Exhibit 99.3
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Kansas City 727 Acquisition LLC and Subsidiaries
Nine-Month Periods Ended September 30, 2015 and 2014
Kansas City 727 Acquisition LLC and Subsidiaries
Consolidated Financial Statements (Unaudited)
Nine-Month Periods Ended September 30, 2015 and 2014
Contents
| | | | |
Consolidated Financial Statements (Unaudited) | | | | |
| |
Consolidated Balance Sheets (Unaudited) | | | 1 | |
Consolidated Statements of Income (Unaudited) | | | 2 | |
Consolidated Statements of Cash Flows (Unaudited) | | | 3 | |
Notes to Consolidated Financial Statements (Unaudited) | | | 4 | |
Kansas City 727 Acquisition LLC and Subsidiaries
Consolidated Balance Sheets (Unaudited)
| | | | | | | | |
| | September 30 | |
| | 2015 | | | 2014 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 5,696,425 | | | $ | 6,179,015 | |
Accounts receivable, net | | | 19,100,711 | | | | 15,470,548 | |
Prepaid expenses and other assets | | | 1,134,538 | | | | 1,061,900 | |
| | | | | | | | |
Total current assets | | | 25,931,674 | | | | 22,711,463 | |
Intangible assets, net | | | 318,196,768 | | | | 295,394,960 | |
Property and equipment, net | | | 3,382,510 | | | | 2,606,732 | |
Other assets, net | | | 3,155,224 | | | | 3,350,327 | |
| | | | | | | | |
Total assets | | $ | 350,666,176 | | | $ | 324,063,482 | |
| | | | | | | | |
Liabilities and members’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 1,829,005 | | | $ | 1,494,139 | |
Accrued commissions | | | 1,917,575 | | | | 1,625,967 | |
Accrued expenses | | | 6,017,827 | | | | 4,145,983 | |
Deferred rent | | | 307,258 | | | | 182,186 | |
Deferred revenue | | | 363,313 | | | | 557,655 | |
Current portion of long-term debt | | | 1,500,000 | | | | 1,125,000 | |
| | | | | | | | |
Total current liabilities | | | 11,934,978 | | | | 9,130,930 | |
Deferred rent, less current portion | | | 500,784 | | | | 308,513 | |
Long-term debt, less current portion | | | 160,757,661 | | | | 147,412,472 | |
| | | | | | | | |
Total liabilities | | | 173,193,423 | | | | 156,851,915 | |
Members’ equity: | | | | | | | | |
Accumulated members’ equity | | | 177,105,347 | | | | 166,860,723 | |
Non-controlling interest | | | 367,406 | | | | 350,844 | |
| | | | | | | | |
Total members’ equity | | | 177,472,753 | | | | 167,211,567 | |
| | | | | | | | |
Total liabilities and members’ equity | | $ | 350,666,176 | | | $ | 324,063,482 | |
| | | | | | | | |
See accompanying notes.
1
Kansas City 727 Acquisition LLC and Subsidiaries
Consolidated Statements of Income (Unaudited)
| | | | | | | | |
| | Nine-Month Period Ended September 30 | |
| | 2015 | | | 2014 | |
Revenue: | | | | | | | | |
Advisory fees | | $ | 64,489,523 | | | $ | 54,213,551 | |
Franchise royalty fees | | | 6,017,077 | | | | 8,019,132 | |
Other | | | 3,892,508 | | | | 3,743,161 | |
| | | | | | | | |
Total revenue | | | 74,399,108 | | | | 65,975,844 | |
Operating expenses: | | | | | | | | |
Compensation and benefits | | | 29,326,612 | | | | 25,911,892 | |
General and administrative | | | 9,915,351 | | | | 7,540,314 | |
Advertising and marketing | | | 6,627,334 | | | | 7,188,172 | |
Depreciation and amortization | | | 7,335,445 | | | | 6,595,662 | |
Loss on acquisition | | | — | | | | 1,747,383 | |
| | | | | | | | |
Total operating expenses | | | 53,204,742 | | | | 48,983,423 | |
| | | | | | | | |
Operating income | | | 21,194,366 | | | | 16,992,421 | |
Other income: | | | | | | | | |
Interest expense, net | | | (7,241,896 | ) | | | (3,829,857 | ) |
Loss on debt refinancing | | | — | | | | (1,600,213 | ) |
Other income, net | | | (13,824 | ) | | | (622 | ) |
| | | | | | | | |
Income from continuing operations | | | 13,938,646 | | | | 11,561,729 | |
Loss on discontinued operations | | | 5,022 | | | | (2,739,723 | ) |
| | | | | | | | |
Consolidated net income | | | 13,943,668 | | | | 8,822,006 | |
Loss attributable to non-controlling interest | | | 113,591 | | | | (396 | ) |
| | | | | | | | |
Net income attributable to Kansas City 727 Acquisition LLC | | $ | 14,057,259 | | | $ | 8,821,610 | |
| | | | | | | | |
See accompanying notes.
2
Kansas City 727 Acquisition LLC and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | |
| | Nine-Month Period Ended September 30 | |
| | 2015 | | | 2014 | |
Operating activities | | | | | | | | |
Net income | | $ | 14,057,259 | | | $ | 8,821,610 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 7,335,445 | | | | 6,673,435 | |
Loss on asset disposals | | | 29,874 | | | | 441,897 | |
Amortization of debt issuance costs | | | 333,416 | | | | 513,470 | |
Amortization of long-term debt premium/discount | | | 164,584 | | | | 37,472 | |
Loss on debt refinancing | | | — | | | | 1,600,213 | |
Non-controlling interest | | | (113,591 | ) | | | 396 | |
Equity-based compensation | | | 475,719 | | | | 510,794 | |
Net changes in operating assets and liabilities, net of acquisitions: | | | | | | | | |
Accounts receivable, net | | | (2,015,190 | ) | | | (1,563,550 | ) |
Prepaid expenses and other assets, net | | | 47,507 | | | | 186,485 | |
Accounts payable | | | 532,329 | | | | 487,758 | |
Accrued expenses and commissions | | | (487,811 | ) | | | 2,714,949 | |
Deferred revenue | | | (57,510 | ) | | | 34,723 | |
Deferred rent | | | 293,137 | | | | (162,599 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 20,595,168 | | | | 20,297,053 | |
Investing activities | | | | | | | | |
Purchases of property and equipment | | | (1,634,546 | ) | | | (957,623 | ) |
Cash paid for acquisitions, net of cash acquired | | | (30,208,268 | ) | | | (16,900,016 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (31,842,814 | ) | | | (17,857,639 | ) |
Financing activities | | | | | | | | |
Proceeds from borrowings on debt | | | 22,000,000 | | | | 158,500,000 | |
Principal payments on debt | | | (8,125,000 | ) | | | (74,000,000 | ) |
Debt issuance costs | | | — | | | | (3,038,714 | ) |
Member contributions | | | 131,355 | | | | 878,641 | |
Repurchase of equity units | | | (14,168 | ) | | | (2,298,015 | ) |
Distributions paid to members | | | (6,172,955 | ) | | | (81,142,656 | ) |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 7,819,232 | | | | (1,100,744 | ) |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (3,428,414 | ) | | | 1,338,670 | |
Cash and cash equivalents at beginning of year | | | 9,124,839 | | | | 4,840,345 | |
| | | | | | | | |
Cash and cash equivalents at end of year | | $ | 5,696,425 | | | $ | 6,179,015 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the year for interest | | $ | 7,923,534 | | | $ | 3,187,434 | |
| | | | | | | | |
See accompanying notes.
3
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2015
1. Summary of Significant Accounting Policies
Description of Business
Kansas City 727 Acquisition LLC (KC LLC or the Company) is a holding company that conducts no operating activities other than through its interests in its subsidiaries. Through its wholly owned subsidiary, TMFS Holdings, LLC, and other indirect wholly owned subsidiaries, KC LLC provides independent, fee-based investment advisory and asset management services to retail investors under the trade name THE MUTUAL FUND STORE®. Through its indirect wholly owned subsidiary, The Mutual Fund Store, LLC, KC LLC also sells franchises for investment advisory and asset management services and provides investment advice and advisory services to a nationwide network of investment advisors doing business under the trade name THE MUTUAL FUND STORE®. KC LLC, through its wholly owned subsidiaries and franchisees, had approximately $9.5 billion and $9.3 billion of assets under management as of September 30, 2015 and 2014, respectively.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of KC LLC for the year ended December 31, 2014. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.
Organization
KC LLC, a Delaware limited liability company, was organized on July 27, 2011, and was created for the purpose of acquiring all equity interests in TMFS Holdings, LLC. TMFS Holdings, LLC (Holdings), a Delaware limited liability company, was organized on February 8, 2006. KC LLC exists in perpetuity, unless terminated by agreement of the members. Under the terms of the operating agreement, the members of KC LLC are not liable for any debt obligation or liability of KC LLC. KC LLC has 40,937 Class A Common Units authorized and 100,000 Class B Common Units authorized. Effective September 15, 2011, members of Holdings contributed 100% of their member interests in Holdings in exchange for newly issued member interests in KC LLC. Certain of the newly issued membership units were redeemed and canceled. Simultaneously, the limited liability company agreement of Holdings was amended and restated to reflect Holdings becoming a wholly owned subsidiary of KC LLC, which resulted in Holdings
4
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
1. Summary of Significant Accounting Policies (continued)
becoming a single member LLC and being treated as a disregarded entity for federal income tax purposes. Kansas City 727 Acquisition Corporation (KC 727 Acquisition Corporation), an indirect wholly owned subsidiary of Warburg Pincus, acquired 30,354 membership units, or approximately 74% of the outstanding membership interests of KC LLC, and approximately 10,583 units, or 26% of the outstanding membership interests of KC LLC, were beneficially owned by management who retained the shares as rollover equity interests. These outstanding units represent all of the Class A Common Units. Because of the transaction, a new accounting basis for KC LLC was established.
Principles of Consolidation
The accompanying consolidated financial statements of the Company reflect the consolidated financial position and operating results of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. On an ongoing basis, the Company evaluates its business relationships such as those with franchisees to identify potential variable interest entities. Generally, franchisees qualify for a scope exception under the variable interest entity consolidation guidance. The Company has concluded that consolidation of any such entity is not appropriate for the periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results may differ from those estimates.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update 2015-03,Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs to be presented in the balance sheet as a deduction from the related debt liability rather than an asset. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that this guidance will have a material impact on its consolidated financial statements.
5
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
1. Summary of Significant Accounting Policies (continued)
In May 2014, the FASB issued Accounting Standard Update (ASU) 2014-09,Revenue from Contracts with Customers (Topic 606). Under ASU2014-09, an entity is required to follow a five-step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers. ASU2014-09 offers specific accounting guidance for costs to obtain or fulfill a contract with a customer. In addition, an entity is required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018, and can be adopted either retrospectively or as a cumulative effect adjustment at the date of adoption, with early adoption not permitted. The Company is in the process of evaluating the potential future effect, if any, of ASU 2014-09 on its consolidated financial position, results of operations, and cash flows.
In April 2014, the FASB issued ASU 2014-08,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for the Company in 2015. The Company will evaluate the adoption of ASU2014-08 as transactions may occur that require evaluation using this guidance.
2. Accounts Receivable
Accounts receivable consisted of the following:
| | | | | | | | |
| | September 30 | |
| | 2015 | | | 2014 | |
Investment advisory fees receivable | | $ | 15,502,655 | | | $ | 13,257,117 | |
Franchise royalty fees receivable | | | 473,420 | | | | 837,264 | |
Account servicing fees receivable | | | 1,344,126 | | | | 1,125,160 | |
Marketing support receivable | | | 1,666,667 | | | | — | |
Accounts receivable, other | | | 149,024 | | | | 275,371 | |
| | | | | | | | |
| | | 19,135,892 | | | | 15,494,912 | |
Less allowance for doubtful accounts | | | (35,181 | ) | | | (24,364 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 19,100,711 | | | $ | 15,470,548 | |
| | | | | | | | |
6
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
3. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
| | | | | | | | |
| | September 30 | |
| | 2015 | | | 2014 | |
Tenant improvements | | $ | 3,462,345 | | | $ | 2,538,545 | |
Office furniture | | | 1,482,452 | | | | 1,075,651 | |
Office equipment | | | 828,328 | | | | 723,557 | |
Computer equipment | | | 1,301,112 | | | | 980,619 | |
Computer software | | | 1,309,464 | | | | 994,557 | |
| | | | | | | | |
| | | 8,383,701 | | | | 6,312,929 | |
Less accumulated depreciation | | | (5,330,922 | ) | | | (4,168,846 | ) |
| | | | | | | | |
| | | 3,052,779 | | | | 2,144,083 | |
Work-in-progress | | | 329,731 | | | | 462,649 | |
| | | | | | | | |
Property and equipment, net | | $ | 3,382,510 | | | $ | 2,606,732 | |
| | | | | | | | |
Unamortized software cost was $221,488 and $233,356 for the nine-month periods ended September 30, 2015 and 2014, respectively. Amortization of software costs was $238,002 and $203,000 for the nine-month periods ended September 30, 2015 and 2014, respectively. Depreciation and amortization expense was $1,016,356 and $810,819 for the periods ended September 30, 2015 and 2014, respectively.
7
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
4. Intangible Assets
Intangible assets consisted of the following as of September 30, 2015:
| | | | | | | | | | | | | | | | |
| | Weighted Average Useful Life (Years) | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Customer and franchise relationships | | | 14.49 | | | $ | 114,124,000 | | | $ | 26,904,047 | | | $ | 87,219,953 | |
Acquired franchise rights | | | 3.75 | | | | 9,302,583 | | | | 2,628,868 | | | | 6,673,715 | |
Other intangibles | | | 1.00 | | | | 16,908 | | | | 11,500 | | | | 5,408 | |
| | | | | | | | | | | | | | | | |
Total finite-lived intangible assets | | | | | | | 123,443,491 | | | | 29,544,415 | | | | 93,899,076 | |
Goodwill | | | | | | | 135,954,692 | | | | — | | | | 135,954,692 | |
Trade name | | | | | | | 88,343,000 | | | | — | | | | 88,343,000 | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | | | | | $ | 347,741,183 | | | $ | 29,544,415 | | | $ | 318,196,768 | |
| | | | | | | | | | | | | | | | |
Intangible assets consist of the following as of September 30, 2014:
| | | | | | | | | | | | | | | | |
| | Weighted Average Useful Life (Years) | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Customer and franchise relationships | | | 14.12 | | | $ | 97,216,000 | | | $ | 19,618,139 | | | $ | 77,597,861 | |
Acquired franchise rights | | | 3.93 | | | | 3,508,583 | | | | 1,640,695 | | | | 1,867,888 | |
| | | | | | | | | | | | | | | | |
Total finite-lived intangible assets | | | | | | | 100,724,583 | �� | | | 21,258,834 | | | | 79,465,749 | |
Goodwill | | | | | | | 127,586,211 | | | | — | | | | 127,586,211 | |
Trade name | | | | | | | 88,343,000 | | | | — | | | | 88,343,000 | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | | | | | $ | 316,653,794 | | | $ | 21,258,834 | | | $ | 295,394,960 | |
| | | | | | | | | | | | | | | | |
Amortization expense was $6,319,203, and $5,784,843 for the nine-month periods ended September 30, 2015 and 2014, respectively.
8
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
4. Intangible Assets (continued)
The change in goodwill from December 31, 2013 to September 30, 2014, and December 31, 2014 to September 30, 2015, is as follows:
| | | | |
Balance, December 31, 2013 | | $ | 121,508,500 | |
Additions due to acquisitions | | | 6,077,711 | |
| | | | |
Balance, September 30, 2014 | | $ | 127,586,211 | |
| | | | |
Balance, December 31, 2014 | | $ | 127,586,211 | |
Additions due to acquisitions | | | 8,368,481 | |
| | | | |
Balance, September 30, 2015 | | $ | 135,954,692 | |
| | | | |
5. Long-Term Debt
Long-term debt consists of the following as of September 30, 2015:
| | | | | | | | | | | | |
| | Maturity Value | | | Unamortized Discount | | | Net Carrying Value | |
Senior secured term loan | | $ | 148,500,000 | | | $ | (1,242,339 | ) | | $ | 147,257,661 | |
Senior secured revolving credit | | | 15,000,000 | | | | — | | | | 15,000,000 | |
| | | | | | | | | | | | |
Total long-term debt | | $ | 163,500,000 | | | $ | (1,242,339 | ) | | $ | 162,257,661 | |
| | | | | | | | | | | | |
Long-term debt consists of the following as of September 30, 2014:
| | | | | | | | | | | | |
| | Maturity Value | | | Unamortized Discount | | | Net Carrying Value | |
Senior secured term loan | | $ | 150,000,000 | | | $ | (1,462,528 | ) | | $ | 148,537,472 | |
Senior secured revolving credit | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total long-term debt | | $ | 150,000,000 | | | $ | (1,462,528 | ) | | $ | 148,537,472 | |
| | | | | | | | | | | | |
9
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
5. Long-Term Debt (continued)
Term and Revolving Loans
Prior to July 31, 2014, the Company’s interest rate expense was subject to the credit agreement entered into on September 15, 2011, and repriced effective April 29, 2013. The repricing amendment was executed to change the rates of the credit agreement as follows: (i) the applicable margin for any base rate loan and any revolving loan was reduced from 4.00% to no more than 3.25%, (ii) the applicable margin for any Eurodollar rate loan was reduced from 5.00% to no more than 4.25%, and (iii) the Eurodollar base rate floor of 1.50% was eliminated.
On July 31, 2014, the Company entered into a new credit agreement (the Credit Agreement) that provides for a $150,000,000 senior secured first lien term loan and a $20,000,000 senior secured revolving credit facility (collectively, the Loans). The Loans bear interest on the unpaid principal amount at variable rates and were issued with a $1,500,000 or 1% Original Issue Discount. The net proceeds from the Credit Agreement were used to repay borrowings from the previous credit agreement and to pay a $77,000,000 cash dividend to the Company’s parent.
Fees and interest on borrowings vary based on the Company’s consolidated leverage ratio and will be based on a margin over London Interbank Offered Rate (LIBOR) or a margin over the base rate as selected by the Company. The margin ranges from 4.25% to 4.50% for LIBOR loans or 3.25% to 3.50% for base rate loans and a commitment fee on the unused portion of the Credit Agreement ranging from 0.38% to 0.50%. The base rate represents the higher of (i) prime rate, (ii) the Federal Funds Effective Rate plus 0.50%, (iii) the Adjusted LIBOR plus 1.00%, or (iv) Alternative Base Rate floor of 2.00%.
Following July 31, 2014 and through September 30, 2015, the interest rate of 5.50% was based upon a Eurodollar rate (LIBOR). The loan made at LIBOR is at a rate per annum equal to the sum of the higher of (i) the Eurodollar rate applicable to the proposed Eurodollar interest rate period or (ii) 1.0% per annum (the Eurodollar interest rate floor) plus a margin of 4.50% per annum.
The Company is a guarantor to the Guaranty and Security Agreement dated July 31, 2014, which pledges all of the Company’s assets and rights as collateral against the Loans outstanding under the Credit Agreement. The Loans mature on July 30, 2021. The Credit Agreement calls for mandatory scheduled quarterly term loan principal payments totaling $375,000, beginning December 31, 2014, and continuing quarterly for a period of seven years. The remaining outstanding balance is due at maturity on July 30, 2021. Additionally, the Company may prepay
10
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
5. Long-Term Debt (continued)
the outstanding principal amount of any Loan in whole or in part at any time. Further, beginning with the fiscal year ending December 31, 2015, the Company may be required to make mandatory prepayments based upon an annual excess cash flow calculation, as defined in the Credit Agreement.
At September 30, 2014, there was a $150,000,000 outstanding balance on the term loan, bearing interest at 5.50% annually, and a $0 outstanding balance on the revolving loan. At September 30, 2015, there was a $148,500,000 outstanding balance on the term loan, bearing interest at 5.50% annually, and a $15,000,000 outstanding balance on the revolving loan, bearing interest at 4.44% annually.
Discount on Debt
In connection with the July 31, 2014, credit agreement, the Company recorded a discount on debt of $1,500,000, which the discount on debt reflects the difference between the proceeds received from the issuance of the debt and the face amount to be repaid over the life of the debt. The discount is amortized as additional interest expense over the life of the debt using the effective interest method. For the nine-month period ended September 30, 2014, $37,472 of the discount was amortized as additional interest expense using the effective interest method. For the nine-month period ended September 30, 2015, $164,584 of the discount was amortized as additional interest expense using the effective interest method.
Debt Issuance Costs
In connection with the July 31, 2014 Credit Agreement, the Company recorded $3,038,714 of debt issuance costs. The Company capitalizes costs associated with the issuance of debt and amortizes them over the lives of the debt as additional interest expense using the effective interest method. Deferred debt issuance costs are classified in other assets on the accompanying consolidated balance sheets and totaled $2,516,742 and $2,962,802 net of accumulated amortization of $521,972 and $75,912 for the periods ended September 30, 2015 and 2014, respectively. Amortization of debt issuance costs is included in interest expense on the consolidated statements of income and totaled $333,416 and $75,912 for the nine-month periods ended September 30, 2015 and 2014, respectively. Additionally, $1,593,963 of debt issuance costs and $6,250 of related prepaid expenses were written off in connection with the debt retirement for the nine-month period ended September 30, 2014, and are reflected as loss on debt refinancing on the consolidated statement of income.
11
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
6. Equity
Membership Units
KC LLC has 40,639 Class A Common Units authorized, and all are outstanding at September 30, 2015. Additionally, there are 100,000 Class B Common Units authorized, of which 5,038 are outstanding at September 30, 2015. The Company repurchased 298 Class A Common Units for $2,298,015 during 2014. All of these Common Units have voting rights and share pro rata in the profits and losses. Certain Common Units have certain restrictions that limit transferability and other rights.
7. Acquisitions
In January 2015, TMFS Insurance Agency, LLC, a wholly owned affiliate of Holdings, purchased substantially all assets and the ongoing operations of S.W.I, Inc. for a purchase price of $212,000. The Company paid $150,000 on January 12, 2015. Pursuant to the Asset Purchase Agreement, $62,000 was held back by the Company and will be paid in cash as two separate earn-out payments in April 2016 and in April 2017 if certain conditions are met. S.W.I, Inc. is a life insurance agency. Substantially all of the purchase price was allocated primarily to goodwill.
In April 2015, TMFS Advisors, LLC, a wholly owned affiliate of Holdings, purchased substantially all assets and the ongoing operations of Palantir Capital Management, LTD for a purchase price of $1,069,676. The Company paid $415,026 on April 1, 2015. Pursuant to the Asset Purchase Agreement, $654,650 was held back by the Company and will be paid in cash as two separate earn-out payments in April 2016 and in April 2017 if certain conditions are met. Palantir Capital Management, LTD is a registered investment advisor in Houston, Texas. Substantially all of the purchase price was allocated to intangible assets, including customer relationships and goodwill.
12
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
7. Acquisitions (continued)
During the period ended September 30, 2015, the Company purchased the assets and operations of seven franchised stores as detailed below.
| | | | |
| | Date Acquired | |
THE MUTUAL FUND STORE® – Jacksonville, LLC | | | January 2015 | |
THE MUTUAL FUND STORE® – Charlotte, LLC | | | January 2015 | |
THE MUTUAL FUND STORE® – Sacramento, LLC | | | April 2015 | |
THE MUTUAL FUND STORE® – Chicago, Inc. | | | May 2015 | |
THE MUTUAL FUND STORE® – Albuquerque | | | May 2015 | |
THE MUTUAL FUND STORE® – Albany, LLC | | | June 2015 | |
THE MUTUAL FUND STORE® – Minneapolis | | | June 2015 | |
The following table summarizes the allocation of the aggregate purchase price to the net assets acquired from all the seven locations listed above.
| | | | |
Advisory fees receivable | | $ | 1,402,388 | |
Other assets | | | 341,449 | |
Accrued liabilities | | | (333,049 | ) |
Customer relationships | | | 15,945,000 | |
Franchise rights | | | 5,794,000 | |
Goodwill | | | 8,067,035 | |
| | | | |
Total purchase price | | $ | 31,216,823 | |
| | | | |
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Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
7. Acquisitions (continued)
During period ended September 30 2014, the Company purchased the assets and operations of nine franchised stores as detailed below.
| | | | |
| | Date Acquired | |
THE MUTUAL FUND STORE® – Seattle (two stores) | | | January 2014 | |
TMFS Capital Partners, LLC (stores in Dallas, TX, and Tulsa, OK) | | | January 2014 | |
THE MUTUAL FUND STORE® – Fresno | | | January 2014 | |
THE MUTUAL FUND STORE® – Wichita | | | February 2014 | |
THE MUTUAL FUND STORE® – Dayton | | | June 2014 | |
Schieber Financial Group (two stores) | | | June 2014 | |
The following table summarizes the allocation of the aggregate purchase price to the net assets acquired from all the nine locations listed above:
| | | | |
Advisory fees receivable | | $ | 535,800 | |
Other assets | | | 148,336 | |
Accrued liabilities | | | (249,027 | ) |
Loss on acquisition | | | 1,747,383 | |
Customer Relationships | | | 6,605,000 | |
Franchise Rights | | | 1,281,000 | |
Goodwill | | | 6,077,711 | |
| | | | |
Total purchase price | | $ | 16,146,203 | |
| | | | |
8. Discontinued Operations
In September 2014, the Company elected to discontinue operations at its New York City metropolitan stores. In connection with the closure of these stores, the Company recordednon-cash impairment charges of $428,587 in 2014, attributable to the carrying value of certain property and equipment.
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Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
8. Discontinued Operations (continued)
The net gain (loss) on discontinued operations totaled $5,022 and $(2,739,723) during the nine-month periods ended September 30, 2015 and 2014, respectively, and is included on the accompanying consolidated statements of income. Depreciation expense related to discontinued operations totaled $0 and $77,773 during the nine-month periods ended September 30, 2015 and 2014, respectively, and is included in loss on discontinued operations on the accompanying consolidated statements of income and in depreciation and amortization expense on the accompanying consolidated statements of cash flows. Amortization expense on intangible assets related to discontinued operations was $0 during the nine-month periods ended September 30, 2014 and 2014. Radio advertising expense related to discontinued operations was $0 and $1,076,896 for the periods ended September 30, 2015 and 2014, respectively, and is included in loss on discontinued operations on the accompanying consolidated statements of income.
The following amounts have been segregated from continuing operations and are included in loss on discontinued operations on the accompanying consolidated statements of income:
| | | | | | | | |
| | Nine-Month Period Ended September 30 | |
| | 2015 | | | 2014 | |
Revenue | | $ | — | | | $ | 80,793 | |
Net gain (loss) on discontinued operations | | | 5,022 | | | | (2,739,723 | ) |
9. Subsequent Events
The Company evaluated subsequent events and transactions for potential recognition or disclosure in the accompanying consolidated financial statements through January 29, 2016, the date the consolidated financial statements were available for issuance.
After September 30, 2015, TMFS Advisors, LLC, a wholly owned affiliate of Holdings, purchased substantially all assets and the ongoing operations of three company franchisees. The total purchase prices were $6,358,109 of which the majority was paid in cash during 2015. The Company expects that substantially all of the purchase prices will be allocated to intangible assets, including customer relationships and goodwill.
15
Kansas City 727 Acquisition LLC and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
9. Subsequent Events (continued)
On December 31, 2015, TMFS – Houston, LLC, a wholly owned affiliate of Holdings, purchased the remaining 49% non-controlling interest of TMFS – Houston I and II, LLC for a purchase price of $1,391,562.
On November 5, 2015, Financial Engines announced it would acquire the Company, for total consideration of approximately $560 million, including cash and stock.
16