Matrix Asset Management Inc.
TSX : MTA

Matrix Asset Management Inc.

August 07, 2012 22:41 ET

Matrix Asset Management Inc. Reports Second Quarter Results, Declares Stock Dividend and Announces Term Loan Arrangements

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 7, 2012) - Matrix Asset Management Inc. (the "Company" or "Matrix") (TSX:MTA) reported today its financial and operating results for the second quarter ended June 30, 2012 and announced that, subject to TSX approval, a stock dividend of $0.015 per share would be payable on September 20, 2012 to shareholders of record on September 5, 2012. A stock dividend means that shareholders would receive additional Matrix common shares issued from treasury at prevailing market prices. The recent decrease in operating performance has caused the Board of Directors to approve a stock dividend, in place of a cash dividend, to retain operating cash flow and support growth. The Board of Directors remains hopeful that a cash dividend will be reinstated as initiatives aimed at growing AUM are implemented and cost-cutting measures continue to reduce Matrix's expenses. Matrix also announced that the Board of Directors approved Matrix raising up to $2 million in debt through term loan arrangements.

Highlights

The second quarter of 2012 saw a decrease in assets under management ("AUM") and a corresponding decrease in fee-based revenues, which are generally calculated by reference to AUM. While management's continued cost-cutting measures have reduced recurring expenses significantly from $9.2 million for the quarter ended June 30, 2011 to $7.7 million for the quarter ended June 30, 2012, the reduction in expenses has not kept pace with declining revenues, resulting in a decrease of Matrix's working capital. For the quarter ended June 30, 2012, EBITDA was $(0.3) million, or $0.0 million on a recurring basis, and Free Cash Flow was $(0.8) million. Matrix incurred a net loss for the quarter of $(1.5) million, and recurring loss before taxes was also $(1.5) million.

As announced in February 2012, Manulife Financial terminated their mandate with SEAMARK, effective June 2012, resulting in an expected decrease in AUM during the second quarter. Manulife's mandate represented approximately $335.6 million in Matrix's AUM or approximately 26.2% of Matrix's overall AUM as of December 31, 2011, but only approximately 3.0% of Matrix's consolidated revenue for the year then ended.

Matrix continues to pursue opportunities to grow AUM organically and through acquisitions. To that end, in April 2012, SEAMARK completed a transaction with LeeSide Capital Inc. ("LeeSide") whereby SEAMARK acquired LeeSide's assets under management and the three founders of LeeSide, Robert (Bob) McKim, George Loughery and Don Wishart, rejoined SEAMARK where they spent a collective 40 years prior to forming LeeSide. Management believes that the return of the LeeSide principals, with an equity participation, is a key building block in the SEAMARK transition.

On June 18, 2012, Matrix announced the appointment of Wan Kim as Senior Vice President, National Sales & Marketing. Before joining Matrix, Wan spent 10 years as Senior Vice President, National Sales Manager at a national mutual fund company, where he oversaw 8 years of annual net sales from 2003 to 2010.

As organic growth initiatives and cost alignment measures typically require several quarters to impact AUM and operating results, Matrix is seeking medium-term working capital financing to provide further time for these initiatives and measures to take hold and to pursue growth opportunities. To this end, on August 7, 2012, the Board of Directors approved Matrix raising up to $2.0 million in debt through term loan arrangements. Subject to TSX approval, lenders may include insiders of Matrix.

David Levi, President and CEO of Matrix, commented: "The past quarter was challenging, but important progress was achieved on reducing expenses over the past year. AUM has decreased mainly due to a previously announced client departure. During the quarter we continued to invest in the growth of our subsidiaries through the launch of retail and institutional products."

Corporate Overview

Matrix is a diversified, asset and wealth management company with offices across Canada. The Company manages approximately $1.1 billion in assets through three operating divisions:

  • Institutional asset management, operated through SEAMARK, which offers portfolio management to institutional and high net worth private clients, including through managed portfolio advisory ("WRAP") programs of leading Canadian investment dealers.
  • Fund management, operated through Matrix Funds Management (a division of GrowthWorks Capital Ltd.), which manages the Matrix family of mutual funds and specialty funds (formerly Mavrix Funds and SEAMARK Mutual Funds) and distributed through investment dealers and financial planners across Canada.
  • Venture capital and private equity, operated through GrowthWorks, which manages funds in the venture capital and private equity sector. With seven offices located in major and regional centres across Canada, GrowthWorks has a true national investment presence and manages venture capital funds for individual and institutional investors.

This diversified set of operations delivers multiple sources of revenue across several asset and client groups. The Company's mission is to provide a diverse array of investment choices and the best possible investment management service to Canadian investors and institutions.

Summary of Second Quarter Financial Results - Unaudited

Results of operations for Matrix for the second quarter consolidate the results of Matrix and its subsidiaries. Matrix reports its consolidated financial position, statement of income (loss), statement of comprehensive income (loss), statement of shareholders' equity and cash flows in accordance with International Financial Reporting Standards ("IFRS" and also referred to as generally accepted accounting principles, or "GAAP") in Canadian dollars.

The following table sets out selected consolidated financial information about Matrix for the three months and six months ended June 30, 2012 compared with financial information for Matrix for the same periods in 2011.

For the threeFor the threeFor the sixFor the six
months endedmonths endedmonths endedmonths ended
June 30, 2012June 30, 2011June 30, 2012June 30, 2011
(in $ thousands)(in $ thousands)(in $ thousands)(in $ thousands)
Revenue
Management and administration fees$5,473$6,973$11,352$14,182
Additional administration fees 313 356 656 724
Incentive participation dividends 399 915 983 1,268
Interest income 150 11 159 25
Other income 102 378 194 538
Total Revenue 6,437 8,633 13,344 16,737
Expenses
Selling, general and administrative 5,896 8,110 11,623 14,103
Share-based compensation 135 132 279 228
Servicing commissions 584 709 1,202 1,417
Amortization - property and equipment 81 72 163 142
Amortization - deferred sales commissions 513 573 1,004 1,207
Amortization - asset management contracts 192 287 384 574
Interest 269 204 456 432
7,670 10,087 15,111 18,103
Loss before merger, acquisition and other special project costs (1,233) (1,454) (1,767) (1,366)
Merger, acquisition and other special project costs 293 2,201 375 3,593
Loss before taxes (1,526) (3,655) (2,142) (4,959)
Income tax loss (recovery) 5 (1,230) (76) (3,902)
Net Loss$(1,531)$(2,425)$(2,066)$(1,057)
Basic loss per share (in $) (0.03) (0.06) (0.05) (0.03)
Diluted loss per share (in $) (0.03) (0.06) (0.05) (0.03)
NON-GAAP MEASURES
EBITDA(1) (336) (2,387) 144 (2,376)
Add non-recurring items, net(2) 293 3,118 375 5,243
Recurring EBITDA(3) (43) 731 519 2,867
Free Cash Flow (5) (777) (3,066) (432) (2,088)
Loss before taxes (1,526) (3,655) (2,142) (4,959)
Add non-recurring items, net(2) 293 3,118 375 5,243
Recurring (loss) income before taxes(4) (1,233) (537) (1,767) 284
Dividends declared and paid 1,386 714 1,403 1425
As atAs atAs at
June 30, 2012June 30, 2011December 31, 2011
(in $ thousands)(in $ thousands)(in $ thousands)
Cash, cash equivalents and investments$901$2,462$1,767
Total assets 28,091 35,510 28,133
Total long-term liabilities 11,965 8,292 11,799
Total assets under management(6) 1,100,000 2,300,000 1,600,000
Notes:
  1. EBITDA (defined by Matrix as earnings before interest, taxes, depreciation and amortization and other non-cash items) is a measure used by many investors to compare issuers on the basis of their ability to generate cash from operations. Management believes EBITDA is a useful supplemental measure of operating performance as it provides an indication as to cash available for working capital needs, capital expenditures and dividends.
  2. Non-recurring items are described in Matrix's Management's Discussion & Analysis posted on SEDAR.
  3. Management believes "recurring EBITDA" is a useful supplemental measure of operating performance because it provides readers with greater insight into what the core or run-rate EBITDA generating capacity of the business may be by adjusting EBITDA for various non-recurring items. Without presentation of this measure, there can be a lack of transparency of the effect of non-recurring revenues or expenses on EBITDA.
  4. Management believes "recurring income (loss) before taxes" is a useful supplemental measure of operating performance because it provides readers with greater insight into what the core or run-rate income before taxes generating capacity of the business may be by adjusting income before taxes for various non-recurring items. Without presentation of this measure, there can be a lack of transparency of the effect of non-recurring revenues or expenses on income before taxes.
  5. Management believes "Free Cash Flow" (defined by Matrix as EBITDA less interest paid, commissions paid and net taxes (payable/refundable as filed)) is a useful supplemental measure of available cash generated from the business' operations for working capital needs, capital expenditures and dividends.
  6. Assets under management or "AUM" means the fair value of the net assets of the funds and accounts managed by Matrix and its subsidiaries in respect of which fees are earned.

Liquidity and Capital Resources

With declines in AUM and revenue outpacing declines in expenses, as at June 30, 2012 Matrix has a working capital deficit of $(4.5) million. $2.5 million of current liabilities relates to severance accruals that will be paid over the next 12 months and are not immediately payable. $1.0 million of current assets relates to tax refunds that are expected this quarter. Management fee receivables include $1.0 million of accrued management fees under a management agreement with GrowthWorks Canadian Fund.

Currently available liquid assets are expected to be adequate to meet Matrix's operational financial needs for the current quarter ending September 30, 2012. Additional capital resources will be required to meet Matrix's financial needs for the next twelve months, which includes funds required to service and re-pay debt, and fund operations.

Matrix is pursuing financing to support its working capital and provide sufficient cash to discharge all outstanding current liabilities. To this end, the Board of Directors today approved Matrix raising up to $2.0 million in debt through term loan arrangements. Subject to TSX approval, lenders may include insiders of Matrix. Initially, the interest rate on loans from insiders would be 8% per annum, payable on maturity, and the loans would be unsecured. These terms may be adjusted to match terms negotiated with additional third party lenders. The term loans are expected to mature during or after the third quarter of 2013. Maturity dates may vary by lender. There can be no assurance as to the amount of capital raised through these arrangements.

The financial statements and MD&A were prepared assuming Matrix would continue as a going concern, realize on its assets and discharge its obligations in the ordinary course of business. The continuation of the Company as a going concern is dependent on restoring positive net income, working capital, cash flows, and obtaining additional financing, while continuing to make timely interest payments and meet its debt covenants under existing financing arrangements. Returning to profitability is a priority for management. There are two key elements to management's plan for doing so. First, to grow fee-generating AUM with existing internal resources, including sales and marketing initiatives and positive portfolio performance. Secondly, to pursue larger growth opportunities through acquisitions after obtaining necessary external financing in the form of equity or debt or both.

Economic Outlook

The asset management industry is affected by economic and market conditions which strongly correlate with asset values, which drive Company fee revenues. For the quarter ended June 30, 2012 economic and market conditions were volatile. All major North American equity markets declined in value during the period amidst variable levels of actual and projected growth rates around the world. While Europe's economy faces austerity induced recessionary pressures, North America, Asia, and some other emerging markets recorded growth albeit at lower levels than recorded at similar points in past economic cycles. The world economy is dealing with a number of challenges including fears of European sovereign debt default and banking system solvency, signs of an economic slowdown in China, and government austerity measures negatively affecting economic output.

The asset management industry in Canada continues to experience a consolidation trend. Many small players realize they need to attain greater scale in the current environment. Firms with less than $1 billion in AUM are the most challenged to achieve sustainability and profitability. Matrix has proven experience in mergers and acquisitions and will seek-out opportunities to complete strategic transactions aimed at supporting Matrix's business plan.

The Company, through its operating units, will also continue to seek to attract additional AUM through competing for new investment management mandates and through positioning and re-positioning its investment fund offerings to meet the current needs of investors. The recent addition of LeeSide principals in our Seamark operating division strengthens our institutional management capabilities. Strategic assessment and planning to strengthen our mandates and offerings will continue to be a focus. The Company also expects to realize additional operating efficiencies over the coming quarters as it integrates its diversified asset management platform.

Matrix's second quarter financial statements and MD&A and year end 2011 financial statements and MD&A are available on the SEDAR website at www.sedar.com.

About Matrix (www.matrixasset.ca)

Matrix (TSX:MTA) is a diversified asset and wealth management company with approximately $1.1 billion in assets under management and offices across Canada. The Company's mission is to provide a diverse array of investment choices and the best possible investment management service to Canadian investors and institutions. The Company delivers its services through three main operating subsidiaries serving institutional, high net worth, and retail investors.

Forward-Looking Statements

Certain statements in this press release are forward-looking statements, including statements regarding the operations, business, financial condition, expected financial results and profitability, expense reductions, dividends and dividend policies, proposed financings, performance, targeted acquisitions, prospects, opportunities, new products, priorities, goals, strategies, accounting policies and estimates and outlook of Matrix for the current fiscal year and subsequent periods. Forward-looking statements are predictive in nature and are not based upon historical fact. Forward-looking statements are based upon beliefs and assumptions, including with respect to levels of Matrix's AUM and expenses and related assumptions as to levels of portfolio returns and managed fund sales and redemptions, beliefs and assumptions concerning prevailing and future economic and market conditions and the impact of such conditions and other factors on Matrix's AUM, the continuation of portfolio and fund management and advisory engagements, the extent and effectiveness of cost-saving measures and the impact of such measures and other factors on earnings, tax rates and laws, performance of managed venture capital investments relative to performance fee return thresholds, the collection of trade receivables and the absence of extraordinary or one-time expenses not currently known to management. While management considers these beliefs and assumptions to be reasonable based on information currently available to it, these statements are subject to numerous risks and uncertainties and no assurance can be given that such beliefs and assumptions will prove to be correct. Accordingly, actual results may differ significantly from those expressed or implied by forward-looking statements due to many factors including, but not limited to, risks associated with institutional, mutual fund and venture capital fund management sectors generally, market, economic, political and other risks affecting portfolio performance, interest and foreign exchange rates, managed fund sales and redemptions and in turn Matrix's AUM, other risks affecting revenues and earnings, regulatory and other risks associated with completing proposed financings, managed fund divestments, targeted acquisitions and introducing new products, integration and continuity risks affecting completed acquisitions, changes in consumer demand for the financial products offered by Matrix and other risks and uncertainties listed under "Risk Factors" in the MD&A for the quarter ended June 30, 2012 available on SEDAR. Many of these risks are beyond the control of Matrix.

Readers are cautioned to consider these and other risks, uncertainties and potential events carefully and not place undue reliance on forward-looking statements. Other than as specifically required by law, Matrix undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results or other factors.

Non-IFRS Measures

"EBITDA", "recurring EBITDA", "Free Cash Flow" and "recurring income (loss) before taxes" are not measures recognized under International Financial Reporting Standards ("IFRS"). However, management of Matrix believes that most shareholders, creditors, other stakeholders and investment analysts prefer to have these measures included as reported measures of operating performance, a proxy for cash flow, and to facilitate valuation analysis. These non-IFRS measures do not have any standard meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. Readers are cautioned that these non-IFRS measures are not alternatives to measures determined in accordance with IFRS and should not, on their own, be construed as indicators of performance, cash flows or profitability or measures of liquidity. These non-IFRS measures should be read in conjunction with the financial statements of Matrix posted on SEDAR. For additional information regarding Matrix's use of non-IFRS measures, including reconciliations of these measures to the nearest IFRS measures, please refer to the "Non-IFRS Financial Measures" and "Non-Recurring Items, EBITDA & Free Cash Flow" sections of its MD&A available on the SEDAR website at www.sedar.com.

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