Quarterly report pursuant to Section 13 or 15(d)

Business Combination

v2.4.0.8
Business Combination
 6 Months Ended
Jun. 30, 2014
Business Combinations [Abstract]  
Business Combination
Business Combination

Accounting Treatment for the Business Combination

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 was 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. 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 no step-up in basis or any intangible assets or goodwill were recognized as a result. 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 three months ended March 31, 2013.

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, 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 three months ended March 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 goodwill recorded for the AIA stock purchase was $35.4 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 following table summarizes the allocation of the AIA purchase price to the estimated fair values of the assets acquired and liabilities assumed in the AIA Stock Purchase (in thousands):
 
Amount
Goodwill
$
35,385

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

Accounts receivable, net of allowances
31,984

Deferred tax liability
(28,752
)
Current liabilities
(56,548
)
Other assets acquired, net of liabilities assumed
67,630

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. Following the Business Combination, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA's shares to 94% as of December 31, 2013. In April 2014, the Company acquired the remaining outstanding shares in AIA for a total consideration of approximately $22.0 million, including approximately $0.6 million of transaction costs, of which approximately $18.2 million was paid in cash as of June 30, 2014. The purchase price and related acquisition costs of approximately $0.6 million exceeded the book value by approximately $11.4 million. This excess is reflected as a reduction in additional paid in capital. Subsequent to June 30, 2014, the Company expects to pay off its remaining obligations of approximately $3.8 million.

As of and for the three months ended June 30, 2013, the remaining 6% 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 five months ended June 30, 2013, eleven month ended December 31, 2013 and six months ended June 30, 2014.

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”). In June 2014, the Company modified the PMG Earn Out to waive the Earn Out and certain other purchase obligations and PMG seller rights in exchange for cash consideration of $2.5 million (the “Additional PMG Consideration”).  Fifty percent of the Additional PMG Consideration is payable after 10 days from closing, and the remaining $1.25 million is payable quarterly through the first half of 2015. Due to the fact that the PMG Earn Out was tied to the fulfillment of certain post-closing employment obligations by certain PMG executives, the Company was 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 three months ended March 31, 2014, the Company accrued for approximately $0.5 million of the PMG Earn Out obligation.  As the Additional PMG Consideration is not conditioned on future employment or services, the Company recorded an additional $1.3 million of expense during the three months ended June 30, 2014, bringing the total accrued liability for the Additional PMG Consideration to $2.5 million as of June 30, 2014. The goodwill recorded for the PMG asset purchase was $4.8 million, and key factors that contributed to the recognition of PMG goodwill were principally trained workforce, the opportunity to consolidate and complement 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 and June 30, 2014, 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.

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

 
Amount
Goodwill
$
4,843

Trade names
1,171

Customer relationships
10,863

Non-compete
396

Fixed assets
3,284

Liabilities assumed, net of other assets acquired
(4,861
)
Total consideration transferred
$
15,696



Significant other assets and liabilities assumed, 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 $12.6 million of accounts payable and accrued expenses outstanding and assumed at the purchase date. The Company incurred approximately $0.3 million in transaction costs associated with the PMG asset purchase.

IFES Stock Purchase

On October 18, 2013, the Company acquired 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

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, $6.7 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 June 30, 2014 and are expected to be finalized during the three months ending September 30, 2014.

The 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 $6.7 million. The Company incurred approximately $0.5 million in transaction costs associated with the IFES purchase.

Supplemental Pro Forma Information

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 of AIA, PMG and IFES had they taken place at the beginning of 2013. Supplemental information on an unaudited pro forma basis, as if these acquisitions had been completed as of January 1, 2013, is as follows (in thousands, except per share data):
 
Six Months Ended June 30,
 
2014
 
2013
Revenues
$
184,113

 
$
161,487

Net loss
$
(14,153
)
 
$
(62,189
)


The unaudited pro forma supplemental information is based on estimates and assumptions that the Company believes are reasonable and reflect amortization of intangible assets as a result of the acquisitions. 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 six months ended June 30, 2013 were certain one-time non-recurring fees associated with the Business Combination of approximately $34.5 million.