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Agency Acquisition
 12 Months Ended
Dec. 31, 2012
Agency Acquisition [Abstract]  
Agency Acquisition

18. Agency Acquisition

 

In January 2012, a subsidiary of the Company, ITIC, entered into a membership interest purchase and sale agreement under which it agreed to acquire a majority ownership interest of United Title Agency Co., LLC ("United").  United, a Michigan limited liability company, is an insurance agency doing business in the State of Michigan.  On April 2, 2012, ITIC purchased a 70% ownership interest in United, with both ITIC and the seller having the option to require ITIC to purchase the remaining 30% interest not less than 27 months from the closing. 

The acquisition date fair value of the total consideration to be transferred is $1,041,250.  This fair value total is equal to $350,000 ITIC has already paid toward the purchase price, as well as $691,250 in estimated contingent payments.  The amount previously paid will be used to offset contingent payment amounts calculated for final consideration, and is eligible for refunding in part or in its entirety if greater than the final settlement amount.

The contingent payment arrangement requires that the purchase price for the 70% majority interest be paid over the next two years and determined by multiplying United's actual GAAP net income for the first full 24 calendar months subsequent to closing by an agreed upon factor.  In no event will the purchase price for the majority interest exceed $1,041,250.  The fair value of the contingent payment was derived using the Company's best estimate (Level 3 inputs) of net income of approximately $859,000 during the 24-month period, discounted at a 15% rate, and limited to the contractual maximum. The resulting $691,250 contingent payment is categorized in the Consolidated Balance Sheets as accounts payable and accrued liabilities.  As of December 31, 2012, management's calculation of the fair value of the contingent consideration was materially unchanged from its acquisition date amount.

In the event that ITIC purchases the remaining 30% interest, the purchase price of the redeemable noncontrolling interest will be calculated by multiplying United's GAAP net income for the full 24 calendar months immediately preceding the written notice of the option exercise by an agreed upon factor.  The agreement stipulates a minimum purchase price of $1,000,000 for the entire agency should this option be exercised.

As certain provisions of the membership interest purchase and sale agreement place the acquisition of the remaining 30% by ITIC out of ITIC's control, the noncontrolling interest in United is deemed redeemable.  The redeemable noncontrolling interest is presented outside of permanent equity, as redeemable equity in the Consolidated Balance Sheets.  On the acquisition date, the fair value of the redeemable noncontrolling interest was $446,250. The fair value of the redeemable noncontrolling interest was based on the noncontrolling interest's share of the value of net assets.

The following table provides a reconciliation of total redeemable equity for the periods ended December 31, 2012 and 2011:      

    

Changes in fair value during the period ended:

2012

2011

Beginning balance at January 1
$
0 
$
0 

Redeemable noncontrolling interest resulting from subsidiary purchase
446,250 
0 

Net income attributable to redeemable noncontrolling interest
88,411 
0 

Distributions to noncontrolling interest
(40,800)
0 

Balance, net

$
493,861 
$
0 

Fair valuation methods used for the identifiable tangible net assets acquired in that acquisition make use of discounted cash flows using current interest rates.  The fair value of identifiable net tangible assets at the acquisition date was $5,600.  Identifiable assets acquired include cash and fixed assets.  Liabilities assumed consisted of notes payable.

The transaction was accounted for using the acquisition method required by ASC 805, Business Combinations.  Accordingly, the Company recognized the required identifiable intangible assets of United.  There was no goodwill recorded as a result of the acquisition. The fair values of intangible assets, all Level 3 inputs, are principally based on values obtained from a third party valuation service.  At acquisition, intangible assets included $645,685 relating to a non-compete contract resulting from the acquisition and $836,215 from referral relationships.  The non-compete contract is being amortized over a 10-year period using the straight-line method, starting at a future date when the related employment agreement is terminated.  The referral relationships are being amortized over a 12-year period using the straight-line method.  At December 31, 2012, accumulated amortization of intangible assets is $52,263.    Net intangible assets of $1,429,637 are categorized as prepaid expenses and other assets in the Consolidated Balance Sheets as of December 31, 2012.  In accordance with ASC 350, Intangibles––Goodwill and Other, the Company completed interim impairment testing and determined that the intangible assets assigned to United were not impaired at December 31, 2012.

The amortization of the non-compete contract will start at a future date when the related employment agreement is terminated. Assuming that the amortization of the non-complete agreement begins on the first day subsequent to the employment period stated in the current employment agreement, estimated aggregate amortization expense for each of the five succeeding fiscal years are as follows:

 

Year Ended:

 

2013
$
69,685 

2014
134,253 

2015
134,253 

2016
134,253 

2017
134,253 

Thereafter
822,940 

Total
$
1,429,637 

In the Consolidated Statement of Income, revenues and expenses include the operations of United since April 2, 2012, which is the acquisition date.  United was formed as a result of the Company's acquisition, and had no net income prior to the acquisition date.

The Company has not provided historical or pro forma financial information related to the United acquisition because none of the purchase price paid, assets acquired or income of United were significant to the Company under Rules 8-04 or 8-05 of the SEC's Regulation S-X.