Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.3.0.814
Acquisitions
 9 Months Ended
Sep. 30, 2015
Business Combinations [Abstract]  
Acquisitions
Acquisitions

Securities Service Network, Inc.

On January 2, 2015, the Company acquired the capital stock of SSN and an affiliated company, Renaissance Capital Corporation (“RCC”). SSN is an independent broker-dealer, registered investment advisor and insurance agency based in Knoxville, TN. RCC is a corporation that owns fixed assets leased to SSN. The purchase price was approximately $47,287, including $25,000 principal amount of secured short-term promissory notes, which bore interest at 0.41% per annum and were paid in full on the business day following the closing date, and $20,000 principal amount of secured four-year promissory notes, bearing interest at 1.74% per annum and payable in equal quarterly installments of principal and interest (valued at $18,697 based on an imputed interest rate of 5.1%). The promissory notes are secured by a pledge of the shares of SSN and RCC purchased in the acquisition pursuant to a stock pledge agreement. The Company paid approximately $3,590, which is included in the purchase price above, based on the amount by which the aggregate net worth of SSN and RCC as of the closing date of the acquisition exceeded a targeted amount.

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

Cash
$
8,081

Securities owned, at fair value
158

Receivables from clearing broker
630

Other receivables, net
2,611

Fixed assets, net
57

Notes receivable
225

Identifiable intangible assets
30,901

Goodwill
8,798

Other assets
714

Total assets acquired
52,175

Commissions and fees payable
3,462

Deferred income
44

Accounts payable and accrued liabilities
1,382

Total liabilities assumed
4,888

Total purchase price
$
47,287





The Company has elected under Section 338 of the Internal Revenue Code to treat the acquisition as an asset acquisition and, accordingly, goodwill will be deductible for income tax purposes over 15 years. Goodwill was assigned to the independent brokerage and advisory services segment.

Factors that contributed to a purchase price resulting in the recognition of goodwill includes SSN'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)
Relationships with financial advisors
$
26,654

 
 
20
Technology
2,080

 
 
12.5
Trade name
1,756

 
 
9
Non-compete agreements
411

 
 
3
Total identifiable intangible assets
$
30,901

 
 
 


Fair value amounts (Level 3 inputs) were determined using an income approach for relationships with financial advisors and non-compete agreements, the relief from royalty method for trade names and the cost approach for developed technology.

The accompanying condensed consolidated financial statements include the results of operations of Highland, KMS and SSN from their dates of acquisition; July 31, 2014, October 15, 2014 and January 2, 2015, respectively. The following unaudited pro forma information represents the Company’s consolidated results of operations as if the acquisitions of KMS, Highland and SSN had occurred at the beginning of 2014. 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 on the date of acquisition and interest expense on notes issued in the KMS and SSN acquisitions. In addition, $21,238 of non-recurring income tax benefit resulting from the acquisitions of Highland and KMS has been excluded from the pro forma results in 2014.
 
 
Three Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2014
Revenue
 
$
278,763

 
$
835,779

Net (loss) income
 
$
(4,241
)
 
$
410

Net loss available to common shareholders
 
$
(9,069
)
 
$
(11,310
)
Basic and diluted loss per share available to common shareholders
 
$
(0.05
)
 
$
(0.06
)
Weighted average common shares outstanding:
 
 
 
 
    Basic and diluted (a)
 
185,257,947

 
185,486,802


(a) Includes 3,981,684 shares of Company common stock 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 KMS, Highland and SSN been completed as of the beginning of 2014, nor should it be taken as indicative of the Company’s future consolidated results of operations.

Combined revenues and net income for SSN from the date of acquisition for the three and nine months ended September 30, 2015, included in the accompanying statements of operations were $28,535 and $86,125 and $343 and $961, respectively.

Other

In July 2015, Highland purchased certain assets of the insurance brokerage business of Select Brokerage Services Inc. ("Select") that was deemed to be a business acquisition.
The consideration for the transaction was $3,021, consisting of cash of $503 paid upon closing, a deferred payment of $504 due on the first anniversary of the closing date and contingent consideration having a fair value of $2,014, for which a liability was recognized based on estimated acquisition-date fair value of the potential earn-out.

The liability was valued using an income-based approach of the earn-out’s probability-weighted expected payout using three earn-out scenarios. The 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: $2,780 to identifiable intangible and other assets, including renewal revenue, and $241 to goodwill.

In June 2015, Securities America purchased certain assets of the broker-dealer business of Dalton Strategic Investment Services, Inc. ("Dalton") that was deemed to be a business acquisition. Relationships with certain registered representatives and investment advisor representatives including their client accounts were acquired. The consideration for the transaction was $2,689, consisting of cash of $2,100 and contingent consideration having a fair value of $589, 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 three-year period, is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. The purchase price was allocated as follows: $2,675 to identifiable intangible and other assets and $14 to goodwill.

Results of operations relating to the acquired assets of Select and Dalton are included in the accompanying consolidated statements of operations from their respective dates of acquisition and were not material. In addition, based on materiality, pro forma results were not presented.