Annual report pursuant to Section 13 and 15(d)

Business Combinations

v2.4.0.8
Business Combinations
 12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
Business Combinations
Business Combinations

Accounting Treatment for the Business Combinations

On January 31, 2013, the Business Combination was consummated, in which a merger subsidiary of GEAC merged with and into Row 44 (the "Row 44 Merger") with Row 44 surviving, and concurrently GEE acquired 86% of the issued and outstanding shares of AIA, which were held by PAR Investment Partners, L.P. ("PAR"). Row 44 is considered the acquirer for accounting purposes, and the Row 44 Merger was accounted for as a recapitalization. The AIA stock purchase was accounted for as an acquisition of a business because the Company obtained effective control of AIA. Row 44 was determined to be the acquirer based on the following facts and circumstances:

•
Row 44 had the greatest enterprise value between Row 44 and AIA based on the consideration paid by GEAC;
•
The officers of the newly combined company consist primarily of former Row 44 executives, including the Chief Executive Officer, Chief Financial Officer, and General Counsel;
•
GEAC paid a premium over the market value of AIA’s shares prior to the public announcement of the AIA Stock Purchase;
•
As of the date of the Business Combination, the Row 44 and combined Company's headquarters are in the same Los Angeles metropolitan area; and
•
The composition of the Board of Directors does not result in the ability of either Row 44 or AIA being able to appoint, elect, or remove a majority of the Board of Directors.

Since the Row 44 Merger was accounted for as a recapitalization, the assets and liabilities of Row 44 and GEAC are carried at historical cost and GEE has not recorded any step-up in basis or any intangible assets or goodwill as a result of the Row 44 Merger. Under the acquisition method, the acquisition-date fair value of the gross consideration transferred to effect the AIA Stock Purchase was allocated to the assets acquired, the liabilities assumed, and non-controlling interest based on their estimated fair values. Transaction costs incurred in 2012 and in 2013 through January 31, 2013 of $16.4 million were attributable to the Business Combination and were recorded as reductions to retained earnings. In connection with the closing of the Row 44 Merger, the Company paid PAR $11.9 million under a backstop fee agreement. This was recorded as transaction costs reflected in operating results as a general and administrative expense in the year ended December 31, 2013.

At January 31, 2013, the fair values in respect of the AIA Stock Purchase were preliminary and subject to adjustment if additional information is obtained during the measurement period (a period of up to one year from the closing date) of this transaction that would change the fair value allocation as of the acquisition date. At December 31, 2013, the Company finalized the fair value allocation of intangibles and goodwill associated with the AIA stock purchase.

In the consolidated financial statements, the recapitalization of the number of shares of common stock attributable to Row 44 is reflected retroactive to all periods presented, and the number of shares of common stock that was used to calculate the Company's earnings per share for all periods prior to the Business Combination is reflective of the outstanding shares during such periods on an as-if converted basis.

Row 44 Merger

Pursuant to the Row 44 Merger Agreement, all shares of capital stock of Row 44 then outstanding were converted into the right to receive shares of common stock of the Company, and all options to purchase common stock of Row 44 then outstanding were net stock settled for shares of common stock of the Company. In exchange for the shares of Row 44, the Company issued at closing 23,405,785 shares of GEAC common stock to the Row 44 equity holders. AIA's ownership of 3,053,634 shares of GEE stock was deemed to be treasury stock when the AIA stock purchase was consummated concurrently.

The cash flows related to the Row 44 Merger in the Business Combination, as reported in the consolidated statements of cash flows within the investing section for the year ended December 31, 2013, is summarized as follows (in thousands):

 
Amount
Operating cash
$
8

Add: cash held in trust
189,255

Less: cash paid for GEAC shares that were redeemed
(101,286
)
Add: cash received from backstop participants
71,250

Net cash received from Row 44 Merger
$
159,227



AIA Stock Purchase

The acquisition date fair value of the consideration transferred totaled $144.3 million. The fair value was determined based on the closing market price of the Company's common stock on January 31, 2013. The preliminary goodwill recorded for the AIA stock purchase was $39.2 million, and key factors that contributed to the recognition of AIA goodwill were principally the acquisition of a trained workforce, the opportunity to expand operations internationally within the airline industry, and the opportunity to generate future savings through synergies with the existing business. None of the goodwill is deductible for tax purposes. The initial fair values set forth below were subsequently adjusted through December 31, 2013 as additional information was obtained during the measurement period of this transaction that changed the fair value allocation as of the acquisition date.

The following table summarizes the preliminary allocation of the AIA purchase price on January 31, 2013 to the estimated fair values of the assets acquired and liabilities assumed in the AIA Stock Purchase (in thousands):
 
Amount
Goodwill
$
39,217

Existing technology – software
2,574

Existing technology – games
12,331

IPR&D
7,317

Customer relationships
80,758

Other intangibles
2,568

Content library
14,297

Other assets acquired, net of liabilities assumed
10,482

Net assets acquired
169,544

Less: Non-controlling interests
25,287

Total consideration transferred
$
144,257



As a result of the AIA Stock Purchase, a non-controlling interest was recorded on the Company's consolidated balance sheets. As of March 31, 2013 and December 31, 2013, the remaining 14% and 6%, respectively, of AIA shares was owned by others unrelated and independent of the Company. The fair value of the non-controlling interest was determined based upon the fair value of AIA common stock on the closing date. Since the acquisition date, the results of AIA have been included in the Company’s consolidated financial results for the eleven months ended December 31, 2013 in the Content operating segment. Since the acquisition date, the amount of revenue for AIA included in the consolidated statements of operations for the year ended December 31, 2013 was $152.8 million.

Changes made in finalizing the allocation of the AIA purchase price at December 31, 2013 are further described in this note below.

PMG Asset Purchase

On July 9, 2013, the Company purchased substantially all the assets of Post Modern Edit, LLC and related entities to further expand its leadership in delivering media and content solutions to the global travel industry. Pursuant to the terms of the purchase, the Company acquired such assets of PMG in exchange for approximately $10.6 million in cash, 431,734 shares of common stock for a fair value of $4.4 million and the assumption of approximately $3.3 million in debt and $0.4 million in certain accrued obligations. The sellers of the PMG assets have the opportunity to receive an additional $5.0 million in cash if, among other things, the PMG business, combined with certain AIA businesses, achieve certain financial target milestones from the second half of 2013 through December 31, 2014 (the “PMG Earn Out”). Due to the fact that the PMG Earn Out is tied to the fulfillment of certain post-closing employment obligations by certain PMG executives, the Company is required to account for the PMG Earn Out as compensation to the sellers and is recognized as an expense, over the requisite service period. During the year ended December 31, 2013, the Company accrued for approximately $0.3 million of the PMG Earn Out obligation. The provisional goodwill recorded for the PMG asset purchase was $7.6 million, and key factors that contributed to the recognition of PMG goodwill were principally trained workforce, the opportunity to consolidate and compliment existing AIA operations within the airline industry, and the opportunity to generate future savings through synergies with the existing business. As a result of the asset purchase of PMG, the goodwill is deductible for tax purposes.
As of December 31, 2013, the Company held 151,420 of the total 431,734 shares issuable to the sellers in escrow, which are subject to certain standard warranties and representations and scheduled to be released to the sellers upon final settlement of certain post-closing terms. In addition, approximately $0.3 million of the cash proceeds is subject to a hold back to satisfy post-closing obligations as well as a working capital adjustment and any remaining portion of such hold back amount that is not subject to then pending claims will be paid to the selling shareholders upon final settlement of post-closing terms and obligations.

The following table summarizes the initial preliminary fair value of the assets and liabilities assumed in the PMG asset purchase on July 10, 2013 (in thousands):

 
Amount
Goodwill
$
7,584

Trade Names
826

Customer relationships
6,865

Non-Compete
824

Fixed assets
3,284

Other assets acquired, net of liabilities assumed
(3,687
)
Total consideration transferred
$
15,696



Significant other assets and net liabilities assumed and included in the table above were $8.5 million of accounts receivable, $1.1 million of tape-stock inventory and prepaid assets, $1.1 million of restricted cash, $3.3 million of assumed indebtedness pertaining to debt assumed by the Company, and $11.1 million of accounts payable and accrued expenses outstanding and assumed at the purchase date. The fair values set forth above were preliminary and if additional information is obtained during the measurement period (a period of up to one year from the closing date) of this transaction that would change the fair value allocation as of the acquisition date. The Company incurred approximately $0.3 million in transaction costs associated with the PMG asset purchase. Since the acquisition date, the amount of revenue of PMG included in the consolidated statements of operations for the year ended December 31, 2013 was $25.1 million.

Changes to finalizing the allocation of the PMG purchase price at December 31, 2013 are further described in this note below.

IFES Stock Purchase

On October 18, 2013, the Company acquired the U.K. parent of IFES from GCP Capital Partners LLP and certain individuals for approximately $36.2 million in cash. IFES provides media content for use by airlines in in-flight entertainment and connectivity systems. The acquisition is intended to enhance the Company's Content operating segment.

The following table summarizes the preliminary fair value of the assets and liabilities assumed in the IFES asset purchase (in thousands):

 
Amount
Goodwill (1)
$
12,117

Trade names
341

Customer relationships
28,258

Non-Compete
—

Fixed assets
3,498

Liabilities assumed, net of other assets acquired (1)
(7,968
)
Total consideration transferred
$
36,246

(1) Included in the table above are $0.5 million of deferred tax assets, $6.6 million of deferred tax liabilities and $1.2 million of accrued taxes payable as of the IFES acquisition date, which were prepared using best estimates available. Due to the preliminary nature of IFES financial results prior to the October 18, 2013 acquisition date, the Company was unable to provide an accurate assessment of certain deferred tax assets, deferred tax liabilities and estimated income taxes payable for the period(s) prior to the October 18, 2013 acquisition date. As a result, these balances are considered preliminary at December 31, 2013, and are expected to be finalized in 2014.

The preliminary goodwill recorded for the IFES acquisition was $12.1 million, and key factors that contributed to the recognition of IFES goodwill were principally trained workforce, expansion of international operations, the opportunity to consolidate and complement existing AIA and PMG operations within the airline industry, and the opportunity to generate future savings through synergies with the existing business. As a result of the stock purchase of IFES, the goodwill is not deductible for tax purposes. Significant other assets and net liabilities assumed and included in the table above were $8.0 million of accounts receivable, $0.2 million of prepaid and other current assets, $1.9 million positive cash balance,$11.0 million of accounts payable and accrued expenses outstanding and assumed at the purchase date, $1.3 million mortgage relating to the building acquired in the acquisition and a net tax liability for $6.2 million, of which $1.2 million of accrued taxes payable were recorded prior to the acquisition. The net tax liability is made up of a deferred tax asset of $0.5 million and deferred tax liabilities of $6.6 million. The Company incurred approximately $0.5 million in transaction costs associated with the IFES purchase. Since the acquisition date, the amount of revenue IFES included in the consolidated statements of operations for the year ended December 31, 2013 was $6.8 million.

Adjustments to Preliminary Allocation of AIA and PMG Fair Values

As of September 30, 2013, elements of the AIA Stock Purchase and the PMG Asset Acquisition had been disclosed as preliminary. As part of the AIA stock purchase measurement process, the Company’s estimation of certain contingent liabilities, uncertain tax positions, and accrued liabilities were not complete by the time the financial statements were issued for the three months and nine months ended September 30, 2013. The Company recognized preliminary amounts for deferred tax liabilities of $25.0 million, contingent consideration of $1.3 million, uncertain tax positions of $3.2 million and accrued liabilities and accrued expenses of $67.9 million as of March 31, 2013.

During the three months ended December 31, 2013, the Company received a final valuation report of the fair value of the AIA purchase from a third-party valuation firm. After considering the results of this valuation report, the Company estimated that the fair value of the intangible assets acquired as part of the merger with AIA to remain unchanged. However, changes were made to certain accrued liabilities specifically pertaining to under-accrued litigation reserves and certain accrued liabilities owed for periods prior to the acquisition, resulting in the preliminary accrual amount to retrospectively decrease by $6.6 million on December 31, 2013, due to this additional information, with a corresponding decrease in goodwill for the same amount. Further, the finalization of the tax provision during the year resulted in changes made to provisional amounts recorded for the acquisition during the year, of $1.3 million, which retrospectively increased the deferred tax liabilities by $3.8 million on December 31, 2013, due to this new information, with a corresponding decrease to goodwill.

The following table summarizes the final fair value of the assets and liabilities assumed in the AIA asset purchase after the changes were made during the three months ended December 31, 2013 (in thousands):

 
Preliminary Allocation of Purchase Price
 
Adjustments
 
Purchase Price Allocation, as Adjusted
Goodwill
$
39,217

 
$
(3,832
)
 
$
35,385

Existing technology – software
2,574

 
—

 
2,574

Existing technology – games
12,331

 
—

 
12,331

IPR&D
7,317

 
—

 
7,317

Customer relationships
80,758

 
—

 
80,758

Other intangibles
2,568

 
—

 
2,568

Content library
14,297

 
—

 
14,297

Accounts receivable, net of allowances
31,611

 
373

 
31,984

Deferred tax liability
(24,970
)
 
(3,782
)
 
(28,752
)
Current liabilities
(63,112
)
 
6,564

 
(56,548
)
Other assets acquired, net of liabilities assumed
66,953

 
677

 
67,630

Net assets acquired
169,544

 
 
 
169,544

Less: Non-controlling interests
25,287

 
—

 
25,287

Total consideration transferred
$
144,257

 
—

 
$
144,257




As part of the PMG asset acquisition measurement process, the Company’s estimation of certain working capital accounts, intangible assets, and leases were not complete by the time the financial statements were issued for the three months and nine months ended September 30, 2013. The Company recognized preliminary amounts for the intangible assets for $8.5 million, with a negative net working capital amount of $0.4 million.

During the three months ended December 31, 2013, the Company received a valuation report from a third-party valuation firm. After considering the results of that valuation report, the Company estimated that the fair value of certain customer-related intangible assets and other intangible assets acquired as part of the acquisition of PMG to be $10.9 million and $1.6 million, respectively. On December 31, 2013, the carrying amount of the customer-related intangible asset was increased by $4.0 million and other intangible assets decreased by $0.1 million, on December 31, 2013. Further, other revisions, which impact the working capital amounts, were made for a net increase in liabilities by $1.5 million. Due to this new information on the intangible asset valuation and other adjustments, a corresponding decrease to goodwill of $2.7 million was recorded. In addition, $0.5 million of additional amortization expense was recognized in the three months ended December 31, 2013 related to this fair value adjustment.

The following table summarizes the changes in fair value of the assets and liabilities assumed in the PMG asset purchase after the changes were made during the three months ended December 31, 2013 (in thousands):

 
Preliminary Allocation of Purchase Price
 
Adjustments
 
Purchase Price Allocation, as adjusted
Goodwill
$
7,584

 
$
(2,741
)
 
$
4,843

Trade Names
826

 
345

 
1,171

Customer relationships
6,865

 
3,998

 
10,863

Non-Compete
824

 
(428
)
 
396

Fixed assets
3,284

 
—

 
3,284

Other Assets
1,054

 
280

 
1,334

Accounts payable and accrued liabilities
(11,125
)
 
(1,454
)
 
(12,579
)
Other assets acquired, net of liabilities assumed
6,384

 
—

 
6,384

Total consideration transferred
$
15,696

 
 

$
15,696




Supplemental Pro Forma Information (Unaudited)

The pro forma financial information as presented below is for informational purposes only and is not indicative of operations that would have been achieved from the acquisitions had they taken place at the beginning of 2012. Supplemental information on an unaudited pro forma basis, as if these acquisitions had been completed as of January 1, 2012, is as follows (in thousands, except per share data):
 
Year ended December 31,
 
2013
 
2012
Revenues
$
330,366

 
$
285,479

Net Loss
(136,808
)
 
(77,288
)



The unaudited pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflect amortization of intangible assets as a result of the acquisition. The pro forma results are not necessarily indicative of the results that would have been realized had the acquisitions been consummated as of the beginning of the periods presented. The pro forma amounts include the historical operating results of the Company, with adjustments directly attributable to the acquisitions. Included in the supplemental information for the year ended December 31, 2013 were certain one-time non-recurring fees associated with the Business Combination of approximately $34.5 million.