Investments in Affiliates
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9 Months Ended |
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Oct. 31, 2011
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Investments in Affiliates |
5. Investments in Affiliates
On Demand Deutschland GmbH & Co. KG
On
February 27, 2007, the On Demand Group Limited
(“ODG”), a wholly-owned U.K. subsidiary of SeaChange,
entered into an agreement with Tele-Munchen Fernseh GmbH &
Co. Produktionsgesellschaft (TMG) to create a joint venture named
On Demand Deutschland GmbH & Co. KG. On Demand Deutschland
specializes in establishing on-demand and pay-per-view services on
multiple platforms in German-speaking Europe. ODG contributed $2.8
million to acquire its 50% ownership interest in the joint venture
of which $2.6 million consisted of the fair value of customer
contracts and content license agreements contributed by ODG and
$154,000 represented a cash contribution. The customer contracts
and licensed content had no book value. SeaChange determined that
this investment is an operating joint venture and does not require
consolidation. Consequently, SeaChange accounts for this investment
under the equity method of accounting.
ODG’s
original investment in the joint venture was recorded at $154,000
representing the US dollar equivalent of the initial cash
contribution. The difference between the book and fair value of the
customer contracts and content license agreements is being accreted
over the expected five year life of the contracts and recorded as a
gain and an increase in the investment. This gain will be partially
offset by ODG’s 50% share of the joint venture’s
amortization expense over the same period related to the acquired
contracts and content license agreements. ODG also recorded a net
payable amount to the joint venture of $337,000 as of the joint
venture formation date reflecting the transfer of net liabilities
incurred by ODG related to the joint venture as well as the joint
venture’s reimbursement of previously incurred costs by ODG
of $787,000 related to joint venture activities prior to its
formation. Consistent
with authoritative guidance regarding non-monetary
transactions, ODG did
not record other income in connection with the reimbursement of
these costs or any other gains as ODG is deemed to have a
commitment to support the operations of the joint venture. ODG
treated the reimbursement and other gain for a total of $869,000 as
a capital distribution in excess of the carrying value of its
investment in the joint venture. This capital distribution is being
accreted over the expected five year life of the customer contracts
and recorded as a gain and an increase in the investment in the
joint venture.
ODG
entered into a Service Agreement with the joint venture whereby ODG
provides content aggregation, distribution, marketing and
administration services to the joint venture under an arm’s
length fee structure. In the three months ended October 31, 2011
and 2010, ODG recorded revenues of
approximately $436,000 and $750,000,
respectively, related to the Service Agreement. In the nine
months ended October 31, 2011 and 2010, ODG recorded revenues
of
approximately $1.4 million and $1.5 million, respectively,
related to the Service Agreement. ODG’s share of profits from
this agreement in proportion to its equity ownership interest is
eliminated in consolidation.
The
Shareholder’s Agreement requires both ODG and TMG to provide
cash contributions up to $4.2 million upon the request of the joint
venture’s management and approval by the shareholders of the
joint venture. To date, the
Company has contributed $1.6 million as required per the
shareholders agreement.
ODG
recorded its proportionate share of the joint venture’s gain
of $259,000 for the three months ended October 31, 2011 and losses
of $39,000 for the three months ended October 31, 2010. ODG
recorded its proportionate share of the joint venture’s gains
of $194,000 for the nine months ended October 31, 2011 and losses
of $284,000 for the nine months October 31, 2010. Due to the
contribution of assets by ODG to the joint venture and ODG’s
share of the joint venture’s net loss exceeding the book
value of its investment in the joint venture, the investment is
recorded as a long-term liability of $1.0 million
as of October 31, 2011 and $1.2 million as of January 31,
2011.
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