Annual report pursuant to Section 13 and 15(d)

Acquisitions

v2.4.1.9
Acquisitions
 12 Months Ended
Dec. 31, 2014
Business Combinations [Abstract]  
Acquisitions
Acquisitions

KMS

On October 15, 2014, the Company acquired KMS, a Seattle-based independent broker-dealer and registered investment advisor, pursuant to a Stock Purchase Agreement, dated as of August 8, 2014, by and among the Company, KMS and the shareholders of KMS.

Under the terms of the purchase agreement, on the closing date, the Company paid the KMS shareholders $24,560, consisting of $11,000 in cash, $8,000 principal amount of four-year promissory notes, bearing interest at 1.84% per annum and payable in equal quarterly installments of principal and interest (valued at $7,508 based on an imputed interest rate of 5.50%), and 1,440,922 shares of the Company's common stock valued at $6,052 (based on the closing price at date of acquisition), which are subject to certain transfer restrictions, in exchange for all of the issued and outstanding capital stock of KMS. The notes contain customary events of default, which if uncured, entitle the holders to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the notes. Legal and other related acquisition costs of approximately $1,168 were incurred and charged to expense

The Company has done a valuation study to determine the acquisition-date fair value of assets acquired and liabilities assumed and related allocation of purchase price of KMS. The following table summarizes the fair value of assets acquired and liabilities assumed at the date of aquisition:

Cash
$
6,708

Securities owned, at fair value
599

Receivables from clearing broker
1,462

Other receivables, net
2,101

Fixed assets, net
192

Restricted assets
150

Identifiable intangible assets
10,859

Goodwill
13,269

Other assets
4,504

Total assets acquired
39,844

Accrued compensation
(826
)
Commissions and fees payable
(2,772
)
Deferred compensation liability
(587
)
Notes payable
(600
)
Accounts payable and accrued liabilities
(6,516
)
Deferred taxes payable
(3,983
)
Total liabilities assumed
(15,284
)
Total purchase price
$
24,560



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, 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 includes KMS' strategic fit with the company's existing businesses, including the resulting synergies and economies of scale expected from the acquisition.

Identifiable intangible assets as of the acquisition date consist of:

 
 
 
Useful Life
(years)
Representative relationships
$
9,192

 
 
20
Trade names
 
1,112

 
 
9
Non-compete agreements
 
555

 
 
5
Total identifiable intangible assets
$
10,859

 
 
 


Fair value amounts (Level 3 inputs) were determined using an income approach for representative relationships and non-compete agreements and the relief from royalty method for trade names.

Highland

On July 31, 2014, the Company acquired HCHC Holdings, Inc. (“HCHC”), which is the parent company of Highland. Highland is an independent insurance broker that delivers life insurance, annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. Under the Agreement and Plan of Merger, dated July 31, 2014, by and among the Company, HCHC, HCHC Acquisition Inc. ("HCHC Acquisition"), a wholly-owned subsidiary of the Company, and the stockholders of HCHC, HCHC merged with and into HCHC Acquisition, with HCHC Acquisition remaining as the surviving corporation and a wholly-owned subsidiary of the Company.

The Company paid the HCHC shareholders $11,566 consisting of $3,613 in cash and 2,540,762 shares of the Company's common stock, which are subject to certain transfer restrictions, valued at $7,953 (based on the closing price at the date of the acquisition). Also, the Company caused all indebtedness owed by certain HCHC subsidiaries under a credit agreement (in the amount of $21,834) to be repaid. Legal and other acquisition related costs of approximately $566 were incurred and charged to expense.

The Company has done a valuation study to determine the acquisition-date fair value of assets acquired and liabilities assumed and related allocation of purchase price of Highland. The following table summarizes the fair value of assets acquired and liabilities assumed at the date of acquisition:
 
Cash
$
260

Receivables
6,070

Identifiable intangible assets
45,587

Goodwill
11,515

Other assets
2,450

Total assets acquired
65,882

Commissions and fees payable
(1,450
)
Notes payable-current
(21,834
)
Notes payable-long term
(7,000
)
Accounts payable and accrued liabilities
(6,777
)
Deferred taxes payable, net
(17,255
)
Total liabilities assumed
(54,316
)
Total purchase price
$
11,566



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, which is non-deductible for income tax purposes, was assigned to the insurance brokerage segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include Highland's strategic fit with the Company’s existing businesses, including the resulting synergies and economies of scale expected from the acquisition.

Identifiable intangible assets as of the acquisition date consist of:
 
 
 
Useful Life
(years)
Technology
$
949

 
 
4
Renewals revenue
 
39,503

 
 
8
Trade names
 
2,864

 
 
9
Non-solicitation agreement
 
2,271

 
 
3
Total identifiable intangible assets
$
45,587

 
 
 
 
 
 
 
 
 


Fair value amounts (Level 3 inputs) were determined using a cost approach for technology, an income approach for renewals revenue and non-solicitation agreements and the relief from royalty method for trade names.

The accompanying condensed consolidated financial statements include the results of operations of KMS and Highland from their dates of acquisition. The following unaudited pro forma information represents the Company’s consolidated results of operations as if the acquisitions of KMS and Highland had occurred at the beginning of 2013. The pro forma net loss reflects amortization of the amounts ascribed to identifiable intangible assets acquired in the acquisitions, elimination of Highland's interest expense related to notes repaid at the date of acquisition and interest expense on notes issued in the KMS aquisition. In addition, $21,238 of non-recurring income tax benefit resulting from the acquisitions has been eliminated from the pro forma results (Note 11).

 
Year Ended December 31,
 
 

 2014
 
2013
 
Revenue
$
1,022,122

 
$
936,785

 
Net income (loss)
$
8,161

 
$
(5,475
)
 
Net loss available to common shareholders
$
(9,083
)
 
$
(12,386
)
 
Basic and diluted loss per share available to common shareholders
$
(0.05
)
 
$
(0.07
)
 
Weighted average common shares outstanding:
 
 
 
 
     Basic and diluted
185,370,262

(a)
186,277,160

(a)

(a) Includes 3,981,684 shares issued in connection with the acquisitions.

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 acquisitions of Highland and KMS been completed as of the beginning of 2013, nor should it be taken as indicative of the Company’s future consolidated results of operations.

Combined revenues and net loss for Highland and KMS for the period of acquisition through December 31, 2014, included in the accompanying statements of operations were $46,004 and $59, 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 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, proforma results were not presented.

In December 2014, Securities America purchased certain assets related to the broker-dealer business of Sunset Financial Services, Inc. from Kansas City Life Insurance Company that was deemed to be a business acquisition. According to the agreement, certain registered representatives and investment advisor representatives and their client accounts and all related goodwill were acquired. The consideration for the transaction was $4,380, consisting of cash of $1,621 and contingent consideration having a fair value of $2,759, 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 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. The purchase price was allocated as follows: $4,359 to identifiable assets and $21 to goodwill. 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, proforma results were not presented.

Set forth below are changes in the carrying value of contingent consideration related to acquisitions 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 related to 2011 acquisition
(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

Payments
(124
)
Change in fair value of contingent consideration
(12
)
Fair value of contingent consideration in connection with 2014 acquisition
2,759

Fair value of contingent consideration as of December 31, 2014
$
3,212




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 2012 had an increase of $121 in the year ended December 31, 2013 and a decrease of $12 in the year ended December 31, 2014.