Attached files
file | filename |
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EX-99.3 - EX-99.3 - VIRTUS INVESTMENT PARTNERS, INC. | d438531dex993.htm |
EX-99.1 - EX-99.1 - VIRTUS INVESTMENT PARTNERS, INC. | d438531dex991.htm |
EX-23.1 - EX-23.1 - VIRTUS INVESTMENT PARTNERS, INC. | d438531dex231.htm |
8-K/A - 8-K/A - VIRTUS INVESTMENT PARTNERS, INC. | d438531d8ka.htm |
Exhibit 99.4
Pro Forma Condensed Combined Financial Statements
(unaudited)
On June 1, 2017, Virtus Investment Partners, Inc. (the Company, we, us, our or Virtus) completed the acquisition (the Acquisition) of RidgeWorth Investments (RidgeWorth). The total purchase price of the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. At the closing, the Company paid $471.4 million in cash, issued 213,669 shares of the Companys common stock with a value of $21.7 million, based on stock price of $101.76, and recorded $51.7 million in contingent consideration and $2.3 million in deferred cash consideration.
The following Unaudited Pro Forma Condensed Combined Statements of Operations for the three months ended March 31, 2017 and for the year ended December 31, 2016, combine the historical consolidated statements of operations of Virtus and RidgeWorth for those periods, giving effect to the Acquisition as if it had been consummated on January 1, 2016, the beginning of the full year period presented. The following Unaudited Pro Forma Condensed Combined Balance Sheet combines the consolidated balance sheets of Virtus and RidgeWorth, giving effect to the Acquisition as if it had been consummated on March 31, 2017. Virtus and RidgeWorth have the same fiscal year end, and, as such, no adjustments were necessary to align the reporting periods.
The Unaudited Pro Forma Condensed Combined Financial Statements were prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, with Virtus considered as the accounting acquirer and RidgeWorth as the accounting acquiree. Accordingly, consideration paid by Virtus to complete the Acquisition were allocated to the identifiable assets and liabilities of RidgeWorth based on their estimated fair values as of the closing date of the Acquisition.
As of the date of the Form 8-K/A filing to which these Pro Forma Condensed Combined Financial Statements are attached (the Form 8-K/A), our estimate of the fair value adjustment specific to the acquired intangible assets and final tax positions remains preliminary given the timing of the transaction and complexity of the purchase accounting. We intend to finalize the accounting for these items as soon as reasonably possible. In addition, the Company may adjust the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the closing date as it obtains more information as to facts and circumstances existing as of the acquisition date. As a result of the foregoing, the unaudited adjustments to the Pro Forma Condensed Combined Financial statements (the pro forma adjustments) are preliminary and are subject to change as additional information becomes available. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in differences from the Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations. The final acquisition method of accounting will be different from that reflected in the pro forma information presented herein, and this difference may be material. In addition, an estimated effective tax rate was used in preparation of these Unaudited Pro Forma Condensed Combined Financial Statements. The actual effective tax rate may differ from this estimate.
Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the Unaudited Pro Forma Condensed Combined Financial Statements to give effect to pro forma events that are: (1) directly attributable to the Acquisition; (2) factually supportable; and (3) with respect to the Unaudited Pro Forma Condensed Combined Statement of Operations, expected to have a continuing impact on the combined results following the Acquisition. The Unaudited Pro Forma Condensed Combined Financial Statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the Acquisition occurred on the dates indicated. Further, the Unaudited Pro Forma Condensed Combined Financial Statements do not purport to project the future operating results or financial position of the combined company following the Acquisition.
These Unaudited Pro Forma Condensed Combined Financial Statements have been derived from, and should be read in conjunction with:
| The unaudited condensed consolidated financial Statements of Virtus as of and for the three-month period ended March 31, 2017, as contained in its Quarterly Report on Form 10-Q filed on May 8, 2017; |
| The audited consolidated financial statements of Virtus as of and for the year ended December 31, 2016, as contained in its Annual Report on Form 10-K filed on February 27, 2017; |
| The unaudited consolidated financial statements of RidgeWorth as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 filed with this Form 8-K/A; and |
| The audited consolidated financial statements of RidgeWorth as of and for the years ending December 31, 2016 and 2015 filed with this Form 8-K/A. |
The Unaudited Pro Forma Condensed Combined Financial Statements do not reflect the costs of any integration activities including any benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies expected to result from the Acquisition. Although Virtus believes that there will be integration costs and that cost savings will be realized following the Acquisition, these cost savings may not be achieved in full or at all. In addition, the Unaudited Pro Forma Condensed Combined Statements of Operations do not include other one-time costs directly attributable to the Acquisition or professional fees incurred by Virtus or RidgeWorth as those costs are not considered part of the purchase price nor are they expected to have a continuing impact on the combined company.
Virtus Investment Partners, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2017
($ in thousands, except per share data) | Historical Virtus |
Historical RidgeWorth |
Reclassifications (1) | Note References |
Acquisition & Financing Adjustments (2) |
Note References |
Pro Forma Combined |
|||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Investment management fees |
$ | 59,271 | $ | 37,816 | $ | | $ | | $ | 97,087 | ||||||||||||||||||
Distribution and service fees |
10,783 | | | | 10,783 | |||||||||||||||||||||||
Administration and transfer agent fees |
8,981 | | | | 8,981 | |||||||||||||||||||||||
Other income and fees |
741 | | | | 741 | |||||||||||||||||||||||
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|
|||||||||||||||||||
Total revenues |
79,776 | 37,816 | | | 117,592 | |||||||||||||||||||||||
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|
|||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||||||
Employment expenses |
39,641 | 20,392 | | 761 | (1 | ) | 60,794 | |||||||||||||||||||||
Distribution and other asset-based expenses |
15,323 | 1,804 | | | 17,127 | |||||||||||||||||||||||
Other operating expenses |
13,226 | 7,175 | | (2,463 | ) | (2 | ) | 17,938 | ||||||||||||||||||||
Other operating expenses of consolidated sponsored investment products |
577 | | | | 577 | |||||||||||||||||||||||
Other operating expenses of consolidated investment products |
65 | 79 | | | 144 | |||||||||||||||||||||||
Depreciation and other amortization |
664 | 322 | | 986 | ||||||||||||||||||||||||
Amortization expense |
233 | 964 | | 3,911 | (3 | ) | 5,108 | |||||||||||||||||||||
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Total operating expenses |
69,729 | 30,736 | | 2,209 | 102,674 | |||||||||||||||||||||||
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|
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Operating Income |
10,047 | 7,080 | | (2,209 | ) | 14,918 | ||||||||||||||||||||||
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|
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Other Income (Expense) |
||||||||||||||||||||||||||||
Realized and unrealized gain (loss) on investments, net |
297 | (2,242 | ) | (45 | ) | (a | ) | | (1,990 | ) | ||||||||||||||||||
Realized and unrealized gain on investments of consolidated sponsored investment products, net |
3,726 | | | | 3,726 | |||||||||||||||||||||||
Realized and unrealized gain on investments of consolidated investment products, net |
718 | 411 | | | 1,129 | |||||||||||||||||||||||
Other income (expense), net |
646 | (9 | ) | 45 | (a | ) | | 682 | ||||||||||||||||||||
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Total other income (expense), net |
5,387 | (1,840 | ) | | | 3,547 | ||||||||||||||||||||||
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|
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Interest Income (Expense) |
||||||||||||||||||||||||||||
Interest expense |
(243 | ) | (1,597 | ) | | (2,129 | ) | (4 | ) | (3,969 | ) | |||||||||||||||||
Interest and dividend income |
188 | 113 | | | 301 | |||||||||||||||||||||||
Interest and dividend income of investments consolidated sponsored investment products |
1,495 | | | | 1,495 | |||||||||||||||||||||||
Interest income of consolidated investment products |
4,161 | 8,620 | | | 12,781 | |||||||||||||||||||||||
Interest expense of consolidated investment products |
(2,857 | ) | (6,178 | ) | | | (9,035 | ) | ||||||||||||||||||||
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Total interest income, net |
2,744 | 958 | | (2,129 | ) | 1,573 | ||||||||||||||||||||||
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Income Before Income Taxes |
18,178 | 6,198 | | (4,338 | ) | 20,038 | ||||||||||||||||||||||
Income tax expense |
4,433 | | | 729 | (5 | ) | 5,162 | |||||||||||||||||||||
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Net Income |
13,745 | 6,198 | | (5,067 | ) | 14,876 | ||||||||||||||||||||||
Noncontrolling interests |
(718 | ) | 193 | | | (525 | ) | |||||||||||||||||||||
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Net Income Attributable to Stockholders |
13,027 | 6,391 | (5,067 | ) | 14,351 | |||||||||||||||||||||||
Preferred stock dividends |
(2,084 | ) | | | | (2,084 | ) | |||||||||||||||||||||
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Net Income Attributable to Common Stockholders |
$ | 10,943 | $ | 6,391 | $ | | $ | (5,067 | ) | $ | 12,267 | |||||||||||||||||
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Earnings per Share-Basic |
$ | 1.67 | $ | | $ | | $ | | $ | 1.82 | ||||||||||||||||||
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Earnings per Share-Diluted |
$ | 1.62 | $ | | $ | | $ | | $ | 1.75 | ||||||||||||||||||
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Cash Dividends Declared per Preferred Share |
$ | 1.81 | $ | | $ | | $ | | $ | 1.81 | ||||||||||||||||||
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Cash Dividends Declared per Common Share |
$ | 0.45 | $ | | $ | | $ | | $ | 0.45 | ||||||||||||||||||
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Weighted Average Shares Outstanding-Basic (in thousands) |
6,542 | | | 214 | (6 | ) | 6,756 | |||||||||||||||||||||
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Weighted Average Shares Outstanding-Diluted (in thousands) |
6,773 | | | 239 | (6 | ) | 7,012 | |||||||||||||||||||||
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(1) | See Note 3 to the Unaudited Pro Forma Condensed Combined Financial Statements |
(2) | See Note 6 to the Unaudited Pro Forma Condensed Combined Financial Statements |
Virtus Investment Partners, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2016
($ in thousands, except per share data) | Historical Virtus |
Historical RidgeWorth |
Reclassifications (1) | Note References |
Acquisition & Financing Adjustments (2) |
Note References |
Pro Forma Combined |
|||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Investment management fees |
$ | 235,230 | $ | 143,875 | $ | | $ | | $ | 379,105 | ||||||||||||||||||
Distribution and service fees |
48,250 | | | | 48,250 | |||||||||||||||||||||||
Administration and transfer agent fees |
38,261 | | | | 38,261 | |||||||||||||||||||||||
Other income and fees |
813 | | | | 813 | |||||||||||||||||||||||
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Total revenues |
322,554 | 143,875 | | | 466,429 | |||||||||||||||||||||||
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Operating Expenses |
||||||||||||||||||||||||||||
Employment expenses |
135,641 | 74,308 | (1,454 | ) | (b | ) | 1,686 | (1 | ) | 210,181 | ||||||||||||||||||
Distribution and other asset-based expenses |
69,049 | 6,662 | | | 75,711 | |||||||||||||||||||||||
Other operating expenses |
50,274 | 34,590 | | (10,319 | ) | (2 | ) | 74,545 | ||||||||||||||||||||
Other operating expenses of consolidated sponsored investment products |
3,009 | | | | 3,009 | |||||||||||||||||||||||
Other operating expenses of consolidated investment products, net |
3,944 | 3,325 | | | 7,269 | |||||||||||||||||||||||
Restructuring and severance |
4,270 | | 1,454 | (b | ) | | 5,724 | |||||||||||||||||||||
Depreciation and other amortization |
3,092 | 1,372 | | | 4,464 | |||||||||||||||||||||||
Amortization expense |
2,461 | 4,454 | | 15,048 | (3 | ) | 21,963 | |||||||||||||||||||||
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Total operating expenses |
271,740 | 124,711 | | 6,415 | 402,866 | |||||||||||||||||||||||
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Operating Income |
50,814 | 19,164 | | (6,415 | ) | 63,563 | ||||||||||||||||||||||
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Other Income (Expense) |
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Realized and unrealized gain (loss) on investments, net |
4,982 | 889 | (472 | ) | (a | ) | | 5,399 | ||||||||||||||||||||
Realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net |
3,818 | | | | 3,818 | |||||||||||||||||||||||
Realized and unrealized gain (loss) on investments of consolidated investment products, net |
(1,070 | ) | 3,934 | | | 2,864 | ||||||||||||||||||||||
Other income (expense), net |
1,089 | (26 | ) | 472 | (a | ) | | 1,535 | ||||||||||||||||||||
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Total other income, net |
8,819 | 4,797 | | | 13,616 | |||||||||||||||||||||||
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Interest Income (Expense) |
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Interest expense |
(679 | ) | (6,680 | ) | | (8,515 | ) | (4 | ) | (15,874 | ) | |||||||||||||||||
Interest and dividend income |
1,743 | 501 | | | 2,244 | |||||||||||||||||||||||
Interest and dividend income of investments of consolidated sponsored investment products |
7,509 | | | | 7,509 | |||||||||||||||||||||||
Interest income of consolidated investment products, net |
12,893 | 21,975 | | | 34,868 | |||||||||||||||||||||||
Interest expense of consolidated investment product |
(11,292 | ) | (14,924 | ) | | (26,216 | ) | |||||||||||||||||||||
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Total interest income, net |
10,174 | 872 | | (8,515 | ) | 2,531 | ||||||||||||||||||||||
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Income Before Income Taxes |
69,807 | 24,833 | | (14,930 | ) | 79,710 | ||||||||||||||||||||||
Income tax expense |
21,044 | | | 3,881 | (5 | ) | 24,925 | |||||||||||||||||||||
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Net Income |
48,763 | 24,833 | | (18,811 | ) | 54,785 | ||||||||||||||||||||||
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Noncontrolling interests |
(261 | ) | | | | (261 | ) | |||||||||||||||||||||
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Net Income Attributable to Stockholders |
48,502 | 24,833 | | (18,811 | ) | 54,524 | ||||||||||||||||||||||
Preferred stock dividends |
| | | (8,338 | ) | (7 | ) | (8,338 | ) | |||||||||||||||||||
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Net Income Attributable to Common Stockholders |
$ | 48,502 | $ | 24,833 | $ | | $ | (27,149 | ) | $ | 46,186 | |||||||||||||||||
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Earnings per Share-Basic |
$ | 6.34 | $ | | $ | | $ | | $ | 5.87 | ||||||||||||||||||
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Earnings per Share-Diluted |
$ | 6.20 | $ | | $ | | $ | | $ | 5.74 | ||||||||||||||||||
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Cash Dividends Declared per Share |
$ | 1.80 | $ | | $ | | $ | | $ | 1.80 | ||||||||||||||||||
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Weighted Average Shares Outstanding-Basic (in thousands) |
7,648 | | | 214 | (6 | ) | 7,862 | |||||||||||||||||||||
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Weighted Average Shares Outstanding-Diluted (in thousands) |
7,822 | | | 224 | (6 | ) | 8,046 | |||||||||||||||||||||
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(1) | See Note 3 to the Unaudited Pro Forma Condensed Combined Financial Statements |
(2) | See Note 6 to the Unaudited Pro Forma Condensed Combined Financial Statements |
Virtus Investment Partners, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2017
($ in thousands, except per share data) | Historical Virtus | Historical RidgeWorth |
Acquisition & Financing Adjustments (1) |
Note References |
Pro Forma Combined |
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Assets: |
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Cash and cash equivalents |
$ | 235,930 | $ | 82,576 | $ | (291,215 | ) | (8 | ) | $ | 27,291 | |||||||||
Investments |
86,066 | 7,261 | (1,818 | ) | (9 | ) | 91,509 | |||||||||||||
Accounts receivable, net |
37,841 | 21,335 | | 59,176 | ||||||||||||||||
Assets of consolidated sponsored investment products |
||||||||||||||||||||
Cash of consolidated sponsored investment products |
1,866 | | | 1,866 | ||||||||||||||||
Cash pledged or on deposit of consolidated sponsored investment products |
1,107 | | | 1,107 | ||||||||||||||||
Investments of consolidated sponsored investment products |
112,930 | | | 112,930 | ||||||||||||||||
Other assets of consolidated sponsored investment products |
39,702 | | | 39,702 | ||||||||||||||||
Assets of consolidated investment products |
||||||||||||||||||||
Cash equivalents of consolidated investment products |
13,957 | 33,736 | | 47,693 | ||||||||||||||||
Investments of consolidated investment products |
354,002 | 701,431 | | 1,055,433 | ||||||||||||||||
Other assets of consolidated investment products |
6,152 | 1,449 | | 7,601 | ||||||||||||||||
Furniture, equipment and leasehold improvements, net |
7,264 | 5,721 | | (10 | ) | 12,985 | ||||||||||||||
Intangible assets, net |
38,194 | 163,207 | 112,493 | (3 | ) | 313,894 | ||||||||||||||
Goodwill |
6,788 | 42,726 | 158,303 | (11 | ) | 207,817 | ||||||||||||||
Deferred taxes, net |
45,716 | | | 45,716 | ||||||||||||||||
Other assets |
25,908 | 2,965 | 2,650 | (12 | ) | 31,523 | ||||||||||||||
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Total assets |
$ | 1,013,423 | $ | 1,062,407 | $ | (19,587 | ) | $ | 2,056,243 | |||||||||||
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Liabilities and Equity |
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Liabilities: |
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Accrued compensation and benefits |
$ | 16,519 | $ | 9,709 | $ | 8,636 | (13 | ) | $ | 34,864 | ||||||||||
Accounts payable and accrued liabilities |
30,364 | 7,570 | 7,821 | (14 | ) | 45,755 | ||||||||||||||
Dividends payable |
5,991 | | | 5,991 | ||||||||||||||||
Debt |
| 104,542 | 143,425 | (4 | ) | 247,967 | ||||||||||||||
Other liabilities |
13,702 | 7,574 | 51,156 | (15 | ) | 72,432 | ||||||||||||||
Liabilities of consolidated sponsored investment products |
2,834 | | | 2,834 | ||||||||||||||||
Liabilities of consolidated investment products |
||||||||||||||||||||
Notes payable of consolidated investment products |
325,843 | 661,457 | | 987,300 | ||||||||||||||||
Securities purchased payable and other liabilities of consolidated investment products |
20,806 | 27,259 | | 48,065 | ||||||||||||||||
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Total liabilities |
416,059 | 818,111 | 211,038 | 1,445,208 | ||||||||||||||||
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Commitments and Contingencies |
||||||||||||||||||||
Redeemable noncontrolling interests |
44,976 | | | 44,976 | ||||||||||||||||
Equity: |
||||||||||||||||||||
Equity attributable to stockholders: |
||||||||||||||||||||
Preferred stock |
110,837 | | | 110,837 | ||||||||||||||||
Common stock |
102 | | 2 | (16 | ) | 104 | ||||||||||||||
Members equity |
| 234,657 | (234,657 | ) | (16 | ) | | |||||||||||||
Additional paid-in capital |
1,196,031 | | 21,740 | (16 | ) | 1,217,771 | ||||||||||||||
Accumulated deficit |
(410,200 | ) | | (17,710 | ) | (16 | ) | (427,910 | ) | |||||||||||
Accumulated other comprehensive loss |
(136 | ) | | | (136 | ) | ||||||||||||||
Treasury stock |
(344,246 | ) | | | (344,246 | ) | ||||||||||||||
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Total equity attributable to stockholders |
552,388 | 234,657 | (230,625 | ) | 556,420 | |||||||||||||||
Noncontrolling interests |
| 9,639 | | 9,639 | ||||||||||||||||
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Total equity |
552,388 | 244,296 | (230,425 | ) | 566,059 | |||||||||||||||
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Total liabilities and equity |
$ | 1,013,423 | $ | 1,062,407 | $ | (19,587 | ) | $ | 2,056,243 | |||||||||||
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(1) | See Note 6 to the Unaudited Pro Forma Condensed Combined Financial Statements |
Virtus Investment Partners, Inc.
Notes To Pro Forma Condensed Combined Financial Statements
(Unaudited)
Note 1 - Description of Acquisition
On June 1, 2017, the Company completed the acquisition of RidgeWorth. The total purchase price of the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. At closing, the Company paid $471.4 million in cash, issued 213,669 shares of the Companys common stock with a value of $21.7 million, based on stock price of $101.76 on the date of issuance, and recorded $51.7 million in contingent consideration and $2.3 million in deferred cash consideration.
Note 2 - Basis of Presentation
The Unaudited Pro Forma Condensed Combined Financial Statements are prepared in accordance with Article 11 of Regulation S-X. The historical financial information has been adjusted to give effect to the transactions that are (i) directly attributable to the Acquisition, (ii) factually supportable and (iii) with respect to the Unaudited Pro Forma Condensed Combined Statements of Operations, expected to have a continuing impact on the operating results of the combined company. The historical information of Virtus and RidgeWorth is presented in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), except that it does not contain all of the footnote disclosures normally required by U.S. GAAP.
Note 3 - Reclassifications and Conforming Accounting Policies
The Unaudited Pro Forma Condensed Combined Statements of Operations reflect the following reclassifications in order to conform the presentation of RidgeWorths financial results to that of Virtus:
(a) | An adjustment to conform the presentation of income from equity method investments from Realized and unrealized (loss) gain on investments, net to Virtuss presentation as Other income, net. |
(b) | An adjustment to conform the presentation of severance expenses as a component of Employment expenses to Virtuss presentation as Restructuring and severance. |
At this time, Virtus is not aware of any additional differences that would have a material impact on the Unaudited Pro Forma Condensed Combined Financial Statements.
Note 4 - Calculation of Preliminary Estimated Purchase Price and Transaction Financing
The Acquisition was financed with a combination of debt, equity, equity-linked securities and balance sheet resources. During the three months ended March 31, 2017, the Company issued 1,046,500 shares of common stock and 1,150,000 shares of 7.25% mandatory convertible preferred stock (MCPS) in public offerings for net proceeds of $220.5 million, after underwriting discounts, commissions and other offering expenses. The Company used the net proceeds of these offerings, together with cash on hand, 213,699 shares of our common stock with a value of $21.7 million, proceeds from the sale of investments and net borrowings of approximately $244.1 million from a new credit agreement (the Credit Agreement) to finance the Acquisition and pay related fees and expenses.
The transaction consideration was as follows (in thousands):
Cash consideration |
$ | 227,286 | ||
Contingent consideration |
51,690 | |||
Deferred cash consideration |
2,300 | |||
Stock consideration |
21,742 | |||
Debt, net of issuance costs |
244,064 | |||
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Total consideration |
$ | 547,082 | ||
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Note 5 - Preliminary Estimated Purchase Price Allocation
Under the acquisition method of accounting, the total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of the acquisition.
The Company performed a preliminary valuation analysis of the fair market value of RidgeWorths tangible and intangible assets and liabilities.
The table below represents a preliminary estimated allocation of the total estimated consideration to RidgeWorths tangible and intangible assets and liabilities as of March 31, 2017 based on the Companys preliminary estimate of their respective fair values (in thousands):
Total consideration |
$ | 547,082 | ||
Tangible net assets acquired |
(70,353 | ) | ||
Identifiable intangible assets acquired |
(275,700 | ) | ||
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Consideration allocated to goodwill |
$ | 201,029 | ||
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This preliminary estimated purchase price allocation was used to prepare pro forma adjustments in these Unaudited Pro Forma Condensed Combined Financial Statements. Any changes to the initial estimates of the fair value of assets and liabilities that are made within the measurement period, which will not exceed one year, will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
Note 6 - Pro Forma Adjustments
The Unaudited Pro Forma Condensed Combined Statements of Operations do not include any material non-recurring charges that will arise in subsequent periods related to the Acquisition. In addition, the Unaudited Pro Forma Condensed Combined Financial Statements do not reflect the costs of any integration activities including any benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies expected to result from the Acquisition. The Unaudited Pro Forma Condensed Combined Financial Statements do, however, reflect the following adjustments:
(1) Employment Expenses
A transaction-related stock incentive program was established upon closing of the Acquisition for certain RidgeWorth employees to replace incentives that were in place prior to the Acquisition. The incentive program provides for two grants of restricted stock units, each of which will be comprised of time and performance based elements. The first grant was made on the closing date, while the second grant will be made on the first anniversary of the closing date; in each case, the grants will be subject to vesting over a five-year period and subject, in the case of performance grants, to the satisfaction of specified performance measures. Each grant has a fair value of approximately $10.0 million at the time of grant. The impact of the stock incentive awards in the Unaudited Pro Forma Statement of Operations for the three months ended March 31, 2017 and year ended December 31, 2016 is estimated to be
$1.0 million and $2.0 million, respectively. Separately, to align annual incentive plans with Virtus, certain RidgeWorth annual incentive plans were modified in connection with the closing of the Acquisition to allocate a percentage of the annual incentive to Virtus restricted stock units or mutual fund investments that will vest over a three-year period. The impact of the modification to certain annual incentive plans for the Unaudited Pro Forma Statement of Operations for the three months ended March 31, 2017 and year ended December 31, 2016 is estimated to be $(0.4) million and $(0.9) million, respectively. Additionally, after the Acquisition, the employment status of certain members of the RidgeWorth staff converted from partners to employees resulting in incremental payroll taxes. The impact of the incremental payroll taxes for the Unaudited Pro Forma Statement of Operations for the three months ended March 31, 2017 and year ended December 31, 2016 is estimated to be $0.2 million and $0.6 million, respectively.
(2) Transaction Costs
This amount represents an adjustment to eliminate $2.5 million and $10.3 million of transactions costs incurred by the Company and RidgeWorth in connection with the Acquisition for the three months ended March 31, 2017 and year ended December 31, 2016, respectively.
(3) Intangible Assets
The preliminary valuation analysis conducted by the Company identified intangible assets consisting of investment contracts and trademarks/tradenames. The fair value of acquired investment contracts, which was determined using the multi-period excess earnings method under the income approach, was estimated at $266.2 million. The fair value of the acquired trademarks/tradenames, which was determined using the Relief from Royalty Method, was estimated at $9.5 million. The calculation of these fair values is preliminary and subject to change.
The following table summarizes the estimated fair values of RidgeWorths identifiable intangible assets and their estimated useful lives and uses a straight line method of amortization (in thousands):
Estimated Fair Value |
Estimated Useful Life in Years |
Three Months Ended March 31, 2017 |
Year Ended December 31, 2016 |
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Investment contracts |
$ | 266,200 | 10-16 | $ | 4,855 | $ | 19,422 | |||||||||
Trademarks/tradenames |
9,500 | 10-Indefinite | 20 | 80 | ||||||||||||
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Total |
$ | 275,700 | 4,875 | 19,502 | ||||||||||||
Historical amortization expense |
(964 | ) | (4,454 | ) | ||||||||||||
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Pro forma adjustments |
$ | 3,911 | $ | 15,048 | ||||||||||||
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Adjustments to intangible assets in the Unaudited Pro Forma Condensed Combined Balance Sheet consist of the following (in thousands):
Intangible assets |
$ | 275,700 | ||
Elimination of RidgeWorths pre-acquisition intangible assets |
(163,207 | ) | ||
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Net adjustment to intangible assets |
$ | 112,493 | ||
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(4) Debt and Interest Expense
At the closing of the Acquisition, existing debt of Ridgeworth was retired and new debt under the Credit Agreement to finance the transaction was incurred which are reflected as adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet as follows (in thousands):
Debt | ||||
RidgeWorth debt - repaid at closing |
$ | (104,542 | ) | |
Increase for issuance of new debt |
247,967 | |||
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Pro forma adjustments to debt |
$ | 143,425 | ||
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Amounts outstanding under the Credit Agreement bear interest at an annual rate equal to, at the option of the Company, either LIBOR (adjusted for reserves) for interest periods of one, two, three or six months (or, solely in the case of the revolving credit facility, if agreed to by each relevant Lender, twelve months or periods less than one month) (subject to a floor of 0% in the case of the revolving credit facility and 0.75% in the case of the term loan) or an alternate base rate, in either case plus an applicable margin. The applicable margins are initially set at 3.75%, in the case of LIBOR-based loans, and 2.75%, in the case of alternate base rate loans and will, following the first delivery of certain financial reports required under the Credit Agreement, range from 3.50% to 3.75%, in the case of LIBOR based loans, and 2.50% to 2.75%, in the case of alternate base rate loans, based on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter, as reflected in such financial reports. Interest is payable quarterly in arrears with respect to alternate base rate loans and on the last day of each interest period with respect to LIBOR-based loans (but, in the case of any LIBOR-based loan with an interest period of more than three months, at three-month intervals. The Credit Agreement consists of a $260.0 million Term Loan and a $100.0 million Revolving Credit Facility. The Revolving Credit Facility was undrawn at the closing of the Acquisition. The Credit Agreement had debt issuance costs of $16.1 million
The Unaudited Pro Forma Condensed Combined Statements of Operations reflect an adjustment to interest expense (inclusive of the amortization of deferred financing costs) related to the Credit Agreement for the three months ended March 31, 2017 and year ended December 31, 2016 of $3.9 million and $15.9 million, respectively. It also includes an adjustment to eliminate RidgeWorths historical interest expenses of $1.6 million and $6.7 million, for the three months ended March 31, 2017 and year ended in December 31, 2016, respectively, as RidgeWorths debt was repaid at closing out of the purchase price proceeds. In connection with entering into the new Credit Agreement, the existing Virtus credit facility was terminated and repaid in full. As a result of the terminated Virtus credit facility, there is also an adjustment to interest expense for the three months ended March 31, 2017 and year ended December 31, 2016 of $0.2 million and $0.7 million, respectively, to eliminate the historical interest expense related to the termination of the Virtus credit facility as it is no longer an on-going cost to Virtus. Adjustments to interest expense in the Unaudited Pro Forma Condensed Combined Statement of Operations consist of the following (in thousands):
Interest Expense | Three Months Ended March 31, 2017 |
Year Ended December 31, 2016 |
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RidgeWorth debt - repaid at closing |
$ | 1,597 | $ | 6,680 | ||||
Existing Virtus Credit Facility - terminated at closing |
243 | 679 | ||||||
New term loan and credit facility |
(3,969 | ) | (15,874 | ) | ||||
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Pro forma adjustments to interest expense |
$ | (2,129 | ) | $ | (8,515 | ) | ||
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(5) Income Taxes
Prior to the Acquisition, RidgeWorth was not required to provide for income taxes as it was treated as a pass-through entity for U.S. federal and state income tax purposes. Federal and state income taxes were assessed at the owner level and each owner was liable for its own tax payments.
The Unaudited Pro Form Condensed Combined Statements of Operations reflect an adjustment of $0.7 million and $3.9 million to income tax expense from continuing operations for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, based on a statutory rate of 38% as Virtus is subject to federal and state income taxes.
(6) Weighted Average Shares Outstanding
This amount reflects an adjustment to increase basic and diluted weighted average shares outstanding in connection with the issuance of approximately 213,699 common shares with respect to the Acquisition representing a part of the consideration paid to certain RidgeWorth employees in respect of the RidgeWorth equity that they previously held. In addition, this amount represents the dilutive impact of the transaction related stock incentive plan, which was estimated to impact diluted weighted average shares outstanding by 24,902 and 10,078 shares for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively.
(7) Preferred Stock Dividends
This amount represents preferred stock dividends on the 1,150,000 share of 7.25% MCPS issued during the three months ended March 31, 2017.
(8) Cash
This amount represents adjustments to cash to reflect cash receipts and payments related to the Acquisition, as follows (in thousands):
Receipts: |
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Issuance of debt, net of costs |
$ | 244,064 | ||
Payments: |
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Cash consideration for acquisition |
(471,350 | ) | ||
Cash not assumed |
(63,929 | ) | ||
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Net pro forma adjustments to cash and cash equivalents |
$ | (291,215 | ) | |
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(9) Investments
This amount reflects an adjustment of $1.8 million to fair value an equity method investment.
(10) Furniture, Equipment and Leasehold Improvements. net
The useful lives of RidgeWorths furniture, equipment and leasehold improvements, net is consistent with Virtuss useful lives and its fair value is not materially different from its carrying value.
(11) Goodwill
This amount reflects an adjustment to remove RidgeWorths historical goodwill of $42.7 million and to record the estimated goodwill associated with the Acquisition of $201.0 million as shown in Note 5.
Goodwill is not amortized, but rather is assessed for impairment at least annually or more frequently whenever events or circumstances indicate that goodwill might be impaired. Adjustments to goodwill consist of the following (in thousands):
Goodwill (as determined in Note 5) |
$ | 201,029 | ||
Elimination of RidgeWorths pre-acquisition goodwill |
(42,726 | ) | ||
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Net adjustment to goodwill |
$ | 158,303 | ||
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(12) Other Assets
This amount reflects: (1) an adjustment of $(1.3) million to remove historical deferred financing costs related to the terminated Virtus credit facility and (2) an adjustment of $3.9 million to capitalize the deferred financing costs related to the Credit Agreement.
(13) Accrued Compensation and Benefits
This amount reflects an adjustment of $8.6 million related to contractual severance obligations that was in place upon completion of the Acquisition.
(14) Accounts Payable and Accrued Liabilities
This amount reflects an adjustment of $7.8 million related to transaction costs incurred after March 31, 2017.
(15) Other Liabilities
This amount reflects the $51.7 million of contingent consideration recorded as part of the purchase consideration and the $2.3 million obligation related to the deferred cash consideration that will be paid following the expiration of a period of time following the completion of the Acquisition. The deferred cash consideration is considered transaction consideration and does not contain an employee service requirement. In addition, there is an adjustment to decrease other liabilities by $2.8 million to reflect the purchase accounting adjustments related to RidgeWorths deferred rent liabilities related to leased office space.
(16) Stockholders Equity
This amount represents the elimination of the historical equity of RidgeWorth of $234.6 million upon completion of the Acquisition. Additional paid in capital also reflects the issuance of $21.7 million in Virtus stock as part of the consideration for RidgeWorth equity held by certain Ridgeworth employees, as further discussed above in Note 4. Accumulated deficit reflects the write-off of $1.3 million of deferred financing costs on the terminated Virtus credit facility, $8.6 million in contractual severance obligations and $7.8 million of transaction costs.