NetSpend 2013 Annual Report Download - page 77

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 ................... 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
(in years)
Customer
relationships ........ $10.0 7.0
Channel relationships . . 1.6 10.0
Covenants-not-to-
compete ........... 0.1 2.0
Total acquired
identifiable
intangible assets . . . $11.7 7.3
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%.
In connection with the TermNet acquisition, TSYS
incurred $192,000 in acquisition-related costs
primarily related to professional legal, finance, and
accounting costs. These costs were expensed as
incurred and are included in selling, general, and
administrative expenses in the income statement for
2011.
Other
On October 1, 2011, TSYS acquired contract-based
intangible assets in its Merchant Services segment for
$2.6 million. These intangible assets are being
amortized on a straight-line basis over their estimated
useful lives of five years.
In May 2011, TSYS made a payment of $6.0 million of
contingent merger consideration in connection with
the purchase of Infonox, which was accounted for
under ASC 805. The payment of the contingent
merger consideration by TSYS was recorded as
goodwill and had no impact on results of operations.
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