3.                       Business Acquisitions

 

FundQuest Incorporated

 

On December 13, 2011, the Company acquired all of the outstanding shares of FundQuest Incorporated (“FundQuest”), a subsidiary of BNP Paribas Investment Partners USA Holdings, Inc. for total consideration of $27,796. FundQuest was renamed Envestnet Portfolio Solutions, Inc. (“EPS”) subsequent to the acquisition. EPS provides managed account programs, overlay portfolio management, mutual funds, institutional asset management and investment consulting to registered investment advisors, independent advisors, broker-dealers, banks and trust organizations. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is not deductible for income tax purposes.

 

In February 2010, the Company signed a seven-year platform services agreement (the “Agreement”) with FundQuest. Pursuant to the Agreement with FundQuest, the Company provided FundQuest and its clients with the Company’s platform technology and support services, replacing FundQuest’s technology platform. The Company earned fees based upon a contractual percentage of assets under administration. In connection with the Agreement, the Company was required to make various payments to FundQuest during the contract term as defined in the Agreement. These payments included an up-front payment upon completion of the conversion of FundQuest’s clients’ assets to the Company’s technology platform, five annual payments and a payment after the fifth year of the Agreement calculated based on the average annual revenues the Company was to receive from FundQuest during the first five years of the contract term. In addition, the Company also issued to FundQuest a warrant to purchase 1,388,888 shares of its common stock, with an exercise price of $10.80 for an estimated fair value of $2,946 (see Note 11). The present value of all payments and the fair value of the warrant was originally accounted for as customer inducement costs and were amortized as a reduction to the Company’s revenues from assets under management or administration on a straight-line basis over the contract term of seven years. Customer inducement amortization totaled $0, $0 and $4,568 for 2013, 2012 and 2011, respectively, and imputed interest totaled $0, $0 and $771 for 2013, 2012 and 2011, respectively.

 

Upon the acquisition, the Agreement between the Company and FundQuest was effectively settled. The Company analyzed the Agreement to determine the amount by which the contract was favorable or unfavorable when compared to current market pricing. The Company, using the discounted cash flow method, determined the Agreement resulted in a favorable amount of $4,897. The favorable amount of the Agreement was compared to the net book value of the customer inducement asset and liability at the date of the business combination resulting in a charge of approximately $1,183, which is included in other expense in the consolidated statements of operations for the year ended December 31, 2011. The net cash portion of the total consideration paid is included in “Cash flows from investing activities” in the consolidated statements of cash flows.

 

The consideration transferred in the acquisition was as follows:

 

Cash paid to owners		$	24,390
Non-cash consideration:
Favorable contract		4,897
Other		1,241
Cash acquired		(671		)
Working capital adjustment		(2,061		)
		$	27,796

 

During 2012, the Company finalized the estimated working capital adjustment, which resulted in a decrease in goodwill of approximately $889 and an increase in prepaid expenses and other current assets, which was retrospectively adjusted in the December 31, 2011 consolidated balance sheet and the related notes to the consolidated financial statements.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of December 13, 2011, as adjusted.

 

		December 31, 2011 (as adjusted)
Accounts receivable		$	2,603
Prepaid expenses and other current assets		46
Property and equipment		442
Intangible assets		11,830
Goodwill		19,303
Accounts payable and accrued liabilities		(1,364		)
Deferred income taxes		(4,710		)
Deferred revenue		(354		)
Total net assets acquired		$	27,796

 

A summary of intangible assets acquired, estimated useful lives and amortization method was as follows:

 

		Amount			Weighted- Average Useful Life In Years		Amortization Method
Customer list		$	11,830		7		Accelerated

 

The results of EPS’s operations are included in the consolidated statements of operations beginning December 13, 2011 and were not material to the 2011 results of operations.

 

Prima Capital Holding, Inc.

 

On April 5, 2012, the Company completed the acquisition of Prima Capital Holding, Inc. (“Prima”). In accordance with the stock purchase agreement, the Company acquired all of the outstanding shares of Prima for total consideration of approximately $13,925. Prima provides investment management due diligence, research applications, asset allocation modeling and multi-manager portfolios to the wealth management and retirement industries. Prima’s clientele includes banks, independent RIAs, regional broker-dealers, family offices and trust companies. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

The consideration transferred in the acquisition was as follows:

 

Cash paid to owners		$	13,750
Cash acquired		(1,767		)
Cash paid for working capital settlement		1,942
		$	13,925

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Accounts receivable		$	72
Prepaid expenses and other current assets		36
Notes receivable		860
Property and equipment		103
Deferred income taxes - non current		1,328
Intangible assets		4,940
Goodwill		9,283
Accounts payable and accrued liabilities		(171		)
Deferred income tax liabilities		(1,796		)
Deferred revenue		(730		)
Total net assets acquired		$	13,925

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

		Amount			Weighted- Average Useful Life in Years		Amortization Method
Customer list		$	3,740		10		Accelerated
Proprietary technology		700			5		Accelerated
Trade names		500			5		Accelerated
Total		$	4,940

 

The results of Prima’s operations are included in the consolidated statements of operations beginning April 5, 2012. Prima’s revenues and net loss for the nine months ended December 31, 2012 totaled $3,626 and ($791), respectively. The net loss for the nine months ended December 31, 2012 included pre-tax acquired intangible asset amortization of $1,005.

 

Tamarac, Inc.

 

On May 1, 2012, the Company completed the acquisition of Tamarac, Inc. (“Tamarac”). In accordance with the merger agreement, a newly formed subsidiary of Envestnet merged with and into Tamarac, and Tamarac became a wholly-owned subsidiary of Envestnet. Under the terms of the merger agreement, total consideration was approximately $48,427 for all of the outstanding stock of Tamarac. Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is not deductible for income tax purposes.

 

The consideration transferred in the acquisition was as follows:

 

Cash paid to owners		$	54,000
Non-cash consideration		101
Cash acquired		(2,533		)
Receivable from working capital settlement		(3,141		)
		$	48,427

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

 

Accounts receivable		$	489
Other receivables		681
Prepaid expenses and other current assets		216
Deferred income tax assets		7,235
Property and equipment		444
Deposits		379
Intangible assets		16,150
Goodwill		35,027
Accounts payable and accrued liabilities		(2,356		)
Deferred income tax liabilities		(5,907		)
Deferred revenue		(3,931		)
Total net assets acquired		$	48,427

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

		Amount			Weighted- Average Useful Life in Years		Amortization Method
Customer list		$	8,680		12		Accelerated
Proprietary technology		5,880			8		Accelerated
Trade names		1,590			5		Accelerated
Total		$	16,150

 

The results of Tamarac’s operations are included in the consolidated statements of operations beginning May 1, 2012. Tamarac’s revenues and net loss for the eight-month period ended December 31, 2012 totaled $9,971 and ($1,236), respectively. The net loss for the eight months ended December 31, 2012 included pre-tax acquired intangible asset amortization of $1,304.

 

In accordance with the terms of the merger agreement between Envestnet and Tamarac, Tamarac senior management was required to apply at least 50% (up to 100%) of the aggregate proceeds of the Tamarac change of control payment totaling $2,759 to purchase registered shares of Envestnet common stock (232,150 shares) in an amount equal to 95% multiplied by the Envestnet closing market price on the day before the merger closed (see Note 11).

 

In addition, the Company adopted the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). The 2012 Plan provides for the grant of up to 559,551 shares of unvested common stock. The unvested common stock vests based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition (see Note 12). The Company also granted to certain Tamarac employees 232,150 stock options to acquire Envestnet common stock at an exercise price of $12.51. These stock options vest on the second anniversary of the grant date (see Note 12).

 

Wealth Management Solutions

 

On July 1, 2013, the Company completed the acquisition of the Wealth Management Solutions (“WMS”) division of Prudential Investments. In accordance with the purchase agreement, the Company acquired substantially all of the assets and assumed certain liabilities of WMS for total consideration of $24,730. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is deductible for income tax purposes.

 

The consideration in the acquisition was as follows:

 

Cash consideration		$	8,992
Contingent consideration		15,738
		$	24,730

 

In connection with the acquisition of WMS, the Company is required to pay Prudential Investments contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets. The Company recorded a liability as of the date of acquisition of $15,738, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8. The estimated fair value of contingent consideration as of December 31, 2013 was $17,026. This amount is the present value of an undiscounted liability of $19,670, applying a discount rate of 10%. Payments will be made at the end of three twelve month closing periods. The future undiscounted payments are anticipated to be $6,000 on July 31, 2014, $6,745 on July 31, 2015 and $6,925 on July 31, 2016. The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets. Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company.

 

For the six month period ending December 31, 2013, the Company recognized imputed interest expense on contingent consideration of $787 and an estimated fair value adjustment on contingent consideration of $501, which are included in general and administration expense in the condensed consolidated statement of operations.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Total tangible assets acquired		$	1,296
Total liabilities assumed		(2,257		)
Identifiable intangible assets:
Customer list		14,000
Proprietary technology		3,000
Goodwill		8,691
Total net assets acquired		$	24,730

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

		Amount			Weighted Average Useful Life in Years		Amortization Method
Customer list		$	14,000		12		Accelerated
Proprietary technology		3,000			1.5		Accelerated
Total		$	17,000

 

The results of WMS operations are included in the condensed consolidated statement of operations beginning July 1, 2013. WMS’s revenues and net loss for the six month period ended December 31, 2013 totaled $33,517 and ($1,056), respectively. The net loss includes acquired intangible asset amortization of $2,164, imputed interest expense on contingent consideration of $787 and an estimated fair value adjustment on contingent consideration of $501.

 

Acquisition related costs of $946, $2,317 and $405 are included in general and administration expenses in the consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011, respectively.

 

Pro forma results for Envestnet, Inc. giving effect to the Prima, Tamarac and WMS acquisitions

 

The following unaudited pro forma financial information presents the combined results of operations of Envestnet and WMS for the year ended December 31, 2013 and Envestnet, Prima, Tamarac and WMS for the year ended December 31, 2012. The unaudited pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2012.

 

The unaudited pro forma results presented include amortization charges for acquired intangible assets and stock-based compensation expense, and the elimination of intercompany transactions, unrealized gain or loss on warrant, imputed interest expense, and transaction-related expenses and the related tax effect on the aforementioned items.

 

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2012.

 

		At December 31,
		2013			2012
Revenues		$	274,983		$	223,838
Net loss		(9,935		)	(25,351		)
Net loss per share:
Basic		(0.30		)	(0.79		)
Diluted		(0.30		)	(0.79		)