Home Shopping Network 2013 Annual Report Download - page 51

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In connection with the 2012 acquisition of Chasing Fireflies, the purchase price included contingent consideration of
$7.8 million. Based on achieving specific annual performance targets or a cumulative three-year performance target, the sellers
can receive payments in each of the three years following the acquisition up to a maximum total payout of $7.8 million . The
estimated fair value of the contingent consideration at the date of acquisition was $6.5 million and was included as part of the
purchase price allocation. HSNi determined the fair value of the contingent consideration based on a probability-weighted
discounted cash flow approach (level 3 criteria). Key inputs used in this calculation included estimates related to each of the
three year's operating performance. In each period, HSNi reassesses its current estimates of performance relative to the stated
targets and adjusts the liability to fair value. Performance targets were achieved for the year ended December 31, 2012;
therefore, a payment of $2.6 million was paid to the sellers in 2013.
During the year ended December 31, 2013, performance targets were not achieved. As a result, during the fourth
quarter ended December 31, 2013, HSNi determined Chasing Fireflies is also less likely to achieve the necessary performance
targets in 2014 to earn the full amount of the contingent consideration. Therefore, HSNi adjusted the fair value of the
contingent consideration in the fourth quarter of 2013 to $1.0 million, a decrease of $3.6 million. HSNi also recognized a fair
value adjustment of $3.0 million for indefinite-lived intangible assets related to the acquisition of Chasing Fireflies. The fair
value of the intangible assets, consisting of trademarks and trade names, was determined using the relief from royalty method
(level 3 criteria). Key inputs used in this calculation included revenue growth, discount, royalty and terminal growth rates. The
net impact of the impairment charge and the contingent consideration adjustment was a reduction of expense of $0.6 million
and is included in "General and administrative expense" in the accompanying consolidated statements of operations.
The change in the fair value of the contingent consideration liability is summarized as follows (in thousands):
2013 2012
Beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,832 $ —
Fair value of contingent consideration issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6,500
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 332
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,583) —
Fair value adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,600) —
End of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,032 $ 6,832
The following table summarizes the fair value of HSNi’s financial assets and liabilities which are carried at cost (in
thousands):
December 31, 2013
Carrying
Value Fair Value
Fair Value Measurement Category
Level 1 Level 2 Level 3
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240,625 $ 240,625 $ — $ 240,625 $ —
December 31, 2012
Carrying
Value Fair Value
Fair Value Measurement Category
Level 1 Level 2 Level 3
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000 $ 250,000 $ — $ 250,000 $ —
The fair value of the term loan was estimated by discounting expected cash flows at the rates currently offered to HSNi
for debt of the same remaining maturities, as advised by HSNi's bankers (level 2 criteria).
HSNi measures certain assets, such as property and equipment and definite-lived intangible assets, at fair value on a
non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired. On July 1, 2012, substantially
all of the assets and certain liabilities of The Territory Ahead were sold. An impairment charge of $5.9 million was recorded in
the second quarter of 2012 to reduce the carrying value of the net assets to their estimated net realizable value based on the
known selling price of $1.1 million and the estimated costs to sell the business. See Note 17 for further discussion of the sale
of The Territory Ahead. There were no other fair value adjustments to the carrying values of HSNi's property and equipment
and definite-lived intangible assets during December 31, 2013 or 2012.