NetSpend 2014 Annual Report Download - page 87

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various possible outcomes related to the indemnification commitments, TSYS has determined that the fair value
of any receivable asset would be immaterial. The maximum amount of contingent consideration returnable to the
Company related to certain indemnification commitments made by the Seller is $12.5 million. The maximum
amount of contingent consideration returnable to the Company related to fundamental representations and
warranties made by the Seller is limited to the purchase price.
Of the $66.0 million in consideration paid for CPAY, $3.3 million was placed in escrow for a period of 21 months
to secure certain claims that may be brought against the escrowed consideration by TSYS pursuant to the
Investment Agreement. The entire amount of the escrow was released to the Seller (as defined below) in May
2014 pursuant to the terms of the Escrow Agreement between the parties. Consideration is contingent and may
be returned to the Company pursuant to indemnification commitments made by the company which formerly
owned 100% of Central Payment (Seller) related to, among other things, a breach of certain representations and
warranties made in the Investment Agreement, and losses arising out of any of the Excluded Liabilities as defined
in the Investment Agreement. Such indemnification commitments are recognized as a possible asset receivable
and measured at fair value. Based upon the probability of various possible outcomes related to the
indemnification commitments, TSYS has determined that the fair value of any receivable asset would be
immaterial. The maximum amount of contingent consideration returnable to the Company related to certain
indemnification commitments made by the Seller is $9.9 million. The maximum amount of contingent
consideration returnable to the Company related to fundamental representations and warranties made by the
Seller is limited to the purchase price.
Identifiable intangible assets acquired in the acquisitions had no significant estimated residual value. These
intangible assets are being amortized over their estimated useful lives of two to ten 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 $76.6 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 acquisitions and the related estimated weighted average useful lives
are as follows:
Fair Value
(in millions)
Weighted
Useful Lives
(in years)
Customer relationships ..................................................... $59.5 8.6
Current technology ........................................................ 13.0 5.0
Covenants-not-to-compete .................................................. 2.9 2.8
Trade name ............................................................... 1.2 2.0
Total acquired identifiable intangible assets .................................. $76.6 7.7
This fair value measurement is based on significant inputs that are both observable (Level 2) and non-observable
(Level 3) in the market. Key assumptions in the ProPay acquisition include (a) cash flow projections based on
market participant and internal data, (b) a discount rate of 14.0% for the overall Company and a discount rate of
14.5% for the intangible assets, (c) a pre-tax royalty rate of 1.0% for trade names and technology (d) an attrition
rate of 3.0%- 5.0%, (e) an effective tax rate of 39.0%, and (f) a terminal value based on a long-term sustainable
growth rate of 3.0%.
Key assumptions in the CPAY acquisition include (a) cash flow projections based on market participant and
internal data, (b) a discount rate of 19.0% for the overall company and a discount rate of 19.5% for the intangible
assets, (c) a pre-tax royalty rate of 1.0% for trade names and technology (d) an attrition rate of 25.0%, (e) an
effective tax rate of 39.0%, and (f) a terminal value based on a long-term sustainable growth rate of 3.0%.
In connection with these acquisitions, TSYS incurred $1.3 million 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 the year ended December 31, 2012.
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