National
Financial Partners Corp. and Subsidiaries
Form
10-Q
INDEX
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Page
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Part
I
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Financial
Information:
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Item
1.
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Financial
Statements (Unaudited):
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5
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Consolidated
Statements of Financial Condition as of September 30, 2009 and December
31, 2008
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5
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Consolidated
Statements of Operations for the Three and Nine Months Ended September 30,
2009 and 2008
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6
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Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008
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7
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Notes
to Consolidated Financial Statements
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8
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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50
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Item
4.
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Controls
and Procedures
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51
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Part
II
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Other
Information:
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Item
1.
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Legal
Proceedings
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52
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Item
1A.
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Risk
Factors
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52
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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53
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Item
5.
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Other
Information
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54
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Item
6.
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Exhibits
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56
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Signatures
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59
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Forward-Looking
Statements
National
Financial Partners Corp. (“NFP”) and its subsidiaries (together with NFP, the
“Company”) and their representatives may from time to time make verbal or
written statements, including certain statements in this report, which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, without
limitation, any statement that may project, indicate or imply future results,
events, performance or achievements, and may contain the words “anticipate,”
“expect,” “intend,” “plan,” “believe,” “estimate,” “may,” “project,” “will,”
“continue” and similar expressions of a future or forward-looking nature.
Forward-looking statements may include discussions concerning revenue, expenses,
earnings, cash flow, impairments, losses, dividends, capital structure, credit
facilities, market and industry conditions, premium and commission rates,
interest rates, contingencies, the direction or outcome of regulatory
investigations and litigation, income taxes and the Company’s operations or
strategy.
These
forward-looking statements are based on management’s current views with respect
to future results, and are subject to risks and uncertainties. Forward-looking
statements are based on beliefs and assumptions made by management using
currently-available information, such as market and industry materials, experts’
reports and opinions, and current financial trends. These statements are only
predictions and are not guarantees of future performance. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated by a forward-looking
statement. These risks and uncertainties include, without
limitation:
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NFP’s ability,
through its operating structure, to respond quickly to regulatory,
operational or financial situations impacting its
firms;
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the Company’s
ability to manage its business effectively and profitably through the
principals of its firms;
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•
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the financial impact
of NFP’s new incentive plans;
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•
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a recessionary
economic environment, resulting in fewer sales of financial products or
services, including rising unemployment which could impact group benefits
sales based on reduced headcount, the availability of credit in connection
with the purchase of such products or services, consumer hesitancy in
spending or the insolvencies of or difficulties experienced by insurance
companies, financial institutions or the Company’s
clients;
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•
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the occurrence of
events or circumstances that could be indicators of impairment to goodwill
and intangible assets which require the Company to test for impairment,
and the impact of any impairments that the Company may
take;
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•
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the impact of the
adoption or modification of certain accounting treatments or policies and
changes in underlying assumptions relating to such treatments or policies
(including with respect to impairments), which may lead to adverse
financial results;
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NFP’s success in
acquiring and retaining high-quality independent financial services
distribution firms and various factors inhibiting the Company’s ability to
acquire and retain firms;
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the performance of
the Company’s firms following
acquisition;
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changes in interest
rates or general economic conditions and credit market conditions,
including changes that adversely affect NFP’s ability to access
capital;
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adverse developments
or volatility in the markets in which the Company operates, resulting in
fewer sales of financial products and services, including those related to
compensation agreements with insurance companies and activities within the
life settlements industry;
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•
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securities and
capital markets behavior, including fluctuations in the price of NFP’s
common stock, recent uncertainty in the U.S. financial markets, or the
dilutive impact of any capital-raising efforts to finance operations or
business strategy;
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any losses that NFP
may take with respect to firm dispositions, firm restructures or
otherwise;
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the continued
availability of borrowings and letters of credit under NFP’s credit
facility;
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NFP’s ability to
manage its indebtedness and capital
structure;
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adverse results or
other consequences from litigation, arbitration, regulatory investigations
or compliance initiatives, including those related to business practices,
compensation agreements with insurance companies, policy rescissions or
chargebacks, regulatory investigations or activities within the life
settlements industry;
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uncertainty in the
financial services, insurance or life settlement industries arising from
investigations into certain business practices and subpoenas received from
various governmental authorities and related
litigation;
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the impact of
legislation or regulations in jurisdictions in which NFP’s subsidiaries
operate, including the possible adoption of comprehensive and exclusive
federal regulation over all interstate insurers and the uncertain impact
of proposals for legislation regulating the financial services
industry;
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•
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the reduction of the
Company’s revenue and earnings due to the elimination or modification of
compensation arrangements, including contingent compensation arrangements
and the adoption of internal initiatives to enhance compensation
transparency, including the transparency of fees paid for life settlements
transactions;
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•
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changes in laws,
including the elimination or modification of the federal estate tax,
changes in the tax treatment of life insurance products, or changes in
regulations affecting the value or use of benefits programs, which may
adversely affect the demand for or profitability of the Company’s
services;
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•
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uncertainty
regarding the impact of proposed healthcare legislation or reform on NFP’s
subsidiaries that operate in the benefits
market;
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developments in the
availability, pricing, design or underwriting of insurance products,
revisions in mortality tables by life expectancy underwriters or changes
in the Company’s relationships with insurance
companies;
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changes in premiums
and commission rates or the rates of other fees paid to the Company’s
firms, including life settlements and registered investment advisory
fees;
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the occurrence of
adverse economic conditions or an adverse regulatory climate in New York,
Florida or California;
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•
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the loss of services
of key members of senior
management;
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the availability or
adequacy of errors and omissions insurance or other types of insurance
coverage protection; and
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•
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the Company’s
ability to effect smooth succession planning at its
firms.
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Additional factors are set
forth in NFP’s filings with the Securities and Exchange Commission (the “SEC”),
including its Annual Report on Form 10-K for the year ended December 31,
2008, filed with the SEC on February 13, 2009 (the “2008 10-K”), and its
Current Report on Form 8-K, filed with the SEC on August 21, 2009 solely to
update the Company’s 2008 10-K for the adoption of new guidance relating to the
accounting for convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement).
Forward-looking statements
speak only as of the date on which they are made. NFP expressly disclaims any
obligation to update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise.
Part I
– Financial Information
Item 1.
Financial Statements (Unaudited)
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)—(in
thousands, except per share amounts)
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September
30,
2009
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December
31,
2008
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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60,084
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$
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48,621
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Cash,
cash equivalents and securities purchased under resale agreements in
premium trust accounts
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75,838
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75,109
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Commissions,
fees and premiums receivable, net
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100,930
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140,758
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Due
from principals and/or certain entities they own
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21,787
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16,329
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Notes
receivable, net
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7,161
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6,496
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Deferred
tax assets
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8,322
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9,435
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Other
current assets
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18,368
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19,284
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Total
current assets
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292,490
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316,032
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Property
and equipment, net
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44,341
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51,683
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Deferred
tax assets
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110,561
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24,889
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Intangibles,
net
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399,265
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462,123
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Goodwill,
net
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57,018
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635,693
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Notes
receivable, net
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32,410
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23,683
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Other
non-current assets
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29,793
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28,018
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Total
assets
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$
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965,878
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$
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1,542,121
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LIABILITIES
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Current
liabilities:
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Premiums
payable to insurance carriers
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$
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82,583
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$
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73,159
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Borrowings
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75,000
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148,000
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Income
taxes payable
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—
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11
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Deferred
tax liabilities
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239
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—
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Due
to principals and/or certain entities they own
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22,779
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38,791
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Accounts
payable
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21,381
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28,513
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Accrued
liabilities
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47,531
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54,380
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Total
current liabilities
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249,513
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342,854
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Deferred
tax liabilities
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116,825
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119,400
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Convertible
senior notes
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201,767
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193,475
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Other
non-current liabilities
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62,037
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62,874
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Total
liabilities
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630,142
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718,603
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STOCKHOLDERS’
EQUITY
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Preferred
stock, $0.01 par value: Authorized 200,000 shares; none
issued
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—
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—
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Common
stock, $0.10 par value: Authorized 180,000 shares; 44,100 and 43,875
issued and 41,201 and 39,753 outstanding, respectively
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4,410
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4,388
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Additional
paid-in capital
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874,839
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881,458
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Retained
(deficit) earnings
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(434,316
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)
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97,178
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Treasury
stock, 2,899 and 4,122 shares, respectively, at cost
|
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(109,373
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)
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(159,456
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)
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Accumulated
other comprehensive income (loss)
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|
176
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(50
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)
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Total
stockholders’ equity
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335,736
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823,518
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Total
liabilities and stockholders’ equity
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$
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965,878
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$
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1,542,121
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See
accompanying notes to consolidated financial statements.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
thousands, except per share amounts)
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2009
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2008
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2009
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2008
|
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Revenue:
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Commissions
and fees
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$
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229,925
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$
|
277,282
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$
|
671,104
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$
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851,135
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Cost
of services:
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Commissions
and fees
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|
63,059
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85,216
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187,934
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275,487
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Operating
expenses (1)
|
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|
88,112
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102,384
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274,553
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|
306,581
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|
Management
fees
|
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|
34,855
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|
41,140
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|
|
|
87,316
|
|
|
|
118,727
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|
Total
cost of services
|
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|
186,026
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|
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|
228,740
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|
549,803
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|
700,795
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|
Gross
margin
|
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|
43,899
|
|
|
|
48,542
|
|
|
|
121,301
|
|
|
|
150,340
|
|
Corporate
and other expenses:
|
|
|
|
|
|
|
|
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|
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|
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General
and administrative
|
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|
13,044
|
|
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|
16,537
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|
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|
37,898
|
|
|
|
48,900
|
|
Amortization
and depreciation
|
|
|
12,336
|
|
|
|
13,404
|
|
|
|
38,130
|
|
|
|
39,029
|
|
Impairment
of goodwill and intangible assets
|
|
|
2,002
|
|
|
|
5,198
|
|
|
|
612,234
|
|
|
|
10,226
|
|
Gain
on sale of subsidiaries
|
|
|
(1,190
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)
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|
|
(578
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)
|
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|
(1,852
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)
|
|
|
(7,665
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)
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Total
corporate and other expenses
|
|
|
26,192
|
|
|
|
34,561
|
|
|
|
686,410
|
|
|
|
90,490
|
|
Income
(loss) from operations
|
|
|
17,707
|
|
|
|
13,981
|
|
|
|
(565,109
|
)
|
|
|
59,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
4,088
|
|
|
|
1,475
|
|
|
|
13,421
|
|
|
|
4,231
|
|
Interest
and other expense
|
|
|
(4,999
|
)
|
|
|
(5,277
|
)
|
|
|
(15,779
|
)
|
|
|
(16,087
|
)
|
Net
interest and other
|
|
|
(911
|
)
|
|
|
(3,802
|
)
|
|
|
(2,358
|
)
|
|
|
(11,856
|
)
|
Income
(loss) before income taxes
|
|
|
16,796
|
|
|
|
10,179
|
|
|
|
(567,467
|
)
|
|
|
47,994
|
|
Income
tax (benefit) expense
|
|
|
6,256
|
|
|
|
6,682
|
|
|
|
(72,230
|
)
|
|
|
27,080
|
|
Net
income (loss)
|
|
$
|
10,540
|
|
|
$
|
3,497
|
|
|
$
|
(495,237
|
)
|
|
$
|
20,914
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
(12.11
|
)
|
|
$
|
0.53
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
(12.11
|
)
|
|
$
|
0.51
|
|
Dividends
declared per share
|
|
$
|
—
|
|
|
$
|
0.21
|
|
|
$
|
—
|
|
|
$
|
0.63
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,604
|
|
|
|
39,670
|
|
|
|
40,888
|
|
|
|
39,493
|
|
Diluted
|
|
|
43,114
|
|
|
|
41,187
|
|
|
|
40,888
|
|
|
|
41,164
|
|
______________
(1)
|
Excludes
amortization and depreciation which are shown separately under Corporate
and other expenses.
|
See
accompanying notes to consolidated financial statements.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited—in
thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(495,237
|
)
|
|
$
|
20,914
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
(87,000
|
)
|
|
|
23
|
|
Stock-based
compensation
|
|
|
7,443
|
|
|
|
10,032
|
|
Impairment
of goodwill and intangible assets
|
|
|
612,234
|
|
|
|
10,226
|
|
Amortization
of intangibles
|
|
|
27,745
|
|
|
|
29,323
|
|
Depreciation
|
|
|
10,385
|
|
|
|
9,706
|
|
Accretion
of senior convertible notes discount
|
|
|
8,292
|
|
|
|
7,778
|
|
Gain
on sale of subsidiaries
|
|
|
(1,852
|
)
|
|
|
(7,665
|
)
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and securities purchased under resale agreements in
premium trust accounts
|
|
|
(729
|
)
|
|
|
4,737
|
|
Commissions,
fees and premiums receivable, net
|
|
|
38,920
|
|
|
|
44,452
|
|
Due
from principals and/or certain entities they own
|
|
|
(3,390
|
)
|
|
|
(17,746
|
)
|
Notes
receivable, net – current
|
|
|
(705
|
)
|
|
|
(889
|
)
|
Other
current assets
|
|
|
(396
|
)
|
|
|
(3,346
|
)
|
Notes
receivable, net – non-current
|
|
|
(2,209
|
)
|
|
|
(7,676
|
)
|
Other
non-current assets
|
|
|
(1,832
|
)
|
|
|
(13,828
|
)
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Premiums
payable to insurance carriers
|
|
|
9,424
|
|
|
|
(2,917
|
)
|
Income
taxes payable
|
|
|
(11
|
)
|
|
|
(1,764
|
)
|
Due
to principals and/or certain entities they own
|
|
|
(22,072
|
)
|
|
|
(33,214
|
)
|
Accounts
payable
|
|
|
(7,125
|
)
|
|
|
(12,425
|
)
|
Accrued
liabilities
|
|
|
(8,475
|
)
|
|
|
(22,282
|
)
|
Other
non-current liabilities
|
|
|
(416
|
)
|
|
|
10,898
|
|
Total
adjustments
|
|
|
578,231
|
|
|
|
3,423
|
|
Net
cash provided by operating activities
|
|
|
82,994
|
|
|
|
24,337
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from disposal of subsidiaries
|
|
|
10,997
|
|
|
|
22,523
|
|
Purchases
of property and equipment, net
|
|
|
(4,943
|
)
|
|
|
(30,322
|
)
|
Payments
for acquired firms, net of cash, and contingent
consideration
|
|
|
(1,606
|
)
|
|
|
(63,782
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
4,448
|
|
|
|
(71,581
|
)
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
—
|
|
|
|
179,000
|
|
Repayments
of borrowings
|
|
|
(73,000
|
)
|
|
|
(132,000
|
)
|
Proceeds
from stock-based awards, including tax benefit
|
|
|
(2,719
|
)
|
|
|
3,481
|
|
Shares
cancelled to pay withholding taxes
|
|
|
(210
|
)
|
|
|
(680
|
)
|
Payments
for treasury stock repurchase
|
|
|
—
|
|
|
|
(24,612
|
)
|
Dividends
paid
|
|
|
(50
|
)
|
|
|
(24,683
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(75,979
|
)
|
|
|
506
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
11,463
|
|
|
|
(46,738
|
)
|
Cash
and cash equivalents, beginning of the period
|
|
|
48,621
|
|
|
|
114,182
|
|
Cash
and cash equivalents, end of the period
|
|
$
|
60,084
|
|
|
$
|
67,444
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
18,010
|
|
|
$
|
29,968
|
|
Cash
paid for interest
|
|
$
|
5,771
|
|
|
$
|
7,568
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
See
Note 8
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
NATIONAL FINANCIAL PARTNERS CORP. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
(Unaudited)
Note 1
- Nature of Operations
National
Financial Partners Corp. (“NFP”), a Delaware corporation, was formed on
August 27, 1998, but did not commence operations until January 1,
1999. The principal business of NFP is the acquisition and management of
operating companies that offer 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. As of September 30, 2009, NFP
and its subsidiaries (the “Company”) owned more than 150 firms. In September
2009, NFP announced corporate reorganizational efforts that are intended to
enhance the Company’s client service delivery structure.
Note 2
- Summary of Significant Accounting Policies
Recently
adopted accounting standards
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 U.S.
generally accepted accounting principles (“GAAP”) recognized by the FASB to be
applied by non-governmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (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 this interim 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 6—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 the convertible
note hedge, including the related tax benefit, and the proceeds from the sale of
the warrants as adjustments to additional paid-in capital. As such, the face
value of the notes of $230.0 million was previously shown as a liability on the
consolidated statement of financial condition and the discount was recognized as
an adjustment to additional paid-in capital of $55.9 million. In addition,
interest expense was previously recognized through earnings based only on the
stated rate of the notes.
The notes
are now presented on the consolidated statement of financial condition at their
net carrying amount, or the face value of the notes less their unamortized
discount. The new guidance does not have any impact on cash payments or
obligations due under the terms of the notes. As required, effective
January 1, 2009 NFP’s comparative financial statements of prior years have
been adjusted to apply its provisions retrospectively.
The
cumulative effect of the change in accounting principle for the adoption of the
new guidance related to the accounting for convertible debt on retained earnings
and additional paid-in capital as of January 1, 2009 was a decrease of
$11.8 million and an increase of $47.2 million, respectively, resulting in a net
$35.4 million increase in total stockholder’s equity. In addition, the notes and
income taxes payable decreased by $36.6 million resulting in total liabilities
decreasing $36.6 million. Prepaid expenses decreased by $1.2 million resulting
in a $1.2 million decrease in total assets as a result of the
adoption.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
The
following financial statement line items within the consolidated statement of
operations for the three-month period ended September 30, 2008 and nine-month
period ended September 30, 2008 were affected by the adoption of the new
guidance relating to the accounting for convertible debt:
|
|
Three
Months Ended September 30, 2008
|
|
|
Nine
Months Ended September 30, 2008
|
|
(in
thousands, except per share data)
|
|
As
Originally
Reported
|
|
|
Effect
of
Change
|
|
|
After
Adoption
of
New Accounting Guidance
|
|
|
As
Originally
Reported
|
|
|
Effect
of
Change
|
|
|
After
Adoption of
New Accounting Guidance
|
|
Interest
and other expense
|
|
$
|
(2,759
|
)
|
|
$
|
(2,518
|
)
|
|
$
|
(5,277
|
)
|
|
$
|
(8,585
|
)
|
|
$
|
(7,502
|
)
|
|
$
|
(16,087
|
)
|
Income
before income taxes
|
|
|
12,697
|
|
|
|
(2,518
|
)
|
|
|
10,179
|
|
|
|
55,496
|
|
|
|
(7,502
|
)
|
|
|
47,994
|
|
Provision
for income taxes
|
|
|
7,556
|
|
|
|
(874
|
)
|
|
|
6,682
|
|
|
|
29,950
|
|
|
|
(2,870
|
)
|
|
|
27,080
|
|
Net
income
|
|
|
5,141
|
|
|
|
(1,644
|
)
|
|
|
3,497
|
|
|
|
25,546
|
|
|
|
(4,632
|
)
|
|
|
20,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.13
|
|
|
|
(0.04
|
)
|
|
|
0.09
|
|
|
|
0.65
|
|
|
|
(0.12
|
)
|
|
|
0.53
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.08
|
|
|
$
|
0.62
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.51
|
|
The
following financial statement line items within the consolidated statement of
financial condition as of December 31, 2008 were affected by the adoption
of the new guidance relating to the accounting for convertible debt:
(in
thousands)
|
|
As
Originally
Reported
|
|
|
Effect
of
Change
|
|
|
After
Adoption of
New Accounting Guidance
|
|
Deferred
tax assets
|
|
$
|
24,858
|
|
|
$
|
31
|
|
|
$
|
24,889
|
|
Other
non-current assets
|
|
|
29,213
|
|
|
|
(1,195
|
)
|
|
|
28,018
|
|
Income
taxes payable
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
Deferred
tax liabilities
|
|
|
119,399
|
|
|
|
1
|
|
|
|
119,400
|
|
Convertible
senior notes
|
|
|
230,000
|
|
|
|
(36,525
|
)
|
|
|
193,475
|
|
Additional
paid-in capital
|
|
|
834,263
|
|
|
|
47,195
|
|
|
|
881,458
|
|
Retained
earnings
|
|
$
|
109,024
|
|
|
$
|
(11,846
|
)
|
|
$
|
97,178
|
|
The
following financial statement line items within the consolidated statement of
cash flows for the nine-month period ended September 30, 2008 were affected
by the adoption of the new guidance relating to the accounting for convertible
debt:
(in
thousands)
|
|
As
Originally
Reported
|
|
|
Effect
of
Change
|
|
|
After
Adoption of
New Accounting Guidance
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
25,546
|
|
|
$
|
(4,632
|
)
|
|
$
|
20,914
|
|
Adjustments
to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of Sr. Convert Notes Discount
|
|
$
|
—
|
|
|
$
|
7,778
|
|
|
$
|
7,778
|
|
Other
current assets
|
|
|
(3,116
|
)
|
|
|
(230
|
)
|
|
|
(3,346
|
)
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-current assets
|
|
|
(13,553
|
)
|
|
|
(275
|
)
|
|
|
(13,828
|
)
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes payable
|
|
|
875
|
|
|
|
(2,639
|
)
|
|
|
(1,764
|
)
|
Other
non-current liabilities
|
|
|
10,899
|
|
|
|
(1
|
)
|
|
|
10,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
$
|
(1,209
|
)
|
|
$
|
4,632
|
|
|
$
|
3,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
On
January 1, 2009, the Company adopted new guidance that related to the
accounting for business combinations. The new guidance requires that upon
initially obtaining control, the acquiring entity in a business combination must
recognize 100% of the fair value of the acquired assets, including goodwill and
assumed liabilities, with only limited exceptions even if the acquirer has not
acquired 100% of its target. Contingent consideration arrangements are now fair
valued at the acquisition date and included on that basis in the purchase price
consideration. The recognition of contingent consideration at a later date when
the amount of that consideration is determinable beyond a reasonable doubt will
no longer be applicable. All transaction costs are now expensed as incurred. On
April 1, 2009, the Company adopted new guidance for accounting for assets
acquired and liabilities assumed in business combinations that arise
from contingencies which is effective January 1, 2009, and amends the prior
accounting guidance to require that assets acquired and liabilities assumed in
business combinations that arise from contingencies be recognized at fair value
if fair value can be reasonably estimated. If the acquisition date fair value of
an asset acquired or a liability assumed that arises from a contingency cannot
be determined, the asset or liability would be recognized in accordance with
GAAP for contingencies. If the fair value is not determinable and the criteria
established by GAAP are not met, no asset or liability would be
recognized.
On
January 1, 2009, the Company adopted new guidance that related to
accounting for non-controlling interests in consolidated financial statements.
The new accounting guidance states for entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners separately within the
consolidated statement of financial condition within equity, but separate from
the parent’s equity and separately on the face of the consolidated statement of
operations. Further, the new guidance states that changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary should be accounted for consistently and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary should be initially measured at fair value. The adoption of the new
guidance did not have a material impact on the Company.
In May
2009, FASB issued new guidance relating to subsequent events, established
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The new guidance sets forth:
·
|
the period after the
balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition
or disclosure in the financial
statements;
|
·
|
the circumstances
under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements;
and
|
·
|
the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date.
|
The
Company has adopted the new guidance and it was effective for financial
statements issued for interim and annual periods ending after June 15, 2009. See
“Note 10—Subsequent Events” for further detail.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Basis
of presentation
The
unaudited interim consolidated financial statements of the Company included
herein have been prepared in accordance with GAAP for interim financial
information and with Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the unaudited interim
consolidated financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of financial position,
results of operations and cash flows of the Company for the interim periods
presented and are not necessarily indicative of a full year’s
results.
All
material intercompany balances and transactions have been eliminated. These
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and related notes for the year ended
December 31, 2008, included in NFP’s Annual Report on Form 10-K for the
year ended December 31, 2008, filed with the SEC on February 13, 2009
(the “2008 10-K”) and as updated in NFP’s Current Report on Form 8-K, filed with
the SEC on August 21, 2009 (the “2008 8-K”).
Use
of estimates
The
preparation of consolidated financial statements in accordance with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of the assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results may
differ from those estimates.
Property,
equipment and depreciation
Property
and equipment are recorded at cost and depreciated using the straight-line
method over their estimated useful lives, generally three to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the terms of the leases. Amortization and depreciation expense totaling
$5.9 million for both the nine months ended September 30, 2009 and 2008,
has been excluded from operating expenses in Cost of services and included in
Corporate and other expenses.
Foreign
currency translation
The
functional currency of the Company is the United States (“U.S.”) dollar. The
functional currency of the Company’s foreign operations is the applicable local
currency. The translation of foreign currencies into U.S. dollars is performed
for balance sheet accounts using current exchange rates in effect at the balance
sheet date and for income and expense accounts using monthly average exchange
rates. The cumulative effects of translating the functional currencies into the
U.S. dollar are included in Accumulated other comprehensive income.
Comprehensive
income
Accumulated other
comprehensive income (loss) includes foreign currency translation. This
information is provided in the Company’s statements of changes in stockholders’
equity and comprehensive income. Accumulated other comprehensive income (loss)
on the consolidated balance sheets at September 30, 2009 and December 31,
2008 represents accumulated foreign currency translation adjustments. See “Note
7—Stockholders’ Equity” for further detail.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Impairment
of goodwill and other intangible assets
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 income.
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.
A
two-step impairment test is performed on goodwill. In the first step, NFP
compares the fair value of each reporting unit to the carrying value of the net
assets assigned to that reporting unit. NFP determines the fair value of its
reporting units by blending two valuation approaches: the income approach and a
market value approach. In order to determine the relative fair value of each of
the reporting units the income approach is conducted first. These relative
values are then scaled to the estimated market value of NFP.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
If the
fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and NFP is not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss,
if any. The second step of the goodwill impairment test compares the implied
fair value of the reporting unit’s goodwill with the carrying value of the
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
a manner that is consistent with the amount of goodwill recognized in a business
combination. That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit.
See “Note
5—Goodwill and Other Intangible Assets—Impairment of goodwill and intangible
assets.”
Fair
value measurements
On
January 1, 2009, the Company adopted new accounting guidance regarding fair
value measurement standards, which clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the disclosures on
fair value measurements. In February 2008, the FASB deferred the effective
date of the new guidance by one year for nonfinancial assets and liabilities
recorded at fair value on a nonrecurring basis. On January 1, 2009, the
Company adopted the new guidance related to accounting for non-financial assets
and liabilities recorded at fair value on a nonrecurring basis. The new guidance
describes three levels of inputs that may be used to measure fair
value:
|
Level 1
- Quoted prices in active markets for identical assets or
liabilities.
|
|
Level
2
- Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
Level
3
- Unobservable inputs that are supported by little or no market
activity such as assets or liabilities that are financial instruments
whose values are determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or
estimation.
|
If the
inputs used to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the lowest level
(with the level 3 being the lowest) input that is significant to the fair value
measurement of the instrument.
Income
taxes
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.
Effective
January 1, 2007, the Company adopted the new guidance, which clarified the
accounting for uncertain tax positions by prescribing a minimum recognition
threshold that a tax position is required to meet before being recognized in the
financial statements.
The
Company believes that the amounts of unrecognized tax benefits may decrease
within the next twelve months due to the settlement of state income tax audits
and the expiration of statutes of limitations in various federal and state
jurisdictions in an amount ranging from $0.5 million to $3.0 million based on
current estimates.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Revenue
recognition
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 benefits programs. The commissions are paid each year as long as the
client continues to use the product and maintains its broker of record
relationship with the Company. The Company also earns fees for the development
and implementation of corporate and executive benefits programs as well as fees
for the duration that these programs are administered. Asset-based fees are
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 commissions have been earned. The Company carries an
allowance for policy cancellations, which approximated $1.2 million at both
September 30, 2009 and 2008, that is periodically evaluated and adjusted as
necessary. Miscellaneous commission adjustments are generally recorded as they
occur. Contingent commissions are recorded as revenue when received which, in
many cases, is the Company’s first notification of amounts earned. Contingent
commissions are commissions paid by insurance underwriters and are based on the
estimated profit and/or overall volume of business placed with the underwriter.
The data necessary for the calculation of contingent commissions cannot be
reasonably estimated prior to receipt of the commission.
The
Company earns commissions related to the sale of securities and certain
investment-related insurance products. The Company also earns fees for offering
financial advice and related services. These fees are based on a percentage of
assets under management and are generally paid quarterly. In certain cases,
incentive fees are earned based on the performance of the assets under
management. Some of the Company’s firms charge flat fees for the development of
a financial plan or a flat fee annually for advising clients on asset
allocation. Any investment advisory or related fees collected in advance are
deferred and recognized as income on a straight-line basis over the period
earned. Transaction-based fees, including performance fees, are recognized when
all contractual obligations have been satisfied. Securities and mutual fund
commission income and related expenses are recorded on a trade date
basis.
Some of
the Company’s firms earn additional compensation in the form of incentive and
marketing support payments from manufacturers of financial services products,
based on the volume, persistency and profitability of business generated by the
Company from these three sources. Incentive and marketing support revenue is
recognized at the earlier of notification of a payment or when payment is
received, unless there exists historical data and other information which enable
management to reasonably estimate the amount earned during the
period.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Note 3
- Earnings Per Share
The
computations of basic and diluted earnings per share are as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
10,540
|
|
|
$
|
3,497
|
|
|
$
|
(495,237
|
)
|
|
$
|
20,914
|
|
Average
shares outstanding
|
|
|
41,211
|
|
|
|
39,645
|
|
|
|
40,775
|
|
|
|
39,485
|
|
Contingent
consideration and incentive payments
|
|
|
393
|
|
|
|
25
|
|
|
|
133
|
|
|
|
8
|
|
Total
|
|
|
41,604
|
|
|
|
39,670
|
|
|
|
40,888
|
|
|
|
39,493
|
|
Basic
earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
(12.11
|
)
|
|
$
|
0.53
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
10,540
|
|
|
|
3,497
|
|
|
$
|
(495,237
|
)
|
|
$
|
20,914
|
|
Average
shares outstanding
|
|
|
41,211
|
|
|
|
39,645
|
|
|
|
40,755
|
|
|
|
39,485
|
|
Contingent
consideration and incentive payments
|
|
|
393
|
|
|
|
384
|
|
|
|
133
|
|
|
|
384
|
|
Stock-based
awards
|
|
|
1,503
|
|
|
|
1,148
|
|
|
|
—
|
|
|
|
1,281
|
|
Other
|
|
|
7
|
|
|
|
10
|
|
|
|
—
|
|
|
|
14
|
|
Total
|
|
|
43,114
|
|
|
|
41,187
|
|
|
|
40,888
|
|
|
|
41,164
|
|
Diluted
earnings (loss) per share
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
(12.11
|
)
|
|
$
|
0.51
|
|
The
calculation of diluted earnings (loss) per share excluded approximately 1.5
million shares for the nine months ended September 30, 2009, because the effect
of inclusion would be antidilutive.
Note 4
- Acquisitions and Divestitures
While
acquisitions remain a component of the Company’s business strategy over the long
term, NFP suspended acquisition activity (with the exception of certain
sub-acquisitions) in the latter part of 2008 in order to conserve cash. During
the nine months ended September 30, 2009, the Company completed one
sub-acquisition effective January 1, 2009, to augment the business of one
of the Company’s existing benefits firms. During the nine months ended
September 30, 2008, the Company completed fifteen acquisitions that offer
wealth transfer, corporate and executive benefits and other financial services
to high net worth individuals and companies. These acquisitions allowed NFP to
expand into desirable geographic locations, further extend its presence in the
financial services industry and increased the volume of services currently
provided.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
The
purchase price excluding contingent consideration, associated with acquisitions
accounted for as purchases, and the allocations thereof, are summarized as
follows:
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Consideration:
|
|
|
|
|
|
|
Cash
|
|
$
|
279
|
|
|
$
|
48,313
|
|
Common
stock
|
|
|
—
|
|
|
|
18,458
|
|
Other
|
|
|
186
|
|
|
|
791
|
|
Totals
|
|
$
|
465
|
|
|
$
|
67,562
|
|
Allocation
of purchase price:
|
|
|
|
|
|
|
|
|
Net
tangible assets
|
|
$
|
—
|
|
|
$
|
328
|
|
Cost
assigned to intangibles:
|
|
|
|
|
|
|
|
|
Book
of business
|
|
|
200
|
|
|
|
22,088
|
|
Management
contract
|
|
|
112
|
|
|
|
16,632
|
|
Trade
name
|
|
|
3
|
|
|
|
442
|
|
Goodwill,
net of deferred tax adjustment of $0.1 million in 2009 and $8.0 million in
2008
|
|
|
150
|
|
|
|
28,072
|
|
Total
|
|
$
|
465
|
|
|
$
|
67,562
|
|
Regarding
acquisitions completed through September 30, 2008, the number of shares
issued by NFP is generally based upon an average fair market value of NFP’s
publicly-traded common stock over a specified period of time prior to the
closing date of the acquisition. No shares were issued in connection with the
sub-acquisition completed during the nine months ended September 30,
2009.
In
connection with contingent consideration $2.8 million was paid in cash and NFP
has issued 978,273 shares of common stock with a value of approximately $2.6
million for the nine months ended September 30, 2009. $14.9 million was paid in
cash and NFP issued 78,023 shares of common stock with a value of approximately
$1.8 million for the nine months ended September 30, 2008.
For
acquisitions that were completed prior to the adoption of new accounting
guidance related to business combinations on January 1, 2009, future
payments made under this arrangement will be recorded as an adjustment to
purchase price when the contingencies are settled. 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 the basis in
the purchase price consideration at the time of the acquisition with subsequent
adjustments recorded in the statement of operations. As of September 30, 2009,
the amount of contingent consideration recorded as an adjustment to
goodwill relating to this sub-acquisition as of January 1, 2009 was $0.2
million. No subsequent changes have been made to the contingent consideration
amounts through September 30, 2009. This arrangement results in the payment of
additional consideration to the seller upon the firm’s attainment of certain
revenue benchmarks following the closing of this sub-acquisition. The range of
payments that may be made upon attainment of the benchmarks ranges from $0
through a maximum amount of $0.3 million.
In
connection with this sub-acquisition, the Company does not expect any amounts of
goodwill to be deductible over 15 years for tax purposes.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
In
connection with a 2008 acquisition of a group benefits intermediary and its
subsequent merger with an existing wholly-owned subsidiary of the Company, a
portion of the consideration, totaling $23.1 million, was treated as prepaid
management fee which will be amortized to management fee expense over the
remaining term of the management contract. Approximately $0.9 million was
amortized to management fee expense for the nine months ended September 30,
2009 and 2008; $1.2 million was included in Other current assets; and $19.7
million was included in Other non-current assets.
The
following table summarizes the required disclosures of the pro forma combined
entity, as if these acquisitions occurred at January 1, 2009 and 2008,
respectively:
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$
|
671,104
|
|
|
$
|
851,317
|
|
(Loss)
income before income taxes
|
|
|
(567,467
|
)
|
|
|
47,928
|
|
Net
(loss) income
|
|
|
(495,237
|
)
|
|
|
20,885
|
|
Earnings
(loss) per share – basic
|
|
|
(12.11
|
)
|
|
|
0.53
|
|
Earnings
(loss) per share – diluted
|
|
$
|
(12.11
|
)
|
|
$
|
0.51
|
|
The
unaudited pro forma results above have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred at January 1,
2009 and 2008, respectively, nor is it necessarily indicative of future
operating results.
Divestitures
During
the nine months ended September 30, 2009, the Company sold fifteen subsidiaries,
receiving aggregate consideration of $6.8 million in cash, promissory notes with
principals in the principal amount of $5.9 million, accounts receivables of $1.3
million, and 16,883 shares of NFP common stock with a value of $0.1 million.
During the nine months ended September 30, 2009 the Company sold certain assets
of four subsidiaries, and received aggregate consideration of $4.2 million in
cash, promissory notes in the principal amount of $1.9 million, and 6,800 shares
of NFP common stock with a value of less than $0.1 million. The Company
recognized a net gain from these transactions of $1.8 million for the nine
months ended September 30, 2009.
Note 5
- Goodwill and Other Intangible Assets
Goodwill
The
changes in the carrying amount of goodwill for the nine months ended
September 30, 2009 are as follows:
(in
thousands)
|
|
2009
|
|
Balance
as of January 1,
|
|
$
|
635,693
|
|
Goodwill
acquired during the year, including goodwill related to the deferred tax
liability of $127
|
|
|
277
|
|
Contingent
consideration
|
|
|
7,911
|
|
Firm
disposals, firm restructures and other, net
|
|
|
(979
|
)
|
Impairment
of goodwill
|
|
|
(585,884
|
)
|
|
|
|
|
|
Balance
as of September 30,
|
|
$
|
57,018
|
|
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Acquired
intangible assets
|
|
As
of September 30, 2009
|
|
|
As
of December 31, 2008
|
|
(in t
housands)
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
Amortizing
identified intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
of business
|
|
$
|
220,715
|
|
|
$
|
(109,741
|
)
|
|
$
|
230,742
|
|
|
$
|
(99,445
|
)
|
Management
contract
|
|
|
352,259
|
|
|
|
(80,709
|
)
|
|
|
385,656
|
|
|
|
(77,467
|
)
|
Institutional
customer relationships
|
|
|
15,700
|
|
|
|
(3,925
|
)
|
|
|
15,700
|
|
|
|
(3,270
|
)
|
Total
|
|
$
|
588,674
|
|
|
$
|
(194,375
|
)
|
|
$
|
632,098
|
|
|
$
|
(180,182
|
)
|
Non-amortizing
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
59,853
|
|
|
$
|
(2,835
|
)
|
|
$
|
647,839
|
|
|
$
|
(12,146
|
)
|
Trade
name
|
|
|
5,042
|
|
|
|
(76
|
)
|
|
|
10,337
|
|
|
|
(130
|
)
|
Total
|
|
$
|
64,895
|
|
|
$
|
(2,911
|
)
|
|
$
|
658,176
|
|
|
$
|
(12,276
|
)
|
Aggregate
amortization expense for intangible assets subject to amortization for the nine
months ended September 30, 2009 was $27.7 million. Intangibles related to
book of business, management contract and institutional customer relationships
are being amortized over a 10-year, 25-year and 18-year period, respectively.
Based on the Company’s acquisitions as of September 30, 2009, estimated
amortization expense for each of the next five years is $35.8 million per year.
Estimated amortization expense for each of the next five years may change
primarily as the result of acquisitions or other corporate
activities.
Impairment
of goodwill and intangible assets
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 either by 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 income.
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.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
A
two-step impairment test is performed on goodwill for reporting units that
demonstrate indicators of impairment. In the first step, NFP compares the fair
value of each reporting unit to the carrying value of the net assets assigned to
that reporting unit. NFP determines the fair value of its reporting units by
blending two valuation approaches: the income approach and a market value
approach. In order to determine the relative fair value of each of the reporting
units the income approach is conducted first. These relative values are then
scaled to the estimated market value of NFP.
Under the
income approach, management uses certain assumptions to determine the reporting
unit’s fair value. The Company’s cash flow projections for each reporting unit
are based on five-year financial forecasts. The five-year forecasts were based
on quarterly financial forecasts developed internally by management for use in
managing its business. The forecast generally translates into an assumption that
the weak economic environment will continue through 2009, revenue will stabilize
at a reduced level in 2010 and the Company will resume normalized long-term
growth rates in 2011. No change has been made to the cash flow projections
during the third quarter. The significant assumptions of these five-year
forecasts included quarterly revenue growth rates for various product
categories, quarterly commission expense as a percentage of revenue and
quarterly operating expense growth rates. The future cash flows were tax
affected and discounted to present value using a blended discount rate, ranging
from 9.03% to 9.67%. Since NFP retains a cumulative preferred position in its
reporting units’ base earnings, NFP assigned a rate of return to that portion of
its gross margin that would be represented by yields seen of preferred equity
securities of 7.6%. For cash flows retained by NFP in excess of target earnings
and below base earnings, NFP assigned a discount rate ranging from 11.43% to
14.77%. Terminal values for all reporting units were calculated using a Gordon
growth methodology using a blended discount rate of 12.55% with a long-term
growth rate of 3%.
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 September 30, 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.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
If the
fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and NFP is not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss,
if any. The second step of the goodwill impairment test compares the implied
fair value of the reporting unit’s goodwill with the carrying value of the
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
a manner that is consistent with the amount of goodwill recognized in a business
combination. That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit.
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 valuation of an
intangible asset in a very short period of time. The timing and amount of
realized losses reported in earnings could vary if management’s conclusions were
different. Any resulting impairment loss could have a material adverse effect on
the Company’s reported financial position and results of operations for any
particular quarterly or annual period.
Non-financial assets
measured at fair value on a non-recurring basis are summarized
below:
($
in thousands)
|
|
Nine
Months
Ended
September
30, 2009
|
|
|
Quoted
Prices
in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
Gains
(Losses)
|
|
Book
of business
|
|
$
|
110,974
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110,974
|
|
|
$
|
(2,080
|
)
|
Management
contract
|
|
|
271,550
|
|
|
|
—
|
|
|
|
—
|
|
|
|
271,550
|
|
|
|
(18,985
|
)
|
Institutional
customer relationships
|
|
|
11,775
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,775
|
|
|
|
—
|
|
Trade
name
|
|
|
4,966
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,966
|
|
|
|
(5,285
|
)
|
Goodwill
|
|
$
|
57,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,018
|
|
|
$
|
(585,884
|
)
|
In
accordance with GAAP, long-lived assets held and used with a carrying amount of
$415.4 million were written down to their fair value of $394.3 million,
resulting in an impairment charge of $21.1 million for amortizing intangibles,
which was included in earnings for the nine months ended September 30,
2009.
In
accordance with GAAP, goodwill and trade name of $653.2 million was written down
to its implied fair value of $62.0 million, resulting in an impairment charge of
$591.1 million, which was included in earnings for the nine months ended
September 30, 2009.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
As
previously stated in NFP’s 2008 10-K, and as updated in the 2008 8-K, 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 in the 2008 10-K, 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
nine months ended September 30, 2009, consistent with the analysis previously
stated in the 2008 10-K, and as updated in the 2008 8-K, led to the impairment
charge of $591.1 million taken for the nine months ended September 30, 2009. Of
this $591.1 million, an impairment charge of $588.4 million was recognized for
the three months ended March 31, 2009.
Note 6
- Borrowings
Credit
Facility
NFP’s
credit facility among NFP, the financial institutions party thereto and Bank of
America, N.A., as administrative agent, is structured as a revolving credit
facility and matures on August 22, 2011. NFP has previously amended its
credit facility as described in the 2008 10-K and as updated in the 2008 8-K. On
May 6, 2009, NFP executed the third amendment to its credit facility (the “Third
Amendment”). Pursuant to the Third Amendment, the definition of EBITDA has been
amended to expressly provide that the non-cash impairment of goodwill and
intangible assets associated with the Company’s evaluation of intangible assets
for the first quarter of 2009 in accordance with GAAP will be disregarded in the
calculation of EBITDA.
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 $35.0
million of the credit facility is available for the issuance of letters of
credit and the sublimit for swingline loans is the lesser of $10.0 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.
As of
September 30, 2009, the Company was in compliance with all of its debt
covenants. Per the terms of its amended credit facility, the maximum
consolidated leverage ratio, one of the Company’s most restrictive debt
covenants, is required to be a maximum of 3.0 to 1.0 on the last day of the
rolling four quarter period ended September 30, 2009. As of September 30, 2009,
the consolidated leverage ratio was 2.2 to 1.0. However, if the Company’s
earnings deteriorate, it is possible that NFP will fail to comply with the terms
of its credit facility in the future, such as the consolidated leverage ratio
covenant, and therefore be in default under the credit facility. Upon the
occurrence of such event of default, the majority of lenders under the credit
facility could cause amounts currently outstanding to be declared immediately
due and payable. Such an acceleration could trigger “cross acceleration
provisions” under NFP’s indenture governing the notes; see “—Convertible Senior
Notes” below.
As of
September 30, 2009, the year-to-date weighted average interest rate for NFP’s
credit facility was 3.92%. The combined weighted average of the credit facility
in the prior year period was 4.53%.
NFP had a
balance of $75.0 million outstanding under its credit facility as of
September 30, 2009, below the maximum allowable balance of $225.0 million.
At December 31, 2008, outstanding borrowings were $148.0 million.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Convertible
Senior Notes
In
January 2007, NFP issued $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”). The notes are senior unsecured
obligations and rank equally with NFP’s existing or future senior debt and
senior to any subordinated debt. The notes will be structurally subordinated to
all existing or future liabilities of NFP’s subsidiaries and will be effectively
subordinated to existing or future secured indebtedness to the extent of the
value of the collateral. The notes were used to pay the net cost of the
convertible note hedge and warrant transactions, repurchase 2.3 million
shares of NFP’s common stock from Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. and to repay a portion of outstanding amounts of
principal and interest under NFP’s credit facility.
Holders
may convert their notes at their option on any day prior to the close of
business on the scheduled trading day immediately preceding December 1,
2011 only under the following circumstances: (1) during the five
business-day period after any five consecutive trading-day period (the
“measurement period”) in which the price per note for each day of that
measurement period was less than 98% of the product of the last reported sale
price of NFP’s common stock and the conversion rate on each such day;
(2) during any calendar quarter (and only during such quarter) after the
calendar quarter ended March 31, 2007, if the last reported sale price of
NFP’s common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding
calendar quarter exceeds 130% of the applicable conversion price in effect on
the last trading day of the immediately preceding calendar quarter; or
(3) upon the occurrence of specified corporate events. The notes are
convertible, regardless of the foregoing circumstances, at any time from, and
including, December 1, 2011 through the second scheduled trading day
immediately preceding the maturity date. Default under the credit facility
resulting in its acceleration would, subject to a 30-day grace period, trigger a
default under the supplemental indenture governing the notes, in which case the
trustee under the notes or holders of not less than 25% in principal amount of
the outstanding notes could declare the principal of and accrued and unpaid
interest on all such notes to be due and payable immediately.
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 is subject
to adjustment in some events but is not adjusted for accrued interest. As of
September 30, 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. 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.
Concurrent with the
issuance of the notes, NFP entered into convertible note hedge and warrant
transactions with an affiliate of one of the underwriters for the notes. A
default under NFP’s credit facility would trigger a default under each of the
convertible note hedge and warrant transactions, in which case the counterparty
could designate early termination under either, or both, of these instruments.
The transactions are expected to reduce the potential dilution to NFP’s common
stock upon future conversions of the notes. Under the convertible note hedge,
NFP purchased 230,000 call options for an aggregate premium of $55.9 million.
Each call option entitles NFP to repurchase an equivalent number of shares
issued upon conversion of the notes at the same strike price (initially $55.62
per share), generally subject to the same adjustments. The call options expire
on the maturity date of the notes. NFP also sold warrants for an aggregate
premium of $34.0 million. The warrants expire ratably over a period of 40
scheduled trading days between May 1, 2012 and June 26, 2012, on which
dates, if not previously exercised, the warrants will be treated as
automatically exercised if they are in the money. The warrants provide for
net-share settlement. The net cost of the convertible note hedge and warrants to
the Company is $21.9 million. Debt issuance costs associated with the notes of
approximately $7.6 million are recorded in Other current assets and Other
non-current assets and will be amortized over the term of the
notes.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Adoption
of new accounting guidance
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 convertible senior notes (see “Note 6—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.
The new guidance does not have any impact on cash payments or obligations due
under the terms of the notes. As required, effective January 1, 2009 NFP’s
comparative financial statements of prior years have been adjusted to apply its
provisions retrospectively. For more detail on the effects of the change in
accounting principle, see “Note 2—Summary of Significant Accounting
Policies—Recently adopted accounting standards.”
As of
September 30, 2009 the net carrying amount of the notes was $201.8 million and
the unamortized discount of the notes within additional paid-in capital was
$28.2 million. As of December 31, 2008 the net carrying amount of the notes
was $193.5 million and the unamortized discount was $36.5 million. As of
September 30, 2009 and December 31, 2008 the principal amount of the notes
was $230.0 million. The discount on the notes is being amortized over the life
of the notes. The effective interest rate on the notes is 6.62%. For the nine
months ended September 30, 2009, the amount of interest expense incurred by NFP
relating to the notes for cash interest paid and for the amortization of the
discount is approximately $9.6 million.
As of
September 30, 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 September 30, 2009 the
instrument’s converted value did not exceed its principal amount of $230.0
million.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Note 7
- Stockholders’ Equity
The
changes in stockholders’ equity and comprehensive income (loss) during the nine
months ended September 30, 2009 are summarized as follows:
(in
thousands)
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings (Deficit)
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
$
|
4,388
|
|
|
$
|
881,458
|
|
|
$
|
97,178
|
|
|
$
|
(159,456
|
)
|
|
$
|
(50
|
)
|
|
$
|
823,518
|
|
Common
stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
|
|
—
|
|
|
|
(6,801
|
)
|
|
|
(31,578
|
)
|
|
|
40,991
|
|
|
|
—
|
|
|
|
2,612
|
|
Common
stock repurchased
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(493
|
)
|
|
|
—
|
|
|
|
(493
|
)
|
Common
stock returned from escrow
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(254
|
)
|
|
|
—
|
|
|
|
(254
|
)
|
Tax
benefit from purchase of call options
|
|
|
—
|
|
|
|
56
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
Stock
issued through Employee Stock Purchase Plan
|
|
|
—
|
|
|
|
(4,370
|
)
|
|
|
(4,625
|
)
|
|
|
9,839
|
|
|
|
—
|
|
|
|
844
|
|
Stock-based
awards exercised/lapsed, including tax benefit
|
|
|
22
|
|
|
|
(2,741
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,719
|
)
|
Shares
cancelled to pay withholding taxes
|
|
|
—
|
|
|
|
(210
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(210
|
)
|
Amortization
of unearned stock-based compensation, net of cancellations
|
|
|
—
|
|
|
|
7,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,443
|
|
Dividend
Equivalents of stock-based awards
|
|
|
—
|
|
|
|
4
|
|
|
|
(54
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(50
|
)
|
Components
of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustments, net of tax effect of $22
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
226
|
|
|
|
226
|
|
Net
(loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(495,237
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(495,237
|
)
|
Comprehensive
income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(495,011
|
)
|
Balance
at September 30, 2009
|
|
$
|
4,410
|
|
|
$
|
874,839
|
|
|
$
|
(434,316
|
)
|
|
$
|
(109,373
|
)
|
|
$
|
176
|
|
|
$
|
335,736
|
|
Stock-based
compensation
NFP is
authorized under its 2009 Stock Incentive Plan to grant awards of stock options,
stock appreciation rights, restricted stock, restricted stock units, performance
units, performance-based awards or other stock-based awards that may be granted
to officers, employees, principals, independent contractors and non-employee
directors of the Company and/or an entity in which the Company owns a
substantial ownership interest (such as a subsidiary of the Company). Any shares
covered by outstanding options or other equity awards that are forfeited,
cancelled or expire after April 15, 2009 without the delivery of shares under
NFP’s Amended and Restated 1998 Stock Incentive Plan, Amended and Restated 2000
Stock Incentive Plan, Amended and Restated 2000 Stock Incentive Plan for
Principals and Managers, Amended and Restated 2002 Stock Incentive Plan or
Amended and Restated 2002 Stock Incentive Plan for Principals and Managers, may
also be issued under the 2009 Stock Incentive Plan.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Summarized below is the
amount of stock-based compensation allocated between cost of services and
corporate and other expenses in the consolidated statements of
income.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
$
|
863
|
|
|
$
|
960
|
|
|
$
|
2,665
|
|
|
$
|
3,059
|
|
Management
fees
|
|
|
405
|
|
|
|
461
|
|
|
|
1,209
|
|
|
|
1,378
|
|
Corporate
and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,188
|
|
|
|
1,870
|
|
|
|
3,569
|
|
|
|
5,595
|
|
Total
stock-based compensation cost
|
|
$
|
2,456
|
|
|
$
|
3,291
|
|
|
$
|
7,443
|
|
|
$
|
10,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
Effective
January 1, 2007, NFP established an Employee Stock Purchase Plan (“ESPP”).
The ESPP is designed to encourage the purchase of common stock by NFP’s
employees, further aligning interests of employees and stockholders and
providing incentive for current employees. Up to 3,500,000 shares of common
stock are currently available for issuance under the ESPP. The ESPP enables all
regular and part-time employees who have worked with NFP for at least one year
to purchase shares of NFP common stock through payroll deductions of any whole
dollar amount of eligible compensation, up to an annual maximum of $10,000. The
employees’ purchase price is 85% of the lesser of the market price of the common
stock on the first business day or the last business day of the quarterly
offering period. The Company recognizes compensation expense related to the
compensatory nature of the discount given to employees who participate in the
ESPP, which totaled $0.5 million and $0.3 million for the nine months ended
September 30, 2009 and 2008, respectively.
Summarized ESPP
information is as follows:
(in
thousands, except per share amounts)
|
|
For
the Period Ended
September
30, 2009
|
|
Purchase
price per share
|
|
$
|
6.36
|
|
Shares
to be acquired
|
|
|
37,677
|
|
Employee
contributions
|
|
$
|
240
|
|
Stock
compensation expense recognized
|
|
$
|
487
|
|
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Note 8
- Non-Cash Transactions
The
following non-cash transactions occurred during the periods indicated:
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Stock
issued as consideration for acquisitions
|
|
$
|
—
|
|
|
$
|
18,458
|
|
Net
assets acquired (liabilities assumed) in connection with
acquisitions
|
|
|
(54
|
)
|
|
|
328
|
|
Stock
issued as incentive compensation
|
|
|
—
|
|
|
|
8,270
|
|
Restricted
stock units issued as incentive compensation
|
|
|
—
|
|
|
|
3,150
|
|
Stock
issued for contingent consideration and other
|
|
|
2,358
|
|
|
|
3,256
|
|
Stock
repurchased, note receivable and satisfaction of an accrued liability in
connection with divestitures of acquired firms
|
|
|
199
|
|
|
|
414
|
|
Stock
repurchased in exchange for satisfaction of a note receivable, due from
principal and/or certain entities they own and other
assets
|
|
|
294
|
|
|
|
707
|
|
Excess
(reduction in) tax benefit from stock-based awards exercised/lapsed,
net
|
|
|
(2,651
|
)
|
|
|
(260
|
)
|
Accrued
liability for contingent consideration
|
|
$
|
7,170
|
|
|
$
|
10,458
|
|
Note 9
- Commitments and Contingencies
Legal
matters
In the
ordinary course of business, the Company is involved in lawsuits and other
claims. Management considers these lawsuits and claims to be without merit and
the Company intends to defend them vigorously. In addition, the sellers of firms
that the Company acquires typically indemnify the Company for loss or liability
resulting from acts or omissions occurring prior to the acquisition, whether or
not the sellers were aware of these acts or omissions. Several of the existing
lawsuits and claims have triggered these indemnity obligations.
In
addition to the foregoing lawsuits and claims, during 2004, several of the
Company’s firms received subpoenas and other informational requests from
governmental authorities, including the New York Attorney General’s Office,
seeking information regarding compensation arrangements, any evidence of bid
rigging and related matters. The Company has cooperated and will continue to
cooperate fully with all governmental agencies.
In March
2006, NFP received a subpoena from the New York Attorney General’s Office
seeking information regarding life settlement transactions. One of NFP’s
subsidiaries received a subpoena seeking the same information. The Company is
cooperating fully with the Attorney General’s investigation. The investigation,
however, is ongoing and the Company is unable to predict the investigation’s
outcome.
Management continues to
believe that the resolution of these lawsuits or claims will not have a material
adverse impact on the Company’s consolidated financial position.
The
Company cannot predict at this time the effect that any current or future
regulatory activity, investigations or litigation will have on its business.
Given the current regulatory environment and the number of its subsidiaries
operating in local markets throughout the country, it is possible that the
Company will become subject to further governmental inquiries and subpoenas and
have lawsuits filed against it. In addition, the stock market continues to
experience significant price and volume fluctuations. When the market price of a
company’s stock drops significantly, shareholders may institute securities class
action litigation against that company. Any litigation against NFP could cause
it to incur substantial costs, divert the time and attention of management and
other resources, or otherwise harm the Company’s business. The Company’s
ultimate liability, if any, in connection with these matters and any possible
future such matters is uncertain and subject to contingencies that are not yet
known.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Contingent
consideration arrangements
The
maximum contingent payment which could be payable as purchase consideration
based on commitments outstanding as of September 30, 2009 is as
follows:
(in
thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Maximum
contingent payments payable as purchase consideration
|
|
$
|
54,028
|
|
|
$
|
117,872
|
|
|
$
|
79,739
|
|
|
$
|
241
|
|
|
$
|
400
|
|
Performance
incentives
Management fees include an
accrual for certain performance-based incentive amounts payable under NFP’s
current ongoing incentive plan. Incentive amounts are paid in a combination of
cash and NFP’s common stock. In addition to the incentive award, NFP pays an
additional cash incentive equal to 50% of the incentive award elected to be
received in the form of NFP’s stock. This election is made subsequent to the
completion of the incentive period. For firms that began their incentive period
prior to January 1, 2005, the principal can elect from 0% to 100% to be
paid in NFP’s common stock. No accrual is made for these additional cash
incentives until the related election is made. However, for firms beginning
their incentive period on or after January 1, 2005 (with the exception of
Highland Capital Holding Corporation firms, which completed this incentive
period in 2008), the principal is required to take a minimum of 30% (maximum
50%) of the incentive award in common stock. The Company accrues on a current
basis for these firms the additional cash incentive (50% of the stock portion of
the award) based upon the principal’s election or the minimum percentage
required to be received in NFP stock. As of September 30, 2009, the maximum
additional payment for this cash incentive that could be payable for all firms
was approximately $0.4 million. Currently, NFP has elected to pay all incentive
awards under this plan in cash.
Firms
likely to receive an incentive payment under the current ongoing incentive plan
can elect to continue to participate in it. The election must be made
prior to November 1, 2009 and will only be effective until the expiration of the
firm’s ongoing incentive plan incentive period. The Annual Principal
Incentive Plan, Annual Business Incentive Plan, and Long Term Equity Incentive
Plan will replace the current ongoing incentive plan, subject to the exceptions
noted below. See “—New Incentive Plans” below.
2009
Principal Incremental Incentive Plan
For the
year beginning January 1, 2009, NFP instituted the 2009 Principal
Incremental Incentive Plan (the “Incremental Plan”). The terms of the
Incremental Plan provide that if NFP’s organic gross margin increases in 2009
relative to 2008, NFP will fund a new incentive pool (the “Incremental Incentive
Pool”) which will be equal to 50% of NFP’s organic gross margin increase.
Generally, the 2009 Incentive Pool will be allocated
pro
rata
with each firm’s contribution to organic gross margin growth. As of
September 30, 2009 the Company has not accrued any amounts relating to the
Incremental Plan. After the year ended December 31, 2009, the Incremental Plan
will not be continued for subsequent fiscal years.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
New
Incentive Plans
NFP
recently adopted three new incentive plans that included both a cash and equity
component (two annual cash-based plans and one long-term equity-based plan) for
principals and key firm employees of its acquired firms.
The
Annual Principal Incentive Plan (“the PIP”) is designed to reward annual
performance of an NFP firm based on the firm’s earnings growth. Under
the PIP, a cash incentive payment will be made to the extent a firm’s earnings
exceed its incentive hurdle for the 12-month performance period ending September
30, 2010. Principals of firms likely to receive an incentive payment under the
current ongoing incentive plan can elect to continue to participate in the
ongoing incentive plan until the end of their current ongoing incentive plan
period. For all other principals, the ongoing incentive plan will terminate
effective September 30, 2009. The Company has not accrued any amounts relating
to the PIP as of September 30, 2009. The Company anticipates it will begin
accruing amounts depending on the firm’s individual performance relative to its
incentive hurdle during the fourth quarter of 2009.
The PIP
is intended to remain in place for successive 12-month performance periods
following the initial PIP performance period and the PIP incentive hurdle will
be set at the beginning of each such performance period. For NFP
firms that have not at this time completed their three year earn-out period, the
initial PIP performance period is expected to commence immediately upon the
completion of such firm’s three year earn-out period, at which time the PIP
incentive hurdle will be determined.
Under the
Business Incentive Plan (“the BIP”), NFP anticipates funding certain incentive
pools based on the achievement of certain gross margin growth for the 12-month
performance period ending December 31, 2010. The Company has not accrued any
expense relating to the BIP as of September 30, 2009. Depending on the Company’s
performance, the Company anticipates accruing expense for the BIP in
2010.
Under the
Long-Term Equity Incentive Plan (“the EIP”) NFP will issue equity awards to
principals and key firm employees based on each firm’s performance over the
two-year period that ended on June 30, 2009 (the “Initial EIP Performance
Period”). The payments made under the EIP for the initial EIP performance period
are anticipated to be in the form of Restricted Stock Units (“RSUs”). The RSUs
will vest 100% on the third anniversary of the grant date. NFP expects to make
the equity grant prior to December 31, 2009. As such, the Company anticipates it
will begin recognizing the expense for the EIP in the fourth quarter of
2009.
NATIONAL
FINANCIAL PARTNERS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009
—
(Continued)
(Unaudited)
Self
insured medical plan
Effective
January 1, 2008, the Company is primarily self insured for medical
insurance benefits provided to employees, and purchases insurance to protect the
Company against claims, both on an individual and in aggregate basis, above
certain levels. A health insurance carrier adjudicates and processes employee
claims and is paid a fee for these services. The Company reimburses the health
insurance carrier for paid claims. The Company estimates its exposure for claims
incurred but not paid using historical census and other information provided by
its health insurance carrier and other professionals. The Company has $3.2
million accrued for self insurance liabilities at September 30, 2009. As of
December 31, 2008, the Company accrued $2.1 million for self insurance
liabilities.
Deferred
compensation plan
On
March 25, 2009, NFP amended and restated its non-qualified deferred
compensation plan for a select group of management and highly compensated
employees of NFP, NFP Securities, Inc. and NFP Insurance Services, Inc. The plan
is designed to aid NFP in retaining and attracting executive employees by
providing them with tax-deferred savings opportunities. Under the plan,
participants may elect to defer receipt of a portion of their annual eligible
compensation. Amounts deferred under the plan are invested at the direction of
the participant. NFP may make a matching contribution of up to 50% of the first
6% of the participant’s eligible compensation, not to exceed the participant’s
deferred amounts. Matching contributions, if any, are credited to the
participant’s deferral account as of the last day of each plan year. 50% of all
matching contributions, plus an additional amount equal to 10% of such matching
contributions is deemed to be invested in an NFP stock fund, and the remaining
50% of the matching contributions is allocated to other hypothetical investments
selected by the participant. The participants are 100% vested in their deferred
amounts at all times. Matching contributions shall vest based on a participant’s
number of years of service. Subject to the terms of the plan, distributions from
a participant’s deferral account will occur upon the end of the deferral period,
upon death or disability, upon the occurrence of unforeseeable emergencies or
upon separation of service. A maximum of 25% of deferred compensation may be
invested in the NFP stock fund. 50% of future matching contributions, if any,
shall be required to be invested in the NFP stock fund. As of September 30,
2009, the Company’s deferred compensation liability balance was $1.9 million. As
of December 31, 2008, the Company’s deferred compensation liability balance was
$1.5 million. NFP has decided that no matching contributions will be made for
base compensation or incentive compensation earned for service in
2009.
Note 10
– Subsequent Events
The
Company adopted new accounting guidance relating to subsequent events in June
2009 and evaluated subsequent events from October 1, 2009 through November 4,
2009, the date of issuance of the financial statements. The Company did not
have any significant subsequent events to report.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the consolidated
financial statements of National Financial Partners Corp. and its subsidiaries
(the “Company”) and the related notes included elsewhere in this report. In
addition to historical information, this discussion includes forward-looking
information that involves risks and assumptions, which could cause actual
results to differ materially from management’s expectations. See
“Forward-Looking Statements” included elsewhere in this report.
Executive
Overview
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,
National Financial Partners Corp. (“NFP”) has grown internally and through
acquisitions and as of September 30, 2009, operates over 150 firms. During the
nine months ended September 30, 2009, revenue decreased $180.0 million, or
21.1%, to $671.1 million from $851.1 million during the nine months ended
September 30, 2008. The Company experienced a net loss of $495.2 million for the
nine months ended September 30, 2009, a decrease of $516.1 million from net
income of $20.9 million during the nine months ended September 30, 2008. The net
loss was due to a substantial increase in the level of impairment of goodwill
and intangible assets from $10.2 million for the nine months ended September 30,
2008 to $612.2 million for the nine months ended September 30, 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’s firms earn revenue that consists primarily of commissions and fees
earned from the sale of financial products and services to their clients. The
Company’s firms also incur commissions and fees expense and operating expense in
the course of earning revenue. NFP pays management fees to non-employee
principals of its firms and/or certain entities they own based on the financial
performance of each respective firm. The Company refers to revenue earned by the
Company’s firms less the expenses of its firms, including management fees, as
gross margin. The Company excludes amortization and depreciation from gross
margin. These amounts are separately disclosed as part of Corporate and other
expenses. Management uses gross margin as a measure of the performance of the
firms that the Company has acquired. Gross margin declined from $150.3 million,
or 17.7% of revenue, during the nine months ended September 30, 2008 to $121.3
million, or 18.1% of revenue, during the nine months ended September 30, 2009.
Gross margin percentage improved slightly despite the decrease in revenue as a
result of decreases in the variable components of the Company’s cost
structure.
The
Company’s gross margin is offset by expenses that NFP incurs at the corporate
level, including corporate and other expenses. Corporate and other expenses
increased from $90.4 million during the nine months ended September 30, 2008 to
$686.4 million during the nine months ended September 30, 2009. Corporate and
other expenses include general and administrative expense, amortization,
depreciation, impairment of goodwill and intangible assets, and (gain) loss on
sale of subsidiaries. General and administrative expense includes the operating
expenses of NFP’s corporate headquarters. General and administrative expense
declined from $48.9 million during the nine months ended September 30, 2008 to
$37.9 million during the nine months ended September 30, 2009. General and
administrative expense as a percentage of revenue declined slightly from 5.7%
during the period ending September 30, 2008 to 5.6% for the nine months ended
September 30, 2009.
The
Company recognized an impairment charge of $607.3 million during the first
quarter of 2009, an impairment charge of $2.9 million during the second quarter
and an impairment charge of $2.0 million during the third quarter. This
represented a significant increase from impairments of $10.2 million recorded
during the nine months ended September 30, 2008. The increase in the impairment
charge reflected the incorporation of market data, including NFP’s market value
which had remained below net book value through the end of the second quarter,
the performance of the Company in the weak 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. As a result, the Company recognized
an impairment charge of $612.2 during the nine months ended September 30,
2009.
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 will fluctuate
from year to year and quarter to quarter. In the third quarter of 2009, the
Company’s gross margin decreased primarily due to the decrease in revenue. The
revenue decline was heavily concentrated in retail life, life brokerage and
settlements revenue. Corporate and executive benefits, financial planning and
investment advisory revenue all declined for the nine-month period ended
September 30, 2009 but at a lower rate than did life insurance. The decline in
revenue was partially offset by the decline in the variable components of the
Company’s cost structure.
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 during the first nine months of 2009. Continued
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. The potential for a significant insurer to experience economic stress
or withdraw from writing certain types of insurance the Company currently offers
its customers could negatively impact the availability of certain types of
insurance and represent potentially reduced revenue and profitability for the
Company.
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.
Acquisitions
While
acquisitions remain a component of the Company’s business strategy over the long
term, NFP suspended acquisition activity (with the exception of certain
sub-acquisitions) in the latter part of 2008 in order to conserve cash. NFP will
continue to reassess the market and economic environment. Under NFP’s typical
acquisition structure, NFP acquires 100% of the equity of businesses that
distribute financial services products on terms that are relatively standard
across its acquisitions. To determine the acquisition price, NFP’s management
first estimates the annual operating cash flow of the business to be acquired
based on current levels of revenue and expense. For this purpose, management
defines operating cash flow as cash revenue of the business less cash and
non-cash expenses, other than amortization, depreciation and compensation to the
business’ owners or individuals who subsequently become principals. Management
refers to this estimated annual operating cash flow as “target earnings.”
Typically, the acquisition price is a multiple (generally in a range of five to
six times) of a portion of the target earnings, which management refers to as
“base earnings.” Under certain circumstances, NFP has paid multiples in excess
of six times based on the unique attributes of the transaction that in the
Company’s view justify the higher value. Base earnings averaged 54% of target
earnings for all firms owned at September 30, 2009. This percentage can
vary based on the percentage of base earnings acquired, disposed, and/or
restructured. In determining base earnings, management focuses on the recurring
revenue of the business. Recurring revenue refers to revenue from sales
previously made (such as renewal commissions on insurance products, commissions
and administrative fees for ongoing benefits plans and mutual fund trail
commissions) and fees for assets under management.
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:
|
•
|
all future earnings
of the acquired business in excess of the base earnings up to target
earnings; and
|
|
•
|
a percentage of any
earnings in excess of target earnings generally based on the ratio of base
earnings to target earnings.
|
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 more recent
transactions 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.
Additional
purchase consideration is often paid to the former owners based on satisfying
specified internal growth thresholds over the three-year period following the
acquisition.
Sub-acquisitions
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.
Substantially all of NFP’s
acquisitions have been paid for with a combination of cash and NFP common stock,
valued at the fair market value at the time of acquisition. NFP typically
requires its principals to take at least 30% of the total acquisition price in
NFP common stock. However, in transactions involving institutional sellers, the
purchase price typically consists of substantially all cash. Through
September 30, 2009, principals have taken on average approximately 34% of
the total acquisition price in NFP common stock. The following table shows
acquisition activity (including sub-acquisitions) in the period:
(in
thousands, except number of acquisitions)
|
|
Nine
Months Ended
September
30, 2009
|
|
Number
of acquisitions closed
|
|
|
1
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
279
|
|
Common
stock
|
|
|
—
|
|
Other
(1)
|
|
|
186
|
|
|
|
$
|
465
|
|
_
_____________
(1)
|
Represents
obligations of the Company associated with this
acquisition.
|
Although
management believes that NFP will continue to have opportunities to complete
acquisitions once market conditions stabilize, there can be no assurance that
NFP will be successful in identifying and completing acquisitions. Any change in
the Company’s financial condition or in the environment of the markets in which
the Company operates could impact its ability to source and complete
acquisitions.
Restructures
and Disposals
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 nine months ended September 30, 2009, NFP has
restructured twenty-four transactions, seven of which had not 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 nine months ended September 30, 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.”
At times,
the Company may dispose of firms, certain business units within a firm or firm
assets for one or more of the following reasons: non-performance, changes
resulting in firms no longer being part of the Company’s core business, change
in competitive environment, regulatory changes, the cultural incompatibility of
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 may sell 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 nine months ended September 30, 2009,
NFP has disposed of fifteen firms and certain assets of four more
firms.
Revenue
The
Company’s firms generate revenue primarily from the following
sources:
|
•
|
Corporate
and executive benefits commissions and fees.
The Company’s firms
earn commissions on the sale of insurance policies written for benefits
programs. The commissions are paid each year as long as the client
continues to use the product and maintains its broker of record
relationship with the firm. The Company’s firms also earn fees for the
development and implementation of corporate and executive benefits
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. Incidental to the
corporate and executive benefits services provided to their customers,
some of the Company’s firms offer property and casualty insurance
brokerage and advisory services. The Company believes that these services
complement the corporate and executive benefits services provided to the
Company’s clients. In connection with these services, the Company earns
commissions and fees.
|
|
•
|
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 twelve
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.
|
|
•
|
Financial
planning and investment advisory fees and securities commissions.
The Company’s firms earn commissions related to the sale of securities and
certain investment-related insurance products, as well as fees for
offering financial advice and related services. These fees are based on a
percentage of assets under management and are generally paid quarterly. In
a few cases, incentive fees are earned based on the performance of the
assets under management. Some of the Company’s firms charge flat fees for
the development of a financial plan or a flat fee annually for advising
clients on asset allocation.
|
Some of
the Company’s firms also earn additional compensation in the form of incentive
and marketing support revenue from manufacturers of financial services products,
based on the volume, persistency and profitability of business generated by the
Company from these three sources. Incentive and marketing support revenue is
recognized at the earlier of notification of a payment or when payment is
received, unless historical data or other information exists which enables
management to reasonably estimate the amount earned during the period. These
forms of payments are earned both with respect to sales by the Company’s owned
firms and sales by NFP’s affiliated third-party distributors.
NFP
Securities, Inc. (“NFPSI”), NFP’s registered broker-dealer and investment
adviser, also earns commissions and fees on the transactions effected through
it. Most principals of the Company’s firms, as well as many of the Company’s
affiliated third-party distributors, conduct securities or investment advisory
business through NFPSI.
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. The Company
believes that the continuation of a difficult economic environment punctuated by
a deterioration in credit and liquidity, investment losses and a reduction in
consumer confidence may result in a change in this historical pattern for the
year ended December 31, 2009, as was the case for the year ended
December 31, 2008.
Expenses
The
following table sets forth certain expenses as a percentage of revenue for the
periods indicated:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Total
revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
27.4
|
|
30.7
|
|
28.0
|
|
32.4
|
|
Operating
expenses
|
|
38.3
|
|
37.0
|
|
40.9
|
|
36.0
|
|
Management
fees
|
|
15.2
|
|
14.8
|
|
13.0
|
|
13.9
|
|
Total
cost of services (excludes items shown separately below)
|
|
80.9
|
|
82.5
|
|
81.9
|
|
82.3
|
|
Gross
margin
|
|
19.1
|
|
17.5
|
|
18.1
|
|
17.7
|
|
Corporate
and other expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
5.7
|
|
6.0
|
|
5.6
|
|
5.7
|
|
Amortization
|
|
3.9
|
|
3.5
|
|
4.1
|
|
3.5
|
|
Depreciation
|
|
1.4
|
|
1.3
|
|
1.5
|
|
1.1
|
|
Impairment
of goodwill and intangible assets
|
|
0.9
|
|
1.9
|
|
91.2
|
|
1.2
|
|
Gain
on sale of subsidiaries
|
|
(0.5
|
)
|
(0.2
|
)
|
(0.2
|
)
|
(0.9
|
)
|
Total
corporate and other expenses
|
|
11.4
|
%
|
12.5
|
%
|
102.2
|
%
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
Commissions
and fees.
Commissions and fees are typically paid to third-party
producers, who are producers that are affiliated with the Company’s firms.
Commission and fees are also paid to non-affiliated producers who utilize the
services of one or more of the Company’s life brokerage entities including the
Company’s life settlements brokerage entities. Commissions and fees are also
paid to non-affiliated producers who provide referrals and specific product
expertise to NFP’s firms. When business is generated solely by a principal, no
commission expense is incurred because principals are only paid from a share of
the cash flow of the acquired firm through management fees. However, when income
is generated by a third-party producer, the producer is generally paid a portion
of the commission income, which is reflected as commission expense of the
acquired firm. Rather than collecting the full commission and remitting a
portion to a third-party producer, a firm may include the third-party producer
on the policy application submitted to a carrier. The carrier will, in these
instances, directly pay each named producer their respective share of the
commissions and fees earned. When this occurs the firm will record only the
commissions and fees it receives directly as revenue and have no commission
expense. As a result, the NFP firm will have lower revenue and commission
expense and a higher gross margin percentage. Gross margin dollars will be the
same. The transactions in which an NFP firm is listed as the sole producer and
pays commissions to a third-party producer, versus transactions in which the
carrier pays each producer directly, will cause NFP’s gross margin percentage to
fluctuate without affecting gross margin dollars or earnings. In addition, NFPSI
pays commissions to the Company’s affiliated third-party distributors who
transact business through NFPSI.
Operating
expenses.
The Company’s firms incur operating expenses related to
maintaining individual offices, including compensating producing and
non-producing staff. Firm operating expenses also include the expenses of NFPSI
and of NFP Insurance Services, Inc. (“NFPISI”), two subsidiaries that serve the
Company’s acquired firms and through which the Company’s acquired firms and its
third-party distributors who are members of its marketing organizations access
insurance and financial services products and manufacturers. The Company records
share-based payments related to firm employees and firm activities to operating
expenses as a component of cost of services.
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 receives its cumulative preferred earnings (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. Incentive amounts are paid in a combination of cash and NFP’s
common stock. In addition to the incentive award, NFP pays an additional cash
incentive equal to 50% of the incentive award elected to be received in NFP
common stock. This election is made subsequent to the completion of the
incentive period. For firms that began their incentive period prior to
January 1, 2005, the principal could elect from 0% to 100% to be paid in
NFP’s common stock. No accrual is made for these additional cash incentives
until the incentive award is earned and the related election is made. However,
for firms beginning their incentive period on or after January 1, 2005
(with the exception of Highland Capital Holding Corporation firms which
completed this incentive period in 2008), the principal is required to take a
minimum of 30% (maximum of 50%) of the incentive award in NFP common stock. The
Company accrues on a current basis for these firms the additional cash incentive
(50% of the stock portion of the award based upon the principal’s election) on
the minimum percentage required to be received in company stock. Currently, NFP
has elected to pay all incentive awards under this plan in cash. Management fees
are reduced by amounts paid by the principals and/or certain entities they own
under the terms of the management contract for capital expenditures, including
sub-acquisitions, in excess of $50,000. These amounts may be paid in full or
over a mutually agreeable period of time and are recorded as a “deferred
reduction in management fees.” Amounts recorded in deferred reduction in
management fees are amortized as a reduction in management fee expense generally
over the useful life of the asset. The ratio of management fees to gross margin
before management fees is dependent on the percentage of total earnings of the
Company’s firms capitalized by the Company, the performance of the Company’s
firms relative to base earnings and target earnings, the growth of earnings of
the Company’s firms in the periods after their first three years following
acquisition and the earnings of NFPISI, NFPSI and a small number of firms
without a principal, to whom which no management fees are paid. Due to NFP’s
cumulative preferred position, if a firm produces earnings below target earnings
in a given year, NFP’s share of the firm’s total earnings would be higher for
that year. If a firm produces earnings at or above target earnings, NFP’s share
of the firm’s total earnings would be equal to the percentage of the earnings
capitalized by NFP in the initial transaction, less any percentage due to
additional management fees earned under the ongoing incentive plan. The Company
records share-based payments related to principals as management fees which are
included as a component of cost of services.
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 total
revenue represents the base profitability of the Company divided by the total
revenue of the Company’s business. Whether or not a principal participates in
the earnings of a firm is dependent on the specific characteristics and
performance of that firm. Management fees as a percentage of gross margin before
management fees represents the percentage of earnings that is not retained by
the Company as profit, but is paid out to principals.
The
Company uses gross margin before management fees and gross margin before
management fees as a percentage of total revenue to evaluate how the Company’s
business is performing before giving consideration to a principal’s
participation in their firm’s earnings. This measure is one for which the
principal is compensated and reflects the principal’s performance and is a
result of their direct operating authority and control. Management fees as a
percentage of gross margin before management fees is a measure that management
uses to evaluate how much of the Company’s margin and margin growth is being
shared with principals. This management fee percentage is a variable, not a
fixed, ratio. Management fees as a percentage of gross margin before management
fees will fluctuate based upon the aggregate mix of earnings performance by
individual firms. It is based on the percentage of the Company’s earnings that
are capitalized at the time of acquisition, the performance relative to NFP’s
preferred position in the earnings and the growth of the individual firms and in
the aggregate. Management fees may be higher during periods of strong growth due
to the increase in incentive accruals. Higher firm earnings will generally be
accompanied by higher incentive accruals. Where firm earnings decrease,
management fees and management fee percentage may be lower as incentive accruals
are either reduced or eliminated. In addition, because management fees earned
are based on a firm’s cumulative performance through the year, to the extent
that a firm’s performance improves through the year, whether by revenue growth
or expense reductions, the management fee percentage may likewise increase
through the year. For example, if a firm has base earnings and target earnings
of $1.0 million and $2.0 million, respectively, and if the firm’s cumulative
earnings are $0.7 million for the first nine months of the year, no management
fee would be earned and the management fee percentage would be zero. In
the remaining fourth quarter, if the firm was able to achieve cumulative
earnings of $2.0 million, the management fee earned would be $1.0 million and
the management fee percentage would be equal to approximately 80% for the
quarter. Further, since NFP retains a cumulative preferred interest in
base earnings, the relative percentage of management fees generally decreases as
firm earnings decline. For firms that do not achieve base earnings, principals
typically earn no management fee. Thus, a principal generally earns more
management fees only when firm earnings grow and, conversely, principals earn
less when firm earnings decline. This structure provides the Company with
protection against earnings shortfalls through reduced management fee expense;
in this manner the interests of the principals and shareholders remain
aligned.
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 41.9%
of gross margin before management fees for the nine months ended September 30,
2009 compared with 44.1% for the nine months ended September 30, 2008. The
decline in management fee percentage for the nine months ended September 30,
2009 was largely due to a decline in the ongoing incentive accrual, and an
increase in NFPISI’s contribution to gross margin before management fees, for
which no management fees were paid.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
229,925
|
|
|
$
|
277,282
|
|
|
$
|
671,104
|
|
|
$
|
851,135
|
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
63,059
|
|
|
|
85,216
|
|
|
|
187,934
|
|
|
|
275,487
|
|
Operating
expenses (1)
|
|
|
88,112
|
|
|
|
102,384
|
|
|
|
274,553
|
|
|
|
306,581
|
|
Gross
margin before management fees
|
|
|
78,754
|
|
|
|
89,682
|
|
|
|
208,617
|
|
|
|
269,067
|
|
Management
fees
|
|
|
34,855
|
|
|
|
41,140
|
|
|
|
87,316
|
|
|
|
118,727
|
|
Gross
margin
|
|
$
|
43,899
|
|
|
$
|
48,542
|
|
|
$
|
121,301
|
|
|
$
|
150,340
|
|
Gross
margin as a percentage of total revenue
|
|
|
19.1
|
%
|
|
|
17.5
|
%
|
|
|
18.1
|
%
|
|
|
17.7
|
%
|
Gross
margin before management fees as a percentage of total
revenue
|
|
|
34.3
|
%
|
|
|
32.3
|
%
|
|
|
31.1
|
%
|
|
|
31.6
|
%
|
Management
fees as a percentage of gross margin before management
fees
|
|
|
44.3
|
%
|
|
|
45.9
|
%
|
|
|
41.9
|
%
|
|
|
44.1
|
%
|
______________
(1)
|
Excludes
amortization and depreciation which are shown separately under Corporate
and other expenses.
|
New
Incentive Plan
s.
For
a discussion of new incentive plans, please see “Note 9—Commitments and
Contingencies—New Incentive Plans.”
The
amounts that will be accrued relating to the new incentive plans will be
recorded through management fee expense.
Corporate
and other expenses
General
and administrative.
At the corporate level, the Company incurs general
and administrative expense related to the acquisition of and administration of
its firms. General and administrative expense includes both cash and stock-based
compensation, occupancy, professional fees, travel and entertainment,
technology, telecommunication, advertising and marketing, legal, internal audit
and certain corporate compliance costs.
Amortization.
The Company incurs amortization expense related to the amortization of
certain identifiable intangible assets.
Depreciation.
The Company incurs depreciation expense related to capital assets, such
as investments in technology, office furniture and equipment, as well as
amortization for its leasehold improvements. Depreciation expense related to the
Company’s firms as well as NFP’s corporate office is recorded within this line
item.
Impairment
of goodwill and intangible assets.
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 income.
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.
A
two-step impairment test is performed on goodwill for reporting units that
demonstrate indicators of impairment. In the first step, NFP compared the fair
value of each reporting unit to the carrying value of the net assets assigned to
that reporting unit. NFP determined the fair value of its reporting units by
blending two valuation approaches: the income approach and a market value
approach. In order to determine the relative fair value of each of the reporting
units the income approach was conducted first. These relative values were then
scaled to the estimated market value of NFP as determined by NFP’s stock
price.
If the
fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and NFP is not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss,
if any. The second step of the goodwill impairment test compares the implied
fair value of the reporting unit’s goodwill with the carrying value of the
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
a manner that is consistent with the amount of goodwill recognized in a business
combination. That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit.
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 valuation of an
intangible asset in a very short period of time. The timing and amount of
realized losses reported in earnings could vary if management’s conclusions were
different. Any resulting impairment loss could have a material adverse effect on
the Company’s reported financial position and results of operations for any
particular quarterly or annual period.
As
previously stated in NFP’s Annual Report on Form 10-K for the year ended
December 31, 2008 (the “2008 10-K”) and as updated in NFP’s Current Report on
Form 8-K, filed with the SEC on August 21, 2009 (the “2008 8-K”), 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 in the 2008 10-K, and as
updated in the 2008 8-K, if the stock price remained below the net book value
per share, or other negative business factors existed as outlined in GAAP, 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
nine months ended September 30, 2009, consistent with the analysis previously
stated in the 2008 10-K, and as updated in the 2008 8-K, led to the
impairment charge taken for the nine months ended September 30, 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 $21.1
million for amortizing intangibles, which was included in earnings for the nine
months ended September 30, 2009. Of this $21.1 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 $591.1 million, which was included in earnings for the nine
months ended September 30, 2009. Of this $591.1 million, an
impairment charge of $588.4 million was recognized for the three months ended
March 31, 2009.
Gain
on sale of subsidiaries.
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 the acquired firms or certain assets of
acquired firms.
Recently
adopted accounting standards
For a
discussion of recently adopted accounting standards, please see “Note 2—Summary
of significant accounting policies.”
Results
of Operations
NFP’s
management monitors acquired firm revenue, commissions and fees expense and
operating expense from new acquisitions as compared with existing firms. For
this purpose, a firm is considered to be a new acquisition for the twelve months
following the acquisition. After the first twelve months, a firm is considered
to be an existing firm. Within any reported period, a firm may be considered to
be a new acquisition for part of the period and an existing firm for the
remainder of the period. Additionally, NFPSI and NFPISI are considered to be
existing firms. Sub-acquisitions that do not separately report their results are
considered to be part of the acquiring firm. The results of firms disposed of
are also included in the calculations and the results of operations discussion
set forth below include analysis of the relevant line items on this
basis.
Three
months ended September 30, 2009 compared with three months ended
September 30, 2008
The
following table provides a comparison of the Company’s revenue and expenses for
the periods presented:
|
|
For
Three Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
229.9
|
|
|
$
|
277.3
|
|
|
$
|
(47.4
|
)
|
|
|
(17.1
|
)%
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
63.0
|
|
|
|
85.2
|
|
|
|
(22.2
|
)
|
|
|
(26.1
|
)
|
Operating
expenses (1)
|
|
|
88.1
|
|
|
|
102.4
|
|
|
|
(14.3
|
)
|
|
|
(14.0
|
)
|
Management
fees
|
|
|
34.9
|
|
|
|
41.1
|
|
|
|
(6.2
|
)
|
|
|
(15.1
|
)
|
Total
cost of services
|
|
|
186.0
|
|
|
|
228.7
|
|
|
|
(42.7
|
)
|
|
|
(18.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
43.9
|
|
|
|
48.6
|
|
|
|
(4.7
|
)
|
|
|
(9.7
|
)
|
Corporate
and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
13.0
|
|
|
|
16.6
|
|
|
|
(3.6
|
)
|
|
|
(21.7
|
)
|
Amortization
|
|
|
9.0
|
|
|
|
9.9
|
|
|
|
(0.9
|
)
|
|
|
(9.1
|
)
|
Depreciation
|
|
|
3.4
|
|
|
|
3.5
|
|
|
|
(0.1
|
)
|
|
|
(2.9
|
)
|
Impairment
of goodwill and intangible assets
|
|
|
2.0
|
|
|
|
5.2
|
|
|
|
(3.2
|
)
|
|
|
(61.5
|
)
|
Gain
on sale of subsidiaries
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
100.0
|
|
Total
corporate and other expenses
|
|
|
26.2
|
|
|
|
34.6
|
|
|
|
(8.4
|
)
|
|
|
(24.3
|
)
|
Income
from operations
|
|
|
17.7
|
|
|
|
14.0
|
|
|
|
3.7
|
|
|
|
26.4
|
|
Interest
and other income
|
|
|
4.1
|
|
|
|
1.5
|
|
|
|
2.6
|
|
|
|
173.3
|
|
Interest
and other expense
|
|
|
(5.0
|
)
|
|
|
(5.3
|
)
|
|
|
0.3
|
|
|
|
5.7
|
|
Net
interest and other
|
|
|
(0.9
|
)
|
|
|
(3.8
|
)
|
|
|
2.9
|
|
|
|
76.3
|
|
Income
before income taxes
|
|
|
16.8
|
|
|
|
10.2
|
|
|
|
6.6
|
|
|
|
64.7
|
|
Income
tax expense
|
|
|
6.3
|
|
|
|
6.7
|
|
|
|
(0.4
|
)
|
|
|
(6.0
|
)
|
Net
income
|
|
$
|
10.5
|
|
|
$
|
3.5
|
|
|
$
|
7.0
|
|
|
|
200.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
______________
(1)
|
Excludes
amortization and depreciation which are shown separately under Corporate
and other expenses.
|
Summary
Net
income.
The company recorded net income of $10.5 million in the three
months ended September 30, 2009 compared with net income of $3.5 million in the
three months ended September 30, 2008. Net income as a percentage of revenue was
4.6% for the three months ended September 30, 2009 compared with 1.3% for the
three months ended September 30, 2008. A decrease in gross margin was offset by
declines in corporate and other expenses. In addition, interest and
other income increased by $2.6 million during the quarter largely due to the
receipt of $1.9 million in proceeds from the settlement of an NFP-owned key man
life insurance policy on one of the principals.
Revenue
Commissions
and fees.
Commissions and fees decreased $47.4 million, or 17.1%, to
$229.9 million in the three months ended September 30, 2009 compared with
$277.3 million in the same period last year. Retail life, life brokerage and
life settlements revenue during the third quarter of 2009 continued to be
negatively impacted by the broader economic environment. The Company
experienced less severe declines in executive benefits revenue and corporate
benefits revenue, as some clients reduced benefits offered to employees due to
cost-cutting measures and rising unemployment. Financial advisory
revenue also declined as fees for assets under management declined with
declining market values. Although the capital markets have
tentatively begun to recover, the recovery may not continue. Additionally, fees
on rising assets under management have not yet been entirely reflected within
the Company’s results. Due to the suspension of acquisitions which
occurred in 2008, for the quarter ended September 30, 2009 there has been no
commission and fees generated from new acquisitions. The revenue
decrease of $47.4 million was exclusively from existing firms and included a
$3.3 million decline in revenue from firms disposed subsequent to the third
quarter of 2008.
Cost
of services
Commissions
and fees.
Commissions and fees expense decreased $22.2 million, or 26.1%,
to $63.0 million in the three months ended September 30, 2009 compared with
$85.2 million in the same period last year. As a percentage of revenue,
commissions and fees expense was 27.4% in the three months ended September 30,
2009 compared with 30.7% in the same period last year. The sharp decline in
commissions and fees expense both in dollars and as a percentage of revenue was
largely attributable to the decline in revenue, particularly in retail life
products, life brokerage and life settlements, which typically have higher
commission payouts. Due to the suspension of acquisitions which occurred in
2008, there has been no commission and fees expense generated from new
acquisitions for the quarter. The commission expense decrease of
$22.2 million was exclusively from existing firms and included a $0.2 million
decline in commission expense from firms disposed subsequent to the third
quarter of 2008.
Operating
expenses.
Operating expenses
decreased $14.3 million, or 14.0%, to $88.1 million in the three months ended
September 30, 2009 compared with $102.4 million in the same period last year. As
a percentage of revenue, operating expenses increased to 38.3% in the three
months ended September 30, 2009 from 37.0% during the prior year period. The
decline in operating expenses at existing firms was largely a result of cost
reduction initiatives across the firms. Personnel and related costs continue to
comprise more than 65% of firm operating expenses and account for 38.5% of the
operating expense decline in the quarter-over-quarter comparison largely as a
result of headcount reductions and reductions in commission payments among
employee producers. The increase in operating expenses as a percentage of
revenue was largely a result of the sharp decline in revenue concentrated in
retail life, life brokerage and life settlements. Stock-based compensation to
firm employees and for firm activities included in operating expenses as a
component of cost of services in the third quarter of 2009 was $0.9 million
compared with $1.0 million in the third quarter of 2008.
Due to the suspension of
acquisitions which occurred in 2008, there has been no operating expense
generated from new acquisitions for the third quarter of 2009. The
operating expense decline of $14.3 million was exclusively from existing firms
and included a $3.1 million decline from firms disposed subsequent to the third
quarter of 2008.
Management
fees.
Management fees decreased $6.2 million, or 15.1%, to $34.9 million
in the three months ended September 30, 2009 compared with $41.1 million in the
three months ended September 30, 2008. Management fees were 44.3% of gross
margin before management fees in the three months ended September 30, 2009
compared with 45.9% in the same period last year. Included in management fees
was a $0.4 million increase of the accrual for the ongoing incentive plan in the
third quarter of 2009 compared with an increase in the accrual of $1.7 million
in the third quarter of 2008. Incentive accruals will vary from period to period
based on the mix of firms participating in the program and the volatility of
their earnings. The decrease in management fees as a percentage of gross margin
before management fees reflects the lower incentive accruals, a greater
contribution to gross margin before management fees from entities that are not
subject to management fees such as NFPISI and NFPSI as well as the higher ratio
of base to target earnings of firms acquired in recent years. In aggregate, the
higher ratio of base to target earnings of 54% in the three months ended
September 30, 2009 as compared with 52% as of September 30, 2008, was
largely as a result of firm restructures. In addition, management fees included
$0.4 million of stock-based compensation expense in the three months ended
September 30, 2009 compared with $0.5 million for the three months ended
September 30, 2008.
Gross
margin.
Gross margin decreased $4.7 million, or 9.7%, to $43.9 million in
the three months ended September 30, 2009 compared with $48.6 million in
the same period last year. As a percentage of revenue, gross margin was 19.1% in
the three months ended September 30, 2009 compared with 17.5% in the same
period last year. Despite the revenue decline, gross margin as a percentage of
revenue improved due to lower commissions and fees expense offset in part by
higher operating expenses and management fees as a percentage of
revenue.
Corporate
and other expenses
General
and administrative.
General and administrative expense, which includes
stock-based compensation, decreased $3.6 million, or 21.7%, to $13.0 million in
the three months ended September 30, 2009 compared with $16.6 million in the
same period last year. As a percentage of revenue, general and administrative
expense decreased to 5.7% in the three months ended September 30, 2009 compared
with 6.0% in the prior year period. The decrease of $3.6 million was primarily
due to a $1.0 million decrease in compensation and benefits and a $0.7 million
decrease in stock-based compensation expense. The decrease was largely the
result of headcount reductions and management’s continued efforts to reduce
expenses. Stock-based compensation included in general and administrative
expense was $1.2 million and $1.9 million in the three months ended
September 30, 2009 and 2008, respectively.
Amortization.
Amortization expense decreased $0.9 million, or 9.1%, to $9.0 million in
the three months ended September 30, 2009 compared with $9.9 million in the same
period last year. Amortization expense decreased as a result of a 38.5% decrease
in amortizing intangible assets resulting primarily from dispositions,
impairments and the suspension of new acquisitions. As a percentage of revenue,
amortization was 3.9% in the three months ended September 30, 2009 compared
with 3.5% in the three months ended September 30, 2008.
Depreciation.
Depreciation expense decreased $0.1 million, or 2.9%, to $3.4 million in
the three months ended September 30, 2009 compared with $3.5 million in the same
period last year. The decrease in depreciation resulted from a decrease in
capital expenditures at the Company’s existing firms and at the corporate
office. As a percentage of revenue, depreciation expense was 1.4% in the three
months ended September 30, 2009 compared with 1.3% in the same period last
year. Depreciation expense attributable to firm operations totaled $1.9 million
in the three months ended September 30, 2009 compared with $2.0 million in the
same period last year.
Impairment
of goodwill and intangible assets.
Impairment of goodwill and intangible
assets decreased $3.2 million to $2.0 million in the third quarter of 2009
compared with $5.2 million in the prior year period. 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. As a
percentage of revenue, impairments of goodwill and intangible assets was 0.9%
for the three months ended September 30, 2009 and 1.9% for the three months
ended September 30, 2008.
Gain
on sale of subsidiaries.
During the third quarter of 2009, the Company
recognized a net gain from the disposition of seven subsidiaries and the sale of
certain assets of two additional subsidiaries totaling $1.2 million. During the
third quarter of 2008, the Company recognized a gain from the sale of certain
assets of three subsidiaries totaling $0.6 million.
Interest
and other income.
Interest and other income increased $2.6 million to
$4.1 million in the three months ended September 30, 2009 compared with
$1.5 million in the three months ended September 30, 2008. Interest and
other income increased $2.6 million resulting largely from the receipt of $1.9
million in proceeds from the settlement of an NFP-owned key man life insurance
policy on a principal.
Interest
and other expense.
Interest and other expense decreased $0.3 million, or
5.7%, to $5.0 million in the three months ended September 30, 2009 compared with
$5.3 million in the three months ended September 30, 2008. The decrease of $0.3
million in interest and other expense was largely a result of the lower interest
rate environment and the lower average balance on NFP’s credit facility in 2009
as compared with 2008.
Income
tax expense
Income
tax expense.
Income tax expense was $6.3 million in the three months
ended September 30, 2009 compared with income tax expense of $6.7 million in the
same period during the prior year. The effective tax rate in the third quarter
of 2009 was 37.5%, which includes adjustments for interest and penalties
totaling $0.6 million, which were treated discretely. This compares with an
effective tax rate of 65.6% in the third quarter of 2008, which includes
adjustments for interest and penalties which totaled less than $0.1
million.
Nine
months ended September 30, 2009 compared with nine months ended
September 30, 2008
The
following table provides a comparison of the Company’s revenue and expenses for
the periods presented:
|
|
For
Nine Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
671.1
|
|
|
$
|
851.1
|
|
|
$
|
(180.0
|
)
|
|
|
(21.1
|
)%
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
187.9
|
|
|
|
275.5
|
|
|
|
(87.6
|
)
|
|
|
(31.8
|
)
|
Operating
expenses (1)
|
|
|
274.6
|
|
|
|
306.6
|
|
|
|
(32.0
|
)
|
|
|
(10.4
|
)
|
Management
fees
|
|
|
87.3
|
|
|
|
118.7
|
|
|
|
(31.4
|
)
|
|
|
(26.5
|
)
|
Total
cost of services
|
|
|
549.8
|
|
|
|
700.8
|
|
|
|
(151.0
|
)
|
|
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
121.3
|
|
|
|
150.3
|
|
|
|
(29.0
|
)
|
|
|
(19.3
|
)
|
Corporate
and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
37.9
|
|
|
|
48.9
|
|
|
|
(11.0
|
)
|
|
|
(22.5
|
)
|
Amortization
|
|
|
27.7
|
|
|
|
29.3
|
|
|
|
(1.6
|
)
|
|
|
(5.5
|
)
|
Depreciation
|
|
|
10.4
|
|
|
|
9.7
|
|
|
|
0.7
|
|
|
|
7.2
|
|
Impairment
of goodwill and intangible assets
|
|
|
612.2
|
|
|
|
10.2
|
|
|
|
602.0
|
|
|
NM
|
|
Gain
on sale of subsidiaries
|
|
|
(1.8
|
)
|
|
|
(7.7
|
)
|
|
|
5.9
|
|
|
|
(76.6
|
)
|
Total
corporate and other expenses
|
|
|
686.4
|
|
|
|
90.4
|
|
|
|
596.0
|
|
|
NM
|
|
Income
(loss) from operations
|
|
|
(565.1
|
)
|
|
|
59.9
|
|
|
|
(625.0
|
)
|
|
NM
|
|
Interest
and other income
|
|
|
13.4
|
|
|
|
4.2
|
|
|
|
9.2
|
|
|
|
219.0
|
|
Interest
and other expense
|
|
|
(15.7
|
)
|
|
|
(16.1
|
)
|
|
|
0.4
|
|
|
|
(2.5
|
)
|
Net
interest and other
|
|
|
(2.3
|
)
|
|
|
(11.9
|
)
|
|
|
9.6
|
|
|
|
(80.7
|
)
|
Income
(loss) before income taxes
|
|
|
(567.4
|
)
|
|
|
48.0
|
|
|
|
(615.4
|
)
|
|
NM
|
|
Income
tax (benefit) expense
|
|
|
(72.2
|
)
|
|
|
27.1
|
|
|
|
(99.3
|
)
|
|
|
(366.4
|
)
|
Net
(loss) income
|
|
$
|
(495.2
|
)
|
|
$
|
20.9
|
|
|
$
|
(516.1
|
)
|
|
NM
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
______________
|
NM
indicates amount is not meaningful
|
(1)
|
Excludes
amortization and depreciation which are shown separately under Corporate
and other expenses.
|
Summary
Net
loss.
The company recorded a net loss of $495.2 million in the nine
months ended September 30, 2009 compared with net income of $20.9 million in the
nine months ended September 30, 2008. The net loss was mainly due to a
substantial increase in the level of impairment of goodwill and intangible
assets from $10.2 million for the nine months ended September 30, 2008 to $612.2
million for the nine months ended September 30, 2009. Excluding the after-tax
impact of impairments, the net income decline was a result of lower revenue
partially offset by declines in cost of services and general and administrative
expense.
Revenue
Commissions
and fees.
Commissions and fees decreased $180.0 million, or 21.1%, to
$671.1 million in the nine months ended September 30, 2009 compared with
$851.1 million in the same period last year. Retail life, life brokerage and
life settlements revenue during the nine months ended September 30, 2009
continued to be negatively impacted by the broader economic environment. The
Company also experienced less severe declines in corporate and executive
benefits revenue, as some clients reduced benefits offered to employees due to
cost-cutting measures and rising unemployment, and financial planning and
investment advisory revenue, as fees for assets under management declined with
declining market values, over the nine-month period compared with the prior year
corresponding period. Although the capital markets have tentatively begun to
recover, the recovery may not continue. Additionally, fees on rising assets
under management have not yet been entirely reflected within the Company’s
results. The revenue decrease of $180.0 million was comprised of a
decrease of $186.3 million from existing firms offset by an increase in revenue
of $6.3 million from new acquisitions and included a $15.4 million decline in
revenue from firms disposed subsequent to the third quarter of
2008.
Cost
of services
Commissions
and fees.
Commissions and fees expense decreased $87.6 million, or 31.8%,
to $187.9 million in the nine months ended September 30, 2009 compared with
$275.5 million in the same period last year. As a percentage of revenue,
commissions and fees expense was 28.0% in the nine months ended September 30,
2009 compared with 32.4% in the same period last year. The sharp decline in
commissions and fees expense both in dollars and as a percentage of revenue was
largely attributable to the decline in revenue, particularly in retail life
products, life brokerage and life settlements, which typically have higher
commission payouts. Approximately $87.8 million of the decrease in commissions
and fees expense was from existing firms which was partially offset by a $0.2
million increase in commission and fees expense from new acquisitions. Included
within the overall decline in commissions and fees expense was a decline of $7.0
million in expenses for firms disposed subsequent to the third quarter of
2008.
Operating
expenses.
Operating expenses decreased $32.0 million, or 10.4%, to $274.6
million in the nine months ended September 30, 2009 compared with $306.6 million
in the same period last year. As a percentage of revenue, operating expenses
increased to 40.9% in the nine months ended September 30, 2009 from 36.0% during
the prior year period. The decline in operating expenses at existing firms was
largely a result of cost reduction initiatives across the firms. Personnel and
related costs continue to comprise more than 65.0% of firm operating expenses
and account for nearly 38.7% of the operating expense decline in the period over
period comparison largely as a result of headcount reductions and reductions in
commission payments among employee producers. The increase in operating expenses
as a percentage of revenue was largely a result of the sharp decline in revenue
concentrated in retail life, life brokerage and life settlements. Stock-based
compensation to firm employees and for firm activities included in operating
expenses as a component of cost of services during the nine months ended
September 30, 2009 was $2.7 million compared with $3.1 million in the nine
months ended September 30, 2008. Approximately $34.2 million of the decrease in
operating expenses was from existing firms which was partially offset by a $2.2
million increase in operating expenses from new acquisitions. Included within
the overall decline of operating expenses was a decline of $6.2 million for
firms disposed subsequent to the third quarter of 2008.
Management
fees.
Management fees decreased $31.4 million, or 26.5%, to $87.3 million
in the nine months ended September 30, 2009 compared with $118.7 million in the
nine months ended September 30, 2008. Management fees were 41.9% of gross margin
before management fees in the nine months ended September 30, 2009 compared with
44.1% in the same period last year. Included in management fees was a less than
$0.1 million reduction of the accrual for the ongoing incentive plan for the
nine months ended September 30, 2009 compared with an accrual of $5.4 million in
the nine months ended September 30, 2008. Incentive accruals will vary from
period to period based on the mix of firms participating in the program and the
volatility of their earnings. The decrease in management fees as a percentage of
gross margin before management fees reflects the lower incentive accrual, a
greater contribution to gross margin before management fees from an entity that
is not subject to management fees, NFPISI, as well as the higher ratio of base
to target earnings of firms acquired in recent years. In aggregate, the higher
ratio of base to target earnings of 54% in the nine months ended September 30,
2009 as compared with 52% as of September 30, 2008, was largely as a result
of firm restructures. In addition, management fees included $1.2 million of
stock-based compensation expense in the nine months ended September 30,
2009 compared with $1.4 million for the nine months ended September 30,
2008.
Gross
margin.
Gross margin decreased $29.0 million, or 19.3%, to $121.3 million
in the nine months ended September 30, 2009 compared with $150.3 million in
the same period last year. As a percentage of revenue, gross margin was 18.1% in
the nine months ended September 30, 2009 compared with 17.7% in the same
period last year. Despite the revenue decline, gross margin as a percentage of
revenue improved slightly as higher operating expenses as a percentage of
revenue were partially offset by lower commissions and fees expense, and lower
management fees expense as a percentage of revenue.
Corporate
and other expenses
General
and administrative.
General and administrative expense, which includes
stock-based compensation, decreased $11.0 million, or 22.5%, to $37.9 million in
the nine months ended September 30, 2009 compared with $48.9 million in the same
period last year. As a percentage of revenue, general and administrative expense
declined slightly to 5.6% for the period ended September 30, 2009 from 5.7%
during the nine-month period ended September 30, 2008. The decrease of $11.0
million was primarily due to a $4.8 million decrease in compensation and
benefits and a $2.0 million decrease in stock-based compensation expense. The
decrease was largely the result of headcount reductions and management’s
continued efforts to reduce expenses. Stock-based compensation included in
general and administrative expense was $3.6 million and $5.6 million in the nine
months ended September 30, 2009 and 2008, respectively.
Amortization.
Amortization expense decreased $1.6 million, or 5.5%, to $27.7 million in
the nine months ended September 30, 2009 compared with $29.3 million in the same
period last year. Amortization expense decreased as a result of a 35.5% decrease
in amortizing intangible assets resulting primarily from dispositions,
impairments, and the suspension of new acquisitions. As a percentage of revenue,
amortization was 4.1% in the nine months ended September 30, 2009 compared
with 3.5% in the nine months ended September 30, 2008.
Depreciation.
Depreciation expense increased $0.7 million, or 7.2%, to $10.4 million in
the nine months ended September 30, 2009 compared with $9.7 million in the same
period last year. The increase in depreciation resulted from an increase in
capital expenditures largely at the corporate office. As a percentage of
revenue, depreciation expense was 1.5% in the nine months ended
September 30, 2009 compared with 1.1% in the same period last year.
Depreciation expense attributable to firm operations totaled $5.9 million for
both the nine months ended September 30, 2009 and for the nine months ended
September 30, 2008.
Impairment
of goodwill and intangible assets.
Impairment of goodwill and intangible
assets increased $602.0 million to $612.2 million in the nine months ended
September 30, 2009 compared with $10.2 million in the prior year period. 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 subsidiaries.
During the nine months ended September 30, 2009,
the Company recognized a net gain from the disposition of fifteen subsidiaries
and the sale of certain assets of four more subsidiaries totaling $1.8 million.
During the nine months ended September 30, 2008, the Company recognized a gain
from the sale of two subsidiaries and certain assets of four 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 $9.2 million to
$13.4 million in the nine months ended September 30, 2009 compared with
$4.2 million in the nine months ended September 30, 2008. The increase of
$9.2 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, the increase of
approximately $1.3 million from the sublet of the Company’s former headquarters,
offset by a $0.6 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 $0.4 million to
$15.7 million in the nine months ended September 30, 2009 compared with
$16.1 million in the nine months ended September 30, 2008. Interest and
other expense remained largely unchanged due to the impact of the increase in
interest expense resulting from the accretion of the non-cash interest component
of the convertible notes and higher fees associated with the Company’s credit
facility netting against the decrease in interest expense on NFP’s credit
facility due to the lower interest rate environment and lower average balance
for the nine months ended September 30, 2009 as compared with the nine months
ended September 30, 2008.
Income
tax expense
Income
tax (benefit) expense.
Income tax (benefit) was $(72.2) million in the
nine months ended September 30, 2009 compared with income tax expense of $27.1
million in the same period during the prior year. The effective tax rate in the
nine months ended September 30, 2009 was 12.7%, which includes the discrete
treatment of adjustments for interest and penalties totaling $0.9 million and
the discrete treatment of tax benefits relating to impairments totaling ($88.1)
million. This compares with an effective tax rate of 56.4% during nine
months ended September 30, 2008 which includes adjustments for interest and
penalties totaling $0.9 million and taxes relating to disposal of subsidiaries
totaling $5.5 million. The estimated annual effective tax rate excluding
discrete items for the nine months ended September 30, 2009 and 2008 was 39.3%
and 49.9% respectively. The estimated annual effective tax rate was lower in the
nine months ended September 30, 2009 largely as a result of non-taxable
insurance proceeds received during the second quarter and tax losses from the
disposition of subsidiaries. The estimated effective tax rate may be
affected by future impairments, restructurings, state tax changes and factors
which may be recognized as discrete items in the quarters in which they arise
and, as a result, may impact income tax expense both in terms of absolute
dollars and as a percentage of income before income taxes.
Liquidity
and Capital Resources
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 at the beginning of the year.
The
increase in cash usage during the first quarter of the year generally requires
increased borrowings under NFP’s credit facility, but this has not occurred for
the year beginning January 1, 2009. As the year progresses, cash flow typically
improves as earnings increase and acquisition activities moderate. With this
increase in cash flow NFP generally reduces the borrowings under its credit
facility. Because the Company suspended acquisition activity in the latter
portion of 2008, the historical pattern of an increase in cash usage during the
first half of the year changed. During the nine months ended September 30, 2009
the Company has utilized cash flow from operations to reduce indebtedness,
paying down $73.0 million of its outstanding credit facility
balance.
NFP’s
credit facility is structured as a revolving credit facility and matures on
August 22, 2011. NFP may elect to pay down its outstanding balance at any
time before August 22, 2011 but repayment is not required before that date.
NFP’s classification of this obligation as a current liability has been driven
by NFP’s practice of drawing against the credit line during the year and
subsequently repaying significant amounts of the borrowing. The debt is current
in the sense of NFP’s practice of frequent draws and repayments; it is not
current in that repayment is not required in the next twelve
months.
During
the second quarter of 2009, NFP executed the third amendment to its credit
facility (the “Third Amendment”). As of September 30, 2009, the Company was in
compliance with all of its debt covenants. However, if the Company’s earnings
deteriorate, it is possible that NFP would fail to comply with the terms of its
credit facility in the future, such as the consolidated leverage ratio covenant,
and therefore be in default under the credit facility. See “—Borrowings—Credit
Facility” below. Upon the occurrence of such event of default, the majority of
lenders under the credit facility could cause amounts currently outstanding to
be declared immediately due and payable. Such an acceleration could trigger
“cross acceleration provisions” under NFP’s indenture governing the notes; see
“—Borrowings—Convertible Senior Notes” below.
A summary
of the changes in cash flow data is provided as follows:
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Net
cash flows provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
82,994
|
|
|
$
|
24,337
|
|
Investing
activities
|
|
|
4,448
|
|
|
|
(71,581
|
)
|
Financing
activities
|
|
|
(75,979
|
)
|
|
|
506
|
|
Net
decrease in cash and cash equivalents
|
|
|
11,463
|
|
|
|
(46,738
|
)
|
Cash
and cash equivalents – beginning of period
|
|
|
48,621
|
|
|
|
114,182
|
|
Cash
and cash equivalents – end of period
|
|
$
|
60,084
|
|
|
$
|
67,444
|
|
NFP has
performed additional assessments to determine the impact of recent market
developments, including a review of access to liquidity in the capital and
credit markets. If the difficult economic conditions continue, leading to longer
term disruptions in the capital and credit markets, the Company’s access to
liquidity needed for its business could be adversely impacted. The inability to
obtain adequate financing from debt or capital sources could force the Company
to forgo certain opportunities. Any disruption in NFP’s access to capital could
require the Company to take additional measures to conserve cash until
alternative credit arrangements or other funding for business needs can be
arranged. Measures the Company may take or has already taken include deferring
capital expenditures, reducing or eliminating future share repurchases, dividend
payments, acquisitions or other discretionary uses of cash. While acquisitions
remain a component of the Company’s business strategy over the long term, NFP
suspended acquisition activity (with the exception of certain sub-acquisitions)
in the latter part of 2008 in order to conserve cash. NFP will continue to
reassess the market and economic environment.
The
tightening of credit in the financial markets also adversely affects the ability
of customers to obtain financing for the products and services the Company
distributes, which could result in a decrease in revenue generated, reducing the
Company’s liquidity.
Cash and
cash equivalents at September 30, 2009 increased $11.5 million from
$48.6 million at December 31, 2008 to $60.1 million at
September 30, 2009. Significant sources of cash flow in 2009 came from cash
received from existing receivables at year end totaling approximately $39.0
million, and proceeds from the sale of businesses totaling approximately $11.0
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 at September 30,
2009 were for earned management fees to principals and/or certain entities they
own of $22.1 million, repayments of the Company’s credit facility of $73.0
million, and payments associated with normal operations.
Operating
Activities
During
the nine months ended September 30, 2009, cash provided by operating
activities was approximately $83.0 million compared with the prior year
nine-month period of $24.3 million. The improvement in operating cash flow in
the nine months ended September 30, 2009 as compared with the prior year
corresponding period was largely due to lower earned management fees to
principals in 2009 for their 2008 performance. During the nine months ended
September 30, 2009, cash was provided primarily from net income adjusted
for non-cash charges, which totaled $82.0 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.
Working capital was positively impacted by the net effect of collecting
receivables outstanding at the beginning of the period and of new receivables
established at the end of the period which totaled approximately $39.0 million.
Cash used during the nine months ended September 30, 2009 was largely the result
of a reduction in amounts due to principals and/or certain entities they own of
$22.1 million, accrued liabilities of $8.5 million and accounts payable of $7.1
million. Included within the decrease in accrued liabilities was a decrease in
the ongoing incentive plan liability balance of approximately $3.0 million.
During the
nine months ended September 30, 2008, cash came primarily from net income
adjusted for non-cash charges, which totaled $80.3 million, plus the net effect
of collecting receivables outstanding at the beginning of the period and new
receivables established at the end of the period which totaled $44.5
million. Cash used during the nine months of 2008 was largely the
result of a reduction in amounts due to principals and/or certain entities they
own of $33.2 million, accrued liabilities of $22.3 million and accounts payable
of $12.4 million. Included and reducing cash used in operating
activities during the nine months ended September 30, 2008 was $14.4 million
paid in connection with the acquisition of a group benefits intermediary and
subsequent merger with an existing wholly-owned subsidiary of the Company which
has been treated as a prepaid management fee. A portion of this
payment has been amortized with the remaining balance included in Other current
assets and Other non-current assets.
Investing
Activities
During
the nine months ended September 30, 2009, cash provided by investing activities
was $4.4 million, which came principally from $11.0 million in proceeds received
from the disposal of subsidiaries, offset by $4.9 million paid for purchases of
property and equipment and approximately $1.6 million paid as payments for
acquired firms, net of cash acquired and contingent consideration. For the nine
months ended September 30, 2009, the Company paid $2.8 million in cash in
connection with contingent consideration. During the nine months ended of 2008
the Company used $63.8 million for payments for acquired firms and contingent
consideration. Included within the $63.8 million for acquired firms
and continent consideration was $14.9 million NFP paid in cash in connection
with contingent consideration. During the nine months ended September 30, 2008,
capital expenditures included approximately $20.2 million due to construction
and other costs related to the relocation of the corporate headquarters and the
concurrent consolidation of space with seven firms. Offsetting these amounts
were proceeds of $22.5 million received from the disposal of
subsidiaries.
Financing
Activities
During
the nine months ended September 30, 2009, cash used in financing activities was
approximately $76.0 million, while cash provided by financing activities was
$0.5 million during the prior year period. During the nine months ended
September 30, 2009, NFP did not borrow any amounts under its credit facility but
repaid $73.0 million of its outstanding credit facility balance. During the nine
months ended September 30, 2008, net borrowings under the Company’s line of
credit were $47.0 million. The Company uses its credit facility primarily to
fund general corporate purposes. Cash dividends paid in the nine months ended
September 30, 2008 were $24.7 million. During the nine months ended
September 30, 2008, pursuant to NFP’s share repurchase authorization, NFP
repurchased 994,500 shares of NFP common stock for $24.6 million.
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 September 30, 2009, the Company had cash, cash
equivalents and securities purchased under resale agreements in premium trust
accounts of $75.8 million, an increase of $0.7 million from the balance of $75.1
million from December 31, 2008. Changes in these accounts are the result of
timing of payments collected from insureds on behalf of insurance
carriers.
Borrowings
Credit
Facility
NFP’s
credit facility among NFP, the financial institutions party thereto and Bank of
America, N.A., as administrative agent, is structured as a revolving credit
facility and matures on August 22, 2011. NFP has previously amended its
credit facility as described in the 2008 10-K and as updated in the 2008 8-K. On
May 6, 2009, NFP executed the Third Amendment. Pursuant to the Third Amendment,
the definition of EBITDA has been amended to expressly provide that the non-cash
impairment of goodwill and intangible assets associated with the Company’s
evaluation of intangible assets for the first quarter of 2009 in accordance with
GAAP will be disregarded in the calculation of EBITDA.
NFP’s
access to funds under its credit facility is dependent on the ability of the
banks party to the credit facility to meet their funding commitments. Those
banks may not be able to meet their funding commitments to the Company if they
experience shortages of capital and liquidity or if they experience excessive
volumes of borrowing requests within a short period of time. In addition,
consolidation of financial institutions could lead to an increased concentration
of credit risk.
NFP’s
credit facility is structured as a revolving credit facility and matures on
August 22, 2011. NFP may elect to pay down its outstanding balance at any
time before August 22, 2011. NFP’s obligations under the credit facility
are secured by all of its and its subsidiaries’ assets. Up to $35.0 million of
the credit facility is available for the issuance of letters of credit and the
sublimit for swingline loans is the lesser of $10.0 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 covenants in the credit
facility concern the consolidated leverage ratio, which states that NFP may not
have a ratio of Consolidated Total Debt to EBITDA, as both terms are defined in
the credit facility, greater than 3.0 to 1.0 on the last day of the rolling four
quarter period ended September 30, 2009, and the restriction on certain
notes outstanding to affiliates which may not exceed $30.0 million. As of
September 30, 2009, the consolidated leverage ratio was 2.2 to 1.0.
As of
September 30, 2009, the Company was in compliance with all of its debt
covenants. However, if the Company’s earnings deteriorate, it is possible that
NFP will fail to comply with the terms of its credit facility in the future,
such as the consolidated leverage ratio covenant, and therefore be in default
under the credit facility. Upon the occurrence of such event of default, the
majority of lenders under the credit facility could cause amounts currently
outstanding to be declared immediately due and payable. Such an acceleration
could trigger “cross acceleration provisions” under NFP’s indenture governing
the notes; see “—Convertible Senior Notes” below.
As of
September 30, 2009, the year-to-date weighted average interest rate for NFP’s
credit facility was 3.92%. The combined weighted average of its credit facility
in the prior year period was 4.53%.
NFP had a
balance of $75.0 million outstanding under its credit facility as of September
30, 2009, below the maximum allowable balance of $225.0 million. At
December 31, 2008, outstanding borrowings were $148.0 million.
Convertible
Senior Notes
In
January 2007, NFP issued $230.0 million (including over-allotment) aggregate
principal amount of 0.75% convertible senior notes due February 1, 2012
(the “notes”). The notes are senior unsecured obligations and rank equally with
NFP’s existing or future senior debt and senior to any subordinated debt. The
notes will be structurally subordinated to all existing or future liabilities of
NFP’s subsidiaries and will be effectively subordinated to existing or future
secured indebtedness to the extent of the value of the collateral. The notes
were used to pay the net cost of the convertible note hedge and warrant
transactions, repurchase 2.3 million shares of NFP’s common stock from
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
(collectively, “Apollo”) and to repay a portion of outstanding amounts of
principal and interest under NFP’s credit facility.
Holders
may convert their notes at their option on any day prior to the close of
business on the scheduled trading day immediately preceding December 1,
2011 only under the following circumstances: (1) during the five
business-day period after any five consecutive trading-day period (the
“measurement period”) in which the price per note for each day of that
measurement period was less than 98% of the product of the last reported sale
price of NFP’s common stock and the conversion rate on each such day;
(2) during any calendar quarter (and only during such quarter) after the
calendar quarter ended March 31, 2007, if the last reported sale price of
NFP’s common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding
calendar quarter exceeds 130% of the applicable conversion price in effect on
the last trading day of the immediately preceding calendar quarter; or
(3) upon the occurrence of specified corporate events. The notes are
convertible, regardless of the foregoing circumstances, at any time from, and
including, December 1, 2011 through the second scheduled trading day
immediately preceding the maturity date. Default under the credit facility
resulting in its acceleration would, subject to a 30-day grace period, trigger a
default under the supplemental indenture governing the notes, in which case the
trustee under the notes or holders of not less than 25% in principal amount of
the outstanding notes could declare the principal of and accrued and unpaid
interest on all such notes to be due and payable immediately.
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 is subject
to adjustment in some events but is not adjusted for accrued interest. As of
September 30, 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. 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.
Concurrent with the
issuance of the notes, NFP entered into a convertible note hedge and warrant
transactions with an affiliate of one of the underwriters for the notes. A
default under NFP’s credit facility would trigger a default under each of the
convertible note hedge and warrant transactions, in which case the counterparty
could designate early termination under either, or both, of these instruments.
The transactions are expected to reduce the potential dilution to NFP’s common
stock upon future conversions of the notes. Under the convertible note hedge NFP
purchased 230,000 call options for an aggregate premium of $55.9 million. Each
call option entitles NFP to repurchase an equivalent number of shares issued
upon conversion of the notes at the same strike price (initially $55.62 per
share), generally subject to the same adjustments. The call options expire on
the maturity date of the notes. NFP also sold warrants for an aggregate premium
of $34.0 million. The warrants expire ratably over a period of 40 scheduled
trading days between May 1, 2012 and September 26, 2012, on which
dates, if not previously exercised, the warrants will be treated as
automatically exercised if they are in the money. The warrants provide for
net-share settlement. The net cost of the convertible note hedge and warrants to
the Company is $21.9 million. Debt issuance costs associated with the notes of
approximately $7.6 million are recorded in Other current assets and Other
non-current assets and will be amortized over the term of the
notes.
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’s 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 secondary offering, on an aggregate basis, as the other
selling stockholders received for the shares they sold in the
offering.
Adoption
of new accounting guidance
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 6—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. The new guidance does not have any impact on cash payments
or obligations due under the terms of the notes. As required, effective
January 1, 2009 NFP’s comparative financial statements of prior years have
been adjusted to apply its provisions retrospectively. For more detail on the
effects of the change in accounting principle see “Note 2—Summary of Significant
Accounting Policies—Recently adopted accounting standards.”
As of
September 30, 2009 the net carrying amount of the notes was $201.8 million and
the unamortized discount of the notes within additional paid-in capital was
$28.2 million. As of December 31, 2008 the net carrying amount of the notes
was $193.5 million and the unamortized discount was $36.5 million. As of
September 30, 2009 and December 31, 2008 the principal amount of the notes
was $230.0 million. The discount on the notes is being amortized over the life
of the notes and as of September 30, 2009 the amortization period has 28 months
remaining. The effective interest rate on the notes is 6.62%. For the nine
months ended September 30, 2009 the amount of interest expense incurred by NFP
relating to the notes for cash interest paid and for the amortization of the
discount is approximately $9.6 million.
As of
September 30, 2009 the instrument’s converted value did not exceed its principal
amount of $230.0 million.
Off-Balance
Sheet Arrangements
The
Company had no material off-balance sheet arrangements during the nine months
ended September 30, 2009.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Through
the Company’s broker-dealer subsidiaries, the Company has market risk on buy and
sell transactions effected by its firms’ customers. The Company is contingently
liable to its clearing brokers for margin requirements under customer margin
securities transactions, the failure of delivery of securities sold or payment
for securities purchased by a customer. If customers do not fulfill their
obligations, a gain or loss could be suffered equal to the difference between a
customer’s commitment and the market value of the underlying securities. The
risk of default depends on the creditworthiness of the customers. The Company
assesses the risk of default for each customer accepted to minimize its credit
risk.
The
Company has market risk on the fees its firms earn that are based on the market
value of assets under management or the value of assets held in certain mutual
fund accounts and variable insurance policies for which ongoing fees or
commissions are paid. Certain of the performance-based fees of the Company’s
firms are impacted by fluctuations in the market performance of the assets
managed according to such arrangements.
NFP has a
credit facility and cash, cash equivalents and securities purchased under resale
agreements in premium trust accounts. Interest income and expense on the
preceding items are subject to short-term interest rate risk. Based on the
weighted average borrowings under NFP’s credit facility during the nine months
ended September 30, 2009 and 2008, an increase or decrease of 100 basis
points change in short-term interest rates would have affected the Company’s
income before income taxes by approximately $1.3 million for the nine months
ended September 30, 2009 and $1.8 million for the nine months ended September
30, 2008. Based on the weighted average amount of cash, cash equivalents and
securities purchased under resale agreements in premium trust accounts during
the nine months ended September 30, 2009 and 2008, an increase or decrease of
100 basis points change in short-term interest rates would have affected the
Company’s income before income taxes by approximately $1.3 million and $1.6
million, respectively. As further discussed in “Liquidity and Capital
Resources,” broad economic and credit market conditions may impact the Company’s
access to capital and the availability or attractiveness of certain products
from which the Company earns revenue.
The
Company has not entered into any derivative financial instrument transactions to
manage or reduce market risk or for speculative purposes, other than a
convertible note hedge and warrant transactions entered into concurrently with
NFP’s convertible senior notes offering. Such transactions were entered into to
lessen or eliminate the potential dilutive effect of the conversion feature of
the convertible senior notes on NFP’s common stock.
The
Company is further exposed to credit risk for commissions received from clearing
brokers and insurance companies. This credit risk is generally limited to the
amount of commissions receivable. Given current market conditions, any potential
defaults by, or even rumors about, financial institutions such as insurers could
result in losses by these institutions. To the extent that questions about an
insurance carrier’s perceived stability and financial strength ratings
contribute to such insurer’s failure in the market, the Company could be exposed
to losses resulting from such insurer’s inability to pay commissions or fees
owed.
There
have been disruptions in the financial markets during the past year and many
financial institutions have reduced or ceased to provide funding to borrowers.
The availability of credit, confidence in the financial sector, and volatility
in financial markets has been adversely affected. Further, there can be no
assurance that future changes in interest rates, creditworthiness or solvency of
counterparties, liquidity available in the market, the dilutive impact of any
capital-raising efforts to finance operations or business strategy or other
general market conditions will not have a material adverse impact on the
Company’s results of operations, liquidity or financial position.
Item 4.
Controls and Procedures
As of the
end of the period covered by this report, NFP’s management carried out an
evaluation, under the supervision and with the participation of NFP’s Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of NFP’s disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934). Based on this evaluation, the CEO and CFO have concluded that, as of the
end of the period covered by this report, the Company’s disclosure controls and
procedures were effective. There have been no changes in internal control over
financial reporting during the quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, such
internal control over financial reporting.
Part II
– Other Information
Item 1.
Legal Proceedings
In the
ordinary course of business, the Company is involved in lawsuits and other
claims. Management considers these lawsuits and claims to be without merit and
the Company intends to defend them vigorously. In addition, the sellers of firms
that the Company acquires typically indemnify the Company for loss or liability
resulting from acts or omissions occurring prior to the acquisition, whether or
not the sellers were aware of these acts or omissions. Several of the existing
lawsuits and claims have triggered these indemnity obligations.
In
addition to the foregoing lawsuits and claims, during 2004, several of the
Company’s firms received subpoenas and other informational requests from
governmental authorities, including the New York Attorney General’s Office,
seeking information regarding compensation arrangements, any evidence of bid
rigging and related matters. The Company has cooperated and will continue to
cooperate fully with all governmental agencies.
In March
2006, NFP received a subpoena from the New York Attorney General’s Office
seeking information regarding life settlement transactions. One of NFP’s
subsidiaries received a subpoena seeking the same information. The Company is
cooperating fully with the Attorney General’s investigation. The investigation,
however, is ongoing and the Company is unable to predict the investigation’s
outcome.
Management continues to
believe that the resolution of these lawsuits or claims will not have a material
adverse impact on the Company’s consolidated financial position.
The
Company cannot predict at this time the effect that any current or future
regulatory activity, investigations or litigation will have on its business.
Given the current regulatory environment and the number of its subsidiaries
operating in local markets throughout the country, it is possible that the
Company will become subject to further governmental inquiries and subpoenas and
have lawsuits filed against it. In addition, the stock market continues to
experience significant price and volume fluctuations. When the market price of a
company’s stock drops significantly, shareholders may institute securities class
action litigation against that company. Any litigation against NFP could cause
it to incur substantial costs, divert the time and attention of management and
other resources, or otherwise harm the Company’s business. The Company’s
ultimate liability, if any, in connection with these matters and any possible
future such matters is uncertain and subject to contingencies that are not yet
known.
Item
1A. Risk Factors
Recent
initiatives to restructure principal incentive plans may not have their intended
effect.
NFP recently instituted
new principal incentive plans with cash and equity
components. The financial impact of the new principal incentive
plans on the Company is uncertain
and in some cases could
lead to a decline in gross margin. Further, the new principal incentive
plans may not be accurately calibrated to promote growth. In particular
scenarios, NFP’s portion of the earnings generated by a particular firm or firms
could be higher without the implementation of the new principal incentive plans.
The new
principal incentive plans may not be effective in motivating principals.
If NFP does not succeed in motivating the Company’s principals, the Company may
be unable to generate positive financial results. Any volatility in the
market price of NFP’s common stock could negatively impact the effectiveness of
the equity component of the new principal incentive plans.
Changes
in the structure of U.S. health insurance may have a material adverse effect on
the Company.
Significant reforms to the
manner in which health insurance is distributed in the United States have
recently been proposed at the federal and state level. The Company cannot
predict what healthcare initiatives, if any, will be implemented, or the effect
any such legislation will have on the Company, particularly on the Company’s
benefits firms. Such reforms could increase competition, reduce the need
for health insurance brokerage services or reduce the demand for health
insurance administration, any of which could harm the Company’s business,
operating results and financial condition. The adoption of state or federal laws
that promote a government-sponsored component could reduce or eliminate the
number of businesses seeking to provide health insurance, which could reduce the
demand for the Company’s services.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Recent Sales of Unregistered Securities
Since
July 1, 2009 and through September 30, 2009, NFP has not issued any
unregistered equity securities.
Since
October 1, 2009 and through November 4, 2009, NFP has issued 105,616 shares
of NFP common stock with a value of approximately $0.8 million relating to
contingent consideration.
The
issuances of common stock described above were made in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”), and Regulation D promulgated
thereunder, for transactions by an issuer not involving a public offering. The
Company did not offer or sell the securities by any form of general solicitation
or general advertising, informed each purchaser that the securities had not been
registered under the Securities Act and were subject to restrictions on
transfer, and made offers only to “accredited investors” within the meaning of
Rule 501 of Regulation D and a limited number of sophisticated investors, each
of whom the Company believed had the knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
securities and had access to the kind of information registration would
provide.
(c)
Issuer Purchases of Equity Securities
Period
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per Share
|
|
|
Total Number of
Shares Purchased
as Part
of Publicly
Announced
Plans
or
Programs
|
|
|
Maximum number
(or Approximate Dollar
Value)
of Shares
that
May
Yet Be Purchased Under
the Plans or Programs
|
|
July
1, 2009 – July 31, 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
August
1, 2009 – August 31, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
September
1, 2009 – September 30, 2009
|
|
|
20,837
|
(a)
|
|
|
8.33
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
20,837
|
|
|
$
|
8.33
|
|
|
|
—
|
|
|
$
|
—
|
|
(a) 3,954
were reacquired relating to the satisfaction of a promissory note. There was no
gain or loss associated with this transaction. 16,883 shares were reacquired
relating to the disposal of a firm. The Company recorded a gain of approximately
$0.2 million related to this disposition.
Item
5. Other
Information.
Amendments
to Articles of Incorporation or Bylaws.
On
November 2, 2009, the Board of Directors (the “Board”) of NFP approved
amendments to NFP’s Amended and Restated By-laws (as further amended and
restated, the “By-Laws”), effective as of that date.
The
By-Laws were amended to provide that only the Board may fill vacancies on the
Board arising through death, resignation, removal or an increase in the size of
the Board. Previously, stockholders were also authorized to fill
vacancies on the Board. The By-Laws were also amended to change the
voting standard required for stockholders to approve amendments to the By-Laws
from a majority of votes cast to a majority of outstanding shares of
NFP.
In
addition, the By-Laws were amended to adopt a plurality voting standard for
contested elections of directors, or elections in which the number of nominees
exceeds the number of directors to be elected. In uncontested
elections, the voting standard will continue to be a majority of votes
cast. Consistent with the standards set forth in NFP’s Corporate
Governance Guidelines, the By-Laws were amended to require an incumbent director
who fails to receive the requisite amount of votes cast “for” his or her
election to automatically tender his or her resignation from the Board to the
Nominating and Corporate Governance Committee of the Board contingent on
acceptance of such resignation by the Board.
Further,
the By-Laws were amended to revise the procedures that a stockholder must comply
with in order to properly present business at an annual meeting of stockholders
or nominate persons for election to the Board. Among other items,
such stockholder must provide certain disclosures regarding certain interests in
NFP stock held by such stockholder or any beneficial owner, affiliate, associate
or director nominee related to such stockholder, including, without limitation,
the extent to which any derivative instrument, swap, option, warrant, short
interest, hedge or profit interest or other similar transaction has been entered
into by or on behalf of such person (the “Disclosable Interests”). In
addition, in order to properly present business at an annual meeting of
stockholders, a stockholder must provide notice to NFP of such business not less
than 120 days nor more than 150 days prior to the anniversary of the immediately
preceding annual meeting of stockholders; previously, stockholders were required
to deliver notice of such business not less than 90 days nor more than 120 days
prior to the anniversary of the immediately preceding annual
meeting. In order to properly nominate a person for election to the
Board at an annual meeting of stockholders, a stockholder must provide notice to
NFP of such nomination not less than 120 days nor more than 150 days prior to
the anniversary of the immediately preceding annual meeting of stockholders;
previously, stockholders were required to deliver such notice not less than 90
days nor more than 120 days prior to the anniversary of the immediately
preceding annual meeting.
In
connection with the foregoing amendments, notice of a proposal intended to be
presented by a stockholder at NFP’s 2010 annual meeting of stockholders (the
“2010 Annual Meeting”) (as opposed to a proposal to be included in NFP’s proxy
materials) and notice of director nominations by stockholders for the 2010
Annual Meeting must be delivered to NFP no earlier than January 4, 2010 and no
later than February 3, 2010. In order to have a stockholder proposal
considered for inclusion in NFP’s proxy materials, the deadline for such
proposal to be delivered to NFP remains December 22, 2009. Proposals
submitted outside these dates are untimely and may not be presented in any
manner at the 2010 Annual Meeting. Such stockholder proposals and
director nominations must also comply with the applicable requirements of the
By-Laws.
The
By-Laws were also amended to clarify that no business may be properly brought
before an annual or special meeting of stockholders except in accordance with
the procedures set forth in the By-Laws and stockholders are restricted from
bringing business before a special meeting of stockholders unless the stated
business of such special meeting includes the election of directors, in which
case, a stockholder may nominate a person for election to the Board at such
meeting in accordance with the procedures set forth in the By-Laws.
Additionally, the By-Laws
were amended to revise the procedures that stockholders must comply with in
order act by written consent. A stockholder must submit a written
request for the Board to fix a record date for stockholders to act by written
consent and such stockholder must also disclose in such request, among other
items, any Disclosable Interests. The By-Laws were also amended to
provide that the Secretary of NFP, or another officer designated by the Board,
may review consents and certify results; previously, an independent inspector of
elections reviewed consents and certified results.
Further,
the By-Laws were amended to require that NFP indemnify directors and officers of
NFP to the fullest extent authorized by law; previously, such indemnification
was available but not required.
Other
provisions of the By-Laws were amended to clarify the duties of certain officers
of NFP, including, without limitation, to limit the NFP officers authorized to
call special meetings of the Board or stockholders.
The
foregoing description of the amendments to the By-Laws is qualified in its
entirety by reference to the full text of the By-Laws, a copy of which is filed
as Exhibit 3.3 to this Quarterly Report on Form 10-Q and incorporated herein by
reference.
EXHIBIT
INDEX
Item 6.
Exhibits
Exhibit
No.
|
|
Description
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of National Financial Partners
Corp. (incorporated by reference to Exhibit 3.1 to NFP’s Registration
Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on
September 15, 2003)
|
|
|
|
3.2
|
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of
National Financial Partners Corp. (incorporated by reference to Exhibit
3.2 to NFP’s Registration Statement on Form S-1 (Amendment No. 4)
(No. 333-105104) filed on September 15, 2003)
|
|
|
|
3.2a
|
|
Certificate
of Amendment of Certificate of Incorporation of National Financial
Partners Corp. (incorporated by reference to Exhibit 3.2a to NFP’s
Quarterly Report on Form 10-Q for the period ended June 30, 2009
filed on August 5, 2009)
|
|
|
|
3.3*
|
|
National
Financial Partners Corp. Amended and Restated By-Laws
|
|
|
|
4.1
|
|
Specimen
common stock certificate (incorporated by reference to Exhibit 4.1 of
NFP’s Registration Statement on Form S-1 (Amendment No. 4) (No.
333-105104) filed on September 15, 2003)
|
|
|
|
4.2
|
|
Form
of Second Amended and Restated Stockholders Agreement, dated as of
February 13, 2004, among National Financial Partners Corp., Apollo
Investment Fund IV, LP and each of the stockholders party thereto
(incorporated by reference to Exhibit 4.2 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2003 filed on March 12,
2004)
|
|
|
|
4.3
|
|
Form
of Lock-up Agreement (incorporated by reference to Exhibit 4.3 to NFP’s
Annual Report on Form 10-K for the year ended December 31, 2003 filed
on February 22, 2007)
|
|
|
|
4.4a
|
|
Indenture,
dated as of January 16, 2007, between National Financial Partners Corp.
and Wells Fargo Bank, National Association, as trustee (incorporated by
reference to Exhibit 4.1 to NFP’s Current Report on Form 8-K filed on
January 22, 2007)
|
|
|
|
4.4b
|
|
First
Supplemental Indenture, dated as of January 22, 2007, between National
Financial Partners Corp. and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.1 to NFP’s Current
Report on Form 8-K filed on January 25, 2007)
|
|
|
|
4.5
|
|
Confirmation
regarding convertible bond hedge transaction, dated January 17, 2007,
between National Financial Partners Corp. and Goldman Sachs Financial
Markets, L.P. (incorporated by reference to Exhibit 10.1 to NFP’s
Quarterly Report on Form 10-Q for the period ended March 31, 2007 filed on
May 4, 2007)
|
|
|
|
4.6a
|
|
Confirmation
regarding issuer warrant transaction, dated January 17, 2007, between
National Financial Partners Corp. and Goldman Sachs Financial Markets,
L.P. (incorporated by reference to Exhibit 10.2a to NFP’s Quarterly Report
on Form 10-Q for the period ended March 31, 2007 filed on May 4,
2007)
|
|
|
|
4.6b
|
|
Amendment
to the Confirmation regarding issuer warrant transaction, dated January
18, 2007, between National Financial Partners Corp. and Goldman Sachs
Financial Markets, L.P. (incorporated by reference to Exhibit 10.2b to
NFP’s Quarterly Report on Form 10-Q for the period ended March 31, 2007
filed on May 4, 2007)
|
|
|
|
10.1a
|
|
Credit
Agreement, dated as of August 22, 2006, among National Financial
Partners Corp., the financial institutions party thereto and Bank of
America, N.A., as administrative agent (incorporated by reference to
Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on August 22,
2006)
|
|
|
|
10.1b
|
|
Amendment
to Credit Agreement, dated as of January 16, 2007, among National
Financial Partners Corp., the financial institutions party thereto and
Bank of America, N.A. as administrative agent (incorporated by reference
to Exhibit 10.2 to NFP’s Current Report on Form 8-K filed on January 19,
2007)
|
|
|
|
10.1c
|
|
Second
Amendment to Credit Agreement, dated as of December 9, 2008, among
National Financial Partners Corp., the financial institutions party
thereto and Bank of America, N.A., as administrative agent (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
December 10, 2008)
|
|
|
|
10.1d
|
|
Third
Amendment to Credit Agreement, dated as of May 6, 2009, among National
Financial Partners Corp., the financial institutions party thereto and
Bank of America, N.A., as administrative agent (incorporated by reference
to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on May 11,
2009)
|
|
|
|
10.2a
|
|
Employment
Agreement, amended and restated as of February 15, 2005, between
National Financial Partners Corp. and Jessica M. Bibliowicz (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
|
|
|
|
10.2b
|
|
Notice
of Grant of Restricted Stock Units to Jessica M. Bibliowicz (incorporated
by reference to Exhibit 10.2 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
|
Exhibit No.
|
|
Description
|
|
|
|
10.2c
|
|
Restricted
Stock Unit Agreement, dated as of February 16, 2005, between National
Financial Partners Corp. and Jessica M. Bibliowicz (incorporated by
reference to Exhibit 10.3 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
|
|
|
|
10.3
|
|
Letter
Agreement, dated August 4, 2008, between National Financial Partners
Corp. and Donna J. Blank (incorporated by reference to Exhibit 10.1 to
NFP’s Quarterly Report on Form 10-Q for the period ended June 30,
2008 filed on August 7, 2008)
|
|
|
|
10.4
|
|
Lease,
dated August 19, 1993, between Prentiss Properties Acquisition Partners,
L.P. and NFP Insurance Services, Inc., as amended through January 1, 2002
(incorporated by reference to Exhibit 10.7 to NFP’s Registration Statement
on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15,
2003)
|
|
|
|
10.5
|
|
Amendment
and Waiver, dated as of November 16, 2006, by National Financial Partners
Corp. and Jessica M. Bibliowicz (incorporated by reference to Exhibit 10.1
to NFP’s Current Report on Form 8-K filed on November 20,
2006)
|
|
|
|
10.5a
|
|
Lease,
dated as of September 4, 2007, between Broadway 340 Madison Operator LLC
and National Financial Partners Corp. (incorporated by reference to
Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on September 5,
2007)
|
|
|
|
10.5b
|
|
Sublease,
dated August 31, 2007, between National Financial Partners Corp. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit
10.2 to NFP’s Current Report on Form 8-K filed on September 5,
2007)
|
|
|
|
10.5c
|
|
First
Amendment of Lease, dated as of December 11, 2007, between Broadway 340
Madison Operator LLC and National Financial Partners Corp. (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
December 13, 2007)
|
|
|
|
10.6
|
|
Agreement
of Lease, dated as of September 9, 2004, and letter agreement thereto,
dated as of September 28, 2004, by and among The Equitable Life Assurance
Society of the United States and Elas Securities Acquisition Corp. and
National Financial Partners Corp. (incorporated by reference to Exhibit
10.9 to NFP’s Annual Report on Form 10-K for the year ended December 31,
2004 filed on March 16, 2005)
|
|
|
|
10.7
|
|
National
Financial Partners Corp. Amended and Restated 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.5 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
|
|
10.8
|
|
National
Financial Partners Corp. Amended and Restated 2002 Stock Incentive Plan
for Principals and Managers (incorporated by reference to Exhibit 10.6 to
NFP’s Annual Report on Form 10-K for the year ended December 31, 2004
filed on March 16, 2005)
|
|
|
|
10.9
|
|
National
Financial Partners Corp. Amended and Restated 2000 Stock Incentive Plan
(incorporated by reference to Exhibit 10.13 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
|
|
10.10
|
|
National
Financial Partners Corp. Amended and Restated 2000 Stock Incentive Plan
for Principals and Managers (incorporated by reference to Exhibit 10.14 to
NFP’s Annual Report on Form 10-K for the year ended December 31, 2004
filed on March 16, 2005)
|
|
|
|
10.11
|
|
National
Financial Partners Corp. Amended and Restated 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.15 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
|
|
10.12a
|
|
Form
of Notice of Grant of Restricted Stock Units under 2002 Stock Incentive
Plan (incorporated by reference to Exhibit 10.16a to NFP’s Annual Report
on Form 10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
|
|
10.12b
|
|
Form
of Restricted Stock Unit Agreement under 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.16b to NFP’s Annual Report on
Form 10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
|
|
10.13
|
|
National
Financial Partners Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.1 to NFP’s Registration Statement on Form S-8
filed on December 13, 2006)
|
|
|
|
10.14
|
|
Amended
and Restated National Financial Partners Corp. Deferred Compensation Plan
for Employees of National Financial Partners, NFP Securities, Inc. and NFP
Insurance Services, Inc. (incorporated by reference to Exhibit 10.1 to
NFP’s Current Report on Form
8-K
filed on March 27, 2009)
|
|
|
|
10.15
|
|
National
Financial Partners Corp. Change In Control Severance Plan (incorporated by
reference to Exhibit 10.4 to NFP’s Quarterly Report on Form 10-Q for the
period ended March 31, 2007 filed on May 4, 2007)
|
|
|
|
10.16
|
|
National
Financial Partners Corp. Change In Control Severance Plan Participation
Schedule of Douglas Hammond, dated May 4, 2007 (incorporated by reference
to Exhibit 10.5 to NFP’s Quarterly Report on Form 10-Q for the period
ended March 31, 2007 filed on May 4, 2007)
|
|
|
|
10.17
|
|
National
Financial Partners Corp. Change In Control Severance Plan Participation
Schedule of Mark Biderman, dated May 4, 2007 (incorporated by reference to
Exhibit 10.6 to NFP’s Quarterly Report on Form 10-Q for the period ended
March 31, 2007 filed on May 4,
2007)
|
Exhibit No.
|
|
Description
|
|
|
|
10.18
|
|
National
Financial Partners Corp. Change in Control Severance Plan Participation
Schedule of Michael Goldman, dated June 26, 2007 (incorporated by
reference to Exhibit 10.18 to NFP’s Annual Report on Form 10-K for the
period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
10.19
|
|
National
Financial Partners Corp. Change in Control Severance Plan Participation
Schedule of James Gelder dated July 1, 2007 (incorporated by reference to
Exhibit 10.18 to NFP’s Annual Report on Form 10-K for the period ended
December 31, 2008 filed on February 13, 2009)
|
|
|
|
10.20
|
|
National
Financial Partners Corp. Severance Policy (incorporated by reference to
Exhibit 10.19 to NFP’s Annual Report on Form 10-K for the period ended
December 31, 2008 filed on February 13, 2009)
|
|
|
|
10.21
|
|
Employment
Inducement Restricted Stock Unit Agreement, dated April 17, 2009, between
National Financial Partners Corp. and Donna J. Blank (incorporated by
reference to Exhibit 10.1 to NFP’s Quarterly Report on Form 10-K for the
period ended March 31, 2009 filed on May 11, 2009)
|
|
|
|
10.22
|
|
Letter
Agreement, dated February 13, 2009, between National Financial Partners
Corp. and Mark C. Biderman (incorporated by reference to Exhibit 10.2 to
NFP’s Quarterly Report on Form 10-K for the period ended March 31, 2009
filed on May 11, 2009)
|
|
|
|
10.23
|
|
National
Financial Partners Corp. 2009 Stock Incentive Plan (incorporated by
reference to Appendix B to NFP’s Definitive Proxy Statement on Schedule
14A, filed on April 21, 2009)
|
|
|
|
10.24
|
|
National
Financial Partners Corp. 2009 Management Incentive Plan (incorporated by
reference to Appendix C to NFP’s Proxy Statement on Schedule 14A, filed on
April 21, 2009)
|
|
|
|
10.25*
|
|
Form
of Notice of Grant of Restricted Stock Units under 2009 Stock Incentive
Plan and Additional Terms and Conditions of Restricted Stock Unit Grant
for Employees of National Financial Partners Corp.
|
|
|
|
10.26*
|
|
Form
of Notice of Grant of Restricted Stock Units under 2009 Stock Incentive
Plan and Additional Terms and Conditions of Restricted Stock Unit Grant
for Directors of National Financial Partners Corp.
|
|
|
|
12.1*
|
|
Computation
of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends
|
|
|
|
21.1
|
|
Subsidiaries
of NFP (incorporated by reference to Exhibit 21.1 to NFP’s Annual Report
on Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm (incorporated by reference to Exhibit 23.1 to NFP’s Annual Report on
Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
23.1a
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm (incorporated by reference to Exhibit 23.1a to NFP’s Annual Report on
Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.1*
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
___________________________
* Filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
National
Financial Partners Corp.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/
s
/
J
ESSICA
M. B
IBLIOWICZ
|
|
Chairman, President
and Chief Executive Officer
|
|
November 4,
2009
|
Jessica
M. Bibliowicz
|
|
|
|
|
|
/
s
/
D
ONNA
J.
B
LANK
|
|
Executive Vice
President and Chief Financial Officer
|
|
November 4,
2009
|
Donna
J. Blank
|
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of National Financial Partners
Corp. (incorporated by reference to Exhibit 3.1 to NFP’s Registration
Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on
September 15, 2003)
|
|
|
|
3.2
|
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of
National Financial Partners Corp. (incorporated by reference to Exhibit
3.2 to NFP’s Registration Statement on Form S-1 (Amendment No. 4)
(No. 333-105104) filed on September 15, 2003)
|
|
|
|
3.2a
|
|
Certificate
of Amendment of Certificate of Incorporation of National Financial
Partners Corp. (incorporated by reference to Exhibit 3.2a to NFP’s
Quarterly Report on Form 10-Q for the period ended June 30, 2009
filed on August 5, 2009)
|
|
|
|
3.3*
|
|
National
Financial Partners Corp. Amended and Restated By-Laws
|
|
|
|
4.1
|
|
Specimen
common stock certificate (incorporated by reference to Exhibit 4.1 of
NFP’s Registration Statement on Form S-1 (Amendment No. 4) (No.
333-105104) filed on September 15, 2003)
|
|
|
|
4.2
|
|
Form
of Second Amended and Restated Stockholders Agreement, dated as of
February 13, 2004, among National Financial Partners Corp., Apollo
Investment Fund IV, LP and each of the stockholders party thereto
(incorporated by reference to Exhibit 4.2 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2003 filed on March 12,
2004)
|
|
|
|
4.3
|
|
Form
of Lock-up Agreement (incorporated by reference to Exhibit 4.3 to NFP’s
Annual Report on Form 10-K for the year ended December 31, 2003 filed
on February 22, 2007)
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|
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4.4a
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Indenture,
dated as of January 16, 2007, between National Financial Partners Corp.
and Wells Fargo Bank, National Association, as trustee (incorporated by
reference to Exhibit 4.1 to NFP’s Current Report on Form 8-K filed on
January 22, 2007)
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4.4b
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First
Supplemental Indenture, dated as of January 22, 2007, between National
Financial Partners Corp. and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.1 to NFP’s Current
Report on Form 8-K filed on January 25, 2007)
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4.5
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Confirmation
regarding convertible bond hedge transaction, dated January 17, 2007,
between National Financial Partners Corp. and Goldman Sachs Financial
Markets, L.P. (incorporated by reference to Exhibit 10.1 to NFP’s
Quarterly Report on Form 10-Q for the period ended March 31, 2007 filed on
May 4, 2007)
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4.6a
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Confirmation
regarding issuer warrant transaction, dated January 17, 2007, between
National Financial Partners Corp. and Goldman Sachs Financial Markets,
L.P. (incorporated by reference to Exhibit 10.2a to NFP’s Quarterly Report
on Form 10-Q for the period ended March 31, 2007 filed on May 4,
2007)
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4.6b
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Amendment
to the Confirmation regarding issuer warrant transaction, dated January
18, 2007, between National Financial Partners Corp. and Goldman Sachs
Financial Markets, L.P. (incorporated by reference to Exhibit 10.2b to
NFP’s Quarterly Report on Form 10-Q for the period ended March 31, 2007
filed on May 4, 2007)
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10.1a
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Credit
Agreement, dated as of August 22, 2006, among National Financial
Partners Corp., the financial institutions party thereto and Bank of
America, N.A., as administrative agent (incorporated by reference to
Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on August 22,
2006)
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10.1b
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Amendment
to Credit Agreement, dated as of January 16, 2007, among National
Financial Partners Corp., the financial institutions party thereto and
Bank of America, N.A. as administrative agent (incorporated by reference
to Exhibit 10.2 to NFP’s Current Report on Form 8-K filed on January 19,
2007)
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10.1c
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Second
Amendment to Credit Agreement, dated as of December 9, 2008, among
National Financial Partners Corp., the financial institutions party
thereto and Bank of America, N.A., as administrative agent (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
December 10, 2008)
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10.1d
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Third
Amendment to Credit Agreement, dated as of May 6, 2009, among National
Financial Partners Corp., the financial institutions party thereto and
Bank of America, N.A., as administrative agent (incorporated by reference
to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on May 11,
2009)
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10.2a
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Employment
Agreement, amended and restated as of February 15, 2005, between
National Financial Partners Corp. and Jessica M. Bibliowicz (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
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10.2b
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Notice
of Grant of Restricted Stock Units to Jessica M. Bibliowicz (incorporated
by reference to Exhibit 10.2 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
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Exhibit No.
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|
Description
|
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10.2c
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|
Restricted
Stock Unit Agreement, dated as of February 16, 2005, between National
Financial Partners Corp. and Jessica M. Bibliowicz (incorporated by
reference to Exhibit 10.3 to NFP’s Current Report on Form 8-K filed on
February 18, 2005)
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10.3
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|
Letter
Agreement, dated August 4, 2008, between National Financial Partners
Corp. and Donna J. Blank (incorporated by reference to Exhibit 10.1 to
NFP’s Quarterly Report on Form 10-Q for the period ended June 30,
2008 filed on August 7, 2008)
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10.4
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|
Lease,
dated August 19, 1993, between Prentiss Properties Acquisition Partners,
L.P. and NFP Insurance Services, Inc., as amended through January 1, 2002
(incorporated by reference to Exhibit 10.7 to NFP’s Registration Statement
on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15,
2003)
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10.5
|
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Amendment
and Waiver, dated as of November 16, 2006, by National Financial Partners
Corp. and Jessica M. Bibliowicz (incorporated by reference to Exhibit 10.1
to NFP’s Current Report on Form 8-K filed on November 20,
2006)
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10.5a
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|
Lease,
dated as of September 4, 2007, between Broadway 340 Madison Operator LLC
and National Financial Partners Corp. (incorporated by reference to
Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on September 5,
2007)
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10.5b
|
|
Sublease,
dated August 31, 2007, between National Financial Partners Corp. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit
10.2 to NFP’s Current Report on Form 8-K filed on September 5,
2007)
|
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10.5c
|
|
First
Amendment of Lease, dated as of December 11, 2007, between Broadway 340
Madison Operator LLC and National Financial Partners Corp. (incorporated
by reference to Exhibit 10.1 to NFP’s Current Report on Form 8-K filed on
December 13, 2007)
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10.6
|
|
Agreement
of Lease, dated as of September 9, 2004, and letter agreement thereto,
dated as of September 28, 2004, by and among The Equitable Life Assurance
Society of the United States and Elas Securities Acquisition Corp. and
National Financial Partners Corp. (incorporated by reference to Exhibit
10.9 to NFP’s Annual Report on Form 10-K for the year ended December 31,
2004 filed on March 16, 2005)
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|
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10.7
|
|
National
Financial Partners Corp. Amended and Restated 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.5 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
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10.8
|
|
National
Financial Partners Corp. Amended and Restated 2002 Stock Incentive Plan
for Principals and Managers (incorporated by reference to Exhibit 10.6 to
NFP’s Annual Report on Form 10-K for the year ended December 31, 2004
filed on March 16, 2005)
|
|
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10.9
|
|
National
Financial Partners Corp. Amended and Restated 2000 Stock Incentive Plan
(incorporated by reference to Exhibit 10.13 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
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10.10
|
|
National
Financial Partners Corp. Amended and Restated 2000 Stock Incentive Plan
for Principals and Managers (incorporated by reference to Exhibit 10.14 to
NFP’s Annual Report on Form 10-K for the year ended December 31, 2004
filed on March 16, 2005)
|
|
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10.11
|
|
National
Financial Partners Corp. Amended and Restated 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.15 to NFP’s Annual Report on Form
10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
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10.12a
|
|
Form
of Notice of Grant of Restricted Stock Units under 2002 Stock Incentive
Plan (incorporated by reference to Exhibit 10.16a to NFP’s Annual Report
on Form 10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
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|
10.12b
|
|
Form
of Restricted Stock Unit Agreement under 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.16b to NFP’s Annual Report on
Form 10-K for the year ended December 31, 2004 filed on March 16,
2005)
|
|
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10.13
|
|
National
Financial Partners Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.1 to NFP’s Registration Statement on Form S-8
filed on December 13, 2006)
|
|
|
|
10.14
|
|
Amended
and Restated National Financial Partners Corp. Deferred Compensation Plan
for Employees of National Financial Partners, NFP Securities, Inc. and NFP
Insurance Services, Inc. (incorporated by reference to Exhibit 10.1 to
NFP’s Current Report on Form
8-K
filed on March 27, 2009)
|
|
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10.15
|
|
National
Financial Partners Corp. Change In Control Severance Plan (incorporated by
reference to Exhibit 10.4 to NFP’s Quarterly Report on Form 10-Q for the
period ended March 31, 2007 filed on May 4, 2007)
|
|
|
|
10.16
|
|
National
Financial Partners Corp. Change In Control Severance Plan Participation
Schedule of Douglas Hammond, dated May 4, 2007 (incorporated by reference
to Exhibit 10.5 to NFP’s Quarterly Report on Form 10-Q for the period
ended March 31, 2007 filed on May 4, 2007)
|
|
|
|
10.17
|
|
National
Financial Partners Corp. Change In Control Severance Plan Participation
Schedule of Mark Biderman, dated May 4, 2007 (incorporated by reference to
Exhibit 10.6 to NFP’s Quarterly Report on Form 10-Q for the period ended
March 31, 2007 filed on May 4,
2007)
|
Exhibit No.
|
|
Description
|
|
|
|
10.18
|
|
National
Financial Partners Corp. Change in Control Severance Plan Participation
Schedule of Michael Goldman, dated June 26, 2007 (incorporated by
reference to Exhibit 10.18 to NFP’s Annual Report on Form 10-K for the
period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
10.19
|
|
National
Financial Partners Corp. Change in Control Severance Plan Participation
Schedule of James Gelder dated July 1, 2007 (incorporated by reference to
Exhibit 10.18 to NFP’s Annual Report on Form 10-K for the period ended
December 31, 2008 filed on February 13, 2009)
|
|
|
|
10.20
|
|
National
Financial Partners Corp. Severance Policy (incorporated by reference to
Exhibit 10.19 to NFP’s Annual Report on Form 10-K for the period ended
December 31, 2008 filed on February 13, 2009)
|
|
|
|
10.21
|
|
Employment
Inducement Restricted Stock Unit Agreement, dated April 17, 2009, between
National Financial Partners Corp. and Donna J. Blank (incorporated by
reference to Exhibit 10.1 to NFP’s Quarterly Report on Form 10-K for the
period ended March 31, 2009 filed on May 11, 2009)
|
|
|
|
10.22
|
|
Letter
Agreement, dated February 13, 2009, between National Financial Partners
Corp. and Mark C. Biderman (incorporated by reference to Exhibit 10.2 to
NFP’s Quarterly Report on Form 10-K for the period ended March 31, 2009
filed on May 11, 2009)
|
|
|
|
10.23
|
|
National
Financial Partners Corp. 2009 Stock Incentive Plan (incorporated by
reference to Appendix B to NFP’s Definitive Proxy Statement on Schedule
14A, filed on April 21, 2009)
|
|
|
|
10.24
|
|
National
Financial Partners Corp. 2009 Management Incentive Plan (incorporated by
reference to Appendix C to NFP’s Proxy Statement on Schedule 14A, filed on
April 21, 2009)
|
|
|
|
10.25*
|
|
Form
of Notice of Grant of Restricted Stock Units under 2009 Stock Incentive
Plan and Additional Terms and Conditions of Restricted Stock Unit Grant
for Employees of National Financial Partners Corp.
|
|
|
|
10.26*
|
|
Form
of Notice of Grant of Restricted Stock Units under 2009 Stock Incentive
Plan and Additional Terms and Conditions of Restricted Stock Unit Grant
for Directors of National Financial Partners Corp.
|
|
|
|
12.1*
|
|
Computation
of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends
|
|
|
|
21.1
|
|
Subsidiaries
of NFP (incorporated by reference to Exhibit 21.1 to NFP’s Annual Report
on Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm (incorporated by reference to Exhibit 23.1 to NFP’s Annual Report on
Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
23.1a
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm (incorporated by reference to Exhibit 23.1a to NFP’s Annual Report on
Form 10-K for the period ended December 31, 2008 filed on February 13,
2009)
|
|
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.1*
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
___________________________
* Filed
herewith