Quarterly report pursuant to sections 13 or 15(d)

Acquisitions - Securities America

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Acquisitions - Securities America
 9 Months Ended
Sep. 30, 2012
Acquisitions - Securities America
4. Acquisitions – Securities America

 

On November 4, 2011, the Company acquired the outstanding capital stock of Securities America for $150,000 in cash at closing. The Company will also pay, if earned, a cash earn-out over two years, subject to a maximum of $70,000, calculated based on a percentage of the amount, if any, by which Securities America’s consolidated gross revenue and cash spread, each as defined in the stock purchase agreement, for the years ending December 31, 2012 and 2013, exceed certain levels. The purchase price, together with related cash requirements, was financed through various loans (see Note 7). 

 

The total acquisition date fair value of the consideration transferred (“Purchase Price”) is estimated at $157,111, which includes $7,111 for the estimated fair value of the earn-out. Also, the stock purchase agreement provides for a purchase price adjustment based on the working capital of Securities America at the date of acquisition. Such adjustment, which has not been finalized, is not anticipated to be material and will be recorded upon final determination. Legal and other acquisition related costs of approximately $2,971 were incurred and charged to expense.

 

A liability of $7,111 was recognized based on the estimated acquisition date fair value of the potential earn-out. The liability was valued using an income based approach based on discounting to present value the earn-out’s probability weighted expected payoff using four earn-out scenarios for both earn-out periods. The fair value measurement of the earn-out is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. The significant unobservable inputs used in the fair value measurement of the earn-out are: probability of outcomes; projected revenues; and weighted average cost of capital. Significant increases or decreases in any of these inputs in isolation would result in either a significantly lower or higher fair value measurement. As a result of decreases in projected revenues based on actual revenues generated by Securities America for the nine months ended September 30, 2012, the estimated fair value of the earn-out decreased by $7,111 which is included in the results of operations for the nine months ended September 30, 2012.

 

Set forth below are changes in the carrying value of contingent consideration classified as accounts payable and accrued liabilities.

 

Nine months Ended September 30, 2012:        
Fair value of contingent consideration as of December 31, 2011   $ 7,111  
Change in fair value of contingent consideration     (7,111 )
Fair value of contingent consideration as of September 30, 2012   $ —  

 

 

A deferred tax liability had been recorded for the excess of financial statement basis over tax basis of the acquired assets and assumed liabilities with a corresponding increase to goodwill. During the quarter ended March 31, 2012, the Company reduced the deferred tax liability by $935 with a corresponding reduction to goodwill (attributable to the Independent Brokerage and Advisory Services segment) to correct the liability originally recorded.

 

Results of operations of Securities America are included in the Company’s consolidated financial statements from the date of acquisition in November 2011. The following unaudited pro forma information represents the Company’s consolidated results of operations as if the acquisition of Securities America had occurred at the beginning of 2011. The pro forma net loss reflects amortization of the amounts ascribed to intangible assets acquired in the acquisition, amortization related to forgivable loans, compensation related to stock option grants to independent contractors and employees, and interest expense on debt used to finance such acquisition and related cash requirements.

 

    Three Months
Ended		     Nine Months
Ended		  
    September 30,
2011		     September 30,
2011		  
Total revenue   $ 150,491     $ 508,706  
Net loss   $ (12,538 )   $ (28,746 )
Basic and diluted loss per share   $ (0.07 )   $ (0.16 )
Weighted average common shares outstanding — basic and diluted     182,810,137       183,068,493  

 

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the acquisition of Securities America been completed as of the beginning of 2011, nor should it be taken as indicative of the Company’s future consolidated results of operations.