sponsored investment products, net
$
(52,874
)
 
$
450

Dividends payable
$
4,173

 
$
4,095

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, 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)
—

 
—

 
—

 
19,342

 
—

 
—

 
—

 
19,342

 
(34
)
 
19,308

 
417

Net unrealized gain on securities available-for-sale
—

 
—

 
—

 
—

 
4

 
—

 
—

 
4

 
—

 
4

 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
(271
)
 
—

 
—

 
(271
)
 
—

 
(271
)
 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11,489

Cash dividends declared ($0.45 per common share)
—

 
—

 
(4,095
)
 
—

 
—

 
—

 
—

 
(4,095
)
 
 
 
(4,095
)
 
—

Repurchases of common shares
(103,818
)
 
—

 
—

 
—

 
—

 
103,818

 
(14,000
)
 
(14,000
)
 
—

 
(14,000
)
 
—

Issuance of common shares related to employee stock transactions
39,851

 
—

 
54

 
—

 
—

 
—

 
—

 
54

 
—

 
54

 
—

Taxes paid on stock-based compensation
—

 
—

 
(4,122
)
 
—

 
—

 
—

 
—

 
(4,122
)
 
—

 
(4,122
)
 
—

Stock-based compensation
—

 
—

 
3,784

 
—

 
—

 
—

 
—

 
3,784

 
—

 
3,784

 
—

Excess tax benefits from stock-based compensation
—

 
—

 
1,130

 
—

 
—

 
—

 
—

 
1,130

 
—

 
1,130

 
—

Balances at March 31, 2015
8,911,866

 
$
96

 
$
1,145,659

 
$
(488,179
)
 
$
(509
)
 
679,259

 
$
(91,699
)
 
$
565,368

 
$
(224
)
 
$
565,144

 
$
34,977

Balances at December 31, 2015
8,398,944

 
$
96

 
$
1,140,875

 
$
(472,614
)
 
$
(1,034
)
 
1,214,144

 
$
(157,699
)
 
$
509,624

 
$
(167
)
 
$
509,457

 
$
73,864

Net income (loss)
—

 
—

 
—

 
12,363

 
—

 
—

 
—

 
12,363

 
—

 
12,363

 
(493
)
Net unrealized gain on securities available-for-sale
—

 
—

 
—

 
—

 
160

 
—

 
—

 
160

 
—

 
160

 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
99

 
—

 
—

 
99

 
—

 
99

 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(32,946
)
Cash dividends declared ($0.45 per common share)
—

 
—

 
(3,850
)
 
—

 
—

 
—

 
—

 
(3,850
)
 
—

 
(3,850
)
 
—

Repurchases of common shares
(176,204
)
 
—

 
—

 
—

 
—

 
176,204

 
(15,000
)
 
(15,000
)
 
—

 
(15,000
)
 
—

Issuance of common shares related to employee stock transactions
37,091

 
1

 
374

 
—

 
—

 
—

 
—

 
375

 
—

 
375

 
—

Taxes paid on stock-based compensation
—

 
—

 
(1,001
)
 
—

 
—

 
—

 
—

 
(1,001
)
 
 
 
(1,001
)
 
—

Stock-based compensation
—

 
—

 
4,029

 
—

 
—

 
—

 
—

 
4,029

 
—

 
4,029

 
—

Tax deficiencies from stock-based compensation
—

 
—

 
(1,246
)
 
—

 
—

 
—

 
—

 
(1,246
)
 
—

 
(1,246
)
 
—

Balances at March 31, 2016
8,259,831

 
$
97

 
$
1,139,181

 
$
(460,251
)
 
$
(775
)
 
1,390,348

 
$
(172,699
)
 
$
505,553

 
$
(167
)
 
$
505,386

 
$
40,425

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, exchange traded funds ("ETFs"), variable insurance funds, Undertaking for Collective Investment in Transferable Securities (“UCITS”) and separately managed accounts. Institutional investment management services are provided to corporations, multiemployer retirement funds, employee retirement systems, foundations, endowments and as a subadviser to unaffiliated mutual funds.
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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The Company has 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 investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest which is typically present when the Company 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 or investment product.
The Company 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 through voting or similar rights to direct the activities that most significantly impact the entity’s economic 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 an investor with disproportionately fewer voting rights. 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.
The Company's investment products that are consolidated are referred to as consolidated sponsored investment products or the consolidated investment product. Consolidated sponsored investment products are investment products in which the Company generally holds a majority of the economic interests. The consolidated investment product is a special purpose entity ("SPE") that was created specifically to accumulate bank loan assets for securitization as a potential consolidated loan obligation ("CLO"). The Company does not hold a majority of the economic interests of the consolidated investment product. The consolidation and deconsolidation of these investment products have 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 and the investment management fee it earns. 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 the investment products it consolidates to be assets of the Company other than its direct investment in these products. See Note 12 for additional information related to the consolidation of sponsored investment products and the investment product. Intercompany accounts and transactions have been eliminated.
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

7
Table of Contents

December 31, 2015 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2015 Annual Report on Form 10-K.

New Accounting Standards Implemented
The Company adopted ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02") on January 1, 2016. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain entities. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. Certain unconsolidated entities that had been classified as VOEs under previous consolidation guidance are now classified as VIEs under ASU 2015-02. As such, disclosure for VIEs is included in Note 12 to the condensed consolidated financial statements.
The Company adopted ASU No. 2014-13, Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity (“CFE”) ("ASU 2014-13") on January 1, 2016. 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. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements. The Company has elected the measurement alternative for its consolidated investment product, and the Company's subsequent earnings from the consolidated investment product will reflect changes in value of the Company's own economic interest in the consolidated investment product.
The Company adopted Accounting Standards Update ("ASU") No. 2015-16 on January 1, 2016, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” ("ASU 2015-16) which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
The Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-3") on January 1, 2016, 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 outstanding borrowings.

New Accounting Standards Not Yet Implemented

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) ("ASU 2016-09"). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 with updated guidance on accounting for leases and requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous U.S. GAAP did not require lease assets and liabilities to be recognized for most leases. Furthermore, companies are permitted to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Early

8
Table of Contents

adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-1"), which requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods therein. Early adoption is not permitted. The Company is currently evaluating the potential impact of this standard 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 is currently evaluating the potential impact of this standard on its consolidated financial statements.

3. Intangible Assets, Net

Intangible assets, net are summarized as follows:
 
 
March 31, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Investment contracts
$
158,747

 
$
158,747

Accumulated amortization
(153,327
)
 
(152,676
)
Definite-lived intangible assets, net
5,420

 
6,071

Indefinite-lived intangible assets
34,816

 
34,816

Total intangible assets, net
$
40,236

 
$
40,887


Activity in intangible assets, net is as follows:
 
 
Three Months Ended March 31,
 
2016
 
2015
($ in thousands)
 
 
 
Intangible assets, net
 
 
 
Balance, beginning of period
$
40,887

 
$
41,783

Amortization
(651
)
 
(837
)
Balance, end of period
$
40,236

 
$
40,946

4. Investments
Investments consist primarily of investments in the Company's sponsored mutual funds. The Company’s investments, excluding the investments of consolidated sponsored investment products and the investments of the consolidated investment product, which are separately discussed in Note 12, at March 31, 2016 and December 31, 2015 were as follows:

9
Table of Contents

 
March 31, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Marketable securities
$
79,505

 
$
41,496

Equity method investments
10,145

 
9,007

Nonqualified retirement plan assets
5,319

 
5,310

Other investments
925

 
925

Total investments
$
95,894

 
$
56,738

Marketable Securities
The Company’s marketable securities consist of both trading and available-for-sale securities. The composition of the Company’s marketable securities is summarized as follows:
March 31, 2016
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
69,144

 
$
(3,186
)
 
$
186

 
$
66,144

Equity securities
10,055

 
(340
)
 
333

 
10,048

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,417

 
(260
)
 
156

 
3,313

Total marketable securities
$
82,616

 
$
(3,786
)
 
$
675

 
$
79,505

December 31, 2015
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
31,167

 
$
(2,134
)
 
$
298

 
$
29,331

Equity securities
9,434

 
(386
)
 
120

 
9,168

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,355

 
(365
)
 
7

 
2,997

Total marketable securities
$
43,956

 
$
(2,885
)
 
$
425

 
$
41,496


For the three months ended March 31, 2016, the Company recognized a net realized loss of $0.4 million on trading securities, and for the three months ended March 31, 2015, the Company recognized a net realized gain of $0.4 million on trading securities.

10
Table of Contents

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, which are separately discussed in Note 12, as of March 31, 2016 and December 31, 2015 by fair value hierarchy level were as follows:
March 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
28,617

 
$
—

 
$
—

 
$
28,617

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
66,144

 
—

 
—

 
66,144

Equity securities
10,048

 
—

 
—

 
10,048

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,313

 
—

 
—

 
3,313

Other investments:
 
 
 
 
 
 
 
Nonqualified retirement plan assets
5,319

 
—

 
—

 
5,319

Total assets measured at fair value
$
113,441

 
$
—

 
$
—

 
$
113,441


December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
54,772

 
$
—

 
$
—

 
$
54,772

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
29,331

 
—

 
—

 
29,331

Equity securities
9,168

 
—

 
—

 
9,168

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
2,997

 
—

 
—

 
2,997

Other investments
 
 
 
 
 
 
 
Nonqualified retirement plan assets
5,310

 
—

 
—

 
5,310

Total assets measured at fair value
$
101,578

 
$
—

 
$
—

 
$
101,578

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.

11
Table of Contents

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 Levels during the three months ended March 31, 2016 and 2015.
6. Equity Transactions
During the three months ended March 31, 2016 and 2015, the Company repurchased 176,204 and 103,818 common shares, respectively, at a weighted average price of $85.09 and $134.81 per share, respectively, plus transaction costs for a total cost of approximately $15.0 million and $14.0 million, respectively. The Company has repurchased a total of 1.4 million shares of common stock at a weighted average price of $124.17 per share plus transaction costs for a total cost of $172.6 million under its share repurchase program. At March 31, 2016, there were 1.3 million 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 quarters of 2016 and 2015. Total dividends declared were $3.9 million and $4.1 million for the three months ended March 31, 2016 and 2015, respectively. Dividends declared in the first quarter of 2016 will be paid on May 13, 2016 to all shareholders of record on April 29, 2016.
7. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2016 and 2015 were as follows:
 
 
Unrealized 
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2015
$
(465
)
 
$
(569
)
Unrealized net gains on securities available-for-sale, net of tax of ($97)
160

 
—

Foreign currency translation adjustments, net of tax of ($61)
—

 
99

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

Net current-period other comprehensive income
160

 
99

Balance March 31, 2016
$
(305
)
 
$
(470
)
 
 
 
 
 
Unrealized
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2014
$
(107
)
 
$
(135
)
Unrealized net gains on securities available-for-sale, net of tax of ($1)
4

 
—

Foreign currency translation adjustments, net of tax of $165
—

 
(271
)
Amounts reclassified from accumulated other comprehensive income
—

 
—

Net current-period other comprehensive income (loss)
4

 
(271
)
Balance March 31, 2015
$
(103
)
 
$
(406
)


8. Stock-based Compensation

12
Table of Contents


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 March 31, 2016, 179,179 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 three months ended March 31, 2016 is summarized as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2015
191,617

 
$
156.66

Granted
143,937

 
$
75.05

Forfeited
(130
)
 
$
140.68

Settled
(40,332
)
 
$
167.81

Outstanding at March 31, 2016
295,092

 
$
115.34

For the three months ended March 31, 2016 and 2015, a total of 13,024 and 29,295 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $1.0 million and $4.1 million for the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016, the Company granted 33,244 RSUs which contain performance based metrics in addition to a service condition. The 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 three months ended March 31, 2016, total stock-based compensation expense included less than $0.1 million for these performance contingent RSUs.
The Company recognized total stock compensation expense of $3.3 million and $3.1 million, respectively, for the three months ended March 31, 2016 and 2015. As of March 31, 2016, unamortized stock-based compensation expense for unvested RSUs was $23.5 million, with a weighted-average remaining amortization period of 2.3 years.
Stock Options
Stock option activity for the three months ended March 31, 2016 is summarized as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise Price
Outstanding at December 31, 2015
156,636

 
$
18.78

Granted
—

 
$
—

Exercised
(9,783
)
 
$
38.25

Forfeited
—

 
$
—

Outstanding at March 31, 2016
146,853

 
$
17.48



13
Table of Contents

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.
The computation of basic and diluted EPS is as follows:
 
 
Three Months Ended March 31,
 
2016
 
2015
($ in thousands, except per share amounts)
 
 
 
Net Income
$
11,870

 
$
19,725

Noncontrolling interests
493

 
(383
)
Net Income Attributable to Common Stockholders
$
12,363

 
$
19,342

Shares (in thousands):

 

Basic: Weighted-average number of shares outstanding
8,344

 
8,964

Plus: Incremental shares from assumed conversion of dilutive instruments
162

 
187

Diluted: Weighted-average number of shares outstanding
8,506

 
9,151

Earnings per Share—Basic
$
1.48

 
$
2.16

Earnings per Share—Diluted
$
1.45

 
$
2.11

For the three months ended March 31, 2016 and 2015, there were 14,230 and 6,085 instruments, respectively, excluded from the above computations of weighted-average shares for diluted EPS, because the effect would be anti-dilutive.

10. 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 38.9% and 35.5% for the three months ended March 31, 2016 and 2015, respectively. The increase in the effective tax rate is due to a lower valuation allowance release related to market adjustments on the Company's marketable securities in the first quarter of 2016 compared to the same period last year.

14
Table of Contents



11. 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 Securities and Exchange Commission ("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 but are not limited to 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 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. 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.

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. Briefing of the motion was completed on December 4, 2015 and oral argument was held on December 17, 2015. The motion is pending. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.

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

15
Table of Contents

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. 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. On January 4, 2016, Plaintiffs filed a Second Amended Complaint. A motion to dismiss was filed on behalf of the Company and affiliated defendants on February 1, 2016. Briefing of the motion was completed on March 11, 2016 and oral argument was held on April 8, 2016. The motion is pending. 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.
12. Consolidation
Consolidated Sponsored Investment Products

As of March 31, 2016 and December 31, 2015, the Company consolidated 20 and 12 sponsored investment products, respectively. During the three months ended March 31, 2016, the Company consolidated ten additional sponsored investment products and deconsolidated two sponsored investment products because it no longer held a majority voting interest.

Consolidated sponsored investment products that are voting interest entities ("VOEs") are fund products in which the Company has a controlling financial interest. Consolidated sponsored investment products are typically consolidated when the Company makes an initial investment in a newly launched fund as the Company typically owns a majority of the voting interest and are deconsolidated when the Company redeems its investment or its voting interests decrease to a minority percentage.
The consolidated sponsored investment product that is a variable interest entity ("VIE") is a global fund product that is considered a VIE for which the Company is the primary beneficiary. The Company determined that it is the primary beneficiary of the VIE as the Company has the power to direct the activities that most significantly impact the economic performance of the entity and has the obligation to absorb losses, or the rights to receive benefits from, the VIE that could potentially be significant to the VIE. As of March 31, 2016, the Company consolidated one sponsored investment product that was a VIE.
The following table presents the balances of the consolidated sponsored investment products that were reflected in the Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015:
 
As of
 
March 31, 2016
 
December 31, 2015
 
VOEs
 
VIE
 
VOEs
 
VIE
($ in thousands)
 
 
 
 
 
 
 
Total cash and cash equivalents
$
8,759

 
$
289

 
$
11,408

 
$
458

Total investments
165,836

 
33,794

 
291,247

 
32,088

All other assets
59,896

 
4,033

 
8,281

 
268

Total liabilities
(17,262
)
 
(2,949
)
 
(14,948
)
 
(439
)
Redeemable noncontrolling interests
(25,214
)
 
(15,211
)
 
(61,236
)
 
(12,628
)
The Company’s net interests in consolidated sponsored investment products
$
192,015

 
$
19,956

 
$
234,752

 
$
19,747

Fair Value Measurements

The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 by fair value hierarchy level were as follows:

16
Table of Contents


As of March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
124,341

 
$
677

 
$
125,018

Equity securities
74,269

 
24

 
319

 
74,612

Derivatives
33

 
31

 
—

 
64

Total Assets Measured at Fair Value
$
74,302

 
$
124,396

 
$
996

 
$
199,694

Liabilities
 
 
 
 
 
 
 
Derivatives
$
—

 
$
81

 
$
—

 
$
81

Short sales
1,495

 
—

 
—

 
1,495

Total Liabilities Measured at Fair Value
$
1,495

 
$
81

 
$
—

 
$
1,576

As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
151,156

 
$
1,397

 
$
152,553

Equity securities
162,986

 
7,796

 
—

 
170,782

Derivatives
33

 
738

 
—

 
771

Total Assets Measured at Fair Value
$
163,019

 
$
159,690

 
$
1,397

 
$
324,106

Liabilities
 
 
 
 
 
 
 
Derivatives
$
128

 
$
844

 
$
—

 
$
972

Short sales
5,334

 
75

 
—

 
5,409

Total Liabilities Measured at Fair Value
$
5,462

 
$
919

 
$
—

 
$
6,381


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.

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.


17
Table of Contents

 
Three Months Ended March 31,
 ($ in thousands)
2016
 
2015
Level 3 Debt securities (a)
 
 
 
Balance at beginning of period
$
1,397

 
$
1,065

Realized losses, net
(102
)
 
—

Purchases
19

 
—

Paydowns
(1
)
 
(1
)
Sales
(498
)
 
—

Transferred to Level 2
(618
)
 
(152
)
Transfers from Level 2
710

 
—

Change in unrealized gain, net
89

 
1

Balance at end of period
$
996

 
$
913


(a)
None of the securities reflected in the table were internally fair valued at March 31, 2016 or March 31, 2015.

For the three months ended March 31, 2016 and 2015, securities held by consolidated sponsored investment products with an end of period value of $3.8 million and $15.3 million, respectively, were transferred from Level 2 to Level 1 because certain non-U.S. 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 three months ended March 31, 2016 and 2015, securities held by consolidated sponsored investment products with an immaterial end of period value were transferred from Level 1 to Level 2 because certain non-U.S. 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.

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 March 31, 2016 and March 31, 2015 was immaterial.

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.


18
Table of Contents

Consolidated Investment Product

During 2015, the Company contributed $40.0 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 SPE is a VIE, and the Company consolidates the SPE's assets and liabilities as a consolidated investment product within its financial statements as it is the primary beneficiary of the VIE. The Company determined that it is the primary beneficiary of the VIE as the Company has the power to direct the activities that most significantly impact the economic performance of the entity and has the obligation to absorb losses, or the rights to receive benefits from, the VIE that could potentially be significant to the VIE.

As discussed in Note 2, the Company adopted ASU 2014-13 effective January 1, 2016. This 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. The Company has elected the measurement alternative for its consolidated investment product, and the Company's subsequent earnings from the consolidated investment product will reflect changes in value of the Company's own economic interest in the consolidated investment product.

The following table presents the balances of the consolidated investment product that were reflected in the Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015:
 
As of
 
March 31, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Total cash equivalents
$
7,440

 
$
8,297

Total investments
193,663

 
199,485

Other assets
1,585

 
1,467

Debt
(155,464
)
 
(152,597
)
Securities purchased payable
(6,554
)
 
(18,487
)
The Company’s net interests in the consolidated investment product
$
40,670

 
$
38,165


Fair Value Measurements of Consolidated Investment Product

The assets and liabilities of the consolidated investment product measured at fair value on a recurring basis by fair value hierarchy level were as follows:

As of March 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
7,440

 
$
—

 
$
—

 
$
7,440

Bank loans
—

 
193,663

 
—

 
193,663

Total Assets Measured at Fair Value
$
7,440

 
$
193,663

 
$
—

 
$
201,103

As of December 31, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
8,297

 
$
—

 
$
—

 
$
8,297

Bank loans
—

 
199,485

 
—

 
199,485

Total Assets Measured at Fair Value
$
8,297

 
$
199,485

 
$
—

 
$
207,782



19
Table of Contents

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 March 31, 2016 and December 31, 2015, which has a variable interest rate, approximates its carrying value. The securities purchase payable at March 31, 2016 and December 31, 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 SPE 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 $40.0 million contributed by the Company 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 in the SPE. At March 31, 2016 and December 31, 2015, $155.5 million and $152.6 million, respectively, was outstanding under the Financing Facility.

Consolidating Financial Data

The following tables reflect the impact of the consolidated sponsored investment products and consolidated investment product in the Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015:

As of March 31, 2016
 
 
Balance Before
Consolidation of
Investment 
Products
 

Consolidated
Sponsored
Investment
Products-VOEs
 

Consolidated
Sponsored
Investment
Product-VIE
 
Consolidated Investment Product - VIE
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Balance Sheet
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
$
50,402

 
$
8,759

 
$
289

 
$
7,440

 
$
—

 
$
66,890

Total investments
348,452

 
165,836

 
33,794

 
193,663

 
(252,558
)
 
489,187

All other assets
159,796

 
59,896

 
4,033

 
1,585

 
(83
)
 
225,227

Total assets
$
558,650

 
$
234,491

 
$
38,116

 
$
202,688

 
$
(252,641
)
 
$
781,304

Total liabilities
$
53,264

 
$
17,323

 
$
2,971

 
$
162,018

 
$
(83
)
 
$
235,493

Redeemable noncontrolling interest
—

 
—

 
—

 
—

 
40,425

 
40,425

Equity attributable to stockholders of the Company
505,553

 
217,168

 
35,145

 
40,670

 
(292,983
)
 
505,553

Non-redeemable noncontrolling interest
(167
)
 
—

 
—

 
—

 
—

 
(167
)
Total liabilities and equity
$
558,650

 
$
234,491

 
$
38,116

 
$
202,688

 
$
(252,641
)
 
$
781,304


20
Table of Contents

As of December 31, 2015
 
 
Balance Before
Consolidation of
Investment 
Products
 

Consolidated
Sponsored
Investment
Products-VOEs
 

Consolidated
Sponsored
Investment
Product-VIE
 
Consolidated Investment Product - VIE
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Balance Sheet
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
$
87,574

 
$
11,408

 
$
458

 
$
8,297

 
$
—

 
$
107,737

Total investments
349,147

 
291,247

 
32,088

 
199,485

 
(292,409
)
 
579,558

All other assets
162,673

 
8,281

 
268

 
1,467

 
(255
)
 
172,434

Total assets
$
599,394

 
$
310,936

 
$
32,814

 
$
209,249

 
$
(292,664
)
 
$
859,729

Total liabilities
$
89,937

 
$
15,181

 
$
461

 
$
171,084

 
$
(255
)
 
$
276,408

Redeemable noncontrolling interest
—

 
—

 
—

 
—

 
73,864

 
73,864

Equity attributable to stockholders of the Company
509,624

 
295,755

 
32,353

 
38,165

 
(366,273
)
 
509,624

Non-redeemable noncontrolling interest
(167
)
 
—

 
—

 
—

 
—

 
(167
)
Total liabilities and equity
$
599,394

 
$
310,936

 
$
32,814

 
$
209,249

 
$
(292,664
)
 
$
859,729

 
(a)
Adjustments include the elimination of intercompany transactions between the Company, its consolidated sponsored investment products and consolidated investment product, primarily the elimination of the investments, consolidated sponsored investment product equity, consolidated investment product equity and recording of any noncontrolling interest.

The following table reflects the impact of the consolidated sponsored investment products and consolidated investment products in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2016 and 2015:
For the Three Months Ended March 31, 2016
 
 
Balance 
Before
Consolidation of
Investment 
Products
 

Consolidated
Sponsored
Investment
Products-VOEs
 

Consolidated
Sponsored
Investment
Product-VIE
 
Consolidated Investment Product - VIE
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Statement of
Operations
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
$
80,504

 
$
—

 
$
—

 
$
—

 
$
(209
)
 
$
80,295

Total operating expenses
66,356

 
1,267

 
75

 
56

 
(209
)
 
67,545

Operating income (loss)
14,148

 
(1,267
)
 
(75
)
 
(56
)
 
—

 
12,750

Total other non-operating income, net
5,771

 
2,732

 
525

 
2,561

 
(4,913
)
 
6,676

Income before income taxes
19,919

 
1,465

 
450

 
2,505

 
(4,913
)
 
19,426

Income taxes
7,556

 
—

 
—

 
—

 
—

 
7,556

Net income
12,363

 
1,465

 
450

 
2,505

 
(4,913
)
 
11,870

Noncontrolling interests
—

 
—

 
—

 
—

 
493

 
493

Net income attributable to common stockholders
$
12,363

 
$
1,465

 
$
450

 
$
2,505

 
$
(4,420
)
 
$
12,363


21
Table of Contents

For the Three Months Ended March 31, 2015
 
 
Balance 
Before
Consolidation of
Investment 
Products
 

Consolidated
Sponsored
Investment
Products-VOEs
 

Consolidated
Sponsored
Investment
Product-VIE
 
Consolidated Investment Product - VIE
 
Eliminations
and
Adjustments (a)
 
Balances as
Reported in
Condensed
Consolidated
Statement of
Operations
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
$
104,232

 
$
—

 
$
—

 
$
—

 
$
(401
)
 
$
103,831

Total operating expenses