RNS Number:2363S
DIC Entertainment Holdings, Inc.
14 April 2008
14th April 2008
The information contained herein is restricted and is not for publication,
release or distribution in or into the United States of America, Canada,
Australia, New Zealand, the Republic of Ireland, South Africa or Japan or to any
national, resident or citizen of the United States of America, Canada, Australia
or Japan.
DIC Entertainment Holdings, Inc.
Preliminary Results for the Period Ended 31st December 2007
Highlights
* Net Revenues declined 8.6% to $74.7 million (2006: $81.7 million).
* Non-US GAAP Adjusted EBITDA of $.01 million (2006: $11.2 million) and Losses
Before Taxes of $34.1 million (2006: Profit Before Taxes $5.6 million).
* Successful international roll out of KidsCo, a new joint venture
international children's television channel, with Eastern and Central
European, Middle Eastern and Asian channels now operational, ahead of
Western European and Latin American launches planned for later in the
current year.
* CPLG, the Company's international licensing business had its most profitable
year in its 34 year trading history, with 40 third-party licensors
comprising over 80 properties.
* Significant progress with new media strategy including:
o DIC online network of character-branded web-sites currently generating
traffic of over 700,000 unique visitors each month with approximately 100
million page views.
o Development and launch in February 2008 of www.kewlcartoons.com, a free,
streaming-video site debuting with approximately 300 videos from DIC's
extensive library.
o Development and launch in March 2008 of www.cuetunes.com, an online music
licensing businesses providing royalty-free music for film, television or
other audio visual activities.
* Brand activity highlights include:
o Strawberry Shortcake surpassed $2.7 billion in cumulative worldwide
retail sales with more than 400 licensees globally, continued
international expansion and was aired on US network television for the
first time.
o Mommy & Me launched the initial phase of the five year retail programme
with Wal-Mart to make the property its in-house brand targeted at mothers
with children under the age of five in 1,290 stores across the US.
Rollout of an extended licensing programme anticipated in autumn 2008 in
up to 3,400 stores.
o Horseland: Extensive US licensing programme in the US now in place, top
ten Saturday morning broadcast TV performance within its target age
group, strong international TV presence and in production on third
series.
o Dino Squad, DIC's latest 100%-owned series, began airing on the
KEWLopolis block on CBS in November 2007. Aimed at 6 - 11 year old boys,
26 half hour episodes have been produced with 13 airing currently.
Andy Heyward, Chairman and Chief Executive Officer, DIC Entertainment Holdings,
Inc., commented:
"Looking to the future there are many excellent opportunities for the Company.
Specifically, we are excited about the continued success of CPLG; the growth and
expansion of our interactive and new media activities, including the launch of
www.kewlcartoons.com and www.cuetunes.com; the ongoing global rollout of our
joint venture children's channel, KidsCo; and the continued success of our many
home entertainment, television and consumer products brands on a worldwide
basis."
For further information please contact:
Simon Forrest, Investor Relations, DIC Tel: +44 (0) 7885 317746
Craig Breheny, Ash Spiegelberg, Brunswick Tel: +44 (0) 20 7404 5959
This announcement is not for publication, release or distribution, directly or
indirectly, in, into or from the United States of America, Canada, Australia,
New Zealand, the Republic of Ireland, South Africa or Japan or their respective
territories or possessions.
This announcement does not constitute or form part of an offer for sale or
subscription of, or any solicitation of an offer to purchase or subscribe for,
shares or other securities. The price and value of, and income from, shares and
other securities may go down as well as up. And past performance cannot be
relied upon as a guide to future performance. Persons needing advice should
consult a professional adviser.
Any securities referred to herein have not been registered in any jurisdiction,
and, in particular, will not be registered under the U.S. Securities Act of
1933, as amended, or any applicable state securities laws and may not be offered
or sold in the United States absent registration or an applicable exemption from
such registration requirements.
To supplement DIC's consolidated financial statements presented on a US
Generally Accepted Accounting Principles (US GAAP) basis, DIC is providing
certain income statement information that is not calculated according to US GAAP
(Adjusted EBITDA). DIC believes that its non-US GAAP disclosures are useful in
evaluating its operating results as this information supplies the user with
another view of the matching of costs and expenses. The non-US GAAP information
presented is supplemental and is not purported to be a substitute for
information prepared in accordance with US GAAP.
Information contained in this announcement may include 'forward looking
statements'. All statements other than statements of historical facts included
herein, including, without limitation, those regarding DIC's financial position,
business strategy, plans and objectives of management for future operations
(including development plans and objectives relating to DIC's business) are
forward- looking statements.
Such forward-looking statements are based on a number of assumptions regarding
DIC's present and future business strategies and the environment in which DIC
expects to operate in the future. These forward-looking statements speak only as
to the date of this announcement and cannot be relied upon as a guide to future
performance. DIC expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statements contained
in this announcement to reflect any changes in its expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based.
DIC ENTERTAINMENT HOLDINGS, INC.
PRELIMINARY STATEMENT FOR THE TWELVE MONTH PERIOD ENDED
31st DECEMBER 2007
CHAIRMAN'S STATEMENT
OVERVIEW
During the year ended 31st December 2007, DIC Entertainment Holdings, Inc.
("DIC" or the "Company") saw a decline in revenues year over year due to lower
television and home entertainment revenues. Notwithstanding the decline, it was
a period that saw strong operational achievement on a number of key fronts: our
success in launching new, potentially valuable brands; the launch of our joint
venture international children's channel, KidsCo, which gives us our own
international broadcast platform for our approximately 3,000 half hours of
animated and live action programming; development of the just-launched
www.kewlcartoons.com, our online cartoon channel and www.cuetunes.com, our
online music licensing business; and our streamlined and more effective approach
to managing our business. It was also a year of great challenges which we
believe we have been able to address successfully.
In 2007, Net Revenues declined 8.6% to $74.7 million (2006: $81.7 million) with
Non-US GAAP Adjusted EBITDA of $.01 million (2006: $11.2 million) and Losses
Before Taxes of $34.1 million (2006: Profit Before Taxes $5.6 million).
The highlights of our achievements during the year include the successful launch
and rapid roll out of KidsCo, the international joint venture children's channel
with Corus Entertainment's Nelvana Enterprises and NBC Universal (which acquired
its share from Sparrowhawk Media). Our investment in KidsCo gives DIC a 33%
holding in a company that is positioning itself to be the fourth major
international children's channel. This is not only a valuable asset in its own
right, but DIC now has a platform whereby it can get further international
exposure for its programming in addition to generating additional revenue by
licensing content from its library to fulfill KidsCo's programming needs.
Copyright Promotions Licensing Group ("CPLG"), which the Company acquired in
June 2006, enjoyed the most profitable year in its 34 year history, with
Non-GAAP unaudited EBITDA of $5.2 million on a standalone basis. CPLG's success
was achieved across the board - through successful movie, sports and children's
brand licensing activities. These achievements reaffirm CPLG's position as one
of the leading pan-European licensing agencies. On the new media front DIC also
made great progress. The Company currently has 13 programme-related or branded
interactive websites including the just-launched www.kewlcartoons.com, our
online cartoon channel featuring existing content from DIC's library, including
such classics as Inspector Gadget and Tex Avery, in addition to new content such
as Cake, Horseland and Dino Squad.
During the year DIC faced many challenges which led us to revise our financial
performance forecasts. These previously announced revised forecasts arose
because of a number of factors, including: non-cash write-downs in the carrying
values of certain properties contained in the Company's animation library;
slower than anticipated development and poor licensing performance of certain
DIC properties (Trolls/Trollz and Slumber Party Girls); and the payment default
by China Overseas Investment Limited ("COIL"), the master toy and apparel
licensee for McDonald's McKids line in Asia (excluding Japan and India).
Management moved swiftly to address these matters; and we do not believe that
these adjustments impact the long-term value of the Company.
We made two important changes in our US television broadcasting business. First,
we found a partner, American Greetings, for our KEWLopolis on CBS Saturday
morning children's block which generated additional television revenues. Second,
we reduced our costs related to the DKN syndicated broadcast network by changing
from a barter airtime model to a cash license fee model.
We have also addressed the ways in which we evaluate property development,
ensuring shows fulfil strict internal criteria before a significant capital
investment is made. As an example, in the case of Horseland we did not green
light production of an additional 13 episodes until we believed we had
sufficient international television interest to cover approximately 60% of the
production costs. In addition, where appropriate, we continue to strive to find
strong partners who can share the financial risk for new and emerging
properties. For instance, Sushi Pack is a co-production with American Greetings,
allowing us to assume less financial risk related to the production of new
programming while still giving us the right to exploit the property
internationally. In addition, DIC shares in the domestic Sushi Pack licensing
revenues generated by American Greetings' licensing programmes.
Further, we settled our previously announced legal action with the Bemelmans,
the family of the late author of Madeline. As a result of the settlement, we
agreed to pay the Bemelmans $1.65 million; $922,000 of which was paid in March
2008 and was related to the buy-out of the rights as discussed below, with the
remaining portion, to be paid in August 2008, relating to the settlement of the
Bemelman's claims. As a result of the settlement, we are no longer required to
share any revenues generated under any of our current worldwide Madeline
consumer products licensing agreements; however, except for these existing
agreements, all consumer products licensing rights have been returned to the
Bemelmans. Additionally, DIC has the right, in perpetuity, to retain all future
revenues generated from its exploitation of the Madeline library across all
media platforms.
We also believe we are in a enviable position relative to other children's
content providers. US broadcasters are required to provide at least three hours
of educational/informational ("E/I") content per week, and due to our extensive
library of E/I content, DIC is in a unique position to fulfil the FCC-mandated E
/I needs for TV stations' digital multicast channels upon the transition of US
television to a digital format in 2009.
FINANCIAL REVIEW
For the year ended 31st December 2007, net Revenues decreased 8.6% from 2006.
The Company incurred an Operating Loss of $27.2 million primarily as the result
of the previously announced decisions to: take non-cash write-downs in the
carrying values of certain properties contained in the Company's animation
library; write-off of the development and production costs related to the
Slumber Party Girls brand which was abandoned earlier in the year; take a bad
debt provision for revenues lost as a result of the litigation over amounts due
to us and McDonald's Corporation by COIL; and take a bad debt provision and
write-down of production costs related to our underperforming brand Trolls/
Trollz.
As a result of the write-downs and adjustments noted above, Non-GAAP Adjusted
EBITDA decreased from $11.2 million in 2006 to $.01 million in 2007.
Included in Operating Expenses is a charge for the amortisation of the
investment in Film and TV programming of $26.8 million which includes
approximately $19 million of previously disclosed write-downs related to the
Slumber Party Girls and Trolls/Trollz brands and the carrying values of certain
properties contained in the Company's animation library. The Company continues
to amortise investments in new programming over an average life of 10 years or
less.
The Company currently operates under a $65 million revolving credit facility
which as of 4 April 2008 had borrowing base of $44.4 million. As of 4 April 2008
the outstanding balance under the credit facility was $39.0 million and the
Company had approximately $5.4 million of borrowing capacity. In addition, as of
4 April 2008, the Company had available cash of approximately $14.2 million,
including cash at CPLG.
Net interest expense for 2007 was $3.1 million, $1.5 million greater than in
2006 due to increased borrowings.
The income tax provision for 2007 is $2.5 million and is primarily related to
foreign withholding taxes on international revenues and income taxes on income
generated by the Company's subsidiaries in foreign jurisdictions. As of 31
December 2007, the Company had net operating loss carry forwards for its federal
and state income tax purposes of approximately $44.9 million and $30.2 million,
respectively.
OPERATIONAL REVIEW
Overall, International TV & Home Video accounted for 8.2% of Net Revenues,
Domestic TV & Ad Sales accounted for 10.6%, Licensed Consumer Products accounted
for 68.4% and Domestic Home Entertainment accounted for 9.1%. The balance
derives from Music and Interactive / New Media activities as well as foreign
exchange gains and losses.
Brand Development
DIC (excluding CPLG which, as discussed below, currently represents over 80
properties) started the year with three brands in active development and now has
fifteen. This year we were appointed worldwide licensing agent for such
established properties as The Beginners Bible and Eloise, adding them to our
brand portfolio to go along with some of our other properties such as Inspector
Gadget, Strawberry Shortcake, Horseland, Cake, Mommy & Me and Dino Squad. We
believe the breadth of our brand portfolio is one of its great strengths. We
have, for example, girl-focused properties (e.g. Strawberry Shortcake),
boy-focused properties (e.g. Dino Squad), pre-school properties (e.g. Mommy &
Me), "tween" properties (e.g. Cake) and classics properties (e.g. Inspector
Gadget), among others. Our brands are also reaching new markets both through our
joint venture, KidsCo, and through sales to other international television
channels. We now have over 350 television licenses in over 200 countries in
addition to numerous consumer products agreements. A consequence of this
increasing international activity was the creation of our Global Brand
Management Department, which co-ordinates international activity by property,
ensuring effective coordinated brand management from initial development through
product launch and beyond.
Brand highlights included:
* In 2007, Strawberry Shortcake surpassed $2.7 billion in worldwide retail
sales (cumulative 2003 - present) with approximately 8 million DVDs sold
domestically, over 11 million books in print and over 500,000 CDs sold to date.
Strawberry Shortcake has a strong international presence with more than 400
licensees worldwide. In Europe, Strawberry Shortcake is an extremely successful
property, especially in France, where it has become one of the leading
properties for girls. There was also strong activity in Latin America,
particularly in Brazil where Strawberry Shortcake is the number one property for
girls. Success in these territories is across a wide range of categories
including television, home entertainment and consumer products. Strawberry
Shortcake is also building a major presence in the Far East with launches in
Indonesia, Malaysia and mainland China with additional promotional activity in
Hong Kong, Japan, Singapore and the Philippines. We have also renewed our
pan-Asian and Australasian home entertainment agreements and launched home
entertainment for the first time in the Philippines. In the US we launched three
new DVDs in addition to new releases of books, music and video games. Strawberry
Shortcake was broadcast for the first time on US network television in 2007 and
consistently secured the highest 2-11 year old and 6-11 year old ratings on the
KEWLopolis block on CBS. Additionally, we had a successful four-week McDonalds
Happy Meal promotion in the US which launched in December 2007 and saw 50
million Strawberry Shortcake branded units included in Happy Meals.
* Horseland, which we launched in 2006, is proving to have wide appeal as
both a television property and a strong licensing brand on a worldwide scale. In
the US there is now an extensive merchandising programme in place covering toys,
home entertainment, publishing, apparel, sleepwear, novelty, stationery and
more. Master toy licensee, Thinkway, has placed toys on shelves at Toys R Us, KB
Toys and Meijer, among others. Horseland, whose core demographic is 6-11 year
old girls, currently airs on the KEWLopolis block on CBS and is one of the top
10 Saturday morning shows across all broadcast networks amongst girls 2-11 years
of age. Our home video partner, NCircle, released two DVDs during the year, two
DVDs in the first quarter of this year and an additional release is planned for
August 2008. Internationally, Horseland has a television presence in many
territories including France, Germany, Benelux, UK, Norway, Sweden, Portugal,
Greece, Central and Latin America and Canada. Strong television ratings in key
European territories such as Germany, Holland and Scandinavia have led to the
launch of a European licensing programme across all consumer products categories
including toys, apparel, games and publishing in addition to a number of home
entertainment agreements in a variety of territories. This international
success, alongside the US achievements, allowed the Company to begin production
on an additional 13 episodes once we believed we had sufficient international
television interest to cover approximately 60% of the production costs. In
addition to its promise as a home entertainment and consumer products brand,
Horseland has shown enormous appeal as an Internet property. Its current site,
www.horseland.com, which is owned by Horseland LLC, has 1.6 million active
player accounts.
* Mommy & Me, the well known US brand for new mothers with a 25-year history
of parent/child playgroup acceptance, is demonstrating great potential as a
consumer products brand. During 2007, we entered into a five-year exclusive
retail programme with Wal-Mart to make the property its in-house brand targeted
at mothers with children under the age of five. The initial phase of the
Wal-Mart programme, which launched 12 pre-school SKUs in 1,290 stores across the
US, has been successful. Consequently, the product line has been increased with
an anticipated autumn 2008 launch of 21 SKUs in up to 3,400 stores nationwide.
In addition, DIC and Wal-Mart have agreed to further promote the brand by
expanding the product offerings to other retailers and as a result, the Company
is currently in discussions with several other major retailers to carry the
Mommy & Me brand in 2009. DIC assisted the initial launch of the brand with an
extensive marketing campaign including print advertising, direct mail and online
initiatives at www.mommyandme.com including "Mommy" blogs, forums, polls and an
exclusive mother/child play area.
* Cake: During the period, DIC launched this unique "do it yourself" ("DIY")
brand for "tween" girls, in Wal-Mart and K-mart stores across the US. Cake,
which is already an established television brand through its exposure on the
KEWLopolis block on CBS, fills a key niche in the consumer products market
for girls, positioned as a sophisticated DIY craft brand. Sales of the
initial 13-product merchandise line have been strong with over 600,000 units
sold since its launch and we plan a more extensive product roll-out in
additional US retail outlets later this year as well as the placement of two
additional SKUs at Wal-Mart in autumn. US television ratings for the Cake
live-action series have been strong with the show now the second
highest-rated show on the KEWLopolis block and a top 7 Saturday morning show
across all broadcast networks among girls aged 2-11. In addition, we are
currently planning Cake interstitials to launch on the KEWLopolis block in
September of this year. As a result of its US broadcast success, we have
broadcast the programme on Boomerang in 35 countries in Latin America. This
television exposure in Latin America is being supported by additional
marketing activities including PR campaigns in teen magazines, local
newspapers, radio campaigns, on-line activity, as well as mall tours in
selected major cities. In addition, we are planning to launch consumer
products in Latin America in the second half of 2008.
* Dino Squad, DIC's latest 100%-owned series, began airing on the KEWLopolis
block on CBS in November 2007. Aimed at 6 - 11 year old boys, 26 half hour
episodes have been produced with 13 airing currently. In conjunction with
the series launch on CBS, we launched a dedicated interactive website
www.dinosquad.com. This website includes a virtual world where children can
visit, play games, watch previously-aired episodes and chat with their
friends. The site receives over 35,000 visitors monthly. The consumer
product launch, targeted for the middle of 2009, is planned to include toys,
games, puzzles, apparel, accessories and back-to-school products. We also
have international broadcast television and home entertainment deals in
Italy, South Africa, the Netherlands, Czech Republic, Hungary, Romania and
Slovakia.
* Sushi Pack: During 2007, DIC joined forces with American Greetings to
co-produce this boy-orientated property. The new animated series debuted on
the KEWLopolis block on CBS in November 2007. DIC provides the production
work and handles international licensing and distribution with American
Greetings managing North American licensing and distribution. Each party
participates in the revenues generated from all such deals. American
Greetings has entered into a publishing deal with Random House for the US
and Canada and has scheduled a domestic consumer products launch in its
Carlton Card stores for July 2008. To date, we have entered into
international television deals in South Korea and Poland, home entertainment
deals with Mirax for Hungary, Romania, Slovakia and Czech Republic and we
were in negotiations in advance of the MIPTV conference with several of the
major international children's channels in Europe and Asia.
* New third party representations: During the year, Mission City Press
appointed DIC worldwide licensing agent for The Beginners Bible, the world's
best-selling children's bible. The Company has already developed plans to
create branded products in the US including toys, apparel, interactive
games, accessories and an online web community. DIC is currently in
discussions with Mission City Press to produce animated DVDs to support the
consumer products launch in addition to a comprehensive national marketing
and promotional campaign which includes relaunching www.beginnersbible.com.
DIC expects a retail rollout of consumer products by the autumn of 2009.
Also, DIC was named exclusive worldwide licensing agent for Eloise, the
classic girls' publishing property. Consequently, we started developing a
licensing and merchandising programme targeting girls 4 - 8 years old across
the key categories. DIC is in the process of developing a classic Eloise
consumer products programme and also plans an additional merchandise rollout
to coincide with the live-action feature film Eloise in Paris featuring Uma
Thurman which is currently in pre-production.
CPLG
CPLG had its most profitable year in its 34 year history, with Non-GAAP
unaudited EBITDA of $5.2 million on a standalone basis, and is now widely
recognized as one of the leading pan-European licensing agencies. CPLG
represents over 40 third-party licensors comprising over 80 properties. CPLG's
clients include most of the major US studios including Fox, Sony/MGM, Paramount/
Dreamworks/Viacom/Nickelodeon and Universal. In addition to its entertainment
clients, approximately 10% of its revenues come from the sports world.
Operational highlights for 2007 include:
* The licensing programme for three of the biggest movies franchises of
2007: The Simpsons Movie, Shrek the Third and Spider-Man 3. In the case of
Spider-Man, classic Spider-Man consumer products are expected to once again
be one of CPLG's top 10 properties.
* In the UK, Germany and Benelux, CPLG led the successful relaunch of the
iconic Sesame Street brand at retail.
* In France, CPLG has made Dora the Explorer the #1 pre-school aged girl
property with an extensive licensing program covering all product
categories.
* CPLG has represented Peanuts since 1994 in selective territories. In 2007,
CPLG added France as a territory and extended its representation of the
property through 2010.
* CPLG's planned launch of Horrid Henry, CITV's most popular show based on
the best-selling books, includes consumer products in the UK with major toy
partner Re:Creation.
* In the UK, CPLG's sports division continued to sign new leading brands
with the addition of Williams F1 and Wembley Stadium adding to The Football
Association, the Rugby Football Union and St Andrews Links, among others.
* CPLG's growth was also fuelled by strong results from local European
brands that the company has been developing the past few years, for example:
Germany's Die Wilden Kerle, the story of a youth football team brought to
life through books and films; and the Netherlands De Efteling children's
theme park (one of the oldest and largest in Europe).
* Looking forward, CPLG has signed licensing agreements with numerous
companies across Europe for Dreamworks Animation's summer 2008 animated film
Kung Fu Panda.
Interactive/New Media Activities
One of DIC's major initiatives in 2007 was developing the DIC Online Network.
This effort has been rewarded with the creation of a series of imaginative,
technically advanced and engaging property-based websites. Consequently we are
pleased to be able to report audience traffic of over 700,000 unique visitors
each month with approximately 100 million page views (traffic numbers based on
DIC's internal server tracking and include Horseland.com). A major part of our
new media strategy during the year was focused on readying for the launch of our
online cartoon channel dedicated to new and classic cartoons,
www.kewlcartoons.com, which was launched in February of this year. This is a
free, streaming-video site which debuted with approximately 300 videos from
DIC's extensive library. Content available ranges from such classic hits as
Inspector Gadget to new properties such as Dino Squad and Cake. This site, which
will be supported by advertising revenues, allows children to safe-chat on line
in real time, participate in daily polls, play DIC-branded games and take part
in other activities. Reaction to the site has been extremely encouraging with
unique visitors up to 10,000 per month after just two months. In addition, the
new site (uniquely designed to work with both PCs and Macs) is a portal to all
the other DIC property sites. We also just launched our online music licensing
business, www.cuetunes.com, which will provide royalty-free music on a one-off
payment basis to producers, directors or any other parties for film, television
or other audio visual activities.
In 2008, the DIC Online Network will grow substantially with the launch of new
property sites, including Eloise, Beginner's Bible and Inspector Gadget, and
with the availability on-line of hundreds of additional hours of DIC
programming.
The current DIC sites available include:
* Kewlopolis.com, the site for the children's programming block, KEWLopolis
on CBS.
* KewlMag.com: (the online component of the print magazine, KEWL, a joint
venture in which DIC is a partner). This site attracts an older 8 - 14 year
old audience with daily updates and the latest news about movies, music and
videos on the top teen celebrities.
* DinoSquad.com: supporting the new animated television series for Boys 6 -
11 years old, featuring dinosaur avatars, games and educational information
on global warming and the history of dinosaurs.
* Horseland.com (owned by Horseland LLC): creating a unique community that
allows youngsters to interactively "breed" and "train" virtual horses, and
compete with themselves and each other.
* Mommyandme.com: the now updated site which doubled traffic in the first
month after its relaunch, aims to become the pre-eminent brand for new
mothers, including mothers' blogs, forums, polls and an exclusive mother/
child play area.
* Trollz.com: designed to completely immerse visitors into the exciting
world of Trollz, this site has an average user visitor time of 20 minutes.
KidsCo
One of the most exciting developments for the Company during the year was the
September launch of KidsCo (www.kidscotv.tv) our joint venture international
children's channel. DIC owns 33% of this new venture alongside partners NBC
Universal and Corus Entertainment's Nelvana Enterprises. The channel is
currently being broadcast in Russia, Poland, Hungary, Romania, Turkey and the
Middle East and across Asia in the Philippines, Hong Kong, Indonesia, Singapore,
Palau and South Korea. Launches are anticipated for Spain, UK, Germany, Austria,
Scandinavia and France in summer 2008 and for Brazil, Chile, Ecuador, Mexico,
Paraguay, Peru, Uruguay and Venezuela by the end of the year. The venture is on
target to reach 40 territories by the end of 2009. The key to the channel's
growing appeal is the access it has to approximately 6,000 half-hours of high
quality, internationally established content from DIC and Nelvana. In 2007,
DIC's content represented almost 40% of the global channel's output and DIC is
guaranteed to have up to 40% of the global channels' output on a go-forward
basis. As a result, DIC has an international broadcast platform to exploit its
approximately 3,000 half hours of animated and live action content and drive
consumer product sales of its properties as well as the ability to generate
valuable content licensing fees by providing content to the channel. In addition
to commissioning new content from DIC and Nelvana, KidsCo will license
programming from third party children's content suppliers with schedules
localised region by region. DIC has committed to invest up to $4 million over
two years in the enterprise. To date DIC has invested approximately $2.8 million
in the venture. The channel is currently anticipated to become cash flow
positive by the end of 2008.
CREATIVE AND PRODUCTION ACTIVITY
On the creative front, 2007 was an extremely busy time for the Company with over
60 individual episodes or programmes produced or worked on during the period.
This includes eight DVDs produced for Strawberry Shortcake and 26 half-hour
episodes each of Sushi Pack and Dino Squad. Other projects focused on during the
period included the Secret Millionaires Club, the animated programme starring
Warren Buffet, which gives investing advice to a group of teenagers who discover
baseball paraphernalia worth millions of dollars. Work also began on an
additional 13 episodes of Horseland in response to the popularity of the show's
first two series. Other projects in the pipeline include development work for a
spin-off Cake series and a new Inspector Gadget series.
MANAGEMENT AND BOARD
During the year we appointed Kirk Bloomgarden (effective 1st January 2008)
Executive Vice President of Global Sales, overseeing the Company's worldwide
television (excluding CBS ad sales), home entertainment, consumer products and
music divisions. This is a key role in the global development of our brands and
one he is extremely well qualified to have. Mr. Bloomgarden, a 15-year veteran
at CPLG, served as CEO from 2000 to 2008 and worked to build it into a one-stop,
pan-European licensing shop for licensors, overseeing the management of leading
brands, including Care Bears, Peanuts, Pink Panther, Shrek, Spider-Man,
Strawberry Shortcake, The F.A., The Simpsons and WWE. In 2001, he led the
management buyout from Integrated Sports Media & Marketing; and in 2006, Mr.
Bloomgarden orchestrated the sale of CPLG to DIC.
We recently made another key management appointment with the promotion of
Frederic Soulie to the new position of VP - Interactive/New Media, where he will
manage the Company's growing network of websites. Prior to joining DIC, Mr.
Soulie served as Manager of Strategic Planning at Intermix Media, Inc. -- the
publicly traded parent company of MySpace -- where he worked with Jeffrey Edell,
DIC's President, who formerly served as Chairman of Intermix Media. In this
capacity, he was actively involved in the Company's mergers and acquisitions
activities. Mr. Soulie also identified and developed post-acquisition
integration strategies for numerous acquisitions and managed successful online
properties.
Previously announced during the year was the appointment of Gray Davis, former
Governor of California as a non-executive director. Governor Davis was Governor
from 1998 to 2003.
STAFF
I would like to thank our wonderful staff for their contributions during this
challenging year. Throughout a period of great creative, sales and
organisational activity, DIC's employees have shown tremendous commitment and
energy. I believe that we have one of the best management teams around - one
that continues to demonstrate great strategic vision and execution.
DIVIDEND
As we focus on developing the business over the next few years, we will be
investing in opportunities that create high margin revenue streams and world
class family content. Consequently we do not intend to propose a dividend for
the interim period. We will, however, keep this policy under regular review.
CURRENT TRADING AND PROSPECTS
Current trading is in line with management's expectations as announced by the
Company in January 2008. We are optimistic and excited about the future
opportunities for the Company. Specifically, we are excited about the continued
success of CPLG; the growth and expansion of our interactive and new media
activities, including the launch of www.kewlcartoons.com and www.cuetunes.com;
the ongoing global rollout of our joint venture children's channel, KidsCo; and
the continued success of our many home entertainment, television and consumer
products brands on a worldwide basis.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
DIC Entertainment Holdings, Inc.
We have audited the accompanying consolidated balance sheets of DIC
Entertainment Holdings, Inc. and subsidiaries (collectively the "Company") as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America as established by the American Institute of
Certified Public Accountants. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DIC Entertainment
Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
Los Angeles, California
April 11, 2008
DIC ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED 31 DECEMBER
2007 2006
Notes $'000 $'000
Net revenues 74,716 81,697
Operating expenses:
Film and television cost amortisation and
write-downs 6 26,790 13,850
Participation and distribution costs 31,040 28,438
Selling, general and administrative 44,117 30,115
Depreciation and amortisation 3,355 2,088
Total operating expenses 105,302 74,491
Operating (loss) profit (30,586) 7,206
Other expense
Interest on credit facilities, net
of interest income 9 (3,072) (1,610)
Total interest expense, net (3,072) (1,610)
Other income 19 67
Equity in losses, net of earnings, of
equity investments 13 (467) (69)
(Loss) profit before income taxes (34,106) 5,594
Provision for income taxes 11 (2,530) (2,314)
Net (loss) profit (36,636) 3,280
Except for Except for
per share per share
data data
000's 000's
Basic (loss) earnings per Common Share 16 $ (0.86) $ 0.08
Diluted (loss) earnings per Common Share $ (0.86) $ 0.08
Weighted average number of Common Shares
outstanding - basic 42,633 42,398
Weighted average number of Common Shares
outstanding - diluted 42,633 42,588
DIC ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS AT 31 DECEMBER
2007 2006
Notes $'000 $'000
Assets
Cash and cash equivalents 16,069 3,377
Accounts receivable, net 4 24,912 39,252
Notes receivable from related
parties 13 - 980
Prepaid expenses and other assets 10 9,129 9,800
Property and equipment, net 5 3,150 3,696
Goodwill 17 6,807 5,334
Film and television costs, net 6 44,020 55,633
Intangibles assets, net 7,17 13,714 14,938
Total assets 117,801 133,010
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses 8 12,747 12,458
Participations payable 30,731 23,188
Deferred revenue 18,290 24,205
Revolving line of credit 9 41,000 23,214
Deferred tax liability 11 899 1,278
Total liabilities 103,667 84,343
Commitments and contingencies 10 - -
Stockholders' equity:
Common shares-$0.001 par value 220,000,000 shares
authorised; 42,843,289 shares issued and
outstanding (2006: 42,397,589) 12 43 42
Additional paid-in capital 12 71,669 69,561
Accummulated other comprehensive loss (151) (145)
Accummulated deficit (57,427) (20,791)
Total stockholders' equity 14,134 48,667
Total liabilities and stockholders' equity 117,801 133,010
DIC ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED 31 DECEMBER
2007 2006
$'000 $'000
Cash flows from operating activities:
Net (loss) profit (36,636) 3,280
Adjustment to reconcile to net cash used in operating
activities:
Amortisation of film and television costs 7,644 13,850
Write-downs of film and television costs 19,146 -
Depreciation and amortisation 3,355 2,088
Provision for bad debts 5,066 2,603
Compensation expense related to the issue and repricing 1,178 765
of options
Equity in losses of equity investments 467 69
Amortization of debt issuance costs 341 346
Deferred tax liability (379) 1,278
Changes in operating assets and liabilities:
Accounts receivable 9,274 (20,611)
Film and television costs (14,870) (14,777)
Intangible assets (251) (318)
Prepaid expenses and other assets 2,111 (4,496)
Accounts payable and accrued expenses 292 (3,103)
Participations payable 7,540 7,021
Deferred revenue (5,914) 1,619
Net cash used in operating activities (1,636) (10,386)
Cash flows from investing activities:
Purchase of property and equipment (1,334) (1,643)
Interest capitalized to film and television costs (307) (409)
Investment in affiliates (2,248) (359)
Advances to related parties - (1,108)
Repayment of note receivable from related parties 980
Cash paid for business acquisition, net of cash acquired (543) (3,696)
Net cash used in investing activities (3,452) (7,215)
Cash flows from financing activities:
Payments under revolving credit line (13,750) (50,144)
Borrowings under revolving credit line 31,536 70,100
Tax benefit from stock options exercised - 322
Share issuance costs - (107)
Net cash provided by financing activities 17,786 20,171
Effects of foreign exchange rates on cash (6) (145)
Net increase in cash and cash equivalents 12,698 2,570
Cash and cash equivalents at beginning of period 3,377 952
Cash and cash equivalents at end of period 16,069 3,377
Supplemental disclosures of cash paid for:
Interest 2,667 1,270
Income Taxes 2,471 1,085
DIC ENTERTAINMENT HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED 31 DECEMBER 2006 and 2007
Accummulated Other Additional
Common Shares (Note 12) Comprehensive Paid-In Accumulated Stockholders'
Shares Amount Loss Capital Deficit Equity
'000 $'000 $'000 $'000 $'000 $'000
Balance at 1 January 2006 42,398 42 - 68,581 (24,071) 44,552
Net profit - - - - 3,280 3,280
Share based compensation - - - 765 - 765
Income tax benefit on
exercise of stock options - - - 322 - 322
Foreign currency translation adjustment - - (145) - - (145)
Share issuance costs - - - (107) - (107)
Balance at 31 December 2006 42,398 42 (145) 69,561 (20,791) 48,667
Net loss - - - - (36,636) (36,636)
Share based compensation - - - 1,178 - 1,178
Foreign currency translation adjustment - - (6) - - (6)
Shares issued 446 1 - 930 - 931
Balance at 31 December 2007 42,844 43 (151) 71,669 (57,427) 14,134
NOTE 1 - BUSINESS
DIC Entertainment Holdings, Inc. was incorporated on 13 October 2000, in the
State of Delaware. DIC Entertainment Holdings, Inc. and its subsidiaries are a
global family entertainment brand management company based in the United States.
On 14 October 2005 the Company completed its initial public offering ("IPO")
with its admission to the Alternative Investment Market ("AIM") of the London
Stock Exchange.
On 12 June 2006, the Company acquired the privately-owned, pan-European
licensing agency, Copyright Promotions Licensing Group ("CPLG"), see Note 17.
NOTE 2 - BASIS OF PRESENTATION
General
The accompanying consolidated financial statements include the accounts of DIC
Entertainment Holdings, Inc. and its subsidiaries (collectively, "DIC" or "the
Company"). All significant inter-company balances and transactions have been
eliminated.
Certain reclassifications have been made to the 2006 financial statements to
conform to the 2007 presentation.
Liquidity and Capital Resources
In 2007, the Company incurred negative cash flow from operations of $1.6
million, operating losses of $30.6 million and had an accumulated deficit at 31
December 2007 of $57.4 million. Historically, the Company's liquidity needs have
been met primarily by additional borrowings under the Company's revolving credit
facility (the "Credit Facility") and sales of securities through the IPO. The
Company has borrowed significantly over the last two years, resulting in an
increase in the outstanding balance of the Credit Facility from $3.3 million (31
December 2005) to $41.0 million (31 December 2007). As of 31 March 2008, the
outstanding balance of the Credit Facility was $39.0 million. As of 31
December 2007, the Company was in compliance with all its Credit Facility
covenants.
NOTE 2 - BASIS OF PRESENTATION - Continued
Liquidity and Capital Resources (continued)
The maximum available borrowing capacity is $65 million; however available
capacity is subject to a borrowing base calculation described more fully in Note
9. Based on this borrowing base calculation, at 31 December 2007 the Company
had approximately $1.3 million available under the Credit Facility ($5.4 million
available as of 31 March 2008). The Company assesses the borrowing base on a
monthly basis and once a year hires a third party valuation firm to appraise the
film library. There is no guarantee that the library appraised value will not
be impaired, which in turn may reduce the Company's borrowing capacity; however
management does not expect the film library value to decline.
Management expects to generate negative cash flows from operations in 2008;
however management expects, to be in compliance with the Credit Facility
covenants, have cash on hand and borrowing availability under the Credit
Facility through 31, December 2008. The assumptions used in the development of
these expectations require significant management judgment and actual results
could differ adversely from these expectations.
Management believes that the existing cash balance of $16.1 million at 31
December 2007 will be sufficient to fund currently anticipated cash requirements
for the next twelve months. Should cash flows used in operations cause the
Company to exceed its available cash and borrowing capacity, the Company's
operations and expansion plans could be constrained. Failure to obtain
additional or alternative financing in such circumstances may require the
Company to significantly curtail its productions, operations and/or dispose of
certain operations or assets.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At times, cash balances held at
financial institutions are in excess of the Federal Deposit Insurance
Corporation's limits. At 31 December 2007, the Company had $12,735,000 (2006:
$3,094,000) deposited at various banks in foreign currencies, respectively.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accounts Receivable
Accounts receivable represent amounts billed and unbilled. Billed accounts
receivable may include amounts not yet recognized as revenue. These deferred
revenues are usually recognized as revenue within one to three years. Unbilled
amounts relate to arrangements where revenue has been recognized but for which
billings have not been presented to customers at year-end (see Note 4). The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers deteriorate, resulting in the
impairment of their ability to make payments, additional allowances may be
required. The Company performs periodic credit evaluations of its customers and
maintains allowances for potential credit losses based on management's
evaluation of historical experience and current industry trends. Although the
Company expects to collect net amounts due, actual collections may differ.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. Leasehold improvements
are amortised over the lesser of their estimated useful lives or the terms of
the related leases. Useful lives for fixed assets range from 3 to 6 years. In
tangible assets, having a definite life, consist primarily of copyrights and
representation agreements are amortised using the straight-line method over
their estimated useful life of three years and five years, respectively.
Capitalized amounts related to patents represent external legal costs for the
application and maintenance of patents.
The Company follows the accounting guidance as specified in Emerging Issues Task
Force ("EITF") 00-2, "Accounting for Web Site Development Costs". The Company
capitalises certain costs incurred during the Web Site Application and
Infrastructure Development Stage, and costs incurred to develop graphics.
These costs are amortised over the estimated useful lives of the web site,
generally three years.
During the year ended 31 December 2007, the Company acquired $1,334,000 of
additional property and equipment (2006: $1,643,000). Depreciation and
amortisation expense for 2007 was $1,880,000 (2006: $1,365,000). The net book
value of capitalised brand web site costs included in property and equipment at
31 December 2007 was $1,524,000 (2006: $1,735,000). The net book value of
general software costs included in property and equipment at 31 December 2007
was $353,000 (2006: $442,000).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property and Equipment (continued)
In accordance with Statement of Financial Accounting Standards No. 144 ("SFAS
144"), "Accounting for the Impairment and Disposal of Long-Lived Assets", the
Company assesses the impairment of long-lived assets and intangible assets,
having a definite life, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors considered important
which could trigger an impairment review include the following: (1) significant
underperformance relative to expected historical or projected future operating
results; (2) significant changes in the manner or use of the assets or strategy
for the overall business and (3) significant negative industry or economic
trends.
When the Company determines that the carrying value may not be recoverable based
upon the existence of one or more of the above indicators of impairment, the
Company conducts an impairment review. The impairment loss is the amount by
which the carrying value of the asset exceeds its fair value. The Company
calculates fair value by taking the sum of the undiscounted projected cash flows
over the assets' remaining useful life. When calculating fair value, management
makes assumptions regarding estimated future cash flows and other factors. At
December 31, 2007, it was determined there was no impairment of long-lived
assets or intangible assets.
Film and Television Costs
The Company follows American Institute of Certified Public Accountants Statement
of Position No. 00-2, "Accounting by Producers or Distributors of Films", ("SOP
No. 00-2") in accounting for its film and television costs. Film and television
costs include acquisition and production costs and production overhead and are
stated at the lower of unamortised cost, less accumulated amortisation or fair
value. Film and television costs are amortised, and participation and residual
expenses are accrued, in the proportion that revenue recognised during the
period for each film bears to the estimated remaining total revenues to be
received from all sources under the individual-film-forecast method. Estimated
remaining total revenues include estimates of revenues from all sources that
will be earned within ten years of the release of the film or television
program.
Costs of film libraries acquired are stated at the lower of cost (value assigned
at the date of acquisition, net of accumulated amortisation) or estimated fair
value. Film and television costs associated with acquired libraries are
amortised in accordance with SOP No. 00-2. Interest on film and television
productions is capitalised and accounted for in accordance with SFAS No. 34
"Capitalization of Interest Cost".
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Film and Television Costs (continued)
Estimates of total revenues can change significantly due to a variety of
factors, including the level of market acceptance of film and television
products, advertising rates and the ability of the company to generate
merchandising revenue. Accordingly, revenue estimates are reviewed periodically
and amortisation is adjusted if necessary. Such adjustments could result in a
change in the rate of amortisation of film and television costs and/or a write
down of the value of the film and television costs to estimated fair value.
Revisions to revenue estimates can result in significant year-to-year
fluctuations in rates of amortisation and film and television cost write downs.
If a total net loss is projected for a particular title, the associated film and
television costs are written down to estimated fair value. During 2007, as a
result of the Company's review of its film and television revenue forecasts, the
Company wrote down approximately $19 million of the carrying values of certain
properties.
Goodwill and Indefinite Life Intangible Assets
Intangible assets consist principally of the excess of cost over the fair value
of net assets acquired (or goodwill, stated separately), and trademarks
associated with the "DIC" and "CPLG" names and certain animated characters.
Goodwill was allocated based on the original purchase price allocation. Certain
intangible assets, consisting primarily of trademarks, are considered to have an
indefinite life and, accordingly, are not amortised. The Company performs an
annual impairment test in accordance with SFAS No. 142, "Goodwill and other
Intangible Assets", using a discounted cash flow model to determine if the fair
value of the indefinite life intangible assets exceeds their carrying value. If
the carrying value is greater than the fair value, an impairment charge is
recorded. No impairment charges were recorded in 2007 and 2006.
Debt Issue Costs
Debt issue costs are capitalised as other assets and amortised on the
straight-line basis over the remaining related term of the modified debt
arrangement. In 2007, the Company recorded debt issuance amortization of
$341,000 (2006: $346,000) associated with the Credit Facility. Unamortised debt
issue costs at 31 December 2007 were $910,000 (2006: $1,251,000).
Income Taxes
Income taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes," whereby deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities, and are measured using enacted tax rates and laws that will be in
effect when differences are expected to reverse.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes (continued)
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income
Taxes", effective 1 January 2007. Under FIN 48, the Company is required to
determine whether it is more likely than not that a tax position will be
sustained upon examination based on the technical merits of the position. A tax
position that meets the more likely than not recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. The
adoption of FIN 48 did not have a material effect on the financial statements.
The Company has concluded that there are no significant uncertain tax positions
requiring recognition in its financial statements.
The Company's policy is to recognize interest and penalties expense, if any,
related to unrecognized tax benefits as a component of income tax expense. As
of December 31, 2007, the Company has not recorded any interest and penalty
expense. The Company's determination on its analysis of uncertain tax positions
are related to tax years that remain subject to examination by the relevant tax
authorities. These include the 2004 through 2006 tax years for federal purposes
and the 2003 through 2006 tax years for California purposes.
Foreign Currency Translation and Transactions
The financial statements of CPLG are measured using the local currency (GBP) as
the functional currency. Assets and liabilities of CPLG are translated into U.S.
dollars at the exchange rate in effect at each year end. Income and expense
items are translated at the average exchange rates during the reporting period.
The resulting translation adjustments are recorded in the other comprehensive
loss and for the year ended 31 December 2007 were $151,000 (2006: $145,000).
The Company records all currency transaction gains and losses in income. These
gains or losses are classified in the statement of operations based upon the
nature of the transaction that gives rise to the currency gain or loss. Net
foreign currency transactions gains for the years ended 31 December 2007 were
$331,000 (2006: $67,000).
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising
costs for the year ended 31 December, 2007 were $401,000 (2006: $421,000).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share are computed by dividing net
profit (loss) by the weighted average number of shares of common shares
outstanding during each year. Shares issued during the year and shares acquired
during the year are weighted for the portion of the year that they were
outstanding. Diluted earnings per share are computed in a manner consistent with
that of basic earnings per share while giving effect to all potentially dilutive
common shares that were outstanding during the period. All references to
earnings per share are on a diluted basis unless otherwise noted.
Revenue Recognition
The Company recognises revenue in accordance with SOP 00-2. The Company
recognises revenue from home entertainment (videocassettes and DVDs) when the
license period begins and the film product has been made available to
sub-distributors. Revenue from free television and pay television license
agreements is recognised when films are made available for exhibition.
Distribution of the Company's films in foreign countries and in the domestic
home entertainment market is primarily accomplished through the licensing of
various distribution rights to sub-distributors. The terms of licensing
agreements with such sub-distributors generally include the receipt of
non-refundable guaranteed amounts by the Company and revenue thereon is
recognised when films are available for exhibition in the related markets. Cash
collected in advance of the time of availability is recorded as deferred
revenue. Merchandising revenues, and related participations payable, are
recognised at the greater of the straight-line method over the license term or
actual royalty earnings as reported. Music publishing revenues are recognised
when royalty statements are received. Television advertising revenues are
recognised when the related commercial is aired and is recorded net of estimated
reserves for television audience under-delivery. Licensing advances and
guaranteed payments collected, but not yet earned by the Company, are classified
as deferred revenue in the accompanying consolidated balance sheets.
Approximately 38% of the deferred revenue balance at 31 December 2007 is
expected to be recognised as income within one year. Substantially all of the
remainder is expected to be recognised between two to five years.
Concentration of Credit Risk
The Company licenses films to television broadcasters and sub-distributors.
Credit is extended to these broadcasters and sub-distributors based on an
evaluation of the customers' financial condition, and generally collateral is
not required. Estimated credit losses are provided for in the financial
statements. At 31 December 2007, one customer accounted for approximately 19% of
net accounts receivable (2006: 16%). During the year ended 31 December 2007, no
single customer accounted for more than 10% of net revenues; (one customer
accounted for 14% of net revenue in 2006).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Concentration of Credit Risk (continued)
The Company places its temporary cash investments with high credit-quality
financial institutions and limits the amount of credit exposure to any one
financial institution. Generally, such investments mature within 30 to 90 days
and therefore are not subject to significant risk. Since its inception, the
Company has not incurred any losses related to these investments.
Fair Value of Financial Instruments
The recorded value of cash, cash equivalents, and accounts receivable, accounts
payable and accrued liabilities approximates fair value because of the
short-term maturity of these instruments. The recorded value of debt
approximates the fair value due to the variable nature of the interest on such
debt.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Share-Based Compensation
Effective 1 January 2006, the Company adopted SFAS No. 123 (revised 2004) -
"Share-Based Payment" ("SFAS No.123(R)"). This statement requires compensation
expense to be measured based on the estimated fair value of the share-based
awards and recognised in income on a straight-line basis over the requisite
service period, which is generally the vesting period.
The Company adopted the fair-value-based method for share-based payments using
the modified prospective transition method described in FASB Statement No.148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123". The Company uses the Black-Scholes formula
to estimate the value of stock options granted to employees. Because SFAS No.
123(R) must be applied not only to new awards but to previously granted awards
that are not fully vested on the effective date, and because the Company adopted
SFAS No. 123(R) using the modified prospective transition method (which applies
to awards granted, modified or settled after the adoption date), compensation
cost for some previously granted awards that were not recognised under SFAS No.
123 will be recognised under SFAS No. 123(R).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Share-Based Compensation (continued)
The fair market value of each option grant was estimated on the date of grant
under the Black-Scholes option pricing model with the following weighted average
assumptions at:
Weighted Average
2007 2006
Risk-free interest rate 4.2% 5.0%
Expected life (in years) 6.5 3.0
Dividend yield - -
Market rate volatility 50.1% 48.0%
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at 31 December 2007 and 2006 consist of the following:
2007 2006
$'000 $'000
Trade receivables - billed $ 21,106 $ 29,370
Trade receivables - unbilled 10,062 12,590
31,168 41,960
Allowance for doubtful accounts (6,256) (2,708)
Net accounts receivable $ 24,912 $ 39,252
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at 31 December 2007 and 2006 consist of the following:
2007 2006
$'000 $'000
Software and web-site development costs $ 5,251 $ 4,540
Furniture and fixtures 1,897 1,506
Leasehold improvements 997 930
Motor vehicles 34 39
Computer equipment 452 417
8,631 7,432
Accumulated depreciation
and amortisation (5,481) (3,736)
$ 3,150 $ 3,696
NOTE 6 - FILM AND TELEVISION COSTS
Film and television costs at 31 December 2007 and 2006 consist of the following:
2007 2006
$'000 $'000
Film and television costs $139,288 $124,209
Accumulated amortisation (95,268) (68,576)
44,020 55,633
Released 32,718 43,167
In-process 11,302 12,466
$44,020 $55,633
As at 31 December 2007, unamortised film libraries of approximately $22,794,000
(2006: $24,801,000) remain to be amortised. At 31 December 2007, 21% of the
remaining released product is expected to be amortised in one year (2006 25%).
At 31 December 2007, 55% of the remaining released product is expected to be
amortised in three years (2006: 85%). At 31 December 2007, management estimates
that approximately 79% of accrued participation liabilities will be paid in the
following fiscal year.
NOTE 7 - INTANGIBLE ASSETS
Intangibles at 31 December 2007 and 2006 consist of the following:
2007 2006
$'000 $'000
Intangibles - indefinite life $10,158 $ 10,158
Intangibles - definite life 5,717 5,463
15,875 15,621
Accumulated amortisation (2,161) (683)
$ 13,714 $ 14,938
Estimated amortization expense for existing intangible assets for each of the
five succeeding years ending 31 December and thereafter are as follows:
$'000
Year ending 31 December,
2008 $ 1,279
2009 784
2010 534
2011 436
2012 180
Thereafter 343
Total $ 3,556
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at 31 December 2007 and 2006 consist of
the following:
2007 2006
$'000 $'000
Accrued production costs $ 304 $ 195
Accounts payable 1,787 4,803
Litigation accrual (see Note 10) - 230
Distribution costs 1,956 810
Vacation accrual 468 415
Bonus accrual 2,364 800
Other accrued expenses 5,868 5,205
$ 12,747 $ 12,458
NOTE 9 - REVOLVING LINE OF CREDIT
On 31 August 2005, the Company entered into a revolving credit facility with JP
Morgan Chase Bank. As amended, the credit facility allows for a maximum
borrowing of $65,000,000, with a maturity date of 31 August 2010.
The maximum available borrowing capacity is $65 million; however such capacity
is subject to a borrowing base which is limited to a combination of the
following:
i) 100% of eligible receivables secured by an acceptable letter of credit,
plus
ii) 95% of eligible receivables from acceptable customers located within
the United States, plus
iii) 85% of eligible receivables from acceptable customers located outside
the United States, plus
iv) 40% of the eligible film library amount, plus
v) (v) 50% of other receivables; provided, that the amount included in
the borrowing base at any time pursuant to this clause (v) shall not
exceed either (a) in the aggregate for all customers, 15% of the
aggregate amount included in the borrowing base pursuant to clause
(i), (ii) and (iii) above or (b) $50,000 for any one customer.
NOTE 9 - REVOLVING LINE OF CREDIT - Continued
The revolving credit facility bears interest at LIBOR plus 2.75% or the bank's
prime rate plus 1.75%, at the election of the Company. At 31 December 2007,
$41,000,000 (2006: $23,214,000) was outstanding under the line of credit.
Substantially all of the borrowings under the credit facility for the period 31
December 2006 through 31 December 2007 were at LIBOR plus 2.75%. At 31 December
2007, the weighted average LIBOR rate was 8.2% (inclusive of the 2.75% margin).
The credit facility bears a commitment fee of 0.5% for any unused portion of the
credit revolver.
The credit facility contains covenants which among other things, require
adherence to certain financial ratios and balances and impose limitations on
film acquisition and production costs, and general and administrative costs. At
31 December 2006, the Company violated its overhead expense covenant, and
subsequently obtained a waiver from the lender for this violation. At 31
December 2007, the Company was in compliance with all covenants. The credit
facility is collateralised by substantially all of the Company's assets. At 31
December 2007, under the credit facility, the Company has available credit of
$1,300,000 (2006: $20,100,000).
CPLG has a credit facility of $3,000,000 with the Bank of Scotland. The credit
facility bears interest at 2% over the Bank of Scotland base rate, which was
5.5% at 31 December 2007. At 31 December 2007, no amounts were outstanding under
this line of credit. This facility expired 29 February 2008.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Certain non-cancellable leases are classified as capital leases, and the leased
assets are included as a component of property and equipment. Such leasing
arrangements involve office equipment. The net book value of assets under
capital leases was $56,000 in 2007 ($68,000 in 2006).
Other leases are classified as operating leases and are not capitalised. The
Company leases office facilities under operating lease commitments expiring in
2018. Rent for certain leases is adjusted based upon changes in the Consumer
Price Index. The payments on such leases are recorded as expense. For the year
ended 31 December 2007, rent expense under all operating leases was $3,172,000
(2006: $2,019,000).
NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued
At 31 December 2007, the estimated future minimum operating lease payments under
operating and capital leases, which at inception had a non-cancellable term of
more than one year, were as follows:
Operating Capital
Leases Leases
$'000 $'000
Year ending 31 December,
2008 $ 3,075 $ 61
2009 2,755 37
2010 2,583 32
2011 2,561 16
2012 1,477 4
Thereafter 7,991 -
Total $ 20,442 $ 150
Distribution Arrangement
In September 2006, the Company entered into a three-year agreement with CBS to
purchase television air-time, for an aggregate distribution fee of $30,000,000,
payable $10,000,000 per year, which may be extended for a further two years
under similar terms at the option of the third party and the Company. These
costs are recognized on a straight-line basis over the term of the agreement.
During 2007, the Company recognized $10,000,000 as a component of participation
and distributions costs. During the year ended 31 December 2007, the Company
paid $7,500,000, and $2,100,000 was included in prepaid expenses and other
assets. At 31 December 2007, the remaining commitment under this agreement was
$15,000,000.
Litigation
On or about 9 September 2004, Madeline Bemelmans and Barbara Bemelmans
(''Claimants'') commenced an arbitration before the American Arbitration
Association regarding the Company's exploitation of the trademark and character
''Madeline'' as depicted in the books of Ludwig Bemelmans (the ''Madeline
Property''). Claimants asserted causes of action for, among other things,
specific performance regarding certain audit rights, breach of contract,
declaratory relief, and termination of the contract based on fraud, breach of
fiduciary duty and material breach. Claimants alleged that the Company
improperly exercised its contractual rights to utilise and exploit the Madeline
Property. Claimants sought relief including, but not limited to, the enforcement
of certain audit rights, monetary damages of approximately $3,900,000 plus
interest and recovery of audit fees, and termination of the Company's
contractual rights.
NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued
Litigation (continued)
On 10 August 2007, the arbitrator issued a Phase I decision in the Arbitration
awarding Claimants $1,157,000 (the "Award"), of which approximately $312,000
constituted interest and audit fees. On 6 November 2007, believing that the
Award was flawed, DIC filed a Petition to vacate the Award in the Superior Court
of the State of California. On 20 November 2007, Claimants filed a Petition to
confirm the Award.
During the pendency of the cross-Petitions, the parties engaged in extensive
settlement discussions, culminating in a written Settlement Agreement and Mutual
General Release effective as of 26 February 2008 ("Settlement Agreement"), the
key terms of which are that: (i) DIC shall pay the Claimants the total sum of
$1,648,000 in two installments. The first installment, for the total sum of
$922,000, representing the acquisition of Claimants' interest in filmed content
produced by the Company, was paid on 5 March 2008. The second installment, for
the total sum of $726,000, representing Claimants' participation on prior
revenue received by the Company, shall be paid no later than 180 calendar days
after 26 February 2008; (ii) Claimants shall immediately dismiss the AAA
arbitration, with prejudice, and the parties shall promptly dismiss their
cross-Petitions; (iii) as of 26 February 2008, the Award is null and void; (iv)
except for the Settlement Agreement, all contracts between the Company and
Claimants are terminated; and (v) Claimants reaffirm and grant certain rights to
the Company regarding the Madeline Property, including the Company's right to
retain all future revenues from its exploitation of the Madeline Property
(excluding most future consumer products exploitation, the rights to which were
returned to Claimants under the Settlement Agreement).
As of 31 December 2006, the Company accrued $230,000 in the event of an adverse
ruling. As of 31 December 2007, the remaining amount due on the settlement of
$726,000 is accrued as participations payable.
On 17 August 2007, Troll Company A/S ("Claimant") filed a petition against the
Company with the American Arbitration Association ("AAA") in connection with the
Company's exploitation of the Troll Company's classic "Good Luck Troll"
property, as well as an updated derivative property called "Trollz"
(collectively, the "Troll Properties"). The petition asserts causes of action
for, among other things, breach of contract, breach of fiduciary duty, fraud,
unjust enrichment and breach of the implied covenant of good faith and fair
dealing, based on Claimant's allegations that, among other things, the Company
failed to properly exploit the Troll Properties and failed to properly account
to Claimant for royalties generated by the Troll Properties. Claimant seeks to
terminate its contracts with the Company for the Troll Properties and further
seeks monetary damages in an amount in excess of $25,000,000. The Company
strenuously denies all of the allegations raised in Claimant's petition and
intends to defend itself vigorously with respect to this matter.
NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued
Litigation (continued)
On 24 October 2007, the Company filed a complaint in Federal District Court in
Los Angeles against Claimant, asserting causes of action for fraud in the
inducement and negligent misrepresentation. The Company alleges that Claimant
made misrepresentations regarding the existence of infringing products on the
market at the time the parties entered into their license agreements for the
Troll Properties. Claimant filed a motion to dismiss the Company's complaint on
28 November 2007, which motion was denied in its entirety by the Court.
Claimant then filed a counterclaim against the Company on 22 January 2008,
asserting a cause of action for fraudulent inducement, arising out of the same
license agreements at issue in the Company's complaint and in the AAA action.
The parties have each alleged damages of approximately $20,000,000 arising out
of their respective claims in this action. The Company intends to aggressively
prosecute its claims in this action and strongly defend against Claimant's
allegations.
On 29 October 2007, Claimant filed a complaint in Los Angeles Superior Court
against the Company, alleging a single cause of action for fraudulent
inducement, arising out of the same license agreements at issue in the Company's
Federal action and in the AAA action. Claimant alleges that the Company made
misrepresentations during the negotiation of the license agreements regarding
the Company's financial stability and plans for the Troll Properties. Claimant
alleged damages in excess of $20,000,000 arising out of its claim. On 17
December 2007, the Company moved to dismiss this action, and the Court granted
the Company's motion on 30 January 2008. To date, Claimant has not filed an
appeal of the dismissal, but should Claimant do so, the Company will vigorously
defend itself against Claimant's assertions. At 31 December 2007, no accrued
liabilities have been recorded as it is too early to determine the outcome.
The Company is party to other litigation and management proceedings relating to
claims arising in the normal course of business. Management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 11 - INCOME TAXES
The components of the income tax provision for the year ended 31 December 2007
and 2006 are as follows:
2007 2006
$'000 $'000
Current
Federal $ - $ -
State 55 60
Foreign 1,278 -
Foreign withholding 1,576 1,467
Total current tax provision 2,909 1,527
Deferred
Federal - -
State - 324
Foreign (379) 463
Foreign withholding - -
Total deferred tax provision (379) 787
Total $ 2,530 $ 2,314
NOTE 11 - INCOME TAXES - Continued
The primary components of temporary book-tax differences at 31 December 2007 and
2006 are:
2007 2006
$'000 $'000
Deferred tax assets:
Allowance for doubtful accounts $ 2,565 $ 1,031
Accrued liabilities 357 297
Deferred revenue 1,924 2,958
Stock options/warrants 905 977
State taxes 5 15
Net operating loss carry forwards 19,081 5,492
AMT tax credits 216 216
Charitable contributions 36 -
Foreign tax credits 1,257 1,389
Total deferred tax
assets 26,346 12,375
Deferred tax liabilities:
Film and television costs (4,362) (870)
Separately stated intangibles (1,031) (1,410)
Total deferred tax liabilities (5,393) (2,280)
Valuation allowance (21,852) (11,373)
Net deferred tax liability $ (899) $ (1,278)
As of 31 December 2007, the Company has established a valuation allowance of
$21,852,000 (2006: 11,373,000) because management believes that it is more
likely than not that these deferred tax assets will not be realized in the near
future. For the year ending 31, December 2007, the valuation allowance increased
by $10,479,000 (2006: $2,366,000 increase).
As of 31 December 2007, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $44,874,000 (2006:$11,439,000), and
for state income tax purposes of $30,202,000 (2006: $663,000), which begin to
expire in the year 2022 and 2013, respectively. The net operating loss
carryforwards may be subject to limitations imposed under the ownership change
rules of the U.S. Internal Revenue Code. Additionally, the Company had federal
tax credits of approximately $1,400,000, which begin to expire in 2016.
NOTE 11 - INCOME TAXES - Continued
The differences between the reported effective tax rate and the statutory
federal and state rate for the year ended 31 December 2007 and 2006 are as
follows:
2007 2006
$'000 $'000
Statutory tax rate (federal and state) 35% 41%
Net change in valuation allowance (31%) (20%)
Foreign withholding tax paid (5%) 27%
Foreign tax credits generated 0% (23%)
Permanent differences 0% 18%
Other (7%) (1%)
Effective tax rate (8%) 42%
NOTE 12 - SHARE CAPITAL AND SHARE BASED COMPENSATION
On 14 October 2005 the Company completed its IPO with its admission to the
Alternative Investment Market ("AIM") of the London Stock Exchange and began
trading its shares by issuing 7,783,000 of new common shares at $4.33 per share.
On 15 September 2005, the Company adopted a long-term incentive plan (the "2005
Share Option Plan"). A total of 1,883,000 shares of Common Stock were available
for awards granted under the 2005 Share Option Plan. Any shares subject to
awards that are not exercised before they expire or are terminated, as well as
shares tendered or withheld to pay the exercise or purchase price of an award or
related tax withholding obligations, will become available for other award
grants under the plan. On 15 September 2005, an aggregate of 754,000 awards were
granted under the 2005 Share Option Plan to senior management of the Company.
The awards vest over five years, 20 percent in February 2006, and the remaining
80 percent in monthly installments over four years. The 2005 Share Option Plan
was amended in October 2007 to increase the number of shares available for award
grants by 2,000,000 to a total of 3,883,000. The amendment was approved by the
Company's shareholders on 7 November 2007.
The options have an exercise price of $3.01 per share and expire in ten years
from the grant date (unless there is early expiration in accordance with the
terms of the grant). In connection with this grant, the Company recorded
$765,000 in compensation expense for the period ended 31 December 2006,
representing the fair value of the options calculated in accordance with SFAS
No.123(R).
NOTE 12 - SHARE CAPITAL AND SHARE BASED COMPENSATION - Continued
Upon the consummation of the IPO on 14 October 2005, the Company granted 80,000
options to the non-executive directors. These options have an exercise price of
$4.33 per share and will vest over three years. These options will expire 10
years from grant (unless there is early expiration in accordance with the terms
of the grant).
During 2006, an aggregate of 1,521,000 options were granted partially under the
2005 Share Option Plan and outside of such Plan to senior management and
directors of the Company, and 157,000 options were cancelled as a result of
certain employees leaving the Company. The weighted-average grant date fair
value of stock options granted during the year ended 31 December 2007 and 2006
was $0.68 and $1.60, respectively.
In June 2007, the Company repriced certain stock options for key employees and
directors. An aggregate of 1,799,000 options were repriced from their original
exercise price to the fair market value on 18 June 2007. The Company recorded
additional option expense of $209,000 related to the vested options repriced.
There were no changes to the vesting period or term for the stock options
repriced.
On 4 October 2007, 494,000 stock options were granted to employees of the
Company. The options have an exercise price of $1.21 and vest over 4 years (25%
after the first year and monthly thereafter). The stock options were valued
using a Black-Sholes model with a risk free rate of 4.24%, volatility of 50.1%
and expected life of 6.5 years.
On 7 November 2007, 1,950,000 stock options were granted to employees and
directors of the Company. The options have an exercise price of $1.24 and vest
over 4 years (25% after the first year and monthly thereafter). The stock
options were valued using a Black-Sholes model with a risk free rate of 4.24%,
volatility of 50.1% and expected life of 6.5 years.
In addition, the Company previously issued fully vested warrants in connection
with a prior business combination in 17 November 2000, of which 392,000 warrants
remain outstanding, with an original fair value of $418,000, at 31 December
2007. The weighted-average contractual life of the warrants is 5 years (exercise
price $0.1665).
NOTE 12 - SHARE CAPITAL AND SHARE BASED COMPENSATION - Continued
Activity for the Company's options and warrants is summarised as follows:
Options Weighted Average Warrants
Outstanding Exercise Price Outstanding
Common Common Common
Shares Shares Shares
000 $ 000
Balance at 31 December 2005 667 3.12 392
Granted 1,521 4.78 -
Cancelled (157) 3.35 -
Balance at 31 December 2006 2,031 4.20 392
Granted 2,444 1.23 -
Cancelled (93) 2.09 -
Balance at 31 December 2007 4,382 1.69 392
The following summarizes prices and terms of options outstanding at 31 December
2007:
Stock Options Outstanding
Exercise Price Number Outstanding Weighted Average Number Exercisable
at 31 December 2007 Remaining at 31 December
Contractual Life in 2007
Years
$1.21 494 9.75 0
$1.24 1,950 9.83 0
$2.09 1,798 7.67 928
$4.33 80 7.75 58
$4.95 60 8.33 30
4,382 1,016
NOTE 12 - SHARE CAPITAL AND SHARE BASED COMPENSATION - Continued
The following applies to the Company's stock option plans as of 31 December 2007:
Number of options outstanding 4,382
Weighted-average exercise price $ 1.69
Aggregate intrinsic value $ -
Weighted-average contractual term of options outstanding 9.11 years
Number of options currently exercisable 1,016
Aggregate intrinsic value of options currently exercisable $ -
Weighted average contractual term of options currently exercisable 8.21 years
As at 31 December 2007, there was $3,168,000 of total unrecognized compensation
cost related to unvested stock options. This cost is expected to be recognized
over a weighted-average period of approximately 2.7 years.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company paid $731,000 for film and television costs production services in
2007 (2006: $92,000) to Animation City Ltd., which is 48% owned by the Company.
These costs have been capitalised and are included in film and television costs.
During 2006, the Company loaned $128,000 for administrative costs in 2006 to Les
Studio Tex ("LST"), a partnership in which the Company had a 40% interest.
During 2007, the Company loaned LST an additional $85,000 for administrative
costs. In December 2007, LST filed for bankruptcy. The Company purchased the
film rights to certain properties held by LST for $247,000 plus the forgiveness
of $293,000 then owed to the Company from LST. All costs associated with the
Company's purchase of LST's film rights and prior loans for administrative costs
are now recorded in film and television costs and will be amortized under SOP
00-2.
On 2 April 2007, the Company formed a joint-venture with two strategic
investors, as equal partners, to create KidsCo Limited, a new international
children's television channel. Each party will own a third of the new channel,
which launched in autumn 2007 in Central and Eastern Europe. It is planned to
reach approximately 40 countries in Europe, Latin America and Asia Pacific by
2009.
The Company has invested $2,051,000 as of 31 December 2007 and is committed to
invest an additional $2,000,000 over the next two years ($763,000 paid on 30
January 2008). The Company's share of equity losses for 2007 was $946,000.
NOTE 13 - RELATED PARTY TRANSACTIONS - Continued
During 2007, the Company invested $50,000 in Beacon Media Group, LLC ("Beacon"),
in which the Company has a 30% interest. In 2006, the Company loaned Beacon
$890,000 for working capital which was repaid in 2007.
The Company accounts for these investments using the equity method of
accounting. The investment in these equity method investments is included in
other assets on the accompanying balance sheets as follows:
Balance at Gain (loss) on equity Balance at
31 December Additions investment Reclass 31 December
2006 2007
$'000 $'000 $'000 $'000 $'000
Animation City Ltd. $ - $ - $ - $ -
LST 208 332 - (540) -
Kewl Magazine, LLC - 89 (89) -
KidsCo Limited 157 1,894 (946) 1,105
Beacon Media Group, LLC 76 50 568 694
Total $ 441 $ 2,365 * $ (467) $ (540) $ 2,339
* At 31 December 2007, $117,000 is included in accrued liabilities
NOTE 14 - INCENTIVE SAVINGS PLAN
In January 2001, the Company established the DIC Entertainment Holdings, Inc.
Savings Plan (the "Plan"), a profit sharing and 401(k) savings plan, in which
eligible employees of the Company may participate. To be eligible, employees
must be 18 years of age or older. Eligible employees become participants in the
Plan on the entry date immediately following the completion of the eligibility
requirements. Employees may elect to contribute up to 20% of compensation on a
pre-tax basis, subject to certain limits. Contributions made by participants are
fully vested at all times. In 2007, under the Company's discretionary matching
policy, the Company decided to match 50% of the employee's contribution up to 4%
of the employee's salary. The Company's contribution to the 401(k) plan for plan
year 2007 was $143,000. There was no contribution made by the Company in 2006.
NOTE 15 - SEGMENT INFORMATION
The Company operates in a single operating segment: a global family
entertainment brand management company. Revenue by geographic location of the
customers, with no foreign country individually comprising greater than 10% of
total revenue, is as follows, for the year ended 31 December:
2007 2006
$'000 $'000
Revenue by geographic location is as follows:
North America $ 29,834 $ 35,588
Europe 32,674 29,778
Other 12,208 16,331
Total $ 74,716 $ 81,697
Assets by geographic location is as follows:
North America 89,942 114,415
Europe 27,859 18,595
Other - -
Total $ 117,801 $ 133,010
NOTE 16 - EARNINGS PER SHARE
The following is a computation of basic and diluted loss per share for the year
ended 31 December:
2007 2006
Basic earnings/(loss) per common share $ (0.86) $ 0.08
Diluted earnings/(loss) per common share $ (0.86) $ 0.08
Weighted average common shares outstanding - basic 42,633 42,398
Effect of stock options and warrants - 190
Weighted average common shares outstanding - diluted 42,633 42,588
Options to purchase 4,382,000 common shares at an average aggregate exercise
price of $1.69 and warrants to purchase 392,000 common shares at an average
aggregate exercise price of $0.1665 at 31 December 2007 were anti-dilutive, thus
not converted in the diluted loss per share calculation.
NOTE 17 - ACQUISITION OF CPLG
On 12 June 2006, the Company acquired the privately-owned, pan-European
licensing agency Copyright Promotions Licensing Group ("CPLG"). The aggregate
purchase price of CPLG was approximately $7,672,000, which was comprised of
approximately $7,064,000 in cash and $608,000 in acquisition related fees. The
acquisition was accounted for under the rules of SFAS No. 141, "Business
Combinations".
As part of the consideration payable to CPLG, certain employees are entitled to
additional cash and shares during the earn-out period from the date of
acquisition to 31 December 2008 if certain earnings targets are achieved. In
June 2007, 445,700 shares of the Company's common stock valued at $931,000 were
issued, and a cash payment of $458,000 was made in connection with the earn-out
for the period ended 31 December 2006. In addition, during 2007 the Company
incurred professional services totaling $85,000 relating to the acquisition. The
issuance of the stock and cash payment as well as the professional services fee
payments is included in Goodwill at 31 December 2007. A third-party appraisal
firm was engaged to assist the Company in the process of determining the fair
values of CPLG's intangible assets. The allocation of the purchase price is
shown in the table below:
As at
12 June
2006
$'000
Cash $ 3,976
Other current assets 9,204
Investments 169
Intangible assets 6,843
Property and equipment 611
Goodwill 5,334
Total assets acquired 26,137
Current liabilities 18,465
Total liabilities assumed 18,465
Net asets acquired 7,672
Less cash acquired in business acquisition 3,976
Net cash paid for business acquisition $ 3,696
NOTE 17 - ACQUISITION OF CPLG - Continued
The primary reason for the acquisition and the principal factor that contributed
to the CPLG purchase price that resulted in the recognition of goodwill was the
"going concern" element of CPLG which presents the opportunity to earn a higher
rate of return on the assembled collection of net assets than would be expected
if the assets were acquired separately.
The following unaudited pro forma summary presents the results of operations for
the year ended 31 December 2006, as if the acquisition of CPLG had occurred at
the beginning of the period:
2006
$'000
Net revenues 88,466
Net profit 3,894
Except for
per share
Data
000's
Basic earnings per Common Share $ 0.09
Diluted earnings per Common Share $ 0.09
Weighted average number of common Shares
outstanding - basic 42,398
Weighted average number of common Shares outstanding -
diluted 42,588
The pro forma summary uses estimates and assumptions based on information
available at the time. Management believes the estimates and assumptions to be
reasonable; however, actual results may differ significantly from this pro forma
financial information. The pro forma information does not reflect any
synergistic savings and is not intended to reflect the actual results that would
have occurred had the companies actually combined during the periods presented.
NOTE 18 - DISTRIBUTION AGREEMENT
In January 2006, the Company reached an agreement with a third-party resulting
in, among other things, the return of several hundred episodes of television
content that the third-party had been distributing. These episodes are now
distributed by the Company, with the third-party receiving a participation in
revenues received after the Company retains a distribution fee. The agreement
also resolves outstanding disputes the two Companies had relating to these
episodes and the distribution thereof, and further includes a television
licensing agreement which extends the third-party's distribution term for
certain other episodes of the Company's content and licenses new episodes of the
Company's content to the third-party for distribution. Under the terms of the
agreement, the Company received $6,000,000 in cash and reduced reported
liabilities of $2,000,000. Under this agreement, during the year ended 31
December 2006, the Company recognized revenue of $6,500,000 and the related
participation and amortization expense.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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