EX-99.2 3 y66876exv99w2.htm EX-99.2: UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS EX-99.2
Exhibit 99.2
INDEX TO PRO FORMA FINANCIAL INFORMATION
   
TVT RECORDS (A DIVISION OF TEEVEE TOONS, INC. — DEBTOR IN POSSESSION)
 
Unaudited Pro Forma Condensed Combined Financial Statements:
  
Introduction to Unaudited Pro Forma Condensed Combined Financial Statements
 23
Unaudited Pro Forma Condensed Combined Balance Sheets at March 31, 2008
 25
Unaudited Pro Forma Condensed Combined Statements of Operations for the Three Months Ended March 31, 2008
 26
Unaudited Pro Forma Condensed Combined Statements of Operations for the Year Ended December 31, 2007
 27
Notes to the Unaudited Pro Forma Condensed Combined Financial Statements
 28

22

 

THE ORCHARD ENTERPRISES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
     The following unaudited pro forma condensed combined financial statements give effect to the acquisition of substantially all of the assets of TVT Records (a division of TeeVee Toons, Inc – Debtor in Possession) (“TVT Records”) by The Orchard Enterprises, Inc. (“The Orchard”). In accordance with Statement of Financial Accounting Standards No 141, Business Combinations, the purchase price is required to be allocated among the fair values of the assets and liabilities acquired.
     For purposes of these unaudited pro forma condensed combined financial statements, The Orchard has made a preliminary allocation of the purchase price to the assets that were acquired and liabilities that were assumed based on estimates of their fair values. A final determination of the fair values, will be made subsequent to the completion of the acquisition based on a final appraisal report (from a third party) of the actual assets and liabilities acquired.
     The unaudited pro forma condensed combined financial statements presented herein are derived from the historical financial statements of TVT Records and The Orchard, adjusted to give effect to the acquisition of TVT Records by The Orchard for accounting purposes. The pro forma adjustments are described in Note 3 to the pro formas.
     The unaudited pro forma condensed combined balance sheet as of March 31, 2008 gives effect to the proposed acquisition as if it occurred on January 1, 2008, and combines the historical balance sheet of TVT Records and The Orchard as of March 31, 2008.
     The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2008, is presented as if the acquisition was consummated on January 1, 2008, and combines the historical results of The Orchard and TVT Records for the three months ended March 31, 2008. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2007, is presented as if the acquisition was consummated on January 1, 2007, and combines the historical results of The Orchard and TVT Records for the year ended December 31, 2007.

23

 

THE ORCHARD ENTERPRISES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS—(Continued)
     These unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not indicative of the combined financial position or results of operations in future periods or the results that actually would have been realized had The Orchard and TVT Records been a combined company during the periods presented. The pro forma adjustments are based on the preliminary information available at the time of the preparation of these statements and are subject to change. These unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of The Orchard and TVT Records.

24

 

THE ORCHARD ENTERPRISES INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2008
                                 
    The Orchard     TVT             Pro Forma  
    Enterprises, Inc.     Records.     Pro Forma     The Orchard  
    Historical     Historical     Adjustments     Enterprises, Inc.  
ASSETS
                                
Current assets:
                                
Cash
   $ 10,737,743     $       $ (5,550,000 ) (b)   $ 5,187,743  
Accounts receivable — net
     7,844,276       2,534,254               10,378,530  
Current portion of royalty advances
     3,933,449       1,017,532       108,055   (b)     5,059,036  
Inventory
             162,025             162,025  
Prepaid expenses and other current assets
     322,578                       322,578  
 
                        
Total current assets
     22,838,046       3,713,811       (5,441,945 )      21,109,912  
Royalty advances, less current portion
     1,853,994                       1,853,994  
Music and audio content — net
     3,973,462               2,001,139   (b)     5,933,546  
 
                     (41,055 ) (d)        
Property and equipment — net
     968,545       137,359       (137,359 ) (a)     968,545  
Goodwill
     24,791,371                       24,791,371  
Intangible assets
                     726,995   (b)     723,890  
 
                     (3,105 ) (d)        
Other assets
     34,761                       34,761  
 
                        
TOTAL ASSETS
   $ 54,460,179     $ 3,851,170     $ (2,895,330 )   $ 55,416,019  
 
                        
 
                                
     LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
                                
Accounts payable
   $ 988,036     $ 15,386,152     $ (14,386,152 ) (a)   $ 1,988,036  
Royalties payable
     14,733,084       7,739,978       (7,739,978 ) (a)     14,733,084  
Accrued expenses
     993,844                       993,844  
Deferred revenue
     654,300                       654,300  
Other current liabilities
             627,382       (627,382 ) (a)     —  
 
                        
Total current liabilities
     17,369,264       23,753,512       (22,753,512 )     18,369,264  
 
                        
 
                                
Commitments and contingencies
                                
 
                                
REEDEMABLE PREFERRED STOCK:                                
Series A convertible preferred stock; $.01 par value, 448,833 shares designated; 448,833 issued and outstanding ; liquidation preference of $25,000,000
     7,017,245                       7,017,245  
 
                        
 
                                
STOCKHOLDERS’ EQUITY:                                
 
                                
Preferred stock; $.01 par value — 1,000,000 shares authorized and 448,833 shares designated; 551,167 shares undesignated; no undesignated shares issued and outstanding ;
     —                       —  
 
                                
Common stock, $0.01 par value - 30,000,000 shares authorized; 6,266,794 shares issued and outstanding as of March 31, 2008.
     62,668                       62,668  
 
                                
Additional paid-in capital
     55,181,197                       55,181,197  
Accumulated deficit
     (25,197,595 )             (41,055 ) (d)     (25,241,755 )
 
                     (3,105 ) (d)        
Net assets to be sold
             (19,902,342 )     19,902,342   (a)     —  
Accumulated other comprehensive income
     27,400                       27,400  
 
                        
Total stockholders’ equity
     30,073,670       (19,902,342 )     19,858,182       30,029,510  
 
                        
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY   $ 54,460,179     $ 3,851,170     $ (2,895,330 )   $ 55,416,019  
 
                        
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

25

 

THE ORCHARD ENTERPRISES INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2008
                                 
    The Orchard                     Pro Forma  
    Enterprises,     TVT             The Orchard  
    Inc.     Records     Pro Forma     Enterprises,  
    Historical     Historical     Adjustments     Inc.  
Revenue
   $ 13,155,770     $ 2,463,302     $       $ 15,619,072  
Costs of revenues
     9,602,680       942,730               10,586,465  
Amortization
                     41,055   (d)        
 
                        
Gross profit
     3,553,090       1,520,572       (41,055 )     5,032,607  
 
                                
Operating expenses
     4,723,252       2,788,481       (13,820 ) (c)     7,501,018  
 
                     3,105   (d)        
 
                        
Loss from operations
     (1,170,162 )     (1,267,909 )     (30,340 )     (2,468,411 )
 
                                
OTHER INCOME (EXPENSE)
                                
Interest income
     84,700       —               84,700  
Loss on disposal of asset
     (21,767 )     —               (21,767 )
Interest expense
     —       (664,351 )     664,351   (e)     —  
Other income (expense)
     2,844       (99,470 )             (96,626 )
 
                        
Total other income (expenses)
     65,777       (763,821 )     664,351       (33,693 )
 
                        
Income taxes
                                
 
                        
Net income (loss)
   $ (1,104,385 )   $ (2,031,730 )   $ 634,011     $ (2,502,104 )
 
                        
 
                                
Loss per share:
                                
Basic
   $ (0.18 )                   $ (0.40 )
 
                            
Diluted
   $ (0.18 )                   $ (0.40 )
 
                            
Weighted average shares outstanding
                                
Basic and diluted
     6,197,325                       6,197,325  
 
                            
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

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THE ORCHARD ENTERPRISES INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2007
                                 
    The Orchard                     Pro Forma  
    Enterprises,     TVT             The Orchard  
    Inc.     Records     Pro Forma     Enterprises,  
    Historical     Historical     Adjustments     Inc.  
Revenue
   $ 28,548,834     $ 16,002,812             $ 44,551,646  
Costs of revenues
     20,893,414       7,692,431               28,750,066  
Amortization
                   $ 164,221  (d)        
 
                        
Gross profit
     7,655,420       8,310,381       (164,221 )     15,801,580  
 
                                
Operating expenses
     14,355,998       19,061,604       (112,525 )(c)     33,317,496  
 
                     12,419  (d)        
 
                        
Loss from operations
     (6,700,578 )     (10,751,223 )     (64,115 )      (17,515,916 )
 
OTHER INCOME (EXPENSE)
                                
Beneficial conversion feature
     (477,430 )                     (477,430 )
Interest income
     37,797                       37,797  
Interest expense
    (423,009 )     (3,920,489 )     3,920,489  (e)     (423,009 )
Other income (expense)
     (39,096 )     16,159             (22,937 )
 
                        
Total other income (expenses)
     (901,738 )     (3,904,330 )     3,920,489       (885,579 )
 
                        
Income taxes
             —                  
 
                        
Net income (loss)
   $ (7,602,316 )   $ (14,655,553 )   $ 3,856,374     $ (18,401,495 )
 
                        
 
                                
Loss per share:
                                
Basic
   $ (3.18 )                   $ (7.70 )
 
                            
Diluted
   $ (3.18 )                   $ (7.70 )
 
                            
Weighted average shares outstanding
                                
Basic and diluted
     2,390,388                       2,390,388  
 
                            
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

27

 

THE ORCHARD ENTERPRISES INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. The Merger and Basis of Presentation
On June 26, 2008, the United States Bankruptcy Court of the Southern District of New York (“the Bankruptcy Court”) entered an order that, among other things, approved the sale of substantially all of the assets of TVT Records to The Orchard Enterprises, Inc. (“The Orchard”) pursuant to the terms and conditions of the form of asset purchase agreement provided to the Bankruptcy Court. On July 3, 2008, The Orchard and TVT Records entered into a definitive purchase agreement (the “Asset Purchase Agreement”) pursuant to which The Orchard (i) acquired substantially all of the assets of TVT Records’ record label business operations including, but not limited to, masters, artists’ agreements, certain inventory, other property and (ii) assumed certain liabilities of TVT Records related to the Assets. The aggregate purchase price of the Assets was $5,050,000 (subject to reduction). The Company also incurred acquisition costs of $500,000.
In addition to the purchase price referred to above, the Asset Purchase Agreement required The Orchard to cure certain monetary defaults of TVT Records relating to the Assets to be acquired by the Orchard in an amount not to exceed $1,025,000.
2. Preliminary Purchase Price Allocation
     Under the purchase method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of TVT Records based on their estimated fair values as of the closing date. The excess of the purchase price (if any) over the fair value of assets acquired and liabilities assumed is allocated to goodwill. A preliminary allocation of the purchase price to the acquired tangible and intangible assets and assumed liabilities of TVT Records based on their estimated fair values, including acquisition costs as of March 31, 2008, is as follows:
         
    FMV  
    3/31/2008  
Accounts receivable and inventory
   $ 2,696,279  
Intangible assets - other
     726,995  
Royalty advances
     1,125,587  
Music and audio content
     2,001,139  
Potential liabilities related to cures
     (1,000,000 )
 
      
Net assets acquired
   $ 5,550,000  
 
      
     The purchase price allocation is preliminary and will be adjusted when TVT Records completes its final valuation of the tangible and intangible assets acquired and liabilities assumed. Based on the preliminary allocation of the purchase price presented above (with respect to March 31, 2008 assets and liabilities assumed) the excess purchase price resulted in negative goodwill, if any, will be determined based on the acquired assets and liabilities assumed at the closing date (July 3, 2008), such amount may be different than the values presented above.
3. Pro Forma Adjustments
(a) To eliminate the historic book values of TVT Records ( a division of TeeVee Toons, Inc. – Debtor in Possession), that were not acquired or assumed.
(b) To record the preliminary purchase price of TVT Records totaling $5,550,000 (including $500,000 of acquisition costs) by adjusting the historical value of TVT Records assets and liabilities to their estimated fair values as described in Note 2 above.
(c) To eliminate TVT Records historical depreciation expense for assets not acquired.
(d) To record TVT Records pro forma amortization expense based on the preliminary estimated fair value of the underlying assets. Music and audio content which consists of master recordings have been calculated on a pro forma basis using a 10 year amortization period and digital distribution agreements have been calculated on a pro-forma basis based on the life of the contracts which range between two to six years. Intangible assets consist of corporate trade names are based on the estimated expected life of 15 years.
(e) To eliminate interest expense on borrower funds from TeeVee Toons Inc. – Debtor in Possession, as such related obligations will not be assumed by The Orchard.

28