Annual report pursuant to Section 13 and 15(d)

Acquisitions

v3.3.1.900
Acquisitions
 12 Months Ended
Dec. 31, 2015
Business Combinations [Abstract]  
Acquisitions
Acquisitions

Securities Service Network, Inc.

On January 2, 2015, the Company acquired the capital stock of Securities Service Network, Inc. ("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 imputed interest rate of 5.10%). 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 subsequent to the closing date, 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. Legal and other related acquisition costs of approximately $51 and $523 were incurred and charged to expenses in 2015 and 2014, respectively.

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
11,711

(2) 
Fixed assets, net
57

 
Notes receivable
225

 
Identifiable intangible assets
30,901

 
Goodwill
9,282

(1) 
Other assets
714

 
Total assets acquired
61,759

 
Commissions and fees payable
12,562

(2) 
Deferred income
44

 
Accounts payable and accrued liabilities
1,866

(1) 
Total liabilities assumed
14,472

 
Total purchase price
$
47,287

 

(1) Increased by $484 from amounts originally reported.
(2) Increased by $9,100 from amounts originally reported.

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:

 
 
 
Estimated 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.

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 $520 were incurred and charged to expense in 2014.

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 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:

 
 
 
Estimated Useful Life
(years)
Relationships with financial advisors
$
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. 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 in 2014.

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 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:
 
 
 
Estimated 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 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 and Highland had occurred at the beginning of 2013 and as if the acquisition of SSN had occured 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. Also, $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.

 
 
Year Ended December 31,
 
 
2014
 
2013
Revenue
 
$
1,130,420

 
$
936,785

Net income (loss)
 
12,754

 
(5,475
)
Net loss available to common shareholders
 
(4,409
)
 
(12,386
)
Basic and diluted net loss per share available to common shareholders
 
(0.02
)
 
(0.07
)
Weighted average common shares outstanding:
 
 
 
 
    Basic and diluted (a)
 
185,370,262

 
186,277,160



(a) Includes 3,981,684 shares of Company common stock issued in connection with the acquisitions of Highland and KMS.

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 and Highland been completed as of the beginning of 2013 and SSN as of the beginning of 2014, nor should it be taken as indicative of the Company’s future consolidated results of operations.

Revenues and net income for SSN from the date of acquisition through December 31, 2015, included in the accompanying statements of operations were $116,207 and $1,629, respectively.

Combined revenues and net loss for Highland and KMS for the period from dates of acquisition, July 31, 2014 and October 15, 2014, respectively, through December 31, 2014, included in the accompanying statements of operations were $46,004 and $59, respectively.

Other

In December 2014, Securities America purchased certain assets related to the broker-dealer business of Sunset Financial Services, Inc. ("Sunset") 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 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.

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 $2,019, 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 $1,012 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 $2,019 to identifiable intangible and other assets.

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 Sunset, Select and Dalton, which are included in the accompanying consolidated statements of operations from their respective dates of acquisition, 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 related to acquisitions, which is included in accounts payable and accrued liabilities:

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

Payments
 
(1,945
)
Change in fair value of contingent consideration
 
(55
)
Fair value of contingent consideration in connection with 2015 acquisitions
 
1,601

Fair value of contingent consideration as of December 31, 2015
 
$
2,813