PRO FORMA FINANCIAL STATEMENTS
EXHIBIT 99.3
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED INCOME STATEMENTS AND BALANCE SHEETS
YEAR ENDED DECEMBER 31, 2005 AND THREE MONTHS ENDED MARCH 31, 2006
The following unaudited condensed pro forma income statements and balance sheets for the year ended December 31, 2005 and the three months ended March 31, 2006, respectively, are derived from a21’s audited historical consolidated financial statements for the year ended December 31, 2005 and unaudited historical consolidated financial statements for the three months ended March 31, 2006, and ArtSelect’s audited historical financial statements for the year ended December 31, 2005 and unaudited historical financial statements for the three months ended March 31, 2006, after giving effect to the pro forma adjustments described in the notes to the Pro Forma Consolidated Financial Information. Such adjustments have been determined as if the acquisition of ArtSelect took place on January 1, 2005 and January 1, 2006, respectively, the first day of the financial periods presented in the Pro Forma Consolidated Financial Information.
PRO FORMA FINANCIAL STATEMENTS
INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
(thousands, except share amounts) | | | | | | | | Consolidated | |
| | | a21 | | ArtSelect | | Adjustments | | Proforma | |
| | | | | | | | | | |
| Revenue, net | | $ | 9,563 | | $ | 11,739 | | $ | - | | $ | 21,302 | |
| Cost of Revenue | | | 3,090 | | | 5,213 | | | - | | | 8,303 | |
| Selling, general and administrative | | | 7,401 | | | 6,025 | | | - | | | 13,426 | |
| Depreciation and amortization | | | 1,683 | | | 353 | | | 1,200 | | | 3,236 | |
| TOTAL OPERATING EXPENSES | | | 12,174 | | | 11,591 | | | 1,200 | | | 24,965 | |
| OPERATING (LOSS) INCOME | | | (2,611 | ) | | 148 | | | (1,200 | ) | | (3,663 | ) |
| | | | | | | | | | | | | | |
| Interest expense, net | | | (1,380 | ) | | (603 | ) | | 217 | | | (1,766 | ) |
| Other income, net | | | (678 | ) | | 3 | | | - | | | (675 | ) |
| NET LOSS BEFORE TAXES | | | (4,669 | ) | | (452 | ) | | (983 | ) | | (6,104 | ) |
| Income tax | | | (105 | ) | | - | | | - | | | (105 | ) |
| Deemed dividends | | | (219 | ) | | - | | | | | | (219 | ) |
| NET LOSS | | | ($4,993 | ) | | ($452 | ) | | ($983 | ) | | ($6,428 | ) |
| | | | | | | | | | | | | | |
| NET LOSS PER SHARE, BASIC AND DILUTED | | | (0.10 | ) | | | | | | | | (0.12 | ) |
| | | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | | | 47,723,202 | | | | | | 4,950,000 | | | 52,673,202 | |
See accompanying notes to the Unaudited Condensed Pro Forma Consolidated Financial Information
PRO FORMA FINANCIAL STATEMENTS
BALANCE SHEETS AS OF DECEMBER 31, 2005
(thousands, except share amounts) | | | | | | | | Consolidated | |
| | | a21 | | ArtSelect | | Adjustments | | Proforma | |
| ASSETS | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,194 | | $ | 284 | | $ | - | | | 1,478 | |
| Accounts receivable, net | | | 1,840 | | | 653 | | | - | | | 2,493 | |
| Inventory | | | 156 | | | 646 | | | - | | | 802 | |
| Other | | | 277 | | | 32 | | | 80 | | | 389 | |
| Total current assets | | | 3,467 | | | 1,615 | | | 80 | | | 5,162 | |
| | | | | | | | | | | | | | |
| Property and equipment, net | | | 7,602 | | | 250 | | | - | | | 7,852 | |
| Software, net | | | - | | | 404 | | | - | | | 404 | |
| Goodwill | | | 2,263 | | | - | | | 3,147 | | | 5,410 | |
| Intangible assets, net | | | 3,882 | | | - | | | 4,800 | | | 8,682 | |
| Other | | | 3,300 | | | 7 | | | - | | | 3,307 | |
| Total assets | | $ | 20,514 | | $ | 2,276 | | $ | 8,027 | | $ | 30,817 | |
| | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS EQUITY | | | | | | | | | | | | | |
| Accounts payable | | $ | 1,351 | | $ | 730 | | | - | | $ | 2,081 | |
| Notes payable - current portion | | | 1,050 | | | 28 | | | - | | | 1,078 | |
| Other | | | 2,012 | | | 252 | | | - | | | 2,264 | |
| Total current liabilities | | | 4,413 | | | 1,010 | | | - | | | 5,423 | |
| | | | | | | | | | | | | | |
| Notes Payable | | | 2,442 | | | - | | | 6,850 | | | 9,292 | |
| Loan Payable from sale leaseback of building | | | 7,438 | | | - | | | - | | | 7,438 | |
| Preferred Stock | | | - | | | 9,371 | | | (9,371 | ) | | - | |
| Minority interest | | | 2,800 | | | - | | | | | | 2,800 | |
| | | | | | | | | | | | | | |
| Stockholders Equity | | | 3,421 | | | (8,105 | ) | | 10,548 | | | 5,864 | |
| Total Liabilities and Stockholders Equity | | $ | 20,514 | | $ | 2,276 | | $ | 8,027 | | $ | 30,817 | |
See accompanying notes to the Unaudited Condensed Pro Forma Consolidated Financial Information
PRO FORMA FINANCIAL STATEMENTS
INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2006
(thousands, except share amounts) | | | | | | | | Consolidated | |
| | | a21 | | ArtSelect | | Adjustments | | Proforma | |
| | | | | | | | | | |
| Revenue, net | | $ | 2,935 | | $ | 3,106 | | $ | - | | $ | 6,041 | |
| Cost of Revenue | | | 903 | | | 1,386 | | | - | | | 2,289 | |
| Selling, general and administrative | | | 3,186 | | | 1,518 | | | - | | | 4,704 | |
| Depreciation and amortization | | | 603 | | | 84 | | | 300 | | | 987 | |
| TOTAL OPERATING EXPENSES | | | 4,692 | | | 2,988 | | | 300 | | | 7,980 | |
| OPERATING (LOSS) INCOME | | | (1,757 | ) | | 118 | | | (300 | ) | | (1,939 | ) |
| | | | | | | | | | | | | | |
| Interest expense, net | | | (353 | ) | | (154 | ) | | 202 | | | (305 | ) |
| Other income, net | | | (279 | ) | | - | | | - | | | (279 | ) |
| NET LOSS BEFORE TAXES | | | (2,389 | ) | | (36 | ) | | (98 | ) | | (2,523 | ) |
| Income tax | | | (27 | ) | | - | | | - | | | (27 | ) |
| Deemed dividends | | | (157 | ) | | - | | | - | | | (157 | ) |
| NET LOSS | | | (2,573 | ) | | (36 | ) | | (98 | ) | | (2,707 | ) |
| | | | | | | | | | | | | | |
| NET LOSS PER SHARE, BASIC AND DILUTED | | $ | (0.04 | ) | | | | | | | $ | (0.04 | ) |
| | | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | | | 72,142,537 | | | | | | 4,950,000 | | | 77,092,537 | |
See accompanying notes to the Unaudited Condensed Pro Forma Consolidated Financial Information
PRO FORMA FINANCIAL STATEMENTS
BALANCE SHEETS AS OF MARCH 31, 2006
(thousands, except share amounts) |
| | | a21 | | ArtSelect | | Adjustments | | Consolidated Proforma | |
| ASSETS | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,442 | | $ | 304 | | $ | - | | $ | 1,746 | |
| Accounts receivable, net | | | 2,085 | | | 572 | | | - | | | 2,657 | |
| Inventory | | | 156 | | | 692 | | | - | | | 848 | |
| Other | | | 317 | | | 50 | | | 94 | | | 461 | |
| Total current assets | | | 4,000 | | | 1,618 | | | 94 | | | 5,712 | |
| | | | | | | | | | | | | | |
| Property and equipment, net | | | 7,527 | | | 224 | | | - | | | 7,751 | |
| Software, net | | | - | | | 398 | | | - | | | 398 | |
| Goodwill | | | 2,340 | | | - | | | 3,027 | | | 5,367 | |
| Intangible assets, net | | | 3,631 | | | - | | | 5,700 | | | 9,331 | |
| Other | | | 3,234 | | | 7 | | | - | | | 3,241 | |
| Total assets | | $ | 20,732 | | $ | 2,247 | | $ | 8,821 | | $ | 31,800 | |
| | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS EQUITY | | | | | | | | | | | | | |
| Accounts payable | | $ | 1,086 | | $ | 698 | | | - | | $ | 1,784 | |
| Notes payable - current portion | | | 1,050 | | | 15 | | | - | | | 1,065 | |
| Other | | | 2,700 | | | 148 | | | - | | | 2,848 | |
| Total current liabilities | | | 4,836 | | | 861 | | | - | | | 5,697 | |
| Notes payable | | | 2,341 | | | - | | | 6,850 | | | 9,191 | |
| Loan payable from sale leaseback of building | | | 7,431 | | | - | | | - | | | 7,431 | |
| Preferred stock | | | - | | | 9,527 | | | (9,527 | ) | | - | |
| Minority interest | | | 2,800 | | | - | | | - | | | 2,800 | |
| | | | | | | | | | | | | | |
| Stockholders equity | | | 3,324 | | | (8,141 | ) | | 11,498 | | | 6,681 | |
| Total liabilities and stockholders equity | | $ | 20,732 | | $ | 2,247 | | $ | 8,821 | | $ | 31,800 | |
See accompanying notes to the Unaudited Condensed Pro Forma Consolidated Financial Information
PRO FORMA FINANCIAL STATEMENTS
1. PRO FORMA ADJUSTMENTS
(a) ADDITIONAL FINANCE COSTS RELATING TO DEBT
| | | YEAR ENDED | | THREE MONTHS ENDED | |
| | | DECEMBER 31, 2005 | | MARCH 31, 2006 | |
| | | (in Thousands) | | (in Thousands) | |
| Interest on $4.5 million convertible | | | | | |
| debt at 5% per annum | | $ | 225 | | $ | 57 | |
| Interest on $2.35 million convertible | | | | | | | |
| debt at 6% per annum | | | 141 | | | 35 | |
| | | $ | 366 | | $ | 92 | |
Additionally, certain allocable capitalized finance costs have been identified at acquisition and are to be included in the ongoing purchase price allocation exercise. The estimated deferred finance costs of $100,000 at December 31, 2005 and March 31, 2006. Related amortization expense is estimated to be $20,000 and $6,000 for the year ended December 31, 2005 and three months ended March 31, 2006, respectively.
(b) EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED
(IN THOUSANDS)
| Cash consideration paid to selling stockholders of ArtSelect | | $ | 4,500 | |
| Seller note payable | | | 2,350 | |
| Preliminary value of preferred shares issued as consideration to selling stockholders of ArtSelect | | | 2,700 | |
| Preliminary value of warrants issued as consideration to selling stockholders of ArtSelect | | | 375 | |
| Estimated transaction expenses | | | 500 | |
| Total purchase price | | | 10,425 | |
| Estimated fair value of net assets of ArtSelect | | | 1,400 | |
| Excess of purchase price over fair value of net assets acquired * | | $ | 9,025 | |
| *Amount allocated to goodwill and identifiable intangible assets | | | | |
The allocation of purchase price is based upon a preliminary fair value assessment. A formalized fair valuation project is ongoing and is expected to be completed by September 30, 2006. Certain intangible assets have been identified at acquisition and are to be included in the ongoing purchase price allocation exercise. The estimated intangible assets, at cost, are $6.0 million at December 31, 2005 and March 31, 2006. Related amortization expense is estimated to be $1.2 million and $300,000 for the year ended December 31, 2005 and three months ended March 31, 2006, respectively. Goodwill is estimated to be $3.1 million and $3.0 million at December 31, 2005 and March 31, 2006, respectively.
(c) INTERCOMPANY TRADING
Intercompany revenue and cost of sales are not considered material and therefore have not been eliminated for the purpose of the pro forma financial information.
PRO FORMA FINANCIAL STATEMENTS
(d) EARNINGS PER SHARE
The average number of shares used in the calculation of pro forma consolidated earnings per share has for the year ended December 31, 2005 and three months ended March 31, 2006 has been increased to take into account 4,200,000 shares issuable upon the conversion of preferred stock and 750,000 shares issuable upon the exercise of warrants, each of which was issued in connection with a21’s acquisition of ArtSelect.
