Business Combination

9 Months Ended

Sep. 30, 2013

Business Combination

Business Combination

Note 2. Business Combination

On April 4, 2013, the merger by and among Cinelatino, WAPA and Azteca providing for the combination of Cinelatino, WAPA and Azteca as indirect, wholly-owned subsidiaries of Hemisphere (the “Transaction”) was consummated. The primary purpose of the Transaction was to create a Spanish-language media company targeting the Hispanic broadcast and cable television network business.

The Transaction was accounted for by applying the acquisition method, which requires the determination of the accounting acquirer, the acquisition date, the fair value of the purchase consideration to be transferred, the fair value of assets and liabilities of the acquiree and the measurement of goodwill. ASC Topic 805-10, “Business Combinations—Overall” (“ASC 805-10”) provides that in identifying the acquiring entity in a business combination effected primarily through an exchange of equity interests, the acquirer is usually the entity that issues equity interests but all pertinent facts and circumstances must be considered in determining the acquirer. Other pertinent facts and circumstances to consider include the relative voting rights of the shareholders of the constituent companies in the combined entity, the composition of the board of directors and senior management of the combined company, the relative size of each company and the terms of the exchange of equity interests in the Transaction, including payment of any premium. Although Hemisphere issued the equity interests in the Transaction, since it is a new entity formed solely to issue these equity interests to effect the Transaction it would not be considered the acquirer and one of the combining entities that existed before the transaction must be identified as the acquirer. Based on the following, WAPA is the accounting acquirer and predecessor, whose historical results are the results of Hemisphere:

i. WAPA shareholders obtained approximately 46.4% of the post-Transaction common shares of stock and 59.9% of the voting rights in the combined entities;

ii. WAPA, through its parent company, InterMedia Partners VII, L.P. (“InterMedia Partners”), has the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, as they represent five of the nine directors on the combined entity board of directors, including the Chief Executive Officer; and

iii. WAPA’s historical revenues represent approximately 69.0% of the total revenues of the combined entities.

As WAPA is the accounting acquirer (and legal acquiree), the Transaction is considered to be a reverse acquisition. Since WAPA issued no consideration in the Transaction, unless the fair value of accounting acquirees’ equity interests are more reliably measurable, the fair value of the consideration transferred by WAPA would be based on the number of shares WAPA would have had to issue to give owners of the other entities in the transaction the same percentage ownership in the combined entities that results from the Transaction. In this situation, since Azteca’s shares were publicly traded and they are one of the combining entities in this Transaction, the fair value of those shares are considered to be more reliably measurable than the fair value of WAPA’s shares and therefore were used to determine the fair value of the consideration transferred for the acquisition of Cinelatino, which is the other operating entity involved in this Transaction.

Total consideration transferred by WAPA (accounting acquirer) to Cinelatino (accounting acquiree) was $129,423,943 based on: (i) cash consideration of $3.8 million (funded from cash on hand), plus (ii) 12,567,538 shares with a fair value of $128.8 million based on the Company’s opening share price of $10.25 per share on the date following the consummation of the Transaction for each share of the Company’s common stock to be received by Cinelatino stockholders in the Transaction, (iii) less contingently returnable consideration with a fair value of $3.2 million, which represents the difference between the fair value of 1,142,504 shares of Hemisphere Class B common stock that are subject to forfeiture in the event the closing market price of Hemisphere Class A common stock does not equal or exceed $12.50 and $15.00 for any twenty trading days within at least one 30-day trading period and the estimated fair value of these shares using a Monte Carlo simulation model (571,252 shares with fair value of $1.2 million have achieved the $12.50 trading price and are no longer subject to forfeiture). Significant assumptions utilized in the Monte Carlo simulation model include:

· Stock Price: $10.25

· Volatility: 32.5%

· Risk-Free Rate: 0.69%

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition of Cinelatino:

Cash	$	12,865,242
Accounts receivable	4,052,590
Programming rights	4,459,550
Prepaid expenses and other current assets	939,945
Property and equipment, net	21,415
Other assets	2,054,956
Intangible asset - affiliate agreements	37,900,000
Current liabilities	(6,271,770		)
Long-term debt	(32,097,167		)
Fair value of identifiable net assets acquired	23,924,761
Goodwill	105,499,182
Total	$	129,423,943

The estimated fair values of Cinelatino’s affiliate agreements of $37.9 million, was determined using a discounted cash flow method based on expected renewal rates utilizing a 10% discount rate.  These intangible assets will be amortized on a straight-line basis over 6 years.

The accounts receivable acquired have a fair value of $4.1 million and all contractual receivables are expected to be collected.

During the three months ended September 30, 2013, the Company finalized the valuation of its affiliate agreements which resulted in a reclassification of $14.2 million from goodwill to intangible assets and $4.9 million related to the corresponding deferred tax liability, which is included in other assets above. As a result of this reclassification, the Company reported an additional $0.7 million of amortization expense during the quarter ended June 30, 2013.

Goodwill of $105.5 million is the excess of the net consideration transferred over the fair value of the identifiable net assets acquired, and primarily represents the benefits the Company expects to realize from the acquisition.  The goodwill associated with the transaction is not deductible for tax purposes.

The number of shares of stock of the Company issued and outstanding immediately following the consummation of the Transaction is summarized as follows:

	Number of Shares
Azteca public shares outstanding prior to the Transaction	10,000,000
Azteca founder shares (1)	2,500,000
Total Azteca shares outstanding prior to the Transaction	12,500,000
Less: shareholders of Azteca public shares redeemed	(1,258,900	)
Less: Azteca founder shares cancelled	(250,000	)
Shares issued to WAPA member (2)	20,432,462
Shares issued to Cinelatino stockholders (3)	12,567,538
Total shares outstanding at closing, April 4, 2013	43,991,100

(1) Includes 985,294 shares of Hemisphere Class A common stock which are subject to forfeiture in the event the market price of Hemisphere Class A common stock does not meet certain levels.

(2) Includes 1,857,496 shares of Hemisphere Class B common stock, which were issued in the Transaction by Hemisphere that are subject to forfeiture in the event the market price of Hemisphere Class A common stock does not meet certain levels.

(3) Includes 1,142,504 shares of Hemisphere Class B common stock, which were issued in the Transaction by Hemisphere that are subject to forfeiture in the event the market price of Hemisphere Class A common stock does not meet certain levels.

The cash flows related to the Transaction are summarized as follows:

	Amount
Cash in trust at Azteca	$	100,520,532
Cash on hand at Cinelatino	12,865,242
Less: redemption of Azteca public shares	(12,651,945		)
Less: cash consideration paid to Azteca warrantholders	(7,333,334		)
Less: cash consideration paid to WAPA member and Cinelatino stockholders	(5,000,000		)(1)
Less: payment of Azteca fees and expenses	(5,963,030		)
Net cash received by the Company	$	82,437,465

(1) Includes $3.8 million paid by WAPA to Cinelatino.

Pro Forma Information

The following table sets forth the unaudited pro forma results of operations assuming that the Transaction occurred on January 1, 2012:

	Pro Forma
	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net Revenues	$	23,704,566	$	23,550,498	$	66,232,569	$	66,022,358
Operating Expenses:
Cost of revenues	10,106,353		10,446,262		24,687,086		27,260,184
Selling, general and administrative	6,448,503		6,404,096		22,305,259		21,733,698
Depreciation and amortization	2,585,615		3,233,155		7,025,558		6,751,401
Loss (gain) on disposition of assets	—		—		67,577		(50,000		)
Total operating expenses	19,140,471		20,083,513		54,085,480		55,695,283
Operating income	$	4,564,095	$	3,466,985	$	12,147,089	$	10,327,075

The unaudited pro forma results of operations for all periods set forth above includes the operating results of Cinelatino, stock-based compensation, corporate overhead including public company costs, and amortization of intangibles created as a result of the Transaction, and excludes all transaction related fees and expenses and non-recurring expenses (primarily the $3.8 million charge as a result of the termination of a certain agreement with MVS in connection with the Transaction).