Although NFP was founded in August 1998, the Company commenced operations on January 1, 1999. In each year since the Company commenced operations, the Company has completed a significant number of acquisitions with the exception of the year ended December 31, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Acquisitions.” As a result of the Company’s acquisitions, the results in the periods shown below may not be directly comparable.
b) NFP’s borrowings consist of $230.0 million of convertible senior notes that are due by February 1, 2012 and $40.0 million outstanding under a bank line that is structured as a revolving credit facility and due on August 22, 2011. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Borrowings.”
The Company is a leading independent financial services distribution company. The Company offers high net worth individuals and companies throughout the United States and in Canada comprehensive solutions across corporate and executive benefits, life insurance and wealth transfer, and investment advisory products and services. Founded in 1998, and commencing operations on January 1, 1999, NFP has grown internally and through acquisitions and, as of December 31, 2009, operates a national distribution network with over 150 owned firms. The Company acquired 3, 19 and 25 firms in 2009, 2008, and 2007, respectively. During the year ended December 31, 2009, revenue decreased $202.1 million or 17.6%, to $948.3 million from $1,150.4 million during the year ended December 31, 2008. The Company experienced a net loss of $493.4 million for the year ended December 31, 2009, a decrease of $501.9 from net income of $8.5 million during the year ended December 31, 2008. The net loss was due to a substantial increase in the level of impairment of goodwill and intangible assets from $41.3 million to $618.5 million for the year ended December 31, 2009. Excluding the after-tax impact of impairments, the net income decline was a result of lower revenue, particularly in life insurance, partially offset by declines in cost of services and general and administrative expense.
The Company recognized an impairment charge of $607.3 million, $2.9 million, $2.0 million and $6.3 million during the first, second, third and fourth quarters, respectively, of 2009. As a result, the Company recognized an impairment charge of $618.5 million during the year ended December 31, 2009 as compared to the $41.3 million impairment charge for the prior year.
Many external factors affect the Company’s revenue and profitability, including economic and market conditions, legislative and regulatory developments and competition. Because many of these factors are unpredictable and generally beyond the Company’s control, the Company’s revenue and earnings may fluctuate from year to year and quarter to quarter. The Company’s revenue and net income, particularly in the second half of 2005 and early 2006, benefited from strong sales of financed life insurance products. Management believes that sales of financed life insurance products diminished in the second half of 2006 and this declining trend continued through 2007. The Company experienced continued declines in its life insurance revenue in 2008 which led to the overall decline in revenue and margins and offset gains in gross margin through the first half of 2008. In 2008, the decline in gross margin reflected the challenging economic environment which worsened in the second half of 2008. During 2009, the Company experienced continued declines in its retail life and life settlements products and also experienced less severe declines in its benefits and financial advisory revenue which contributed to the decline in revenue and margins during the year.
While the challenging economic and market environment is showing signs of stabilization, there is considerable uncertainty as to the scope of any economic recovery. Additionally, poor economic conditions during the latter part of 2008 largely continued in 2009. Financial market volatility and a distressed economic environment may reduce the demand for the Company’s services or the products the Company distributes and could negatively affect the Company’s results of operations and financial condition.
In light of the financial environment, NFP has taken certain steps to streamline operations and conserve available cash and continues to explore further expense reductions. With the exception of certain sub-acquisitions, NFP does not anticipate completing acquisitions until market conditions and financial results improve. NFP continues to consider actions designed to strengthen its financial position, including evaluating its capital structure or further reducing indebtedness. In September 2009, NFP announced corporate reorganizational efforts that are intended to enhance the Company’s client service delivery structure.
NFP enters into a management contract with principals and/or certain entities they own. Under the terms of the management contract, the principals and/or such entities are entitled to management fees consisting of:
NFP typically retains a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year NFP is entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid. In certain transactions later in the Company’s operating history involving large institutional sellers, the Company has provided minimum guaranteed compensation to certain former employees of the seller who became principals of the acquired business.
A sub-acquisition involves the acquisition by one of the Company’s firms of a business that is generally too small to qualify for a direct acquisition by NFP or where the individual running the business wishes to exit immediately or soon after the acquisition, prefers to partner with an existing principal or does not wish to become a principal. The acquisition multiple paid for sub-acquisitions is typically lower than the multiple paid for a direct acquisition by NFP.
(a) Represents other consideration and capitalized costs of the acquisitions for prior years.
Certain businesses acquired by NFP have been adversely affected by changes in the markets served, necessitating a change in the economic relationship between NFP and the principals. For the year ended December 31, 2009, NFP has restructured 28 transactions, 8 of which had been previously restructured. These restructures generally result in either temporary or permanent reductions in base and target earnings and/or changes in the ratio of base to target earnings and the principals typically paying cash, surrendering NFP common stock, issuing notes or other concessions by principals. As part of the restructures that occurred during the year ended December 31, 2009, the Company received greater operating control over the restructured firms, including expense control and limitations on management fee advances. Such restructures are an indicator of a need to assess whether an impairment exists. See “-Expenses-Corporate and other expenses-Impairment of goodwill and intangible assets.”
an acquired firm’s management team with the Company, change of business interests of a principal or other issues personal to a principal. In certain instances NFP sells operating companies back to the principals. Principals generally buy back businesses by surrendering all of their NFP common stock and paying cash or issuing NFP a note. For the year ended December 31, 2009, NFP has disposed of 23 firms and certain assets of 11 more firms.
Life insurance commissions and estate planning fees. Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first 12 months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company’s firms receive renewal commissions for a period following the first year. Some of the Company’s firms receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds. The Company’s firms also earn fees for developing estate plans. Revenue from life insurance activities also includes amounts received by the Company’s life brokerage entities, including its life settlements brokerage entities, that assist non-affiliated producers with the placement and sale of life insurance.
Although NFP’s operating history is limited, historically a significant number of its firms earn approximately 65% to 70% of their revenue in the first three quarters of the year and approximately 30% to 35% of their revenue in the fourth quarter. In 2008, NFP earned 26% of its revenue in the fourth quarter. In 2009, NFP
Management fees. NFP pays management fees to the principals of its firms and/or certain entities they own based on the financial performance of the firms they manage. NFP typically pays a portion of the management fees monthly in advance. Once NFP earns its cumulative preferred earnings, or base earnings, from a firm, the principals and/or entity the principals own will earn management fees equal to earnings above base earnings up to target earnings. An additional management fee is paid in respect of earnings in excess of target earnings based on the ratio of base earnings to target earnings. For example, if base earnings equal 40% of target earnings, NFP receives 40% of earnings in excess of target earnings and the principals and/or the entities they own receives 60%. A majority of the Company’s acquisitions have been completed with a ratio of base earnings to target earnings of 50%. Management fees also include an accrual for certain performance-based incentive amounts payable under NFP’s ongoing incentive plan, the PIP and the EIP. Incentive amounts are paid in a combination of cash and NFP’s common stock.
The table below summarizes the results of operations of NFP’s firms for the periods presented and uses the following non-GAAP measures: (i) gross margin before management fees, (ii) gross margin before management fees as a percentage of total revenue and (iii) management fees, as a percentage of gross margin before management fees. Gross margin before management fees represents the profitability of the Company’s business before principals receive participation in the earnings. Gross margin before management fees as a percentage of
Management uses these non-GAAP measures to evaluate the performance of its firms and the results of the Company’s model. This cannot be effectively illustrated using the corresponding GAAP measures as management fees would be included in these GAAP measures and produce a less meaningful measure for this evaluation. On a firm-specific basis the Company uses these measures to help the Company determine where to allocate corporate and other resources to assist firm principals to develop additional sources of revenue and improve their earnings performance. The Company may assist these firms in expense reductions, cross selling, providing new products or services, technology improvements, providing capital for sub-acquisitions or coordinating internal mergers. On a macro level, the Company uses these measurements to help it evaluate broad performance of products and services which, in turn, helps shape the Company’s acquisition policy. In recent years, the Company has emphasized acquiring businesses with a higher level of recurring revenue, such as benefits businesses, and those which expand the Company’s platform capabilities. The Company also may use these measures to help it assess the level of economic ownership to retain in new acquisitions or existing firms. Finally, the Company uses these measures to monitor the effectiveness of its incentive plans.
Management fees were 46.3% of gross margin before management fees in 2009 compared with 45.1% in 2008 and 48.6% in 2007. In 2009, the increase in management fee percentage was largely due to the increase in the accrual during the fourth quarter for the PIP of $9.0 million. Excluding the effect of the PIP, the management fee percentage was lower compared with the prior year period due to a decline in the ongoing incentive plan accrual, lower firm earnings and an increase in NFPISI’s contribution to gross margin before management fees, an entity for which no management fees are paid. In 2008, as gross margin before management fees as a percentage of revenue declined, the principals’ percentage participation in those earnings also declined.
The amounts that have been accrued relating to the new incentive plans in effect at December 31, 2009 have been largely recorded through management fee expense. A lesser portion of expense for the EIP was expensed within operating expenses relating to firm activities and relating to equity awards granted to certain firm employees at the discretion of principals.
On January 1, 2009 the Company adopted new guidance related to accounting for non-financial assets and liabilities, which emphasizes market-based measurement, rather than entity-specific measurement, in calculating reporting unit fair value. In applying the market value approach, management derived an enterprise value of the Company as a whole as of December 31, 2009, taking into consideration NFP’s stock price, an appropriate equity premium and the current capital structure. The market value approach was used to derive the implied equity value of the entity as a whole which was then allocated to the individual reporting units based on the proportional fair value of each reporting unit derived using the income approach to the total entity fair value derived using the income approach.
As referenced above, the method to compute the amount of impairment incorporates quantitative data and qualitative criteria including new information and judgments that can dramatically change the decision about the
As previously disclosed, NFP carefully monitors both the expected future cash flows of its reporting units and its market capitalization for the purpose of assessing the carrying values of its goodwill and intangible assets. As further stated, if the stock price remained below the net book value per share, or other negative business factors existed as outlined in the relevant accounting guidance, NFP may be required to perform another Step 1 analysis and potentially a Step 2 analysis, which could result in an impairment of up to the entire balance of the Company’s remaining goodwill; if NFP performed a Step 2 goodwill impairment analysis as defined by GAAP, it would also be required to evaluate its intangible assets for impairment under GAAP. NFP’s impairment analysis for the year ended December 31, 2009, consistent with the analysis previously provided, led to the impairment charge of $618.5 million taken for the year ended December 31, 2009. In accordance with the provisions of GAAP, long-lived assets held and used were written down to their fair value, resulting in an impairment charge of $27.0 million for amortizing intangibles, which was included in earnings for the year ended December 31, 2009. Of this $27.0 million, an impairment charge of $18.9 million was recognized for the three months ended March 31, 2009. In accordance with the provisions of GAAP, goodwill and trade name was written down to its implied fair value, resulting in an impairment charge of $591.5 million, which was included in earnings for the year ended December 31, 2009. Of this $591.5 million, an impairment charge of $588.4 million was recognized for the three months ended March 31, 2009.
Management agreement buyout. From time to time, NFP may seek to acquire an additional economic interest in one of its existing firms through the acquisition of a principals’ ownership interest in a management company which has been contracted by NFP to manage and operate one of its wholly-owned subsidiaries. The acquisition of this ownership interest will be treated for accounting purposes as the settlement of an executory contract in a business combination between parties with a preexisting relationship and expensed as part of corporate and other expenses.
Gain on sale of businesses. From time to time, NFP has disposed of acquired firms or certain assets of acquired firms. In these dispositions, NFP may realize a gain or loss on the sale of acquired firms or certain assets of acquired firms.
Commissions and fees. Commissions and fees decreased $202.1 million, or 17.6%, to $948.3 million in 2009 from $1,150.4 million in 2008. Retail life, life brokerage and life settlements revenue during the year ended December 31, 2009 continued to be negatively impacted by the broader economic environment and uncertainty regarding the financial stability of insurance carriers in the first months of 2009. The Company also experienced more moderate declines in corporate and executive benefits revenue, as some clients reduced benefits offered to
Management fees. Management fees decreased $24.4 million, or 14.3%, to $146.2 million in 2009 compared with $170.6 million in 2008. Management fees as a percentage of revenue increased to 15.4% in 2009 from 14.8% in 2008. Management fees were 46.3% of gross margin before management fees in 2009 compared with 45.1% in 2008. Included in management fees is an accrual of $9.7 million for NFP’s incentive plans for the year ended December 31, 2009. This accrual increased $3.6 million due to the accrual for the PIP which was $9.0 million in the fourth quarter. During the year ended December 31, 2008, the accrual for the ongoing incentive plan was $6.1 million and represented the total incentive plan expense amount for the year ended December 31, 2008. Excluding the effect of the PIP, the management fee percentage was lower compared with the prior year period due to a decline in the ongoing incentive plan accrual, lower firm earnings and an increase in NFPISI’s contribution to gross margin before management fees, an entity for which no management fees were paid. Management fees included a total of $2.1 million of stock-based compensation expense for the year ended December 31, 2009 compared with $1.9 million for the year ended December 31, 2008. Included within the total stock-based compensation expense of $2.1 million was $0.5 million of stock-based compensation expense related to implementation of the EIP, further contributing to the increase in the management fee percentage for the year.
General and administrative. General and administrative expenses, which include stock-based compensation, decreased $5.0 million, or 7.8%, to $59.2 million in 2009 compared with $64.2 million in 2008. As a percentage of revenue, general and administrative expenses were 6.2% in 2009 compared with 5.6% in 2008. The decrease of $5.0 million was primarily due to a $7.3 million decrease in compensation and benefits, a $1.9 million decrease in stock-based compensation expense, a $1.9 million decline in professional fees and several declines across other expense categories. These declines were offset by a $1.0 million increase in bad debt expense and by a $9.0 million loss and related expenses recognized on the sublet of one of the floors of the Company’s New York corporate headquarters in the fourth quarter of 2009. Excluding the one time loss and related expense recognized on the sublease, general and administrative expenses would have declined during the year. Stock-based compensation included in general and administrative expense was $4.8 million for the year ended December 31, 2009 and $6.8 million for the year ended December 31, 2008.
Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $577.2 million to $618.5 million in 2009 compared with $41.3 million in 2008. The impairment resulted in a reduction of the carrying value of the identifiable intangible assets and goodwill associated with these firms to their estimated fair value. The impairment recorded during the year reflected the incorporation of market data, including NFP’s market value which had been below net book value for a sustained period, the recent performance of the Company in the distressed economic environment, discount rates that are risk adjusted to reflect both company-specific and market-based credit spreads and other relevant market data. Among other items, the market value reflected the decline in the Company’s sales, particularly in the life insurance area, and the Company’s capital structure.
Gain on sale of businesses. During the year ended December 31, 2009, the Company recognized a net gain from the disposition of 23 subsidiaries and the sale of certain assets of 11 more subsidiaries totaling $2.1 million. During the year ended December 31, 2008, the Company recognized a gain from the sale of three subsidiaries and certain assets of five other subsidiaries totaling $7.7 million. The more significant gain in the prior year period was $6.5 million primarily related to the sale of a wholesale group benefits subsidiary resulting from the strategic decision by its largest carrier to bring all wholesale distribution in-house, either by acquisition or cancellation of distribution arrangements.
Interest and other income. Interest and other income increased $8.6 million or 138.7%, to $14.8 million in 2009 compared with $6.2 million in 2008. The increase of $8.6 million resulted largely from key man life proceeds of $5.5 million during the second quarter, the receipt of $1.9 million in proceeds from the settlement of an NFP-owned key man life insurance policy on a principal during the third quarter, the increase of approximately $1.2 million from the sublet of the Company’s former headquarters, offset by a $0.8 million loss resulting from the investment in the Company’s life settlements joint venture and lower interest income due to the lower interest rate environment in 2009 as compared with 2008.
Interest and other expense. Interest and other expense decreased $1.1 million, or 5.0%, to $20.8 million in 2009 compared with $21.9 million in 2008. Interest and other expense declined largely due to the combined impact of the lower interest rate environment in the current year as compared to the prior year on the Company’s credit facility as well as its lower average balance for the year, offset against higher fees associated with the Company’s credit facility and an increase in the interest expense relating to the convertible notes.
Gross margin. Gross margin decreased $16.5 million, or 7.4%, to $207.9 million in 2008 compared with $224.4 million in 2007. As a percentage of revenue, gross margin decreased to 18.1% in 2008 compared with 18.8% in 2007. Gross margin declined due to the decline in revenue and an increase in operating expenses partially offset by lower commissions and fees and management fees expenses. The gross margin percentage was lower due to the increase in operating expenses as a percentage of revenue partially offset by the decreases in commissions and fees expense and management fees expense as a percentage of revenue during the year when compared with the prior year period.
General and administrative. General and administrative expenses, which include stock-based compensation, increased $5.6 million, or 9.6%, to $64.2 million in 2008 compared with $58.6 million in 2007. As a percentage of revenue, general and administrative expenses were 5.6% in 2008 compared with 4.9% in 2007. The increase of $5.6 million was primarily due to an increase in rent expense of $5.0 million related to new corporate headquarters, an increase of $0.5 million in compensation and benefits partially offset by a $0.9 million decrease in stock-based compensation expense, a $0.4 million decrease in professional fees and other miscellaneous expense totaling $1.4 million. Included in the $0.5 million increase in compensation expense was $1.4 million of severance expense recorded during the fourth quarter related to headcount reductions. Stock-based compensation included in general and administrative expense was $6.8 million for the year ended December 31, 2008 and $7.7 million for the year ended December 31, 2007.
Depreciation. Depreciation expense increased $2.4 million, or 21.8%, to $13.4 million in 2008 compared with $11.0 million in 2007. The increase in depreciation resulted from an increase in the number of owned firms and capital expenditures at the Company’s existing firms and at the corporate office. As a percentage of revenue, depreciation expense was 1.2% in 2008 and 0.9% in 2007. Depreciation expense attributable to firm operations totaled $8.0 million and $6.9 million in 2008 and 2007, respectively, which has not been included in Cost of services.
Gain on sale of businesses. Gain on sale of businesses increased to $7.7 million in 2008 from a gain on sale of businesses of $1.9 million in 2007. The gain on sale resulted from the disposal of three subsidiaries and the sale of assets of five other subsidiaries in 2008. In 2008, the more significant gain was $6.5 million related to the sale of a wholesale group benefits subsidiary resulting from the strategic decision by its largest carrier to bring all wholesale distribution in-house, either by acquisition or cancellation of distribution arrangements. The gain on sale in 2007 resulted from the disposal of four subsidiaries in 2007.
The Company historically experiences its highest cash usage during the first quarter of each year as balances due to principals and/or certain entities they own for management fees and incentive bonuses earned are finalized and paid out, more acquisitions are completed and the Company experiences the seasonal revenue and earnings decline from the fourth quarter of the prior year.
Cash and cash equivalents at December 31, 2009 increased $7.4 million from $48.6 million at December 31, 2008 to $56.0 million at December 31, 2009. Significant sources of cash flow in 2009 came from cash received from existing receivables at year end totaling approximately $10.4 million, and proceeds from the sale of businesses totaling approximately $16.1 million. Included within cash provided by operating activities was $5.5 million of cash received for key man life proceeds during the year and $1.9 million in proceeds from the settlement of an NFP-owned key man life insurance policy on a principal during the third quarter. Significant uses of cash in 2009 were for payments to principals and/or certain entities they own of $11.9 million, repayments of the Company’s credit facility of $108.0 million, and payments associated with normal operations. Cash and cash equivalents at December 31, 2008 decreased $65.6 million from $114.2 million at December 31, 2007 to $48.6 million at December 31, 2008. Significant sources of cash flow in 2008 came from operating activities, totaling $56.5 million, net borrowings under NFP’s line of credit of $22.0 million and proceeds from the sale of businesses totaling $22.6 million. Significant uses of cash in 2008 were acquisitions and capital expenditures. In 2008 the Company acquired $15.5 million of base earnings resulting in cash payments of $76.4 million compared with $34.5 million of base earnings resulting in cash payments of $206.4 million in the prior year. Cash and cash equivalents at December 31, 2007 increased by $16.0 million from the prior year end principally due to increased borrowings, including the issuance of $230.0 million of convertible senior notes in
January 2007, to support increased base earnings acquired during the year and the repurchase of common stock from Apollo Investment Fund IV L.P. and Apollo Overseas Partners IV L.P. (collectively, “Apollo”).
Some of the Company’s firms maintain premium trust accounts, which represent payments collected from insureds on behalf of carriers. Funds held in these accounts are invested in cash, cash equivalents and securities purchased under resale agreements overnight. At December 31, 2009, the Company had cash, cash equivalents and securities purchased under resale agreements in premium trust accounts of $75.9 million, an increase of $0.8 million from the balance of $75.1 million from December 31, 2008. During 2008, cash, cash equivalents and securities purchased under resale agreements decreased $5.3 million from the balance of $80.4 million at December 31, 2007 to $75.1 million at December 31, 2008. Changes in these accounts are the result of timing of payments collected from insureds on behalf of insurance carriers.
NFP may elect to pay down its outstanding balance at any time before August 22, 2011. Subject to legal or regulatory requirements, the credit facility is secured by the assets of NFP and its wholly-owned subsidiaries. Up to $35 million of the credit facility is available for the issuance of letters of credit and the sublimit for swingline loans is the lesser of $10 million or the total revolving commitments outstanding. The credit facility contains
various customary restrictive covenants, subject to certain exceptions, that prohibit the Company from, among other things: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property, (v) making certain restricted payments and (vi) making advances or loans. In addition, the credit facility contains financial covenants requiring the Company to maintain certain ratios. The most restrictive negative covenant in the credit facility concerns the Consolidated Leverage Ratio, as defined in the Credit Agreement.
On May 29, 2007, a new lender was added to the Credit Agreement pursuant to a Lender Joinder Agreement, which increased the $212.5 million credit facility to $225.0 million.
On April 7, 2008, NFP received an increase in the maximum amount of revolving borrowings available under the credit facility (the “Increase”). The Increase was in the amount of $25.0 million and raised the maximum amount of revolving borrowings available under the Credit Agreement from $225.0 million to $250.0 million. As consideration for the Increase, NFP agreed to pay to the Administrative Agent, for the ratable benefit of the increasing lenders, a fee equal to 0.25% of the increased amount of such increasing lenders’ commitment, or approximately $62,500.
The Second Amendment included a new Consolidated Fixed Charge Coverage Ratio, defined as the ratio of (i) EBITDA less Capital Expenditures made and taxes paid to (ii) Consolidated Fixed Charges. NFP will be obligated to maintain a minimum Consolidated Fixed Charge Coverage Ratio of 2.0 to 1.0 on a rolling four-quarter basis, to be first tested on the last day of the fiscal quarter during which Restricted Payments in respect of dividends and repurchases of stock are made. The Credit Agreement’s negative covenant regarding Restricted Payments was amended so that NFP will be permitted to make Restricted Payments in the form of dividend payments and repurchases of its own stock so long as (i) both before and after giving effect to such payment, no Default or Event of Default shall have occurred and be continuing on a pro forma basis, and (ii) after giving
The definition of Consolidated Total Debt was amended to take into account the impact of new guidance related to the accounting for business combinations. The definition of EBITDA was amended to take into the account the impact of new guidance related to the accounting for business combinations and for new accounting guidance related to the definition of fair value. The definition of Indebtedness was amended to include the Company’s earn-out obligations and contingent consideration obligations incurred in connection with acquisitions. As of January 1, 2009, for purposes of determining Consolidated Total Debt, the definition of Indebtedness will include earnout obligations and other contingent consideration obligations only to the extent required to be set forth pursuant to the new guidance related to the accounting for business combinations on the Company’s consolidated financial statements.
NFP’s access to funds under its credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments and the Company’s compliance with all covenants under the facility. Those banks may not be able to meet their funding commitments to NFP if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from other borrowers within a short period of time. Any disruption in the ability to borrow could require NFP to take measures to conserve cash until markets stabilize or until alternative credit arrangements or other funding for its business needs could be arranged.
As of December 31, 2009 the year-to-date weighted average interest rate for NFP’s credit facility was 3.31%. The combined weighted average of NFP’s credit facility in the prior year was 4.55%.
Upon conversion, NFP will pay, at its election, cash or a combination of cash and common stock based on a daily conversion value calculated on a proportionate basis for each trading day of the relevant 20 trading day observation period. The initial conversion rate for the notes was 17.9791 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately $55.62 per share of common stock. The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change” (as defined in the First Supplemental Indenture governing the notes) occurs prior to the maturity date, NFP will, in some cases and subject to certain limitations, increase the conversion rate for a holder that elects to convert its notes in connection with such fundamental change.
NFP received proceeds from the issuance of the notes, net of underwriting fees and the cost of the convertible note hedge and warrant transactions, of approximately $201.2 million of which $106.6 million was used to repurchase 2.3 million shares of NFP common stock from Apollo in a privately negotiated transaction and $94.6 million was used to pay down balances outstanding under NFP’s credit facility. Apollo received the same proceeds per share, net of underwriting discounts, for the shares it sold pursuant to the repurchase and in the January 2007 secondary public offering, on an aggregate basis, as the other selling stockholders received for the shares they sold in the offering.
As of December 31, 2009 the conversion rate for the notes is 18.0679 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately $55.35 per share of common stock. As of December 31, 2009 the instrument’s converted value did not exceed its principal amount of $230.0 million.
NFP considers applying a reserve to a promissory note when it becomes apparent that conditions exist that may lead to NFP’s inability to fully collect on outstanding amounts due. Such conditions include delinquent or late payments on loans, deterioration in the credit worthiness of the borrower, and other relevant factors. When such conditions lead to an expectation of a loss, NFP generally applies a reserve to the uncollateralized portion of the promissory note. The reserve is generally based on NFP’s payment and collection experience, and whether NFP has an ongoing relationship with the borrower. In instances where the borrower is a principal, NFP has the contractual right to offset management fees earned with any payments due under a promissory note.
On November 23, 2009, NFP entered into a sublease for one of the floors of NFP’s corporate headquarters. The sublease expires on August 14, 2023 and contains a termination clause that grants NFP the option to terminate the sublease on the day immediately preceding the fifth or ninth year. For the year ended December 31, 2009, the Company recognized a $9.0 million loss in corporate and other expenses and a $5.5 million acceleration in amortization and depreciation expense on certain leasehold improvements, based upon the first termination period of the sublease. Should NFP elect to continue the sublease after the first termination period, NFP may recognize an additional loss.
NFP’s credit facility provides for the issuance of letters of credit of up to $35 million on NFP’s behalf, provided that, after giving effect to the letters of credit, NFP’s available borrowing amount is greater than zero. The Company was contingently obligated for letters of credit in the amount of $1.6 million as of December 31, 2009.
In order to better determine the economic value of the businesses the Company has acquired, the Company has incorporated contingent consideration, or earnout, provisions into the structure of its acquisitions since the beginning of 2001. These arrangements generally provide for the payment of additional consideration to the sellers upon the firm’s satisfaction of certain compounded growth rate thresholds over the three-year period generally following the closing of the acquisition. In a small number of cases, contingent consideration may also be payable after shorter periods. As of December 31, 2009, 15 acquisitions are within their initial three-year contingent consideration measurement period. For acquisitions effective prior to January 1, 2009, contingent consideration is considered to be additional purchase consideration and is accounted for as part of the purchase price of the Company’s acquired firms when the outcome of the contingency is determined beyond a reasonable doubt. For acquisitions completed after January 1, 2009, in accordance with GAAP, contingent consideration amounts are fair valued at the acquisition date and are included on that basis in reported purchase price consideration at the time of the acquisition with subsequent adjustments recorded in the statement of operations.
The minimum contingent payments which could be payable as purchase consideration and employee compensation in each year is zero. The maximum contingent payment which could be payable as purchase consideration and employee compensation based on commitments outstanding as of December 31, 2009 consists of the following:
The maximum consideration is generally payable upon a firm achieving a compound annual growth rate of 35%, or higher, in earnings during the first three years following acquisition. The payments of purchase consideration are generally made in cash and NFP common stock (based on the average closing price of NFP common stock for the 20 trading days up to and including the end of the period), in proportions that vary among acquisitions. Contingent firm employee payments are generally payable in cash and recorded as an expense in the year earned.
The table below shows NFP’s contractual obligations as of December 31, 2009:
As of December 31, 2009, the Company’s liability for uncertain tax positions was $21.1 million. The Company was unable to reasonably estimate the timing of liability payments in any individual year due to uncertainties in the timing of the effective settlement of tax positions. NFP has other unrecognized tax positions that were not recorded on the Consolidated Balance Sheet in accordance with the relevant guidance. See Note 13 of the Notes to Consolidated Financial Statements for further information regarding unrecognized tax positions.
It is impracticable for the Company to disclose the revenue from external customers for corporate and executive benefits, life insurance and wealth transfer and financial planning and investment advisory services, as the Company does not have available discrete financial information for such specific products and services.
While as of the year ended December 31, 2009 the Company did not manage its business based on specific revenue categories, management continually assesses the Company’s reporting processes and plans to develop a reporting infrastructure to accommodate more robust client, product and service-level information.
The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with GAAP.
In accordance with GAAP, long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company generally performs its recoverability test on a quarterly basis for each of its acquired firms that have experienced a significant deterioration in its business indicated principally by either an inability to produce base earnings for a period of time or in the event of a restructure in base. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted cash flows expected to be generated by the asset and by the eventual disposition of the asset. If the estimated undiscounted cash flows are less than the carrying amount of the underlying asset, an impairment may exist. The Company measures impairments on identifiable intangible assets subject to amortization by comparing the fair value of the asset to the carrying amount of the asset. In the event that the discounted cash flows are less than the carrying amount, an impairment charge will be recognized for the difference in the consolidated statements of operations.
In accordance with GAAP, goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the intangible asset might be impaired. The Company generally performs its impairment test on a quarterly basis for each of its acquired firms that may have an indicator of impairment. Indicators at the Company level include but are not limited to: sustained operating losses or a trend of poor operating performance, which may cause the
terms of the applicable management contract to be restructured, loss of key personnel, a decrease in NFP’s market capitalization below its book value, and an expectation that a reporting unit will be sold or otherwise disposed of. Indicators of impairment at the reporting unit level may be due to the failure of the firms the Company acquires to perform as expected after the acquisition for various reasons, including legislative or regulatory changes that affect the products and services in which a firm specializes, the loss of key clients after acquisition, general economic factors that impact a firm in a direct way, and the death or disability of significant principals. If one or more indicators of impairment exist, NFP performs an evaluation to identify potential impairments. If an impairment is identified, NFP measures and records the amount of impairment loss.
Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company receives renewal commissions for a period following the first year, if the policy remains in force. Some of the Company’s firms also receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds received by their clients, and recognized as revenue when the policy is transferred and the rescission period has ended. The Company also earns commissions on the sale of insurance policies written for benefit programs. The commissions are paid each year as long as the client continues to use the product and maintain its broker of record relationship with the Company. Additionally, the Company earns fees for the development and implementation of corporate and executive benefit programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans. Insurance commissions are recognized as revenue when the following criteria are met: (1) the policy application and other carrier delivery requirements are substantially complete, (2) the premium is paid, and (3) the insured party is contractually committed to the purchase of the insurance policy. Carrier delivery requirements may include additional supporting documentation, signed amendments and premium payments. Subsequent to the initial issuance of the insurance policy, premiums are billed directly by carriers. Commissions earned on renewal premiums are generally recognized upon receipt from the carrier, since that is typically when the Company is first notified that such
The Company accounts for income taxes in accordance with standards established by GAAP which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred tax assets and liabilities are measured utilizing statutory enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.
As of December 31, 2009, the Company is subject to U.S. federal income tax examinations for the tax years 2006 through 2008, and to various state and local income tax examinations for the tax years 2001 through 2008.
In June 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (“SFAS 168”),” which became the source of authoritative GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the FASB Accounting Standards Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the FASB Accounting Standards Codification became non-authoritative. The Company adopted SFAS 168 as it became effective for financial statements issued for interim and annual periods ending after September 15, 2009. Upon the adoption of SFAS 168, beginning for the interim reporting period ending September 30, 2009, references to authoritative accounting literature have been modified to “plain English” in accordance with the adoption of SFAS 168.
On January 1, 2009, the Company adopted new guidance related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The new guidance applies to NFP’s $230.0 million (including over-allotment) aggregate principal amount of 0.75% convertible senior notes due February 1, 2012 (the “notes” or the “convertible senior notes”) (see “Note 9-Borrowings”). The new guidance requires NFP to separate the convertible senior notes into two separate components: a non-convertible note and a conversion option. As a result, NFP is required to recognize interest expense on its convertible senior notes at their non-convertible debt borrowing rate (6.62%) rather than at their stated face rate (0.75%). With the change in accounting principle required by the new guidance, NFP is required to amortize to interest expense the excess of the principal amount of the liability component of its notes over the carrying amount using the interest method, and the non-cash portion of interest expense relating to the discount on the notes is now recognized as a charge to earnings. Previously, NFP recorded the cost incurred in connection with
For more detail on the effects of change in accounting principle, see “Note 2-Summary of Significant Accounting Policies-Recently adopted accounting guidance.”
The Company had no material off-balance sheet arrangements during the year ended December 31, 2009.