TV Guide Entertainment Group, LLC, a limited liability company (“the Company”), was formed pursuant to a Limited Liability Agreement dated May 28, 2009. TV Guide Entertainment Group, LLC includes the operations of its consolidated subsidiaries, which include TV Guide Network, TV Guide Online, TV Guide Broadband and TV Guide Video On Demand. The Company conducts substantially all of its business in the United States.
TV Guide Network offers entertainment and television guidance-related programming as well as localized program listings and descriptions primarily in the United States. TV Guide Network is typically included in a basic or expanded basic viewing package offered by cable or satellite operators to their subscribers. TV Guide Online is currently comprised of two entertainment websites, led by tvguide.com, which feature a combination of entertainment news, video programming, celebrity information, localized channel listings, editorial guidance, community features and search features. TV Guide Video On Demand and TV Guide Broadband are advertiser supported, video-on-demand services featuring short-form, originally produced entertainment programs about television programming. TV Guide Broadband is available on www.tvguide.com and is also distributed on major video portals such as Hulu and YouTube.
Organization and Basis of Presentation
In January 2009, Lions Gate Entertainment Corp. (“Lions Gate”) entered into an Equity Purchase Agreement with Macrovision Solutions Corporation (“Macrovision,” later re-named as Rovi Corporation, “Rovi”), for the purchase of all of the issued and outstanding equity interests of TV Guide Entertainment Group, Inc. The acquisition closed on February 28, 2009. At the time of the acquisition, Lions Gate allocated its purchase price to the estimated fair values of the tangible and intangible assets and liabilities of TV Guide Entertainment Group, Inc. The purchase price allocation has been pushed down to the Company. The excess of the purchase price over the estimated fair value of the net tangible and intangible assets and liabilities acquired was recorded as goodwill. The Company believes the goodwill represents the value of its existing workforce and position in the industry.
Conversion to a Limited Liability Company. On May 18, 2009, the Company was converted to a limited liability company, and the previous common shares of TV Guide Entertainment Group, Inc. were effectively exchanged for members’ interest in TV Guide Entertainment Group, LLC.
1. Description of Business, Organization and Basis of Presentation (continued)
Sale of Interest in the Company. On May 28, 2009, Lions Gate entered into a Purchase Agreement with One Equity Partners (“OEP”), the global private equity investment arm of JPMorgan Chase Bank N.A., pursuant to which OEP purchased 49% of Lions Gate’s interest in TV Guide Entertainment Group, LLC. In addition, OEP reserved the option of buying another 1% of TV Guide Entertainment Group, LLC under certain circumstances. The arrangement contains joint control rights, as evidenced in an operating agreement as well as certain transfer restrictions and exit rights. In connection with the transaction, the Company issued 49,000 Series A Preferred Units (“Preferred Units”) and 49,000 Series B-1 Common Units (“B-1 Common Units”) to OEP in exchange for cash consideration paid to Lions Gate, and 51,000 Preferred Units and 51,000 B-1 Common Units to Lions Gate in exchange for Lions Gate’s membership interest.
The Preferred Units are mandatorily redeemable and carry a dividend rate of 10% compounded annually. These units are redeemable in May 2019 at the stated value plus the dividend return and any additional capital contributions less previous distributions. The Preferred Units were initially recorded based on their estimated fair value, as determined using an option pricing model methodology, as a liability in the consolidated balance sheets.
The Preferred Units and the 10% dividend are being accreted, through charges to interest expense, up to their redemption amounts, over the ten-year period to the redemption date. During the year ended March 31, 2011, the Company paid $20 million of accrued dividends to the Preferred Unit holders.
2. Significant Accounting Policies
Generally Accepted Accounting Principles
These consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The U.S. dollar is the functional currency of the Company’s businesses.
Principles of Consolidation
All material intercompany balances and transactions between the entities that comprise the Company have been eliminated.
2. Significant Accounting Policies (continued)
Revenues primarily consist of advertising revenues and subscriber fees.
Advertising Revenues. Advertising revenues are earned and recognized when the advertising
spot is displayed or aired on the Company’s distribution platforms. Advertising revenues are recorded net of agency commissions and discounts. Cash payments received in advance for advertising are deferred until earned, at which time revenue is recognized.
Network advertising contracts may guarantee the advertiser a minimum audience for its advertisements over the term of the contracts. Revenues are only recognized when those minimum requirements are met. The determination of whether such audience minimums have been met is based on information provided by ratings services companies and historical experience. If the minimum guaranteed audience requirements are not met, the Company provides the advertiser additional advertising time until the minimum audience guarantees have been met. A liability is recorded for the amount of the contract fee which has not yet achieved the minimum audience guarantee. This liability is recognized as revenue when minimum audience guarantees have been met.
Subscriber Fees. The Company has entered into agreements with cable operators and digital broadcast satellite providers for the licensing or distribution of its services in exchange for “subscriber fees” generally calculated on a per-subscriber basis. Subscriber fees revenue from the distribution of TV Guide Network programming is recognized in the month the services are provided. Payments received in advance for subscription services are deferred until the month earned, at which time revenue is recognized.
The Company enters into transactions that exchange advertising time for program license rights. Advertising barter transactions are recorded at the estimated fair value of the advertising surrendered and recognized as the related advertising units are aired.
For the years ended March 31, 2011 and 2010, the Company recognized barter revenues and expenses of $1.6 million and $2.2 million, respectively. Such amounts are included in Advertising Revenues and Programming Cost of Services, respectively, in the accompanying consolidated statements of operations.
2. Significant Accounting Policies (continued)
Marketing and promotion costs to promote the Company’s distribution platforms are expensed when incurred and are classified as advertising expense in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits at financial institutions and money market mutual funds. The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents.
For programs produced by the Company, capitalized costs include all direct production costs and production overhead. Costs for programs produced are expensed over the economic life of the program in relation to revenues generated. If the content of the program deals with current events, program costs are generally expensed upon first airing. The valuation of the cost of programs produced is evaluated on a program-by-program basis. When an event or change in circumstances indicates that the fair value of the program is less than its unamortized cost, the program is written down to its estimated fair value.
For acquired programs, the cost of acquired programming is capitalized and a liability is recorded upon delivery of the episodes acquired. The liability represents the present value of the contractual cash payments scheduled over the license period. Capitalized costs of programs acquired are allocated to the estimated number of projected runs over the program license period and subsequently amortized as those runs are aired. Acquired programming costs are stated at the lower of unamortized cost or net realizable value.
2. Significant Accounting Policies (continued)
Property and Equipment and Amortizable Intangible Assets
Property and equipment and amortizable intangible assets are recorded at cost, or fair value as of the date of the Lions Gate acquisition. Property and equipment and amortizable intangible assets are depreciated using the straight-line method over the estimated useful lives of the assets. Assets acquired under capital lease arrangements are recorded at the present value of the minimum lease payments and are amortized over the shorter of the lease term or useful life of the leased asset. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the useful life of the leasehold improvement.
Estimated useful lives of property and equipment and amortizable intangible assets are as follows:
The Company periodically reviews and evaluates the recoverability of property and equipment and amortizable intangible assets. Where applicable, estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue and cost estimates. If undiscounted cash flow estimates are less than the carrying value, a reduction in the carrying amount is recorded to adjust the carrying amount to fair value, which approximates discounted cash flows.