GSN / FUN Merger
Additional Diligence Items
March 23, 2009
Responses to Questions from March 22 / March 23 Phone Conversation
Legal Issues
• FUN currently offers skill-based game tournaments for fees to players playing within 34 states and does
not offer such tournaments to players within 14 states, plus 2 additional states where players are
prohibited from playing card games in such tournaments (although tournaments involving other games
are allowed). FUN's and SPE's gaming counsel agree that the law in this area is in flux, is susceptible
to political influences and should be monitored regularly for changes in the law and/or enforcement in
all 50 states. Specifically, FUN and its gaming counsel currently are closely monitoring 9 states (out of
the 34), where the law is ambiguous or there are activist governmental officials, looking for any changes
that could impact whether tournaments for a fee continue to be offered in these states. FUN has not
prepared a legal analysis of relevant law in any foreign jurisdiction, although less than 10% of FUN's
business is outside the U.S. SPE legal has kept Nicole apprised of the gaming issues.
Liberty Guarantee
•
Prior to the Liberty spin, Liberty Media Corporation ("LMC") owns 54% of DirecTV and this interest is
held in Greenlady Corp. ("Greenlady"), a wholly owned subsidiary of LMC, and is included in Liberty
Entertainment, one of LMC's tracking stocks. In connection with the GSN/FUN transactions, and prior
to the Liberty spin, Greenlady will be guaranteeing all of Liberty's payment obligations to SPE in this
deal, including under the put/call. After the Liberty spin, either Greenlady or Liberty Entertainment, Inc.
("LEI"), Greenlady's parent entity under the new post-spin structure, will be providing this guarantee. In
either case, the direct owner of 54% of DirecTV (Greenlady), or its parent entity (LEI), will be
guaranteeing all of Liberty's payment obligations to SPE in this deal, including under the put/call or
buy/sell, as the case may be.
page 1
E-mail Question 1 – Governance and Financial Obligations
• What kind of financial obligation do we have under the new 65:35 organization? If we have any
obligation could we assume that this would be 65:35 and not 50:50? The 50:50 governance
structure will be applied only to voting rights (board seats) and everything else will be on 65:35 is
what I understand?
50/50
Governance
• SPE will retain its 50% of key approval rights under the new GSN operating
agreement (exactly the same as current arrangement), including approvals of:
– Budgets, business plans, and non-budgetary items
– Additional capital calls
– Acquisitions over $1MM
– Issuance of membership interests
65/35
Financial
Obligations
1
• All financial obligations (excluding potential pre-close GSN MFN liabilities of $201
$25MM ) will be shared 35% to SPE and 65% to Liberty
Pre-close MFN liabilities will be split 50/50 between SPE and Liberty
page 2
E-mail Question 2 – Carve-out Balance Sheet
FUN Games Pro Forma Balance Sheet Estimate as of April 1, 2009
Forecast as of April 1, 2009
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash
Money market funds
Accounts receivable, net
Prepaid expenses
Other current assets
Total Current Assets
Property and equipment, at cost
Accumulated depreciation
$1,000,000
1,156,226
377,529
1,513,229
177,883
4,224,866
1,558,568
(456,345)
1,102,222
Intangibles, at cost
Accumulated amortization
42,505,406
(27,269,792)
15,235,614
Notes receivable, intercompany
Goodwill
Other LT assets
Investments
117,541,560
-
Total Assets
$138,104,262
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable and accrued liabilities
Customer deposits
Taxes payable
Deferred revenue
Current portion of long-term liabilities
Total Current Liabilities
Long Term Liabilities
Notes payable, intercompany
Deferred income taxes
Other long term
Intercompany
Shareholders Equity
Capital stock:
Common stock
Additional paid-in capital
Capital redemption reserve
Foreign currency translation adjustment
Deferred stock-based compensation
Retained earnings
Opening
Current period/year (earnings) loss
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$4,281,301
1,481,412
679,748
100,000
6,542,461
5,232,257
1,130,263
6,362,521
(28,879)
• April 1, 2009 Balance
Sheet is management’s
estimate as of the time
Sony acquires 35%.
• Represents only the
gaming segment that
Sony will be investing in
63,742,804
237,328,445
634,235
1,999,447
9,099,666
312,804,598
(164,383,287)
(23,193,152)
(187,576,439)
125,228,159
$138,104,262
page 3
E-mail Question 3 – Summary of Goodwill
Acquisition Date
FUN acquires SkillJam
Goodwill
(Net of Impairments)
July 2004
$8,906,897
Liberty acquires FUN
March 2006
$91,356,154
FUN acquires WorldWinner
March 2006
$15,830,385
FUN acquires Teagames
August 2006
$1,448,123
Ending Balance
$117,541,559
page 4
Questions 4, 6, and 7 – Earnings History
Overview of FUN Earnings History
P&L Profits
• Fun Games (exclusive of FUN Sports) generated $6.5MM of EBITDA in 2008. On a
consolidated basis, FUN (including FUN Games and FUN Sports) generated $6.6MM of
EBITDA in 2008
• FUN has not been net income positive on a consolidated basis or a FUN Games divisional
basis, largely due to deal amortization and write-offs. However, FUN Games is expected to
generate $13.2MM of EBITDA and $7.9MM of Net Income in 2009
Balance Sheet Detail
• FUN’s retained earnings were reset in 2006 when Liberty acquired a controlling stake in FUN.
From that time through December 31, 2008, $154MM of FUN’s total accumulated deficit was
attributable to FUN Games in the carve-out balance sheet. However, only $21MM related to
operating losses from continuing operations.
• The $23MM identified as “current period losses” on the carve-out balance sheet is due to
pre-close adjustments between 12/31/2008 and 4/1/2009. These adjustments primarily relate
to the write-off of inter-company receivables prior to close
page 5
Questions 4, 6, and 7 – Earnings History
Historical P&L for FUN Games Segment
(Values in $000s)
Revenue
COGS
Operating Expenses
EBITDA
D&A
Interest Expense
Tax Expense
Net Income Before Other Items
Other Items (Write-downs, Impairments, etc.)
Net Income From Continuing FUN Businesses
2006
2007
$22,334
$42,269
$56,111
(13,591)
(20,846)
(20,569)
(20,212)
(28,794)
(20,863)
($12,103)
$1,488
$6,454
(6,354)
(312)
1,370
(5,984)
85
1,648
(11,297)
(12)
3,983
($17,399)
($2,763)
($872)
(59,940)
(7,705)
(33,233)
(77,339)
(10,467)
(34,105)
-
(28,538)
(3,881)
($39,005)
($37,986)
Loss from Entities Sold in 2008
Net Income
2008
($77,339)
FUN Games Retained Earnings 12/31/08
Dividends to Liberty in March 2009
FUN Games Retained Earnings 4/1/09
Settlement of Intercompany Receivables and Other Pre-Close Adjustments 4/1/09
Retained Earnings as of Sony's Investment
NOTE: The above “carve-out” P&L required various assumptions and allocations to reflect the P&L for FUN Games and associated corporate
allocations only. Variance to prior historical P&L provided primarily relates to the inclusion of corporate allocations that will be included with FUN
Games after the transaction.
($154,331)
($10,053)
($164,383)
($23,193)
($187,576)
page 6
Questions 4, 6, and 7 – Earnings History
FUN Technologies P&L (Consolidated, Including FUN Sports and FUN Games)
(Values in $000s)
Revenue
2006
2007
2008
$41,648
$69,103
$69,738
(17,240)
(34,381)
(29,477)
(33,439)
(34,235)
(28,881)
EBITDA
($9,973)
$6,187
$6,622
D&A
(15,853)
(12,928)
(19,145)
(695)
(172)
COGS
Operating Expenses
Interest Expense
Tax Expense
Net Income Before Other Items
Other Items (Write-downs, Impairments, etc.)
Net Income
14
5,519
3,963
5,626
($20,294)
($3,473)
($7,068)
(88,392)
(40,144)
(27,872)
($108,686)
($43,617)
($34,939)
page 7
E-mail Question 5 – Valuation
Summary of Preliminary FUN Valuation Analysis
Based on internal projections; in the process of reviewing with EY; subject to further review by PWC
Valuation Overview ($MM)
Valuation
Method
Market Trading Comps
Indicated
Fair Value
Weighting
Effective
Value
Median Multiples
Company
Discounted Cash Flow 1
$219
50%
$109
Market Trading Comps
$141
25%
$35
Precedent Transaction Comps
$171
25%
$43
Enterprise Value 2
$187
% Share Acquired
35%
Value Acquired
$66
WACC 3
Electronic Arts, Inc.
Activision Blizzard
Microsoft
Yahoo! Inc.
Time Warner
Amazon.com, Inc.
eBay, Inc.
Blue Nile, Inc.
Metric
LTM
Forward 1 Yr
Forward 2 Yr
Revenue
2.2x
2.1x
N/A
EBITDA
15.0x
13.9x
N/A
Precedent Transactions
Acquisition
Buyer
13.7%
Real Networks, Inc.
FUN Technologies Inc
PartyGaming Plc
FUN Technologies Inc
Electronic Arts Inc.
BET and WIN.com
Electronic Arts Inc.
Liberty Freedom Inc.
Fox Interactive Media
Fox Interactive Media
FUN Technologies Plc
FUN Technologies Plc
Target
WiderThan Co. Ltd
CDM Fantasy Sports
Gamebookers
WorldWinner.com
Digital Illusions CE AB
Ongame e-solutions AB
JAMDAT Mobile Inc
Fun Technologies Plc (51%)
IGN Entertainment, Inc.
Intermix Media, Inc.
Fanball Interactive, LLC
Don Best
Median Multiples
Metric
LTM
Revenue
3.7x
EBITDA
7.4x
(1) DCF analysis based on free cash flow incorporating charge for corporate overhead
(2) Enterprise Value includes $1MM of cash and no debt
(3) WACC based on all companies listed for Market Trading Comps
page 8
E-mail Question 5 – Valuation
FUN P&L Used for Valuation Analysis
Values in $000s
ACTUALS
BUDGET
Calendar Years
2008
2009
2010
2011
2012
2013
REVENUE
Advertising
Standard Tournament
Jackpot / FPUE Tournament
Partner Fees
All Other
TOTAL REVENUE
Y/Y Growth
1,300
40,814
11,956
1,292
749
$56,111
2,467
52,274
16,917
2,512
820
$74,990
33.65%
3,701
68,562
21,651
3,768
877
$98,560
31.43%
4,811
83,760
25,909
4,899
921
$120,301
22.06%
5,533
96,796
29,942
5,634
967
$138,872
15.44%
5,948
108,298
33,500
6,056
1,016
$154,818
11.48%
(28,794)
(40,627)
(52,749)
(63,900)
(73,846)
(82,620)
$27,316
48.68%
$34,364
45.82%
$45,811
46.48%
$56,400
46.88%
$65,026
46.82%
$72,197
46.63%
SG&A
(20,863)
(21,139)
(24,549)
(27,705)
(29,838)
(31,609)
EBITDA
EBITDA %
$6,454
11.5%
$13,225
17.6%
$21,262
21.6%
$28,695
23.9%
$35,189
25.3%
$40,588
26.2%
(11,297)
(6,544)
(3,964)
(3,503)
(2,435)
(400)
($4,844)
$6,680
Cost of Sales
GROSS PROFIT
Gross Profit %
D&A
EBIT
Other
LTIP
Interest
Income (Loss) before Taxes
Deferred Tax
Current Tax
NET INCOME (LOSS)
(32,519)
(715)
(12)
($38,090)
4,159
(176)
($34,106)
(528)
(36)
$6,116
2,164
(306)
$7,974
FORECAST
$17,299
(1,233)
(36)
$16,029
1,227
(801)
$16,455
$25,192
(804)
(36)
$24,352
1,103
(6,582)
$18,873
$32,753
(969)
(36)
$40,188
(969)
(36)
$31,748
$39,184
551
(10,794)
(13,322)
$21,505
$25,861
Changes from
Financial Appendix Page
Previously Sent
•
Previous P&L provided was for
FUN Games only; current
version (left) includes FUN
Games plus corporate
allocations, including overhead
of $1.9MM in 2008 and $700K
from 2009 – 2013. Based on
recent diligence calls with FUN
management.
•
Current tax calculation in
CY2011 increased on the
assumption that NOLs will be
fully utilized earlier in the year
NOTE: The above “carve-out” P&L required various assumptions and allocations to reflect the P&L for FUN Games and associated corporate
allocations only. Variance to prior historical P&L provided primarily relates to the inclusion of corporate allocations that will be included with FUN
Games after the transaction.
page 9
E-mail Question 5 – Valuation
FUN Valuation Based on Market and Precedent Transaction Comps
Metric
FUN
Multiple
Implied Value
Weight
Weighted Value
LTM Revenue
$56,111
2.2x
$124,479
25%
$31,120
LTM EBITDA
$6,454
15.0x
$96,565
25%
$24,141
Forward 1 Yr Revenue
$74,990
2.1x
$156,301
25%
$39,075
Forward 1 Yr EBITDA
$13,225
13.9x
$183,562
25%
$45,890
(Values in $000s)
MARKET TRADING COMPS
Total Value
$140,227
Add Cash ($1MM)
$141,227
PRECEDENT TRANSACTION COMPS
LTM Revenue
$56,111
3.7x
$210,135
75%
$157,601
LTM EBITDA
$6,454
7.4x
$47,885
25%
$11,971
Total Value
$169,573
Add Cash ($1MM)
$170,573
page 10
E-mail Question 5 – Valuation
FUN Valuation Based on Discounted Cash Flow Analysis
BUDGET
2009
FORECAST
DECLINING GROWTH
2010
2011
2012
2013
2014
2015
2016
2017
$31.6
4.2%
Free Cash Flow
$11.7
$20.0
$19.3
$23.4
$25.8
$27.8
7.8%
$29.1
4.7%
$30.4
4.3%
Terminal Value
-
-
-
-
-
-
-
-
$337.6
Total
$11.7
$20.0
$19.3
$23.4
$25.8
$27.9
$29.1
$30.4
$369.3
NPV
$217.7
•
Free cash flow projections based on the P&L on page 9 (Net Income adjusted for non-cash items such as
depreciation, amortization, deferred taxes, and CAPEX)
•
Detailed forecast extends through 2013; 2014 – 2017 projections based on declining growth method
•
Terminal value based on 4% perpetuity growth
•
Cash flows are discounted at a 13.7% WACC
page 11