10. Acquisitions

Blockbuster Acquisition

On April 26, 2011, we completed the Blockbuster Acquisition for a net purchase price of $234 million. This transaction was accounted for as a business combination and therefore the purchase price was allocated to the assets acquired based on their estimated fair value.

Blockbuster operations are included in our financial results beginning April 26, 2011. During 2012, we closed approximately 700 domestic retail stores, leaving us with approximately 800 domestic retail stores as of December 31, 2012. In January 2013, we announced the closing of approximately 300 additional domestic retail stores. We continue to evaluate the impact of certain factors, including, among other things, competitive pressures, the ability of significantly fewer Blockbuster domestic retail stores to continue to support corporate administrative costs, and other issues impacting the store-level financial performance of our Blockbuster domestic retail stores. These factors, or other reasons, could lead us to close additional Blockbuster domestic retail stores. In addition, to reduce administrative expenses, we moved the Blockbuster headquarters to Denver during June 2012.

This transaction was accounted for as a business combination using purchase price accounting. The allocation of the purchase consideration is in the table below.

	Purchase
	Price
	Allocation
	(In thousands)
Cash	$	107,061
Current assets	153,258
Property and equipment	28,663
Acquisition intangibles	17,826
Other noncurrent assets	12,856
Current liabilities	(86,080		)
Total purchase price	$	233,584

The pro forma revenue and earnings associated with the Blockbuster Acquisition are not included in this filing. Due to the material ongoing modifications of the business, management has determined that insufficient information exists to accurately develop meaningful historical pro forma financial information. Moreover, the historical operations of Blockbuster materially changed during the periods preceding the acquisition as a result of Blockbuster Inc.’s bankruptcy proceedings, and any historical pro forma information would not prove useful in assessing our post acquisition earnings and cash flows.

Blockbuster Entertainment Limited and Blockbuster GB Limited, our Blockbuster operating subsidiaries in the United Kingdom (collectively, the “Blockbuster UK Operating Entities”), entered into administration proceedings in the United Kingdom on January 16, 2013 (the “Administration”). Administrators have been appointed by the English courts to sell or liquidate the assets of the Blockbuster UK Operating Entities for the benefit of their creditors. Since we no longer exercise control and the administrator now exercises control over all operating decisions for the Blockbuster UK Operating Entities, we will be required to deconsolidate our Blockbuster entities in the United Kingdom (collectively, “Blockbuster UK”) during the first quarter 2013.

As a result of the Administration, we have written down the assets of Blockbuster UK to their estimated net realizable value on our Consolidated Balance Sheets as of December 31, 2012, and we recorded a charge to “Cost of sales - equipment, merchandise, services, rental and other” of $21 million during the year ended December 31, 2012 on our Consolidated Statements of Operations and Comprehensive Income (Loss). Furthermore, we have intercompany receivables due from Blockbuster UK of approximately $37 million that are eliminated in consolidation on our Consolidated Balance Sheets as of December 31, 2012. Upon deconsolidation of Blockbuster UK in the first quarter 2013, these intercompany receivables will no longer be eliminated in consolidation. We currently believe that we will not receive the entire amount for these intercompany receivables in the Administration. Accordingly, we recorded a $25 million impairment charge related to these intercompany receivables, to adjust this amount to their estimated net realizable value for the year ended December 31, 2012. This impairment charge was recorded in “Other, net” within “Other Income (Expense)” on our Consolidated Statements of Operations and Comprehensive Income (Loss) and the resulting liability was recorded in “Other accrued expenses” on our Consolidated Balance Sheets as of December 31, 2012. The $25 million impairment liability will be offset against the intercompany receivables that will be recorded upon deconsolidation in the first quarter 2013. In total, we recorded charges described above totaling approximately $46 million on a pre-tax basis on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2012 related to the Administration. The proceeds that we actually receive from the Administration and the actual impairment charge may differ from our estimates.

As of December 31, 2012, Blockbuster UK had total assets and liabilities as follows (in thousands):

Cash	$	14,072
Trade accounts receivable	1,153
Inventory	34,937
Other current assets	10,243
Restricted cash and marketable securities	484
Property and equipment	186
Trade accounts payable	(13,081		)
Intercompany payable	(36,676		)
Deferred revenue and other	(1,369		)
Other accrued expenses	(9,949		)
Total net assets	$	—

Upon deconsolidation in the first quarter 2013, the above amounts will be combined into one net asset and the intercompany receivables of $37 million, net of the impairment liability of $25 million described above, will be recorded in “Other noncurrent assets, net” on our Consolidated Balance Sheets as a component of our investment in Blockbuster UK.

For the years ended December 31, 2012 and 2011, Blockbuster UK had $293 million and $242 million of revenue, respectively. In addition, for the years ended December 31, 2012 and 2011, Blockbuster UK had an operating loss of $31 million and operating income of $16 million, respectively. Upon deconsolidation in the first quarter 2013, the revenue and expenses related to Blockbuster UK will no longer be recorded in our Consolidated Financial Statements.

DBSD North America and TerreStar Transactions

On March 2, 2012, the FCC approved the transfer of 40 MHz of 2 GHz wireless spectrum licenses held by DBSD North America and TerreStar to us. On March 9, 2012, we completed the DBSD Transaction and the TerreStar Transaction, pursuant to which we acquired, among other things, certain satellite assets and wireless spectrum licenses held by DBSD North America and TerreStar. In addition, during the fourth quarter 2011, we and Sprint entered into a mutual release and settlement agreement (the “Sprint Settlement Agreement”) pursuant to which all issues then being disputed relating to the DBSD Transaction and the TerreStar Transaction were resolved between us and Sprint, including, but not limited to, issues relating to costs allegedly incurred by Sprint to relocate users from the spectrum then licensed to DBSD North America and TerreStar. Pursuant to the Sprint Settlement Agreement, we made a net payment of approximately $114 million to Sprint. The total consideration to acquire these assets was approximately $2.860 billion. This amount includes $1.364 billion for the DBSD Transaction, $1.382 billion for the TerreStar Transaction, and the net payment of $114 million to Sprint pursuant to the Sprint Settlement Agreement.

Our consolidated FCC applications for approval of the license transfers from DBSD North America and TerreStar were accompanied by requests for waiver of the FCC’s Mobile Satellite Service (“MSS”) “integrated service” and spare satellite requirements and various technical provisions. The FCC denied our requests for waiver of the integrated service and spare satellite requirements but did not initially act on our request for waiver of the various technical provisions. On March 21, 2012, the FCC released a Notice of Proposed Rule Making (“NPRM”) proposing the elimination of the integrated service, spare satellite and various technical requirements attached to the 2 GHz licenses. On December 11, 2012, the FCC approved rules that eliminated these requirements and gave notice of its proposed modification of our 2 GHz authorizations to, among other things, allow us to offer single-mode terrestrial terminals to customers who do not desire satellite functionality. On February 15, 2013, the FCC issued an order, which will become effective on March 7, 2013, modifying our 2 GHz licenses to add terrestrial operating authority. The FCC’s order of modification has imposed certain limitations on the use of a portion of this spectrum, including interference protections for other spectrum users and power and emission limits that we presently believe could render 5 MHz of our uplink spectrum effectively unusable for terrestrial services and limit our ability to fully utilize the remaining 15 MHz of our uplink spectrum for terrestrial services. These limitations could, among other things, impact the finalization of technical standards associated with our wireless business, and may have a material adverse effect on our ability to commercialize these licenses. The new rules also mandate certain interim and final build-out requirements for the licenses. By March 2017, we must provide terrestrial signal coverage and offer terrestrial service to at least 40% of the aggregate population represented by all of the areas covered by the licenses (the “2 GHz Interim Build-out Requirement”). By March 2020, we must provide terrestrial signal coverage and offer terrestrial service to at least 70% of the population in each area covered by an individual license (the “2 GHz Final Build-out Requirement”). If we fail to meet the 2 GHz Interim Build-out Requirement, the 2 GHz Final Build-out Requirement will be accelerated by one year, from March 2020 to March 2019. If we fail to meet the 2 GHz Final Build-out Requirement, our terrestrial authorization for each license area in which we fail to meet the requirement will terminate. In addition, the FCC is currently considering rules for a spectrum band that is adjacent to our 2 GHz licenses, known as the “H Block.” If the FCC adopts rules for the H block that do not adequately protect our 2 GHz licenses, there could be a material adverse effect on our ability to commercialize the 2 GHz licenses.

As a result of the completion of the DBSD Transaction and the TerreStar Transaction, we will likely be required to make significant additional investments or partner with others to, among other things, finance the commercialization and build-out requirements of these licenses and our integration efforts including compliance with regulations applicable to the acquired licenses. Depending on the nature and scope of such commercialization, build-out, and integration efforts, any such investment or partnership could vary significantly. Additionally, recent consolidation in the wireless telecommunications industry, may, among other things, limit our available options, including our ability to partner with others. There can be no assurance that we will be able to develop and implement a business model that will realize a return on these spectrum licenses or that we will be able to profitably deploy the assets represented by these spectrum licenses, which may affect the carrying value of these assets and our future financial condition or results of operations.

For the purposes of acquisition accounting, management determined that the DBSD Transaction and the TerreStar Transaction, together with the net payment pursuant to the Sprint Settlement Agreement, should be accounted for as a single transaction. In reaching this conclusion, management considered, among other things, the fact that the transactions occurred in contemplation of one another and the expectation that the acquired assets will be utilized as a single integrated service. The total consideration of approximately $2.860 billion in connection with the DBSD Transaction and the TerreStar Transaction included $2.761 billion in cash and a $99 million non-cash gain related to the conversion of our DBSD North America 7.5% Convertible Senior Secured Notes due 2009. Of this non-cash gain, $78 million was included as a component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” on our Consolidated Balance Sheets as of December 31, 2012. We expense all transaction costs related to the acquisition as incurred. We have recognized the acquired assets and assumed liabilities based on our estimates of fair value at their acquisition date as shown below.

	Purchase
	Price
	Allocation
	(In thousands)
Cash	$	5,230
Current and noncurrent assets	5,600
Property and equipment	1,206,663
Goodwill (1)	119,904
FCC authorizations	1,949,000
Current liabilities	(58,873		)
Noncurrent liabilities	(367,876		)
Total acquisition consideration	$	2,859,648

(1) This amount is deductible for tax purposes and is included as a component of “Other noncurrent assets, net” on our Consolidated Balance Sheets.

Pro forma revenue and earnings associated with the DBSD Transaction and the TerreStar Transaction are not included in this filing. Due to the material ongoing modifications of the business, management has determined that insufficient information exists to accurately develop meaningful historical pro forma financial information. Moreover, the historical results of operations of DBSD North America and TerreStar are not indicative of their potential prospective operations because DBSD North America and TerreStar were in bankruptcy proceedings and did not have significant operations in periods prior to the transactions. As such, any historical pro forma information would not prove useful in assessing our post transaction earnings and cash flows.