EXHIBIT 99.2
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
with respect to Source Interlink are based on our historical consolidated
financial statements. Set forth below are the following unaudited pro forma
condensed combined financial statements:
o The unaudited pro forma condensed combined balance sheet as of January
31, 2005, assuming the business combination between Source Interlink
and Alliance occurred on January 31, 2005 and combining the January
31, 2005 historical balance sheet for Source Interlink and the
December 31, 2004 historical balance sheet for Alliance; and
o The unaudited pro forma condensed combined statement of operations for
the year ended January 31, 2005, assuming the business combination
between Source Interlink and Alliance occurred as of February 1, 2004
and combining the January 31, 2005 historical statement of operations
for Source Interlink and the December 31, 2004 historical statement of
operations for Alliance.
The unaudited pro forma condensed combined financial statements are
presented for informational purposes only, are based on certain assumptions that
we believe are reasonable and do not purport to represent our financial
condition or our results of operations had the business combination occurred on
or as of the dates noted above or to project the results for any future date or
period. In the opinion of management, all adjustments have been made that are
necessary to present fairly the unaudited pro forma condensed combined financial
information.
The unaudited pro forma condensed combined statements of operations do not
include adjustments to eliminate operations of Alliance that were phased out
prior to the acquisition of Alliance by Source Interlink. These operations did
not meet the criteria for discontinued operations treatment under FASB 144, and
therefore are included in the pro forma condensed combined statement of
operations. For the year ended January 31, 2005, the following amounts are
included in the Alliance historical financial statements related to these
operations: (1) revenues of $1.2 million; (2) cost of revenues of $1.1 million;
(3) selling, general and administrative expenses of $1.2 million; and (4)
interest charges of $0.4 million. In addition, the unaudited pro forma condensed
combined financial statements do not reflect any benefits from potential cost
savings or revenue synergies resulting from this business combination.
The merger and related transactions will be treated as a purchase business
combination for accounting purposes, and Alliance's assets acquired and
liabilities assumed will be recorded at their fair value. For the purposes of
this unaudited pro forma condensed combined consolidated financial data, we have
assumed that our common stock price is $11.31 per share (based on an average of
closing prices for our common stock from November 12, 2004 through November 26,
2004, which is the five trading days before and after the day the transaction
was announced) and that approximately 50.7 million shares of our common stock
are outstanding at the date of consummation of the merger.
The allocations of the purchase price to Alliance's assets, including
intangible assets, and liabilities are only preliminary allocations based on
estimates of fair values and will change when actual fair values are determined.
Among the provisions of Statement of Financial Accounting Standards No. 141,
"Business Combinations," criteria have been established for determining whether
intangible assets should be recognized separately from goodwill. Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
provides, among other guidelines, that goodwill and intangible assets with
indefinite lives will not be amortized, but rather are tested for impairment on
at least an annual basis.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<Table>
<Caption>
HISTORICAL
SOURCE HISTORICAL PRO FORMA
INTERLINK ALLIANCE SOURCE
JANUARY 31, DECEMBER 31, PRO FORMA INTERLINK
2005(a) 2004(a) ADJUSTMENTS COMPANIES
------------- ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash ............................................ $ 1,387 $ 20,688 $ -- $ 22,075
Trade Receivables, net........................... 48,078 180,728 -- 228,806
Purchased claims receivable...................... 2,006 -- -- 2,006
Inventories...................................... 16,868 110,727 -- 127,595
Income tax receivable and other
current assets.................................. 5,624 1,893 -- 7,517
Deferred tax asset............................... 2,302 -- -- 2,302
------------- ------------- ------------- -------------
Total current assets............................... 76,265 314,036 -- 390,301
------------- ------------- ------------- -------------
Property, plant and equipment, net............... 22,331 31,865 12,835 (b) 67,031
Goodwill, net................................... 71,600 3,876 (3,876)(c4) 227,265
155,665 (c1)
Intangible assets, net.......................... 16,126 8,127 90,520 (c2) 106,646
(8,127)(c4)
Deferred tax asset.............................. 2,903 20,030 -- 22,933
Other assets.................................... 8,528 1,588 -- 10,116
------------- ------------- ------------- -------------
Total assets................................. $ 197,753 $ 379,522 $ 247,017 $ 824,292
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and
other current liabilities...................... $ 29,449 $ 291,701 $ 1,000 (c3,e) $ 322,150
Current maturities of long-term debt............ 5,630 9,085 -- 14,715
------------- ------------- ------------- -------------
Total current liabilities......................... 35,079 300,786 1,000 336,865
------------- ------------- ------------- -------------
Long-term debt, less current maturities......... 34,139 2,823 3,800 (c7,d) 40,762
Other liabilities............................... 852 195 4,000 (c3,e) 5,047
------------- ------------- ------------- -------------
Total liabilities................................. 70,070 303,804 8,800 382,674
------------- ------------- ------------- -------------
Preferred Stock, Series A1 Cumulative........... -- 35,853 (35,853)(c5) --
Preferred Stock, Series A2 Cumulative........... -- 70,374 (70,374)(c5) --
Preferred Stock, Series B Cumulative............ -- 17,170 (17,170)(c5) --
Stockholders' Equity:
Common stock.................................... 238 7 (7)(c6) 507
269 (c9)
Additional paid-in capital..................... 150,269 91,953 304,386 (c9) 463,935
9,280 (c8)
(91,953)(c6)
Accumulated deficit............................ (23,696) (139,639) 139,639 (c6) (23,696)
Foreign currency translation................... 1,439 -- -- 1,439
Less: Treasury Stock........................... (567) -- -- (567)
------------- ------------- ------------- -------------
Total stockholders' equity........................ 127,683 (47,679) 361,614 441,618
------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity.......................................... $ 197,753 $ 379,522 $ 247,017 $ 824,292
============= ============= ============= =============
</Table>
See notes to unaudited pro forma condensed combined balance sheet.
2
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Certain reclassifications have been made to the historical presentation
of Source Interlink and Alliance to conform to the presentation used in the
unaudited pro forma condensed combined balance sheet.
(b) To adjust the estimated value of net property, plant and equipment
acquired to its estimated fair market value. The estimated increase in the fair
value is approximately $12.8 million. This allocation has been preliminarily
assigned to land, building and equipment based upon independent third party
appraisals. The allocation included in these pro forma condensed combined
financial statements is as follows (in thousands):
<Table>
<Caption>
Asset Class Increase in Value Estimated remaining useful life (in years)
----------- ----------------- ------------------------------------------
Land $ 5,533 N/A
Building $ 4,872 40.0
Equipment $ 2,430 7.0
</Table>
(c) In connection with the business combination, Alliance merged with and
into a wholly owned subsidiary of Source Interlink and Alliance common
stockholders received for each share of Alliance common stock they held a number
of shares based on the exchange ratio of .258 to 1. Based on the fully diluted
shares outstanding as of February 28, 2005, approximately 26.9 million shares of
our common stock were issued in exchange for all outstanding common stock of
Alliance and resulted in the equity holders of Alliance and Source Interlink
immediately prior to the merger each holding 50% of the fully diluted
capitalization of the combined company immediately following the merger.
Under the purchase method of accounting, the total estimated consideration
as shown in the table below is allocated to Alliance's tangible and intangible
assets and liabilities based on their estimated fair values as of the date of
the business combination. The preliminary estimated consideration is as follows:
<Table>
<Caption>
CAPITAL IN
COMMON EXCESS OF
SHARES PAR VALUE TOTAL
------ ---------- -----------
(IN THOUSANDS)
(c9) Issuance of Source shares to Alliance stockholders (26.9 million shares at
$11.31)........................................................................... $ 269 $ 304,386 $ 304,655
(c8) Fair value of options and warrants issued......................................... 9,280
(c7) Estimated transaction costs....................................................... 3,800
-----------
Total consideration............................................................... $ 317,735
===========
</Table>
The estimated consideration is preliminarily allocated as follows:
<Table>
(c6) Alliance historical net book value...................................................................... $ (47,679)
(c5) Conversion of Alliance preferred stock to common stock.................................................. 123,397
(c4) Elimination of Alliance historical goodwill and intangibles............................................. (12,003)
(b) Estimate of adjustment to fair value property and equipment............................................. 12,835
(c3) To record liability related to consulting agreement with Yucaipa........................................ (5,000)
(c2) Estimate of adjustment to fair value identifiable intangible assets..................................... 90,520
(c1) Estimate of adjustment to goodwill...................................................................... 155,665
-----------
Total consideration allocated........................................................................... $ 317,735
===========
</Table>
(d) Estimated Source Interlink transaction costs have been and will be
funded through borrowings on its revolving line of credit.
(e) In connection with the merger agreement, we entered into a consulting
agreement with Yucaipa, an entity affiliated with Alliance's majority
stockholder, requiring a payment of $1.0 million per year for a period of five
years. Under the agreement, these payments are guaranteed and no additional
services are required.
3
We have not completed a final assessment of the fair values of assets and
liabilities of Alliance and the related business integration plans. The
assessment will not be completed until the full review of the assets has been
completed. We expect that the ultimate purchase price allocation will include
adjustments to the fair values of depreciable tangible assets, identifiable
intangible assets (some of which will have indefinite lives) and liabilities,
including the establishment of any potential liabilities associated with
business integration plans. Accordingly, to the extent such assessments indicate
that the fair value of the assets and liabilities differ from their net book
values, such differences would be allocated to those assets and liabilities. For
purposes of the allocation above, we have allocated $90.5 million to
identifiable intangible assets, the majority allocated to definitive life
intangibles such as customer lists and software. The preliminary allocation
included in these pro forma's financial statements is as follows (in thousands):
<Table>
<Caption>
Asset Class Increase in Value Estimated remaining useful life (in years)
----------- ----------------- ------------------------------------------
Software $ 17,860 8.0
Customer lists $ 72,000 14.5
Covenants not to compete $ 660 3.0
</Table>
4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 2005
<Table>
<Caption>
HISTORICAL
SOURCE HISTORICAL
INTERLINK ALLIANCE PRO FORMA
JANUARY 31, DECEMBER 31, PRO FORMA SOURCE
2005 2004 ADJUSTMENTS INTERLINK
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $ 356,644 $ 961,282 $ (17,119)(a) $ 1,300,807
Cost of Revenues........................................... 258,851 820,725 (9,116)(a) 1,041,113
(29,347)(d)
------------- ------------- ------------- -------------
Gross Profit............................................... 97,793 140,557 21,344 259,694
Selling, General and Administrative Expenses............... 55,130 115,681 (11,453)(a) 164,467
(500)(b)
7,809 (c)
300 (e)
(2,500)(f)
Fulfillment Freight........................................ 21,067 -- 29,347 (d) 50,414
Relocation Expenses........................................ 2,450 -- -- 2,450
Loss on sale of land and building.......................... 1,122 -- -- 1,122
------------- ------------- ------------- -------------
Operating Income (Loss).................................... 18,024 24,876 (1,659) 41,241
------------- ------------- ------------- -------------
Other Income (Expense):
Write off deferred financing costs and original issue
discount................................................ (1,495) -- -- (1,495)
Interest income (expense), net........................... (1,400) (1,725) 1,726 (a) (1,399)
Other.................................................... 161 -- -- 161
------------- ------------- ------------- -------------
Total Other Income (Expense)............................... (2,734) (1,725) 1,726 (2,733)
------------- ------------- ------------- -------------
Income From Continuing Operations before Taxes............. 15,290 23,151 67 38,508
Income Tax Expense (Benefit)............................... 2,228 (11,718) 26 (g) (9,464)
------------- ------------- ------------- -------------
Income From Continuing Operations.......................... $ 13,062 $ 34,869 $ 41 $ 47,972
============= ============= ============= =============
Earnings per Share From Continuing Operations -- Basic..... $ 0.57 $ 1.29 $ -- $ 0.96
Earnings per Share From Continuing Operations -- Diluted... $ 0.53 $ 1.28 $ -- $ 0.92
Weighted Average of shares outstanding -- Basic............ 22,963 26,937 -- 49,900
Weighted Average of shares outstanding -- Diluted ......... 24,833 27,183 -- 52,016
</Table>
See notes to unaudited pro forma condensed combined statement of operations.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 2005
(a) To eliminate the following revenues, cost of revenues, selling, general
and administrative expense and interest charges of Alliance included in the
statement of operations for the year ended January 31, 2005 related to DMISG.
These operations were distributed by Alliance through a spin-off of the shares
of Spinco to the Alliance stockholders. The amounts are as follows: (1) $17.1
million of revenues; (2) $9.1 million of cost of revenues; (3) $11.5 million of
selling, general and administrative expenses; and (4) $1.7 million of interest
expense.
(b) To eliminate $0.5 million of management fees to Yucaipa, an entity
affiliated with Alliance's majority stockholder, for management services
provided to Alliance, which Alliance has recorded in their historical financial
statements. This fee is considered a nonrecurring charge as Yucaipa will have no
continuing role in the management of Alliance after the merger.
(c) To record $7.8 million of additional depreciation and amortization
expense resulting from the adjustment to Alliance's property and equipment
assets and identifiable intangible assets based on the adjustment of such assets
to fair value as discussed in Note (b) of the Notes to the Unaudited Pro Forma
Condensed Consolidated Balance Sheet. We have assumed a remaining useful life of
40 years for the buildings and a remaining useful life of 7 years for the
equipment, which is in accordance with our capitalization policies. We expect
that the ultimate purchase price allocation will include adjustments to the fair
values of identifiable intangible assets (some of which will have indefinite
lives). For purposes of the amortization expense recorded above, we have
allocated approximately $90.5 million to identifiable intangible assets,
including allocations to definitive life intangibles such as customer lists and
software contracts and we have assumed a 12 year average useful life.
(d) Reclassification of fulfillment freight from cost of revenues to a
separate selling, general and administrative line item has been made to the
historical presentation of Alliance to conform to our presentation.
(e) To record licensing fee expense to Spinco for the "All Media Guide"
database in the amount of $0.3 million for the year ended January 31, 2005.
(f) To eliminate the $2.5 million of third party costs incurred by Alliance
directly related to the merger for their year ended December 31, 2004.
(g) Represents the aggregate pro forma statutory income tax effect (39%) of
Notes (a) through (f) above.
6