Crest Animation Studios Ltd Directors Report

CREST ANIMATION STUDIOS LIMITED ANNUAL REPORT 2011-2012 DIRECTORS REPORT The Directors hereby present the Twenty-second Annual Report of the Company with the Audited Statement of Accounts and the Auditors Report for the year ended 31 March 2012. FINANCIAL RESULTS: (Rs. in Million) 2011-2012 2010-2011 Operating Revenue 141.68 371.16 Other Income 50.76 5.60 Total Income 192.45 376.76 Profit before Interest, Depreciation, Tax, Exceptional Items and prior period adjustment (89.11) 59.35 Less: Interest & financial charges 59.60 72.68 Profit before Depreciation, Tax, Exceptional Items and before prior period adjustment (148.71) (13.33) Less: Depreciation 56.88 87.58 Profit before Tax and before prior period adjustment (205.59) (100.91) Less: Provision for Tax - - Add: Excess provision for tax written back - - Add: Prior period income - - Profit after Tax (205.59) (100.91) Less: Surplus/(Deficit) in Profit & Loss account brought forward from previous year - - Net surplus/(Deficit) carried forward to Balance Sheet (205.59) (100.91) Note: Figures for the previous period have been regrouped/restated wherever necessary. DIVIDEND: Since the operations of the Company have registered a loss for the year, the directors express their inability to recommend any divided on the equity shares of the Company. OPERATIONS DURING THE YEAR AND PROSPECTS: Financial Year 2011-12 has been a very challenging year for the Company and it continued to battle multiple concerns. A gloomy and dismal global economy resulted in reduction of fully financed entertainment products. The Companys outsourcing revenues suffered immensely on this account. Financing for proposed Joint Venture with an American Studio was also not possible. Primary amongst these were the twin blows which the Company suffered last year, i.e. the bankruptcy filing by one of the Companys client and the backing out of the financing arrangement on the second feature film Norm of the North by one of the financiers. The full impact of this was felt in the year where it was not possible to have the loss of business replaced immediately. A lackluster stock market also did not allow for recapitalization and the company had to resort to short term borrowings to keep the operations going. The Company was able to place a small portion of the treasury stock only in April 2012. The Companys bankers, employees and vendors have been very supportive in these difficult times as they have had to face delays in getting their dues cleared. The Company continued work on the second feature film Norm of the North despite lack of financial closure, inviting qualification from the auditors. Alternate financing arrangements which the Company hoped to finalize this year were not successful in the period. The Company is working on financial closure in the coming 2-3 months. The Company has taken Television contracts for execution like Brown Bag, Gloe, Swan Princess-5 after the successful completion and fine delivery of Swan Princess-4. Inadequacy of contracts both in the television and feature film space has put pressure on the revenues, resulting in the low performance during the year. The management and the artists along with support staff, despite deferring their compensation for months, continued to do multiple tasks for marketing. One unfeasible, non-contributing and demanding TV contract was discontinued and alternatives are on for more viable projects. Alpha & Omega, co-produced by the Company along with Lions Gate performed reasonably well with gross box office collections over US$ 50 million and sale of direct to videos and television rights raising more than US$ 22 million. As mentioned last year, the waterfall accruing to the Company will be over a longer period of time than originally anticipated. Due to the tight liquidity situation faced by the Company during the year, no additional work could be carried out on the Indian Feature Film; however, continued interest from Cable and satellite networks and from distributors is testimony to the creative and animation quality ability of the Company. The tentative release date is summer of 2013. However the worst seems well behind us. The first quarter of 2012-13 has shown results on the work put in by the Company on different DVD/Television contracts, as the collections have been robust enough to take care of ongoing operational requirements as well retiring small portion of short term borrowings. Continued negotiations and discussions are on for new contracts as well as for new Joint Venture initiatives for ensuring a robust and predictable future pipeline and guaranteed work for hire services. The Direct to Video sales of The Little Engine that Could, co-produced by the Company with Universal Studios, are in line with their expectations and during the year the US subsidiary received a total of US$ 300,000 from Universal Studios towards the subsidiarys share. In line with the accounting practice followed by the US subsidiary, this amount has gone towards reducing the carrying value of the inventory. INFORMATION TECHNOLOGY: The Companys information technology division known as STG i.e. System and Technical Group which has been innovating and deploying technology successfully since past few years through various means like high- performance storage, workflow and asset management tools, grid computing based render farm etc. These deployments have enhanced project delivery capabilities removed bottle necks related to transfer of files and approval delays. Currently the Company is working on next-generation computing based on Hardware Accelerators for visualization and computation to increase the productivity of the studio at highest level. Crest is the only studio in the Asia-Pacific region working on such technologies to enhance the performance of studio. CORPORATE GOVERNANCE: The Board of Directors supports the broad principles of Corporate Governance and the Company has been in compliance with the mandatory provisions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement entered into with the Stock Exchanges. In addition to the basic governance issues, the Board lays strong emphasis on transparency, accountability and integrity. A detailed report on Corporate Governance Compliance and Management Discussion and Analysis as stipulated in the Listing Agreement is annexed and forms part of this report. DIRECTORS: In accordance with the requirements of the Companies Act, 1956 Mr. Randhir Kochhar, Mr. Rajen Damani and Mr. S. Balasubramanian Directors of the Company retire by rotation and, being eligible, offer themselves for re- appointment. Mr. Shyam Benegal, Director, has resigned with effect from 14 June 2012 from the Directorship of the Company. Your Board recorded its gratitude for the guidance and counsel provided by Mr. Shyam Benegal during his tenure as Director and accepted his resignation. Brief particulars and expertise of directors seeking appointment/re- appointment and details of their other directorship and committee membership have been given in the Annexure to the Notice convening the Annual General Meeting. Directors recommend the resolutions pertaining to re-appointment of Directors for approval of the members. AUDITORS: M/s. Chaturvedi and Shah and M/s. S. R. Batliboi & Associates (Member firm of Ernst & Young Global) Chartered Accountants, Mumbai will retire as the Auditors of the Company at the conclusion of the ensuing Annual General Meeting. M/s. Chaturvedi & Shah have given their consent for re-appointment as required under the provisions of Section 224(1B) of the Companies Act, 1956. M/s. S.R. Batliboi & Associates have expressed their inability to continue as Auditors. The Board of Directors of your Company recommend re- appointment of M/s. Chaturvedi and Shah as Statutory Auditors of the Company. A resolution seeking your approval for re-appointment of Auditors is included as item 5 of the Notice convening Annual General Meeting. DEPOSITS: During the year under review the Company has not accepted any deposits from the Public under section 58A and 58AA of the Companies Act, 1956 read with Companies (Acceptance of Deposit) Rules, 1975. DIRECTORS RESPONSIBILITY STATEMENT: Pursuant to Section 217(2AA) of the Companies Act, 1956 (the Act) amended as per the Companies (Amendment) Act, 2000, the Directors confirm that: * In the preparation of the Annual Accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures; * The Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for that period; * The Directors have taken proper and sufficient care of the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding assets of the Company and for preventing and detecting fraud and other irregularities; and * The Directors have prepared the annual accounts on a going concern basis. AUDITORS REPORT: As regards the qualifications made by the auditors as stated in paragraphs 4, 5 & 6 of their report on the accounts of Crest Animations Studios Limited and paragraphs 5, 6 & 7 of the report on the consolidated financial statements of the Company respectively, attention is invited to Note Nos 23, 24, 25 & 26 forming part of the accounts of the Company and Note Nos 23, 24, 25 and 26 of the consolidated financial statements of the Company, wherein the detailed explanation are provided which in the opinion of the Board of Directors are self explanatory. Further the Auditors have laid emphasis on the accounts of the Company in their report, with respect to continuance of the Company as a going concern. In response, the factual situation is as follows. (a) The Company was not a non performing account with any of the lenders on 31 March, 2012 or at any time thereafter until the date of this report. (b) The Company has been able to get the limits and loans with the lenders realigned with respect to repayments and maturities. (c) The Company has been able to service the interest on the private loans and has even repaid/renewed some of these temporary loans since the date of the balance sheet. (d) Since the balance sheet date the Company has executed Rs.95,859,642 of work on hire projects and collected Rs.133,002,805 from debtors. (e) There have been delays and salaries to employees are outstanding. However, this has not impacted execution of work and in the past three months the Company has in fact, recruited additional artists to serve new contracts. (f) The Company is not in default with respect to statutory dues and obligations except Tax deducted at source which have all since been paid with delays. (g) Despite the overall negative sentiments prevailing in the business environment the Company was able to place a small portion of the treasury shares and is confident of completing additional placements before December 2012. h) The Company has adequate positive net worth remaining after adjusting losses and has not witnessed the loss of any of its critical clients nor the stoppage of work from them. CHANGES IN GROUP STRUCTURE: By Virtue of Amalgamation which came in to effect 26 July, 2011, the following downstream subsidiaries have become direct subsidiaries now. 1. Crest Animation Inc. (CAI) 2. Crest Animation Productions Inc.(CAP) 3. Roop BDR Productions Inc. (RBP) During the year, the company entered into television contract with Moonscoop LLC for producing 13 episodes of 11 minutes each titled Gloe. The company took television contract for Ireland based studio Brown Bag Films Ltd, for producing 52 episodes of television series titled Octonauts. The company has successfully completed and delivered DVD project Swan princess 4 for Sony pictures. Due to success of fourth series of Swan Princess, the company has bagged the contract for the fifth series of Swan Princess. During the year the company entered into agreement with Snapdragon Inc for producing televised version of the movie How to train you Dragon. The company started work on the project simultaneously along with the other projects which the company executed. However, due to technical complexities, the company had to terminate the contract in order to concentrate on the delivery of other projects. The company continued to work on the second feature film Norm of the North which is a part of Lionsgate deal. However, one of the financiers to this project defaulted their obligation to fund due to financial crisis in their region. The company is reviewing intended legal recourse to be initiated against the financier. Alternate financing arrangements are also under negotiation. The company continued to work on Ribbit, another CGI feature for limited release which your company is co-producing with KRU Capital Sdn. Bhd, Malaysia. CONSOLIDATED FINANCIAL STATEMENTS: In compliance with the Listing Agreement entered with the Stock Exchanges, a Consolidated Financial Statement of the Company and all its subsidiaries is attached. The Consolidated Financial Statement has been prepared in accordance with Accounting Standards 21, 23 and 27 issued by the Institute of Chartered Accountants of India and show the financial resources, assets, liabilities, income, profits and other details of the Company, its associates companies, joint venture companies and its subsidiaries after elimination of minority interest, as a single entity. The statement pursuant to section 212 of the Companies Act, 1956 forms part of this report. The consolidated accounts present a full and fair picture of the state of affairs and the financial condition. A statement of summarized financials of all the subsidiaries is attached along with the consolidated financial statement. However, on request by any member of the Company/statutory authority interested in obtaining them, these documents will be made available for examination at the Companys registered office. In terms of general exemption granted by the Ministry of Corporate Affairs under section 212(8) of the Companies Act, 1956, the Copy of the Balance Sheet, etc. of the subsidiaries are not required to be attached with the Balance Sheet of the Company. The Company Secretary will make these documents available upon receipt of request from any member of the Company interested in obtaining the same. These documents will be available at the Registered Office of the Company, during working hours up to the date of the Annual General Meeting. PARTICULARS AS PER SECTION 217 OF THE COMPANIES ACT, 1956 ENERGY AND FOREIGN EXCHANGE: The particulars as required under section 217(1)(e) of the Companies Act, 1956 read with Companies (Disclosure of particulars in the report of the Board of Directors) Rules, 1988, are attached as annexure to this report. PARTICULARS OF EMPLOYEES: As required by section 217(2A) of the Companies Act, 1956 read with the Companies (Particular of Employees) Rules, 1975 forms part of this report. However, as permitted by section 219(1)(b)(iv) of the Companies Act, 1956, the report and accounts are being sent excluding the statement containing the particulars to be provided under section 217(2A) of the Act. Any member interested in obtaining such particulars may inspect the same at the Registered Office of the Company or write to Company Secretary for a copy thereof. ACKNOWLEDGMENT: Your Directors place on record its sincere appreciation towards Companys valued overseas customers for the support and the confidence reposed by them in the Company and look forward to the continuance of this mutually supportive relationship in future. Your Directors gratefully acknowledge the contributions made by employees towards the success of your Company. Your Directors are also thankful for the co-operation and assistance received from its vendors, bankers, STPI, regulatory and Governmental authorities in India and abroad and its shareholders. FOR AND ON BEHALF OF THE BOARD Sd/- Place: Mumbai Seemha Ramanna Date : 21 August 2012 Chairperson & Managing Director ANNEXURE TO THE DIRECTORS REPORT: Disclosure of particulars with respect to conservation of Energy, Research & Development expenditure and Foreign Exchange earnings and outgo under Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988. CONSERVATION OF ENERGY: The Company has an efficient energy conservation task force, which is actively involved in continuous monitoring of energy usage and its conservation. In spite of the Companys state-of-the-art equipments having in-built energy efficient features, the Company continues to give highest priority for conservation of energy by using a mix of technology changes, process optimization methods and other conventional methods. RESEARCH & DEVELOPMENT (R&D): Your Company has initiated the process of R&D to develop new sets of skills, enhance existing ones, and improve production facilities and various processes of productions. In future, the emphasis will continue to be on quality to identify ways to optimize cost and develop new skills with focus on clients needs. TECHNOLOGY ABSORPTION: The Company continues to lay emphasis on development and innovation of in- house-technological and technical skills in areas of computer graphics and animation to meet the specific customer requirements. Efforts are also being made to upgrade the existing standards and to keep pace with advances in technological innovations. FOREIGN EXCHANGE EARNINGS AND OUTGOINGS: 1. Total foreign exchange earned Rs. 131,491,483 (Rs. 371,157,058) 2. Total foreign exchange utilized Rs.1,012,540 (Rs. 1,886,181) For and on behalf of the Board Sd/- Place: Mumbai Seemha Ramanna Date : 21 August 2012 Chairperson & Managing Director MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW: Time and again a question comes to the fore. Is the Animation Industry Recession Proof Rs. Animation has not only survived but grown in geometrical progression over decades because it has bred very competent and skilled artists, producers and animation studios where they collaborate to produce quality work at very predictable intervals. With the advent of 3D CGI animation the dynamics have stayed intact. It is an industry with its very own distinct sensibilities and nuances. Over the last year, emergence of well loved movies franchises like Ice Age, Madagascar, Kung Fu Panda, Lorax, just to name a few, many upstart entrepreneurs and visionary artists decided to create 3D animation studios of their own. The hype continues without reaching a bubble status. After all, demand continues for these kinds of entertaining, colorful family oriented films. Having said that, the global financial crisis did not just hit the realty projects and banking firms. It did have a trickling effect on the animation industry but limited itself to geography. Europe. How hard hit was the animation industry Rs. It is no secret that the UK animation industry is in a tight spot right now. According to securing the future of UK animation released recently by Animation UK, as much as 40% of the animation companies located in the territory were either just breaking even or losing money in 2011. And 28% of UK animation companies have gone out of business or left animation in the last three years. Arguably, this could be attributed to the deep financial turmoil in the European markets. But realistically it is due to growing overseas competition. It is important to note that a majority of those animation studios who never quite make the cut ventured into the industry because of the promise of easy money and not because of the love of the art. Art without heart seldom prospers and that goes for mediums such as paintings, music, literature etc. In the Euro Zone, France and Germany are predominantly in TV animation and largely supported by Government tax breaks and subsidys. TV is very crowded and noticeably the licensing fees by broadcasters are dwindling thereby making most shows financially un-viable. It is one thing to state that the animation industry is encountering hard times. It is, however, another thing to label the industry is bust like the dot-com crash of the early 21st century. No, not just yet-not with all the new technologies and procedures coming the way of 3D animators. If anything, these tough times will only separate the cream of the crop from lame pretenders. Also, the difficulties created by global recession has translated to higher quality of animated movies. Interestingly, United States continues to dominate the animated theatrical segment. Not only in producing animated content but also in world-wide distribution. Another very interesting fact to note is the prominence that China & India are getting in the global animation industry. These two countries out of Asia are being positioned as the front runners in both outsourcing as well as original IP creation. Major studios like Walt Disney, Dreamworks etc have been expressing this very transparently through various media. CGI animated theatrical releases continue to dominate the World Box Office and is poised to do even better as more releases are planned over the next few years. With the increase in theatres (multiplexes), TV channels and use of digital satellites, the rapid growth of the Internet and a wide variety of other new technologies (including advances in stereoscopic and large- format projection), distributors and programmers in nearly every country require more content than ever to fill consumer demand. The general pace of international roll-outs is quicker than in the past. Films are launched simultaneously around the world and this is becoming common place. Distributors and exhibitors continue to innovate, find new ways to expand the Box Office pool. The animation industry in India is witnessing a new revenue model, which otherwise only existed in mature markets like North America, Europe, Japan etc. Merchandising and Character licensing is a fast rising industry in Asia today, particularly India. An obvious recent example is Chotta Bheem. Though the product does not fall into 3D CGI category, this animated brand is facilitating the markets to mature. India is also witnessing new horizons, different applications of animation, especially in gaming, live search maps, medicine, surgery and other simulations. COMPANY OUTLOOK AND OVERVIEW: The year 2011-12 was extremely challenging. After the initial set back, we pulled up our sleeves and re-grouped to strategies our way forward. The services product mix had to have all the three formats viz work- for- hire for TV, DVD and Feature. We began our journey with doing fresh tests, for TV series and over the first six months of the financial year demonstrated to the world markets that we continue to lead in quality as we were the only studio, out of many in India, to have qualified. We were successful in converting these prospects to customers. We were the natural choice for Dreamworks Animation, Brown Bag Films and Moonscoop. Brown Bag Films, based out of Ireland, is a two time Academy award nominated studio and are producing some of the finest shows for Disney, BBC etc. Moonscoop, erstwhile Mike Young Productions was pleased to come back to us and Dreamworks Animation needs no introduction. It is common knowledge that we faced operational challenges due to irregular cash-flows largely due to the following reasons: A US client declaring Chapter 11, default in Norm funding and lack of new service contracts. In-spite of this challenge the entire staff demonstrated true grit and moved forward with the belief that the situation prevailing was temporary. During the year under review, the company once again began multiple TV series and a DVD production in full steam. Octonauts a 52 episode TV series, GLoE a TV series for Moonscoop is in full production. Sony, one of the largest studio in US was extremely happy with our quality on the Swan Princess 4 DVD delivery and quickly greenlit Swan Princess 5 DVD which is in production. We also began production of one of the most complex TV series ever made for Dreamworks Animation but had to abandon due to cost/profitability issue. By and large TV series as a product mix has lower margins but if managed diligently it helps in operational cash-flows. During the year under review, the company had a special request from Redchillies, a production house owned by Mr. Shahrukh Khan, to help them finish animation for their Bollywood film called Ra.One. This task was to be accomplished in approximately two weeks and when we delivered the client was so happy that they insisted on giving us credit in the main title. During the year under review, the company continued its work on the feature Ribbit and the final retakes are just being delivered. A few sequences of this film was shown to prospective distributors in Cannes Film Festival and it has bagged some major European territory sales guarantees. This film is slated for theatrical release during this calendar/financial year. On the project Indian Feature Film front, status quo was maintained as there was no movement during the year. The company recruited over 150 personnel and put them through rigorous training in multiple software and skills and they have all become productive in a very short span of time. They are all absorbed in various TV episodical deliveries. The company has also been in talks with a few overseas animation studios for a strategic/dedicated relationship and this could see some fruition in the near future. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE: The Company is engaged in providing 3D/CGI Animation i.e. full-service studio specializing in the development and production of digital animated properties for theatrical, television, home entertainment and interactive distribution for the global entertainment industry. Management believes that the risks and returns from these services are not predominantly different from one another and hence considers the Company to operate in a single business segment. However management has identified geographical segment disclosures based on location of the Companys customers in case of revenue. Further, disclosures of carrying amount of segment assets and cost incurred to acquire segment assets are based on geographical location of segment assets. As per Accounting standard AS (17) on segment reporting, segment information has been provided under the notes to consolidated financial statements. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: The company through its management is responsible for establishing and maintaining adequate internal control over financial reporting commensurate with its size and nature of business. Our internal control systems are effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with the generally accepted principles of accounting. The internal control systems provide for well-defined policies, guidelines, authorizations and approval procedures. Due to its inherent limitations, internal control over financial reporting related to projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our independent registered accounting firms M/s Ernst & Young & M/s Chaturvedi & Shah has audited financial statements and has issued its report on the effectiveness of internal control over financial reporting which is included herein. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE: During the year company started production on two television series titled Gloe and Octonauts as well as two Direct to Video projects, Swan Princess - 5 and Alpha & Omega. The company generated total income of Rs. 192.45 Million as compared Rs.376.76 Million for the previous year. The companys EBIDTA stood at Rs.(89.11) as compared Rs. 59.35 Million for the previous year. The loss after tax of the company for the year 2011-12 was Rs. 205.59 Million as against loss of Rs. 1,711.52 Million. The loss for previous year included impairment of goodwill on amalgamation of Rs. 1,610.61 Million. The Financial performance of the Company can be reviewed in two parts as under: 1. Crest Animation Studios Limited (Standalone), which excludes the performance of subsidiaries. 2. Crest Animation Studios Limited (Consolidated), which includes performance of subsidiary companies, mainly Crest Animation Inc. and its subsidiary. 1. Standalone:- During the year the loss after tax of the company for the year 2011-12 was Rs. 205.59 Million as against loss of Rs. 1,711.52 Million during the previous financial year. The loss during previous year was primarily due to one time exceptional item of impairment of goodwill on amalgamation of Rs.1,610.61. During the current year lower revenue was due to Inventory & Debtor write - downs of Rs. 23.47 Million and Rs. 2.09 Million respectively (due to discontinuation of one project) which contributed to the higher loss. Revenues during the year are down primarily due to new contracts being commissioned only during the second and third quarter of the year. The companys operating revenues have been generated by production service fees out of the work for hire contract for Television series Gloe & Octonauts and Direct to Video projects Swan Princess -5. 2. Consolidated:- During the year, revenue fell by 55% from Rs. 422.03 Million to Rs. 189.06 Million. The consolidated loss stood at Rs. 199.94 Million as compared to Rs. 1,713.09 Million. The loss during previous year was due to impairment of goodwill on amalgamation of Rs. 1,610.61 Million, write down of properties, provision of debtors due to filing of Chapter 11 by one of our clients in USA. During the current year the decrease in revenue of 55% caused due to funding issues pertaining to second feature film Norm of the North project is mainly responsible for the higher loss. OPPORTUNITY, THREATS, RISKS AND CONCERNS: India for Animation - analyzing the opportunities, threats and challenges. SWOT Internal Factors Strengths:- 1. Low cost of animation services 2. Attractive destination for outsourced animation production for international players 3. Increase in institutions providing animation education 4. Well equipped animation studios 5. English speaking talent 6. Growing awareness of Indian Animation talent Among international studios Weaknesses:- 1. Manpower shortage 2. Protection of intellectual property 3. Attrition and poaching loss of experienced professionals 4. Very little awareness of career in animation 5. Minimal government support or incentives 6. Funding problems, Salary issues and constant retaining of professionals Opportunities:- 1. Increasing awareness of Indian Animation talent amongst international studios 2. Increasing animation budgets 3. Increasing acceptance of animation content in domestic entertainment 4. Increasing capex on building world class animation studio 5. Tremendous opportunity of tapping international animation market Threats:- 1. Competition from other countries like Taiwan, Philippines, Korea and China 2. Ever changing technology 3. Lack of awareness in foreign countries 4. Inadequate funding for capex and investment in manpower 5. Lack of support from government RISKS Macro Economic Risk: The global economy is witnessing significant contraction with an unprecedented lack of availability of business and consumer credits. This current decrease and any future decrease in economic activity in the United States and other regions in the world, in which we do business, could significantly impact our results operationally and financially. The business risks are both inherent and perceived. The business of entertainment being a High Risk - High Return business does test our patience, commitment and convictions time and again. The markets are getting increasingly competitive, Technological obsolescence and lack of skilled & trained human resources demand sustained and enhanced levels of investments in both depreciating as well as appreciating assets. Our success is primarily dependent on the audience accepting our products which is extremely difficult to predict or guarantee. The revenue derived from a feature film does not necessarily bear any correlation to the production or distribution cost incurred. The companys business is dependent on the availability of work for hire projects and/or ability to co-produce projects. Unexpected delays in the commencement of work for hire projects or the commercial failures in co- production project would have a material adverse affect on our financial results. Further, as a result of the global economic infirmity, the markets are increasingly meandering towards co-financing models of business association, which stipulate large capital outlay, further necessitating the need for innovative financial structuring of deals. The business is substantially affected by the prevailing global economic conditions. Increases in interest rates, inflation, changes in tax, trade, scarcity of credit are some of the factors which impede the growth of the business. The economic downturn has left no public limited company unaffected which is reflected in the performance of our stock. However given the resilience of the economy in the face of recession as well as its strong fundamentals, the company does not expect to be significantly affected by this risk in the long term. Business Model Risk: We currently operate principally on one business segment i.e. 3D/CGI animation and our lack of diversified business could adversely affect us. Many times business of the Company is also subject to risks such as overall economic and political events etc. The Company is providing services in three areas Filmed entertainment/DVD/TV episodes. Hence, the risks vary for each business area. Filmed entertainment: The success depends on viewers acceptance of the film which is almost impossible to predict and therefore, risky. The financial success of film also depends on other factors like public acceptance of competitors film, other forms of leisure and entertainment available to public etc. Economic/Financial success of theatrical performance also has a huge impact on other revenue streams like DVD/TV/Merchandise etc. Most importantly one cannot assure that the film will generate enough revenue to cover costs like distribution, marketing, production etc. which means the net revenue could get affected. Home entertainment (DVD): This business stream is currently experiencing significant change due to rapid technological shifts and thereby consumer preferences and behavior is changing. Since, this also becomes unpredictable, there is an inherent risk involved on profitability. Internet, You Tube, Mobile devices continue to evolve rapidly due to technology and therefore we are constantly adapting to new distribution channels. TV episodes: This segment is governed and driven largely by broadcasters/networks. As compared to live action, number of networks dedicated to children is relatively lesser and also the license fee, over the years, is continuously reducing. The number of suppliers in this segment are much higher and exist across all geographical regions. Competition especially from other Asian regions (in the animation outsourcing space) like China/Malaysia/Singapore/Korea etc. is growing in geometric progression and their pricing is relatively more aggressive than Indian counterparts. This puts a pressure on Ebitda margins and therefore over a period in time one might have to exit this format and therefore putting a risk on overall lower revenue. To mitigate the risk in our business model, we consciously ensure that we maintain a mix of work-for-hire projects along with ownership of content/intellectual property rights on projects in addition to strongly exploring the Gaming and Digital asset management. Geographic Risk: We are significantly dependent on the US & European markets and any change in the nature and structure of these markets would adversely affect our financials. We do believe that the US & European markets are adequate enough to provide us with continuous and sustainable business opportunities for the foreseeable future, the Asian markets are also warming up to the possibilities of the CGI Industry and we have already made a headway in establishing strategic relationship with producers of repute in these emerging markets. Financial Risk: The production of animated products is capital intensive and our capacity to generate revenues from our work for hire projects may be insufficient to meet our anticipated cash requirements. The companys revenue is predominantly denominated in USD and given the volatility of the Indian Rupee; the financials of the company can swing significantly. To mitigate the risk the company has through proactive and effective risk management techniques entered in forward contracts to hedge its foreign currency receivables. The company has through its strategic initiatives and sustained reconnaissance established formidable relationship in the financial markets that facilitate innovative financial arrangement to provide for its capital requirements. Regulatory and Compliance Related Risk: The Companys transactions are though predominantly in the US, it also transacts with other countries. As the Company pursues towards a global reach the risk of ensuring 100% compliance with the regulations and laws also increases. The Company has an institutionalized structure to ensure regulatory and legal compliance to mitigate such risks. Reputation Risk: The reputation of an entertainment Company is built on various factors including the Credentials of the Creative Directors, The Actors, The success of the products as measured through BOX OFFICE collections etc. We mitigate such risks by endeavoring towards and ensuring that we work with the most reputed of Brands, Creatively Competent Directors of Repute and Properties that appeals to a wide range of audience and has a Long Shelf life. Operational Risk: We cannot predict the impact the rapidly changing technology or alternative forms of entertainment may have on us. Animated products are expensive to produce and the uncertainties inherent in their production could result in the expenditure of significant amounts on projects that are abandoned or delayed for reasons beyond our control. We try to mitigate these risks by investing in developing proprietary tools that enable increase in efficiencies and standardization of processes. We also ensure that we stay abreast with the changes in technology and constantly upgrade the capabilities and capacities of our human resources as well as technological resources. The production completion of animated projects is subject to number of uncertainties, including delays and increased expenditures in lieu of creative and technical difficulties, availability of talent, cost technology and increase in wages. As a result the projected production cost at the commencement of the project may increase, the date of completion may be substantially delayed or the project may even be abandoned by the producer causing the write off of expenses incurred with respect to the project. We mitigate these risks through an effective amalgamation of operational planning & management, enhancing creative and technological competence as well as good Corporate Governance. The company has implemented and would continue to implement changes in its production processes & systems in order to produce stereoscopic projects as and when required. These changes will increase the cost of producing a project, which may have an impact on the realization of profits. We rely on technology that we license from third parties, including software. There is no assurance that these third party technological licenses will continue to be available to us on commercially reasonable terms or at all. The loss or delay to maintain any of these technology licenses could result in delays in the completion of a project and could materially adverse our business, financial conditions or results of operations. Our success also depends on some key employees including Management personnels, Creative & Technical Personnels. We do have employment agreements with these key personnels; however it doesnt guarantee the continued services of such personnels. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED: We believe our people are our biggest asset. Animation is a manpower intensive business and it requires a seamless conjugation of creative brilliance and technical capabilities. The companys Human Resources policies are aimed towards encouraging ownership, building a culture of learning & development. We have initiated processes towards building organization capabilities that would help set benchmarks for the industry, enable our artists to show case their creative potentials and enhance productivity for propelling business growth and profitability. The key HR attributes of the Company include: a. A strong team of Competent, Committed and Passionate CGI artist who are ever ready to meet the growing demands of the business. b. Strategic initiatives undertaken to ensure we are able to attract & retain the best talent. c. Zero non - compliance with regards to any statutory compliance. d. No employer - employee litigations in any court of law. Cautionary Statement: Statements in this report on Management Discussion and Analysis describing the Companys Objective, projection, estimates, predictions and expectations may be forward looking statements within the meaning of applicable laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results could, however, differ materially & substantially from those expressed or implied. The company, The Directors & Management assumes no responsibility with regards to the forward looking statement herein which may change on the basis of subsequent developments, information or events. Observations made on the industry and other players also reflect an opinion by the management and the management accepts no liability on such opinions.