Annual report pursuant to section 13 and 15(d)

Acquisitions

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Acquisitions
 12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
Acquisitions
Acquisitions

Securities America Acquisition

On November 4, 2011, the Company completed its acquisition from Ameriprise Financial, Inc. (“Ameriprise”) of the outstanding capital stock of Securities America Financial Corporation (“SAFC”), which is a holding company and the sole owner of Securities America, Inc. (“SAI”), Securities America Advisors, Inc. (“SAA”), and Brecek & Young Advisors, Inc. (“BYA”). SAI is a registered broker-dealer which conducts securities brokerage services and markets insurance products nationally through a network of independent contractor financial advisors. SAA and BYA are registered investment advisors which provide investment advisory services through a network of independent contractor financial advisors. The acquisition was made to expand the Company’s presence in the independent broker-dealer business.

The Company paid Ameriprise $150,000 in cash at closing and agreed to pay to Ameriprise, 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 SAFC’s consolidated gross revenue and cash spread, as defined, for the years ended December 31, 2012 and 2013 exceeded certain levels. No earn-out was earned for 2012 or 2013. The purchase price, together with related cash requirements, was financed through various loans (see Note 12).

The total acquisition date fair value of the consideration transferred (“Purchase Price”) was $157,111, which included $7,111 for the estimated acquisition date fair value of the earn-out. Also, the stock purchase agreement provided for a purchase price adjustment based on the working capital of Securities America at the date of acquisition. As of December 31, 2012, such adjustment was finalized and resulted in the Company receiving an additional $99. Legal and other acquisition-related costs of approximately $2,971 were incurred and charged to expense during 2011.

The acquisition date fair value of consideration transferred (the “purchase price”) was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed:

 
 
 
Cash
$
24,315

 
Receivables
34,083

 
Identifiable intangible assets
76,458

 
Goodwill
60,493

*
Cash surrender value of life insurance
13,085

 
Other assets
22,591

 
Total assets acquired
231,025

 
Commissions and fees payable
(15,714
)
 
Accounts payable and accrued liabilities
(14,267
)
 
Deferred compensation liability
(19,534
)
 
Deferred taxes payable, net
(19,604
)
*
Deferred fees payable
(4,894
)
 
Total liabilities assumed
(74,013
)
 
Total purchase price
$
157,012

 

*
During 2012, the Company reduced goodwill attributable to the Securities America acquisition by $935 to correct the overstatement of the deferred tax liability originally recorded, and by $99 to reflect the working capital purchase price adjustment.

A deferred tax liability has 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. Goodwill, most of which is non-deductible for income tax purposes, was assigned to the Independent Brokerage and Advisory Services segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include Securities America’s strategic fit into the Company’s Independent Brokerage and Advisory Services segment and the resulting synergies and economies of scale expected from the acquisition when combined with the Company’s other independent broker-dealers and Ladenburg’s traditional investment banking, capital markets, institutional equity and related businesses.

Identifiable intangible assets as of the acquisition date consist of:

 
 
 
 
Useful Life (years)
Technology
 
$
20,996

 
7.7
Relationships with independent contractor financial advisors
 
43,188

 
9.2
Trade names
 
12,267

 
7.2
Non-solicitation agreement
 
7

 
2.2
Total identifiable intangible assets
 
$
76,458

 
 


Fair value amounts were determined using an income approach for relationships with advisors and trade names and a cost approach for technology.

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.

In connection with the acquisition, the Company made loans and granted stock options to SAI’s financial advisors. The loans, which aggregated $20,000, mature in four years and are ratably forgivable over the term of the loans provided the advisors meet certain production requirements and remain affiliated with SAI. The stock options for 8,020,743 common shares have an exercise price of $1.68 and vest ratably over a period of four years as long as the advisors remain affiliated with SAI. In addition, the Company granted to SAI employees options for 920,000 common shares which have an exercise price of $1.68 and vest ratably over a period of four years.

The accompanying consolidated financial statements include the results of operations of Securities America from the date of acquisition. 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, compensation related to forgivable loans and stock option grants to independent financial advisors referred to above and interest expense on debt used to finance the acquisition and related cash requirements.

 
 
Year Ended
December 31, 2011
Total revenue
 
$
658,104

Net loss
 
$
(45,133
)
Basic and diluted loss per share
 
$
(0.25
)
Weighted average common shares outstanding – basic and diluted
 
183,023,590



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 been completed as of the beginning of 2011, nor should it be taken as indicative of the Company’s future consolidated results of operations.

Revenues and net loss for Securities America for the period from November 5, 2011 to December 31, 2011 included in the accompanying statements of operations were $57,090 and $4,533, respectively.

Other

In December 2012, Securities America purchased certain assets of a broker-dealer having independent financial advisors that was deemed to be a business acquisition. The consideration for the transaction was $1,364, consisting of cash of $552 and contingent consideration having a fair value of $812, for which a liability 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 payout using three earn-out scenarios. The fair value measurement of the earn-out which relates to a four-year period, is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. Results of operations of the acquired broker-dealer are included in the accompanying consolidated statements of operations from the date of acquisition and were not material. In addition, based on materiality, pro forma results were not presented.

Set forth below are changes in the carrying value of contingent consideration included in accounts payable and accrued liabilities.
    
 
 
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 in connection with 2012 acquisition
812

Fair value of contingent consideration as of December 31, 2012
$
812

Payments
(344
)
Change in fair value of contingent consideration
121

Fair value of contingent consideration as of December 31, 2013
$
589



As a result of decreases in projected revenues based on actual revenues generated by Securities America for the year ended December 31, 2012, the estimated fair value of the earn-out decreased by $7,111, which is included in the results of operations in 2012. The estimated fair value of the earn-out related to the acquisition made in 2013 increased $121, which is included in the results of operations for 2013.