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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Dic Ent Regs | LSE:DEKE | London | Ordinary Share | COM SHS USD0.001 (REG S) |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.00 | 0.00% | 33.50 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
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DIC Entertainment Holdings, Inc. 14 April 2008 14th April 2008 The information contained herein is restricted and is not for publication, release or distribution in or into the United States of America, Canada, Australia, New Zealand, the Republic of Ireland, South Africa or Japan or to any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 FR DXGDSXDBGGIX
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