NetSpend 2012 Annual Report Download - page 67

passage of time of the second anniversary date. As
such, the Company has adopted the accounting
policy to accrete changes in the redemption value
over the period from the date of issuance to the
earliest redemption date, which the Company
believes to be two years. If the put option was
currently redeemable, the redemption value at
December 31, 2012 is estimated to be approximately
$39.5 million. The Company did not accrete any
changes to the redemption value as the balance at
December 31, 2012 exceeded the accretion fair value
amount.
2011
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet, an
Atlanta-based merchant acquirer, for $42 million in
cash. TermNet provides merchant services to
qualified merchants serving a diverse merchant base
of over 18,000 merchants. The acquisition of
TermNet expands the Company’s presence in the
merchant acquiring industry. The results of
operations for TermNet have been included in the
Company’s results beginning May 2, 2011, and are
included in the Merchant Services segment. The
goodwill of $28.9 million recorded arises largely from
synergies and economies of scale expected to be
realized from combining the operations of TSYS and
TermNet. Goodwill recognized in the acquisition of
TermNet is not deductible for income tax purposes.
The following table summarizes the consideration
paid for TermNet and the recognized amounts of
identifiable assets acquired and liabilities assumed
effective May 2, 2011:
(in thousands)
Cash and restricted cash ............... $ 2,691
Accounts receivable, net ............... 10,253
Other assets ......................... 1,516
Identifiable intangible assets ............ 11,740
Goodwill ............................ 28,918
Accounts payable ..................... (5,578)
Accrued compensation ................. (2,683)
Deferred income tax liability ............ (4,506)
Other liabilities ....................... (351)
Total consideration .................. $42,000
The fair value of accounts receivable, accounts
payable, accrued compensation, and other liabilities
approximates the carrying amount of those assets
and liabilities at the acquisition date. The fair value of
accounts receivable due under agreements with
customers is $10.3 million. The gross amount due
under the agreements is $10.4 million, of which
approximately $100,000 is expected to be
uncollectible. Of the $42 million in consideration paid
for TermNet, $8.4 million was placed in escrow for a
period of 18 months to secure certain claims brought
against the escrowed consideration by TSYS pursuant
to the merger agreement. The maximum amount of
contingent consideration returnable to the Company
related to fundamental representations and
warranties made by TermNet is unlimited.
Identifiable intangible assets acquired in the TermNet
acquisition include customer relationships, channel
relationships, and non-compete agreements. The
identifiable intangible assets had no significant
estimated residual value. These intangible assets are
being amortized over their estimated useful lives of 2
to 10 years based on the pattern of expected future
economic benefit, which approximates a straight-line
basis over the useful lives of the assets. The fair value
of the acquired identifiable intangible assets of $11.7
million was estimated using the income approach
(discounted cash flow and relief from royalty
methods) and cost approach. The fair values and
useful lives of the identified intangible assets were
primarily determined using forecasted cash flows,
which included estimates for certain assumptions
such as revenues, expenses, attrition rates, and
royalty rates. The estimated fair value of identifiable
intangible assets acquired in the acquisition of
TermNet and the related estimated weighted
average useful lives are as follows:
Fair Value
(in millions)
Weighted Average
Useful Lives
Customer
relationships ........ $10.0 7.0 years
Channel relationships . . 1.6 10.0 years
Covenants-not-to-
compete ........... 0.1 2.0years
Total acquired
identifiable
intangible assets . . . $11.7 7.3 years
The fair value measurement of the identifiable
intangible assets is based on significant inputs that are
not observable in the market and therefore,
represents a Level 3 measurement as defined in ASC
820. Key assumptions include (a) cash flow projections
based on market participant and internal data, (b) a
discount rate of 14%, (c) a pre-tax royalty rate range of
3-10%, (d) an attrition rate of 20%, (e) an effective tax
rate of 36%, and (f) a terminal value based on a long-
term sustainable growth rate of 3%.
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