Virtus Investment Partners Inc (VRTS) 2009 Q4 法說會逐字稿

Good morning. My name is Ryan and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. A slide presentation for this call is available on the Virtus website, www.Virtus.com, in the investor relations section. This call is also being recorded and will be available for replay on the Virtus website.

At this time all participants are in a listen-only mode. After the speakers' remarks there will be a question-and-answer period and instructions will follow at that time. I will now turn the conference over to your host, Joe Fazzino.

Thank you, Ryan. On behalf of Virtus Investment Partners I would like to welcome you to our first investor conference call to discuss operating results for the fourth quarter and full year of 2009.

Before we begin, I direct your attention to the important disclosures on page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those discussed in these statements. For a discussion of these risks and uncertainties, please see the Risk Factors and the Management Discussion and Analysis sections of our periodic reports that are filed with the SEC and our other recent filings with the SEC.

In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP financial measures to evaluate its financial results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website along with copies of our filings with the SEC at www.Virtus.com under the Investor Relations section.

For this call, we have a presentation that is accessible with the webcast through the Investor Relations section of our website at www.Virtus.com. The presentation including the appendix will be available on the website following this call.

This morning's call will begin with remarks from George Aylward, our President and Chief Executive Officer, who will provide an overview of Virtus and review some of the accomplishments of 2009. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results, after which we will open the call to questions. Now I would like to turn the call over to George.

Thanks, Joe, and good morning, everyone. We're pleased to hold this morning's call because it represents another step in the process that began more than a year ago when we spun off as a public company. Over the past year we spent many hours speaking one-on-one with shareholders and analysts, and we now welcome the opportunity to talk about Virtus in this broader forum. Mike and I enjoy the dialogue we've had with investors and, as always, we look forward to answering your questions about Virtus.

Since this is our first public conference call and there may be some of you just getting familiar with Virtus, I would like to take this opportunity to give a brief overview of the Company before we review the results for the year.

Virtus became an independent asset management company at the end of 2008 when we spun off from our former parent company. As a Company, we provide a quality asset management services through our affiliated investment managers as well as through select subadvisers. We have a diverse portfolio of product offerings including open-end and closed-end funds as well as separate accounts to retail and institutional investors. We also have a strategic relationship with the Bank of Montreal through its Harris Bank subsidiary, which holds a $45 million convertible preferred interest.

We have a distinctive brand and value proposition that I believe is one reason we have had opportunities for improvement as we transition to being an independent asset management company. We approach investment management as a collection of boutique asset managers, and the uniqueness of each manager is an important part of the value we offer our clients.

Each affiliated firm has its own investment strategy and approach, so there is no over-arching investment philosophy. In our structure, we believe we have the flexibility of a boutique firm, but collectively we have the breadth of product, distribution access, and investment capabilities of some larger firms. To be successful and competitive, we need to offer strong products and be good stewards of our clients' assets.

We employ a multi-manager, multi-style asset manager model with products that are highly diversified by manager, style, and discipline. By offering a wide array of products from both affiliated and unaffiliated managers, we believe we can appeal to a greater number of investors and be less exposed to changes in market cycles and investor preferences. This provides the opportunity to participate in growth opportunities across different market cycles.

Each manager is unique, and we have little to no redundancy. Also, within this structure we have many services that are being shared rather than duplicated; so we have a model that can allow for us to benefit directly from greater efficiencies and economies of scale.

The opportunity to add more assets to our existing teams will be the key driver of an improved operating margin. We have taken important steps this year, so we have demonstrated we clearly are focused on bringing margins into line with industry averages.

Importantly, our managers are part of an integrated business. They focus on managing money and are supported by shared services including administrative functions, marketing and distribution, and active product management.

Our model allows our affiliated managers to maintain their own brand and culture and participate in the earnings they contribute to Virtus. At the top of the chart are the affiliated companies that are part of Virtus.

SCM manages fixed income and growth equity strategies for institutional and retail clients. Kayne Anderson Rudnick manages equities with a quality orientation and provides fixed-income offerings through separate accounts, including directly to high net worth individuals.

Duff & Phelps specializes in utilities, real estate, and fixed-income strategies in open- and closed-end funds as well as institutional separate accounts. Zweig manages closed-end funds with a tactical asset allocation approach and manages large cap core equities and open-end funds.

Our nonaffiliated subadvisers primarily manage mutual funds, and the key firms are illustrated here. Our strategy is to partner with subadvisers that are generally not readily available in the open-end market and provide investment capabilities that are not resident in our affiliated managers.

This chart shows that in addition to the diverse lineup of affiliated and unaffiliated managers we also have a diverse mix of products including open- and closed-end mutual funds, separately managed accounts, and mandates from institutional clients. The Virtus open-end mutual funds include a wide variety of offerings in equity, fixed income, and alternative strategies. We have two sets of closed-end fund offerings offered by Duff & Phelps and Zweig.

We also offer separately managed accounts through broker-dealer sponsored programs and directly to high net worth clients. Our strategies are also available to institutional clients in multiple channels.

Our product management and development capabilities are a core part of the business. As a smaller company, it is important that we execute in terms of ongoing management of our product lineup. We monitor and manage our products continuously, and we are willing to make manager changes when appropriate to improve performance.

New product development is a critical component as we look to build and grow our business, and this is an area where we have been active and creative. Overall, we have strong investment capabilities and we see opportunities to leverage our current affiliated and subadvise capabilities into new products and new channels.

During 2009, for example, we introduced new mutual funds from Duff & Phelps and Kayne Anderson, which are affiliates, and Vontobel, which is a subadviser. We also brought in F-Squared as a subadviser to offer a timely investment offering style in our fund lineup.

But good product must be sold, so our distribution efforts are integral to our success. We market to both the retail and institutional markets.

For retail, we have strong access for a firm of our size and we have a very experienced sales force. This is an important factor in a very competitive business.

On the institutional side, we have a coordinated strategy that uses shared distribution resources in conjunction with our individual affiliated managers. Our focus here is on the areas where we see the greatest opportunities.

I hope that gives you a good perspective of the businessman. Now let me give a high-level review of the year and the quarter.

The strategies in place during 2009 allowed us to get through a very difficult start to the year and positioned us well to demonstrate that we can improve and grow the business. 2009 can be described as a year of foundation building and progress. While we are not where we want to be as a Company, we did have several accomplishments I would like to note.

From the financial perspective, we ended our first year with operating income as-adjusted of $7 million, building on improvement each quarter. That improvement is reflected in our operating margin as-adjusted, which improved from a negative 26% in the fourth quarter of 2008 to a positive 18% in the fourth quarter of 2009.

There were three key drivers of the improvement -- new, lower cost structure that we implemented following the spin off; the results of our sales activities; and the benefits that came from the improving market in the second half of the year.

Turning to flows, we are very pleased with the flow results for the year. Mike will provide some detail, but we did grow our sales in a challenging year and achieved positive flows in three quarters as well as the total for the year.

The major contributor to our flows in 2009 was our mutual fund business. Sales were up 10% for the year, and net flows were positive. While fixed-income products were a big contributor, overall we had a very good mix in our sales for the year.

In terms of products, while our primary focus really was on navigating through the difficult environment, we did continue our efforts to continuously enhance and expand our offerings of products. We leveraged several existing capabilities to new funds and added a new strategy, as I mentioned earlier.

Let me now turn the call over to Mike Angerthal, who will review the financial results for the fourth quarter and the full year. Mike?

Thank you, George, and good morning, everyone. In reviewing the results, I'm going to speak first about assets under management and flows, as those are the key drivers for the business. Then I will review the 2009 operating results and the key income statement line items and finally touch on our liquidity and capital position.

Let me start by reviewing assets under management. As you can see from slide 15, we have seen a steady growth in assets during the course of the year. The markets obviously had a significant impact during the year, contributing $3.1 billion of asset appreciation. As you consider the impact of market appreciation, it is important to note we have a diversified product mix, ending the year with assets that were 45% equity and 45% fixed income, with the remainder in cash products.

The largest increase in assets was in our long-term mutual fund business, which was up 6% over the third quarter and 23% for the full year. This was driven in part by flows, which I will cover shortly.

Money market assets, which represented 15% of our assets under management at year-end, were down in line with what others in the industry experienced last year, as investors shifted into higher yield products. Contributing to the 12% annual growth of AUM was slightly higher sales year-over-year and a significant improvement in outflows.

Slide 16 provides additional context of the sales results for the year. The conditions in the market, the relative performance of some of our products, and investor behavior set the stage for continued improvement in our flows. Overall, the quarterly progression of both sales and net flows is a positive trend.

Our fund sales increased each quarter in 2009, with $904 million in Q4, an improvement of 14% from Q3 and representing the highest sales levels since the second quarter of 2007. In the fourth quarter, fixed income delivered 57% of sales, and equity products contributed 43%.

For the full year, while sales of fixed-income products like multisector short-term bond fund were quite strong, it's important to note that our mutual fund sales were split evenly between fixed income and equity products. Further, funds contributed to positive flows for three quarters, including $351 million in the fourth quarter, which represented a double-digit 11% organic growth rate.

Importantly, both our fixed-income and equity funds were in positive flows for the full year.

In our managed accounts business, sales were up slightly for the full-year. We were also net positive for three consecutive quarters and ended the year with slightly net negative flows. We offer managed accounts in several strategies through intermediaries as well as to private clients, where our municipal fixed-income offerings provided a solid risk-return balance for investors.

With respect to institutional, the redemptions declined dramatically from 2008. Sales are not where we want them to be; but I should note that there was a period in late 2008 and early 2009 time when the search activity pipeline was fairly dry, as consultants put searches on hold or reconsidered their approaches. The pipeline has picked up recently and our institutional sales efforts are making progress.

Moving on to slide 17, before I jump into the operating results, let me spend a moment describing how we calculate operating income as-adjusted and why we believe it represents a useful measure to investors in evaluating our operating results.

You'll find the full description in our schedule of non-GAAP information on page 12 of the press release, but it is important enough for me to spend some time stepping through the calculation on this call. There are three main categories of adjustments that we make to GAAP results to calculate our non-GAAP measures.

First, we exclude the revenue and expenses of our former subsidiary, Goodwin Capital Advisers, which is no longer part of the Company. The fourth quarter of 2009 is the last quarter you will see this item.

Second, we remove distribution and administration expenses from operating expense and instead net them against GAAP total revenues. Included in the GAAP revenues are fees such as 12b-1 fees for distribution and marketing as well as for other fund administrative services. The related expenses are a direct passthrough either to distributors or to third parties that provide these administrative services.

Adjusting for these items is in substance, we believe, a more accurate reflection of our role related to these activities. Importantly, these adjustments have no impact to the bottom line.

Third, we also exclude non-cash items such as depreciation, amortization, impairments, and stock-based compensation, as well as restructuring and severance costs as we believe adjusting for these items will aid in the comparability of the information with prior reporting periods and against other asset management firms.

Now, looking at the results. The upward trend that you see here is attributable to the impact of the market, our asset flows, and our cost initiatives. In the fourth quarter, operating as-adjusted increased $1.2 million or 38% to $4.4 million, primarily driven by $2.3 million of higher revenue as-adjusted, offset by $1.4 million in higher variable compensation that is directly related to the higher sales levels and profits in the quarter.

The improved operating income as-adjusted results in a significant improvement in our margin as-adjusted, which is up 360 basis points to 18% in the fourth quarter. For the full year, adjusted margin improved by 740 bps.

While we are pleased with the continued growth in our operating margin as-adjusted during the year, we fully recognize this remains an area for improvement and our focus.

Turning to investment management fees. Our average assets increased steadily with improving markets and positive flows. Our fee rate also saw modest improvement as a result of a slight shift to higher yielding product. Management fees in the fourth quarter improved by 12% from the prior quarter, with mutual fund fees a significant part of the increase, as they have been throughout the year.

One important item to note is that the fourth quarter included approximately $900,000 of subordinated fees from one of our two structured collateral loan obligations, or CLOs, where we serve as the collateral manager.

The fee recapture covers the period from December 2009 through 12/31/09. In December 2008, we stopped recognizing this fee when the CLO was out of compliance with required financial criteria, so collectability was no longer reasonably assured. In the fourth quarter of 2009, the CLO met this financial criteria and we resumed recognition of the revenue of these managed assets, since collectability was now reasonably assured -- particularly since we received payment for a significant portion of these fees during the fourth quarter.

On a run rate basis, assuming the CLO remains in compliance, we would expect approximately $200,000 per quarter, all things being equal. Excluding the prior-period impact of this item, our blended fee rate for the quarter would be 35.7 bps, an increase of 1.3 basis points from the prior quarter.

Let's now talk about expenses. I'll start with employment expense. As we look at employment expense, please remember that we made significant reductions in our headcount from 2008 through 2009. As we prepared for the spin, we reduced certain functions and outsourced others. Then, in the face of a challenging market at the start of 2009, we made additional reductions throughout the organization.

In the fourth quarter, compensation increased by $1.4 million from the prior quarter. This is directly attributable to the significant increase in both sales and earnings over that period, particularly the 14% increase in mutual fund sales and a 38% increase in operating income as-adjusted.

It is important to note that the majority of our incentive compensation plans are variable and are tied to either sales activity or profit contributions. As sales and earnings vary, so well the related incentive compensation. For sales compensation, the retail sales force is paid at the time of sale, in advance of any revenue being earned.

Two other items to note about employment expenses. The first is stock-based compensation, which is a non-cash item. The primary goal of stock-based compensation is to build a high degree of alignment with shareholders and focus on retention of employees. It is worth noting that a portion of this expense relates to legacy grants issued at market by our former parent.

Touching on the last point on the slide, the first quarter of every year does include significantly higher payroll tax levels, because that is when annual incentive compensation is paid.

In other operating expenses, you can see the results of our new, lower fixed cost structure. Other operating expenses capture certain sales-related costs including travel and entertainment, promotional meetings, marketing and printing, as well as professional fees and certain costs related to being a public company. Market and distribution expenses are tied to sales and asset flows and will tend to elevate when sales move up. Other operating expenses such as professional fees and public company costs will also fluctuate based on the timing of these activities.

Because of the variability of these costs, I think it's appropriate to look at the average of the four quarters in addition to the recent trend this quarter. During the year, these expenses fluctuated from a high of $7 million in the second quarter to a low point of $6.3 million in the fourth quarter. Other operating expenses as a percentage of revenue as-adjusted have declined throughout the year, indicating the scalability of our fixed cost structure.

Finally I want to spend some time reviewing liquidity and capital. In the third quarter of 2009, we refinanced our prior outstanding debt with a new senior secured credit facility that provided an aggregate amount of $30 million. At December 31, 2009, there was $15 million payable as well as $15 million of undrawn capacity under this facility. It is important to highlight that the aggregate amount available under the facility declines to $18 million in the third quarter of 2010.

The $45 million convertible preferred security pays dividends quarterly in arrears at an 8% rate, subject to a free cash flow requirement under the credit facility.

We ended the year with $28.6 million of cash on hand, an improvement of nearly $5 million over the prior quarter, driven primarily by the cash generation of the business. The cash position at the end of 2009 was $22 million lower than the prior year, primarily due to $18 million in incentive payments during the first quarter of '09 as well as the paydown of $5 million of debt and dividend payments of $2.9 million for the $45 million convertible preferred shares.

Working capital at December 31, 2009, was $32 million, which we believe is sufficient for a business that is generally not capital-intensive. With that, let me turn the call back over to George.

Thanks, Mike. I want to cover one other topic before we open up the call for questions. As we look forward to the opportunities ahead of us, we are optimistic about our prospects for long-term growth because we have many elements that position us well for success.

As an established multi-manager, multidiscipline asset manager with a solid lineup of diversified products, we have the potential to raise assets in various market cycles and from different investors. We have an experienced and effective sales force with broad reach into our distribution channels, allowing us the opportunity to grow assets.

Our model allows portfolio teams to have their own brand and identity and participate in the earnings they generate. We think this is an attractive environment for our current managers and can allow for additional opportunities for new teams to become part of our platform. By sharing critical functions like distribution and administrative support, our managers can focus on managing money; and our model allows for the benefits of improved scale.

Lastly, but importantly, we now have a high level of alignment between our shareholders and those who have the ability to create value. We feel there are many ways we can succeed, and we have already demonstrated the ability to refocus the Company and put it on the right heading. We are excited about what is ahead of us and we look forward to the opportunity to demonstrate our value to our shareholders.

Mike and I are ready to respond to your questions. I'm going to ask Ryan to open up the lines. We are going to try to limit the questions to two or three, just in case there are a number of people who want to ask questions. Ryan, can you open it up, please?

(Operator Instructions) [Justin Evans], Sonoma Capital.

Hi, guys. Another great quarter of improvement and fantastic net flows. Thank you for holding the call. So by every comparable metric your Company's stock appears to be extraordinarily undervalued. Perhaps you can speak to the critical question on our minds, which is -- is there anything structurally that would prevent your firm from operating at a similar level of profitability to a similar firm in your industry?

In terms of questions of valuation I have to leave it up to others to determine how they want to do the valuation. But you are correct as you look at how people would apply valuation multiples to others in our industry, whether you look at percentage of AUM, multiple revenues, or even a multiple of forward-looking EBITDA. We generally are being put in at a much lower multiple.

I think as you can see from our float in our stock, we actually currently do not have a lot of activity. And while Mike and I try to be very active in terms of bringing the Virtus story to a large number of potential shareholders, we currently do not have as large of a group following us as we think we would be helpful for the overall market of the Virtus stock.

To get to the bigger question, which is -- is there anything structurally that would preclude us from operating at the margins of other companies? The answer to that is no. But I will just sort of clarify.

As you look at operating margins in our industry, and they have always been an average of various different types of firms, I think everyone -- with the incredible declines in the markets at the end of 2008 and 2009 -- saw a significant deterioration in the margin. Some more than others. So I think we -- and there are several others in our category that are in the upper teens or the lower 20s, and that are not back to the old historical, closer to 30s.

But even if you look at the 30s, I always like to point out that the average for the industry is in the 30s; it's a range, and that there are going to be some people that are going to be at the higher end of the range and some are going to be at the lower end of the range. The things that will drive where you fall on that spectrum will be driven by several factors.

Scale clearly is something that does impact margins in our industry. Whether you are a single-focused, one investment strategy firm versus multiple will impact that. Whether you do retail distribution versus you are just a subadviser or do institutional will drive that. Your mix of equity versus fixed income will have an impact on that. And whether you are a multi-manager versus a single-entity type of structure.

So there are a whole host of things that do drive where you are on the margin. And if you go through the list that I just went through, generally our structure would not be at the very, very high end of the margin spectrum, which would generally be a single strategy manager that has one team managing a lot of assets and doesn't do their own retail distribution, but instead does some subadvisory work. They are generally always going to have very, very high margins.

And in a construct like ours you will be a little lower on that spectrum. But again, I believe we can. There is nothing structurally that prevents us from hitting industry average margins.

I think the improvements that you've seen have clearly demonstrated the ability to move the meter in terms of that margin. The biggest driver for us is really the additional opportunities for increasing scale for the PM teams that we currently have. That is what has moved the meter actually the most this year, though it has clearly been coupled with some very aggressive expense reductions. Does that answer your question, Justin?

Yes, it does, and I appreciate that. Is there -- can you help us with respect to timing, as far as when you think you might get yourselves into that frame? Or is that really completely dependent on flows and market and kind of out of your control?

I wouldn't say it's out of control, but it is -- out of our control. But clearly whether the market goes up or down has an impact on the degree of difficulty.

We do believe that the greatest thing that we can do as a management team and as a Company is to continue to demonstrate growth in assets and sales, because that is the thing that we technically have the greatest control over. We will navigate through the markets.

All of us here and Mike and myself spend a lot of time looking at our expense structure. And as it was demonstrated at the pre-spin period as well as post-spin period, we've taken a lot of aggressive actions. As we look at what is driving the margin, the other thing to say about the margin is a somewhat below average margin, there is two reasons that that could be the case.

One, which was your first question, are you structurally incapable of having an industry average margin? Or, two, is your margin a collection of several things, some of which are above-average margin, but more of which are below industry average margin? And we are more the latter. We are the latter, not the former.

We continue to focus in on those pieces and aspects of the business -- whether it be by products or distribution channels or teams -- that are at the lower end of that margin and focus in on those as the greatest opportunity to raise that out.

In terms of time, again if the markets go up dramatically, the time period will be shorter. And if they remain choppy, as they have in the last week, that will make the challenge a little bit more difficult.

As I said to you and others before, we are not going to hide behind the market and say that we are incapable of doing it if the market doesn't help us. We may have to make more difficult decisions if the market doesn't provide us the opportunity to augment the scale that I think we're already demonstrating we can do by selling products.

That's great. I guess my next question is, it seems that you guys have a tremendous amount of operating leverage going forward because of your smaller expense structure now. Should I still think about you having capacity to theoretically almost double your AUM without having to add many new heads to the firm?

Well, I'm not going to give you any specifics in terms of whether we could double, triple, or increased by a 1.5X. But clearly there is leveragability in our structure. And again, I think what you saw in the four consecutive quarters in 2009 is that we could significantly grow our assets while maintaining our fixed costs and primarily what you see in the other operating expenses at a very, very stable clip.

So that continues to be the case that, to the extent that we just increase assets for existing teams and existing products for which we already have the infrastructure for, we can generally do quite a bit of that without having to add. However, there is a point in time where you would then start having additional fixed costs, but it would only be at very high levels of growth.

So I think we still have a lot more room and opportunity to grow the existing assets and strategies that we currently have without having material changes in fixed cost to support that growth.

Okay, great. My last question and then I will make room for other people's questions, is just kind of a housekeeping question. Did you guys -- can you talk about headcount, where you were at the end of the year? Are you willing to talk about that at all?

Well, terms of headcount, I think -- and we included some reference to it in the press release -- is as you remember we reduced headcount by 25% during 2008 and then an additional 7% through 2009. So that was a significant reduction from a high base quite a while ago.

In the fourth quarter, there weren't any material significant changes in the headcount. Again, we did a lot of heavy lifting early on. And again as I have always said, when you're doing headcount reductions, you obviously do the easiest things first and the harder things later. And all of our reductions have been very hard because they have all been very good people who were contributing value.

Right now we see the greatest opportunity in terms of moving the meter is really on the scale side. So while headcount absolutely is a critical thing that we watch very closely and we have been very aggressive with, as we go through the triage of prioritizing the greatest opportunities and where we focus, really raising scale and raising assets right now had the biggest bang for the buck.

But absolutely, Mike and I and the rest of the management team will continue to very closely look at headcount.

Great. Thank you, guys, and great job with the flows this quarter.

Great. Justin, thank you very much. Appreciate it.

Austin Hopper, AWH Capital.

Good morning and thanks for hosting this conference call and thanks for taking questions. One thing that you didn't mention in your presentation are your tax assets. I was hoping you might just give us some information, color on the tax assets. Size of the assets, what is immediately usable, etc.

Sure. We did, as you recall in the third quarter, we did put out some additional disclosure because as you know well in terms of our tax assets and related attributes there was a level of finality that was required as a result of a tax filing of our former parent company, which did occur in the third quarter. And we did get some closure on some of the things that were open at that point. I'm going to ask Mike to just give you some color around the types of tax attributes we have and how it might be helpful for you to think about them.

Yes, good morning, Austin. This is Mike Angerthal. Austin, if you recall in our disclosures of the prior year we had approximately $112 million of deferred tax assets. The majority of those were made up the basis, the intangible asset basis, which would be the type of tax attributes we could use on a go-forward basis.

So we do expect there to be, to the extent the Company has taxable income, the ability to utilize those going forward. You may have seen in our tax line this year a small tax expense related to state and local tax; so we are getting to benefit from the protection on the federal basis.

On the bigger picture of the overall deferred tax assets, it's important to know we put a valuation allowance up against those items. So we attribute no value in the financial statements.

From our perspective, again, we think they will provide a significant shield for federal taxes on a go-forward basis. And importantly, as George mentioned, the filings from our former parent put us in a position to preserve the majority, if not all, of the deferred tax assets that we disclosed in the prior year. And we will expand that disclosure in our upcoming 10-K filing.

Just one little thing that I would add to that, just sort of how to think about it, so the deferred tax assets. And again, the one that has been focused in on -- and it was specifically identified in our amended tax agreement -- are really the identified intangible assets of which that is a legacy of acquisitions in previous years. We expense them on a GAAP as well as on a tax basis every year.

To the extent that we can't utilize certain deductions they would then be captured in the form of NOLs, which -- while we can't use in a current year. So I just want to be clear because I have had a lot of questions about NOLs versus amortization.

If you think about amortization, you deduct it if you can't use it; it really creates a taxable loss that you can carry forward for a specified number of years as long as you do it in accordance with IRS regulations.

Okay, great. Thank you. You also mentioned your relationship you got with BMO earlier on the call. It looks like one of their representatives on your Board, I guess Barry Cooper, was replaced by a guy named Hugh McKee. Just curious, when does the stand-still agreement with BMO expire?

And then also has anyone else approached the Company about buying Virtus?

In terms of the change for the Board representation, as we indicated in the various press releases and filings, BMO under the nature of the agreement has the right and has the ability to name two designated members. And for reasons of changes in roles and responsibilities of Barry, a determination was made that instead of having Barry be the representative that Hugh McKee would become that individual.

That was treated as it appropriately should be treated through our governance and through our Board in terms of review and approval. And at our last meeting, that was accomplished and executed on.

In terms of our BMO relationship in the transaction, again you are correct that there is a period of time for which there is a stand-still. That is not expiring in the current year. It's in 2011 it expires. It is in 2011, so that is a long way off.

BMO is a very good a partner and we do a lot of business with them, and I'm not going to speak for BMO nor what could happen in the future.

(technical difficulty) also would not be appropriate for me to really speak to anything in terms of has anyone approached the Company. But what I will tell you is that the Board of Virtus and the management of Virtus obviously would have to look at and deal with any increases that came in, in accordance with the policies and procedures that we currently have in place.

But to be clear, right now the primary objective for us is to really demonstrate growth in this business and increase the value to shareholders and to all constituents.

Great. Thank you.

Thank you, Austin.

David Horn, Kiron Advisors.

Good morning, gentlemen. Thanks for taking the questions. So, a follow-up. I realize that the deferred tax assets and NOL is a somewhat complex situation. To what degree would those be available should someone be interested in acquiring Virtus? Would they be able to acquire those losses as well to use to shield future income, or are they only available to this entity?

In terms of interpreting how tax attributes and NOLs are dealt with in an acquisition scenario, really that is not really -- our focus is really on how to utilize and how to deal with the opportunities that we have at Virtus to take advantage of those.

So I would refer you to others to make the determination how that would work in a scenario. But IRS tax rules generally are very specific in terms of how tax attributes can be used by an operating company and what the impact is if there were to be any kind of a change. And generally, some of the rules do allow for limitations.

But again, that is really not an area that we are currently focused in on. We are really looking for the opportunities of how to -- how do we, Virtus, realize those tax opportunities, but would obviously have to look at anything that could ultimately do that.

Right. The reason I ask -- and I guess as the analyst community starts to notice you and pay attention, with a $112 million asset and a $100 million market cap, the size of your asset is significant enough that it really should, I would think, come into play with valuation. It shouldn't be overlooked.

So that is sort of why I asked the question. I think -- I imagine you will get some follow-up on that from future sell-side analysts.

Yes, and I want to be clear, we absolutely recognize it and we have had many questions about our tax attributes. So we absolutely do understand that that, in the circumstances in which it can be utilized, could be a value.

But again, we have to be careful to indicate very clearly that from the perspective of utilizing it within the current operating structure of Virtus, we have allowed for it because right now we can't demonstrate the realizability of that. And we do understand that there are other ways that it could be unlocked. So we do -- are conscious of that and that being an important element of valuation as others look at us.

Okay. Thanks. Then are we going to see a dropdown in cash for the Q1 numbers because of incentive payments again?

Yes, when you think about the first quarter and the pattern will be pretty easy -- generally all of our annual incentive is paid once a year and it is paid within the first quarter. So two things that you see is you will see the liability related to that decline, because it will be paid -- to the extent that they are paid out in cash, there will be a pro rata reduction in cash.

So as Mike pointed out as he was going through the employment expenses, that is also the time where we have a spike in payroll taxes because of the FICA and related costs really hit pretty much all at once. I think the number last year was a relatively significant number. It was approximately around $1 million of additional payroll taxes that then you wouldn't see once those thresholds had been met.

Again, going forward, I don't know if there will be changes in the fact that people max out at FICA. But that is probably a different question.

So the $28 million, can you give an estimate? If we ended Q4 with $28.6 million sort of -- obviously not the other operations of the business, but what impact the incentive payments and the drawdown will have on that number?

Mike, do you want to --?

Yes, good morning. I think importantly the working capital balance that we talked about at $32 million at the end of the year shouldn't be impacted by any cash position because the related payable would be relieved when we make that payment.

Then the other point there is we look at it in the context of our debt covenants. There are certain asset coverage ratios that we evaluate. So when we look forward we don't feel that there will be any consideration or issue with our covenants as we look out into the end of the first quarter.

Okay. Then one last question. If the market does depreciate and we are not able to sort of refill the assets under management bucket with new sales, will we see employment costs go down?

Yes, Mike alluded to our account structures are very, very variable. So when sales go up, our sales-related comp will go up; and it goes down the same.

And our incentive programs are generally very, very linked to profit contributions. So quarters or years where we have more profit, the competition will go up and it will go down. So you should fully expect that there would be a high degree of correlation between what happens on the incentive line compared to the profitability.

All right, great. Thanks, guys.

David Levy, Senvest Partners.

Morning. Great quarter. I wanted to touch a little bit on the last question. How are you planning on growing AUM in 2010? If you could just provide a little bit more color.

And how do you incentivize your sales force, and what expectations and hurdles do you have for them for the year?

That's a good question. In terms of growing the assets, just getting to the overall -- the goal and what we think will move the meter the most on the margin is really the scale-per-PM kind of a concept. Where the quality teams that we currently have in place at our affiliates, the more assets they have managed by the existing team, is obviously the biggest lever on the margin.

Raising assets through our distribution sales force is really, again, the number-one opportunity that we have the highest degree of control over. So that is an area that we are very focused in on.

In terms of sales resources, actually if you look at the fund business, even though I believe we have been very successful this year in a very difficult environment to grow our sales, we don't have an overly large sales force. We actually are very cautious in terms of our sales force. So we have a small but high-quality sales force.

In terms of how we compensate them and how they're compensated, there is great alignment. They are basically paid basis points on sales. So the more they sell the more that they will be paid; and the same is true if they sell less. So there is a good correlation there.

The other thing that I would point out is we try to be very careful in terms of having a comp structure that not only drives towards growing assets and making sales, but moves more towards the higher profit types of products as opposed to the lower types of products. So we use the mechanisms appropriate within a sales compensation structure to drive behavior, to raise a lot of assets, and preferably raise the assets that have the highest margin.

Are you pleased with the existing sales force? Are you looking to ramp that up this year?

As we look at the sales force, while I'm pleased with the sales force -- because I think for a firm our size and even though we have a fewer number of wholesalers and salespeople, I think we have a very high quality team. Their years of service is actually very high in terms of other industry comparables. So I am pleased with the quality.

In terms of the sales force, it's a number that will change over years. If you look at anyone in our industry, in certain years people will be adding to the sales force, and certain years people will be bringing them down.

We did reduce our sales force over the last few years. And if we thought there was a great opportunity to dramatically move the meter in terms of sales, we could bring in additional resources. We do think in this market there are some very fine experienced wholesalers that could be additions to the team.

But I also have to balance it out with making sure that the individual territories that our wholesalers cover provide enough opportunity. So when we see sales go up, you could then expect to see an increased probability that we might bring in some additional sales resources; and the same on the downside.

Okay, but any additional sales resources that you would bring in you would try to keep in line with your existing variable cost structure, right?

Yes. I mean, generally -- and the sensitivity on the sales force, and probably the sales force that is currently listening to this conversation, is they basically get paid bps on sales. So if you bring in one more wholesaler into your grouping of wholesalers, that just means variable comp is going to be spread over one additional person. So there is a balance there.

But absolutely, yes, as we bring things in it's usually variable. Though there are situations if you bring some people in you might have to give them a short-term level of comfort on comp; but that is usually very short term.

Okay. Thank you.

(Operator Instructions) Steve White, RMB Capital Management.

Hi, guys. Most of my questions have been asked, but I was wondering if you could provide a little bit more granularity on the other operating expense line. And if you could talk a little bit about how much of that is fixed versus variable, just to kind of tease out how much of the incentive comp is buried in the compensation line item versus other OpEx.

Sorry, I didn't get just the last piece of it when you talked about comp.

Oh, I am just trying to understand how much of the variable compensation is embedded in the other operating expense line.

None. So let me -- and Mike will go through that, but just to give you a view, all of the variable comp is included in the employment expense line. However, in other operating expense there are some variable sales-related costs -- printing, marketing, when our sales force has meetings or presentations or seminars. So there is a variable element related to sales included in other operating costs, but none of the compensation.

All the compensation is generally included -- or at least the internal compensation is all included up in employment expenses.

But as you are correctly pointing out, other operating expense, that line, is really a combination of fixed costs. Like the cost to be a public company, information technology, rent. That is the staple of the line called other operating expenses; and then it's complemented with some of the more variable stuff that I talked about.

Mike, is there any additional color or clarification you want to give on that line?

Just to respond to some of the items there, the majority of the other operating expenses is fixed in nature. There's investment research tools and certain professional fees; I think we highlighted some of those costs in our press release. Professional fees, certain public company costs are in there.

I think one of the important items to note is you really were able to see the scalability on that line item throughout 2009, where we grew our top line, kept those costs in check. So to a large degree there is fixed elements; there will be some degree of variability based on some sales efforts and then some of those professional fees.

Okay, but that line has been -- it's declined the last two quarters consecutively even though sales have been very strong. So what should we expect, do you think, going forward? I know that you are not providing any guidance, but what kind of run rate do you think is reasonable from this point forward?

Sure, well I think -- and again, I will let Mike give some clarifications. But as Mike went through that line he thought it was very helpful if you look at it in terms of the average of the four quarters. Because if you have something that has fixed costs, it also has lumpy costs -- I hate to use that term. But the certain things that are related maybe to annual Board meetings or big presentations and sales activities are not going to be basically a flat-line fixed cost.

So rent you can think of as a flat-line fixed cost. But certain things related to other types of things such as either happen periodically could cause it to spike up or down. So we could have a period where something is either unusually low or you don't have activity occurring.

So I think the specific reason Mike pointed out, looking at it on average, is that there is some, again, variability in that line. Mike, is there anything --?

Yes, I think that's right. I think the range this year provided a good context for the cost structure.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to our moderators for any closing remarks.

Okay, well, I want to thank everyone for participating this morning. Again, we believe that we have an interesting story to tell and that Virtus is a Company that has great opportunities, and we appreciate your attention to us. Thank you.

That does conclude today's teleconference. Thank you for participating. You may now disconnect.