Acquisition/Purchase Price Accounting – AMV Holding Limited Group

Acquisition/Purchase Price Accounting – AMV Holding Limited Group

Mandalay Media, Inc., a Delaware corporation (“Mandalay”), entered into a Stock Purchase Agreement on October 8, 2008 (the “Original Agreement”), as subsequently amended on October 23, 2008 (the “Agreement”), with Xxxxxxxx Xxxxxxxxx (“Xxxxxxxxx”), Xxxxxxxxx XxxXxxxxx (“MacLeitch,” and together with Xxxxxxxxx, the “Founding Sellers”) and certain shareholders of AMV Holding Limited, a United Kingdom private limited company (“AMV”) signatories thereto (the “Non-Founding Sellers”). Pursuant to the Agreement, on October 23, 2008, Mandalay consummated the acquisition of 100% of the issued and outstanding share capital of AMV (the “AMV Shares”) and 80% of the issued and outstanding share capital of Fierce (the “Fierce Shares,” and together with the AMV Shares, the “Shares”). The Founding Sellers and the Non-Founding Sellers, together with the holders of options to purchase shares of capital stock of AMV (the “Option Holder Sellers”) who have exercised such options prior to closing and delivered their shares of capital stock of AMV to Mandalay at closing, as provided in the Agreement, are referred to herein as the “Sellers.”  

In consideration for the Shares, and subject to adjustment as set forth in the Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375,000 in cash (the “Cash Consideration”); (b) 4,500,000 fully paid and non-assessable shares of Common Stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375,000 (the “Note”); and (d) additional earn-out amounts, if any, if the Acquired Companies achieve certain targeted earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with the Agreement. The Purchase Price is subject to certain adjustments based on the working capital of AMV, to be determined initially within 75 days of the closing, and subsequently within 60 days following June 30, 2009. Any such adjustment of the Purchase Price will be made first by means of an adjustment to the principal sum due under the Note, as set forth in the Agreement.

Prior to closing, each outstanding option to purchase shares of capital stock of AMV (an “AMV Option”) was either exercised in full or terminated. Of the Cash Consideration payable to the Sellers, an amount equal to the exercise price of the AMV Options being exercised was paid to AMV for consideration of such Option Holder Seller’s exercise of such AMV Options, and was deducted from the amount of Cash Consideration otherwise payable to such Option Holder Seller. Additionally, of the Cash Consideration, an amount equal to the maximum taxation liability that would be incurred with respect to the payment of the Purchase Price to any Option Holder Sellers under applicable tax laws (the “Tax Withholding”), was delivered to AMV to be held in a separate account. The amount of the Tax Withholding was deducted from the amount of the Cash Consideration otherwise payable to the applicable Option Holder Seller.

The Note matures on January 30, 2010, and bears interest at an initial rate of 5% per annum, subject to adjustment as provided therein. In the event Mandalay completes an equity financing that results in gross proceeds of over $6,000,000, Mandalay will prepay a portion of the Note in an amount equal to one-third of the excess of the gross proceeds of such financing over $6,000,000. In addition, if within nine months of the issuance date of the Note, Mandalay completes a financing that results in gross proceeds of over $15,000,000, then Mandalay shall prepay the entire principal amount then outstanding under the Note, plus accrued interest. If within nine months of the issuance date of the Note, the aggregate principal sum then outstanding under the Note plus accrued interest thereon has not been prepaid, then on and after such date, interest shall accrue on the unpaid principal balance of the Note at a rate of 7% per annum. Additionally, in connection with the Note, AMV granted to the Sellers a security interest in its assets. Such security interest is subordinate to the security interest granted to ValueAct Small Cap Master Fund, L.P. (“ValueAct) under the Senior Secured Note, issued by Twistbox Entertainment, Inc., a wholly-owned subsidiary of Mandalay (“Twistbox”),  due January 30, 2010, as amended on February 12, 2008 (the “ValueAct Note”), and as subsequently amended on October 23, 2008. AMV also agreed to guarantee Mandalay’s repayment of the Note to the Sellers.

At closing, each of the Sellers agreed to not dispose of or transfer any of the shares of the Stock Consideration they own for a period of one year following the closing.

The Purchase Price has been preliminarily estimated by Mandalay to be $21,487,000, consisting of $9,900,000 attributed to the Stock Consideration issued, $5,375,000 in cash, $5,375,000 under the Note referenced above and $837,000 in transaction costs.  Any adjustments required under the “earn-out” and “working capital adjustment” provisions of the Agreement have not yet been determined and therefore have not been included in the preliminary calculation of the purchase price. The shares of the Stock Consideration were valued using the closing stock price at the acquisition date of $2.20 per share. Under the purchase method of accounting, Mandalay allocated the total Purchase Price of $21,487,000 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date as follows:

Cash and cash equivalents		$	3,020,000
Accounts receivable, net of allowances			9,087,000
Prepaid expenses and other current assets			16,000
Property and equipment, net			406,000
Accounts payable			(10,391,000	)
Bank overdrafts			(1,902,000	)
Other current liabilities			(1,262,000	)
Other long term liabilities			(223,000	)
Minority interests			95,000
Identified intangibles			1,721,000
Acquisition related restructuring reserves			(585,000	)
Goodwill			21,505,000
		$	21,487,000

Goodwill recognized in the above transaction is preliminarily estimated at $21,505,000. Goodwill in relation to the acquisition of AMV is not expected to be deductible for income tax purposes. The preliminary purchase price allocation, including the allocation of goodwill, will be updated as additional information becomes available. Acquisition related restructuring reserves include reserves for employee severance and for office relocation.

Unaudited Pro Forma Summary

The following pro forma consolidated amounts give effect to the acquisition of AMV by Mandalay accounted for by the purchase method of accounting as at September 30, 2008 and as if it had occurred as at the beginning of each period presented. The pro forma consolidated results are not necessarily indicative of the operating results that would have been achieved had the transaction been in effect as of the beginning of the period presented and should not be construed as being representative of future operating results.

MANDALAY MEDIA, INC. AND SUBSIDIARIES

PROFORMA CONSOLIDATED BALANCE SHEET

(In thousands, except share amounts)

		Mandalay				AMV									Mandalay
		Media, Inc.				Holding Ltd									Media, Inc.
		September 30,				September 30,					Pro Forma				September 30,
		2008				2008					Adjustments
		(Unaudited)				(Unaudited)									(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	7,122			$	3,020		(a) $			(875	)		$	9,267
Accounts receivable, net of allowances			6,203			$	9,087					-			$	15,290
Prepaid expenses and other current assets			648			$	16					-			$	664
Total current assets			13,973				12,123					(875	)		$	25,221
Property and equipment, net			993				406					-				1,399
Other long-term assets			206				-					-				206
Intangible assets, net			19,303				-		(b)			1,721				21,024
Goodwill			61,436				6,116		(c)			15,390				82,942
TOTAL ASSETS		$	95,911			$	18,645				$	16,236				130,792
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable			4,325				10,391					-				14,716
Bank overdrafts			-				1,902					-				1,902
Accrued license fees			2,813				-					-				2,813
Accrued compensation			746				-					-				746
Current portion of long term debt			254				-					-				254
Other current liabilities			2,001				1,262		(d)			1,422				4,685
Total currrent liabilities			10,139				13,555					1,422				25,116
Accrued license fees, long term portion			668				-					-				668
Other long term liabilities			-				223					-				223
Long term debt, net of current portion			16,483				-		(e)			5,375				21,858
Minority interests			-				(95	)				-				(95	)
Total liabilities		$	27,290				13,683				$	6,797			$	47,770
Stockholders equity
Preferred stock			100				-					-				100
Common stock			3				-					-				3
Additional paid-in capital			78,220				4,962					9,439				92,621
Accumulated other comprehensive income/(loss)			(55	)			-					-				(55	)
Accumulated deficit			(9,647	)			-					-				(9,647	)
Total stockholders' equity			68,621				4,962					9,439				83,022
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY		$	95,911			$	18,645				$	16,236			$	130,792

Notes to Pro Forma Adjustments:

(a)   Represents cash paid as part of purchase consideration - $5,375; and cash received from the issue of 1,685,394 shares at $2.67, amounting to $4,500

(b)   Represents estimated value of intangible assets to be recognized on the acquisition

(c)   Represents estimated value of goodwill to be recognized on the acquisition and the elimination of AMV Holding Ltd goodwill

(d)   Represents accruals for acquisition costs and restructuring reserves to be recognized in relation to the acquisition

(e)   Represents secured prommissory note issued as part of the purchase consideration

MANDALAY MEDIA, INC. AND SUBSIDIARIES

PROFORMA CONSOLIDATED SUMMARY STATEMENT OF OPERATIONS

(In thousands, except share amounts)

															Mandalay
		Mandalay				AMV									Media, Inc.
		Media, Inc.				Holding Ltd									Pro Forma
		Six Months Ended				Six Months Ended									Six Months Ended
		September 30,				September 30,									September 30,
		2008				2008					Adjustments				2008
		(Unaudited)				(Unaudited)					(Unaudited)				(Unaudited)
Revenues		$	10,349			$	20,478								$	30,827
Cost of revenues		$	4,138				7,504		(a)			44				11,686
Gross profit		$	6,211				12,974									19,141
Operating expenses net of interest
income and other expense		$	12,441				10,574		(b)			112				23,127
Income tax expense		$	148				321									469
Minority interest in consolidated subsidiaries		$	-				(99	)								(99	)
Net Profit/(Loss)		$	(6,378	)		$	2,178								$	(4,356	)
Basic and diluted net loss per common share		$	(0.20	)											$	(0.12	)
Weighted average common shares outstanding,
basic and diluted			32,377						(c)			4,500				36,877

Notes to Pro Forma Adjustments:

(a)   Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to cost of revenues

(b)   Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to general and administrative costs

(c)   Represents shares in Mandalay Media Inc. issued as part of the consideration for the acquisition

															Mandalay
		Mandalay				AMV									Media, Inc.
		Media, Inc.				Holding Ltd									Pro Forma
		Three Months Ended				Three Months Ended									Three Months Ended
		March 31,				March 31,					Pro Forma				March 31,
		2008				2008					Adjustments				2008
		(Unaudited)				(Unaudited)					(Unaudited)				(Unaudited)
Revenues		$	3,208			$	9,293								$	12,501
Cost of revenues			(153	)			2,192		(a)			22				2,061
Gross profit			3,361				7,101									10,440
Operating expenses net of interest
income and other expense			3,643				6,559		(b)			56				10,258
																-
Income tax expense			16				123									139
Minority interest in consolidated subsidiaries			-				-									-
Net Profit/(Loss)		$	(298	)		$	419								$	43
Basic and diluted net loss per common share		$	(0.01	)											$	0.00
Weighted average common shares outstanding,
basic and diluted			21,628						(c)			4,500				26,128

Notes to Pro Forma Adjustments:

The results of operations for Mandalay Media Inc. in the Three Months Ended March 31, 2008 include the results of Twistbox Entertainment Inc. as from the acquisition of that entity in February, 2008

(a)    Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to cost of revenues

(b)    Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to general and administrative costs

(c)    Represents shares in Mandalay Media Inc. issued as part of the consideration for the acquisition

															Mandalay
		Mandalay				AMV									Media, Inc.
		Media, Inc.				Holding Ltd									Pro Forma
		Year Ended				Year Ended									Year Ended
		December 31,				December 31,					Pro Forma				December 31,
		2007				2007					Adjustments				2007
											(Unaudited)				(Unaudited)
Revenues		$	-			$	29,497								$	29,497
Cost of revenues			-				11,144		(a)			87				11,231
Gross profit			-				18,353									18,266
Operating expenses net of interest
income and other expense			2,204				14,109		(b)			224				16,537
																-
Income tax expense			-				1,310									1,310
Minority interest in consolidated subsidiaries			-				-									-
Net Profit/(Loss)		$	(2,204	)		$	2,934								$	419
Basic and diluted net loss per common share		$	(0.12	)											$	0.02
Weighted average common shares outstanding,
basic and diluted			18,997						(c)			4,500				23,497

Notes to Pro Forma Adjustments:

The results of operations for Mandalay Media Inc. in the Year Ended December 31, 2007 do not include the results of Twistbox Entertainment Inc. since that entity was acquired in February, 2008. Mandalay Media Inc. operated as a "shell" company with no significant operations

(a)    Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to cost of revenues

(b)    Represents amortization of the estimated value of intangible assets recognized on the acquisition allocated to general and administrative costs

(c)    Represents shares in Mandalay Media Inc. issued as part of the consideration for the acquisition