Annual report pursuant to Section 13 and 15(d)

Business Combinations

v2.4.1.9
Business Combinations
 12 Months Ended
Dec. 31, 2014
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 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 was 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 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 consideration to acquire AIA was allocated to the acquisition date fair values of assets acquired and liabilities assumed as follows (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. The fair value of the non-controlling interest on the acquisition date 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 and the twelve months ended December 31, 2014 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.
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 cash consideration of approximately $21.7 million, including approximately $0.6 million of transaction costs. The purchase price and related acquisition costs of approximately $0.6 million exceeded the book value by approximately $11.2 million. This excess is reflected as a reduction in additional paid in capital during the year ended December 31, 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. In addition, the sellers of the PMG assets had the opportunity to receive an additional $5.0 million in cash if, among other things, the PMG business, combined with certain AIA businesses, achieved 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 was 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. In June 2014, the sellers of the PMG Assets waived the PMG 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 was due and paid ten days after the execution of the agreement, and the remaining $1.25 million is payable in four equal quarterly installments through the first half of 2015. At December 31, 2014, the accrued liability for the Additional PMG Consideration was $0.9 million.
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, 2014 and 2013, the Company held 75,000 and 151,420, respectively, of the total 431,734 shares of common stock 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 consideration to acquire PMG was allocated to the acquisition date fair values of assets acquired and liabilities assumed as follows (in thousands):
 
Amount
Goodwill
$
4,843

Trade Names
1,171

Customer relationships
10,863

Non-Compete
396

Fixed assets
3,284

Other Assets
1,334

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

Total consideration transferred
$
15,696


Significant other assets acquired 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, and $3.3 million of assumed indebtedness pertaining to debt assumed by the Company at the purchase 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.
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 was 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 stock 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, $6.6 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 acquisition date. As a result, these balances were considered preliminary at such time and were finalized during the year ended December 31, 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 results of operation for IFES have been included in the consolidated statements of operations for the remainder of 2013 and the twelve months ended December 31, 2014. Since the acquisition date, the amount of revenue for IFES included in the consolidated statements of operations for the year ended December 31, 2013 was $6.8 million.
As of December 31, 2013, accrued taxes payable and deferred tax liabilities of the IFES Asset Acquisition had been disclosed as preliminary. During the year ended December 31, 2014, the Company finalized its analysis of the fair value of deferred tax liabilities and accrued taxes payable of IFES. The finalization of the tax provision resulted in changes made to provisional amounts recorded for the acquisition, of $0.3 million, which retrospectively decreased the deferred tax asset by $0.4 million and increased deferred tax liability by $0.1 million on December 31, 2013, due to this new information, with a corresponding increase to goodwill.
The following table summarizes the final fair value of the assets and liabilities assumed in the IFES asset purchase after the changes were made during the year ended December 31, 2014 (in thousands):
 
Preliminary Allocation of Purchase Price
 
Adjustments
 
Purchase Price Allocation, as Adjusted
Goodwill
12,117

 
308

 
12,425

Trade names
341

 
—

 
341

Customer relationships
28,258

 
—

 
28,258

Non-compete
—

 
—

 
—

Fixed assets
3,498

 
—

 
3,498

Liabilities assumed, net of other assets acquired
(7,968
)
 
(308
)
 
(8,276
)
Total consideration transferred
36,246

 
—

 
36,246


Purple Inflight Entertainment Asset Purchase
On August 2, 2014, the Company purchased substantially all of the assets of Purple Inflight Entertainment to further expand its ability to deliver Indian content in local languages. Pursuant to the terms of the purchase, which was accounted for as a business combination, the Company acquired such assets of Purple in exchange for approximately $0.5 million in cash. In addition, the Company is obligated to make an additional payment to the shareholders of Purple of $0.2 million contingent upon the renewal of the terms of a certain supplier's contract. The estimated fair value of the contingent consideration obligation amounted to $0.1 million as of the acquisition date was determined using a probability factor of 70% for the renewal of the supplier's contract.
The Company allocated the consideration to acquire Purple to finite-lived intangible asset (supplier's relationship) of $0.2 million with an estimated useful life of approximately one year, $0.4 million to goodwill and other net liabilities of less than $0.1 million. Since the acquisition date, the amount of revenue for Purple included in the consolidated statements of operations for the year ended December 31, 2014 was not material.
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):
 
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.