FUN Technologies Inc.
TSX : FUN
AIM : FUN

FUN Technologies Inc.

November 08, 2007 18:59 ET

FUN Technologies Reports Continued Strong Revenue Growth and Second Consecutive Quarter of Free Cash Flow for 2007 Third Quarter

TORONTO, ONTARIO--(Marketwire - Nov. 8, 2007) - FUN Technologies Inc. ("FUN" or the "Company") (TSX:FUN)(AIM:FUN), one of the world's leading providers of online and interactive casual and fantasy sports games and sports information, announced today its operating results for the three months ended September 30, 2007. Revenue in the third quarter was $18.5 million, an increase of 41% over the third quarter 2006 and 9% over the second quarter 2007. The Company reported a net after-tax loss for the quarter of $29.3 million, compared with $7.9 million in the third quarter 2006 and $7.6 million in the second quarter 2007. The current quarter included a non-cash impairment charge of $31.3 million in the Sports Information segment as a result of a decline in its customer base and increasing competition in the industry, as reported in a press release dated September 18, 2007.

The quarterly results include one-time expenses of $0.6 million in connection with the Company's response to the privatization bid from Liberty Media Corporation ("Liberty"). Such expenses will be recoverable from Liberty should it not complete the transaction as a result of a unilateral withdrawal of its offer.

2007 Third Quarter Highlights (All currency amounts are stated in U.S. dollars):

- Consolidated Adjusted EBITDA of $2.2 million was an increase of $6.4 million from the same period in 2006 and $0.4 million from the second quarter 2007

- Consolidated Adjusted EBITDA for the nine months ended September 30, 2007 was $3.1 million, or approximately $5.6 million when normalized for $2.5 million of costs that management does not anticipate to continue

- Consolidated free cash flow was $1.7 million, an increase in free cash flow of $0.7 million over the second quarter 2007

- Revenue for the Games segment totaled $11.3 million, an increase of $4.7 million or 72% over the third quarter 2006 and an increase of $0.9 million or 9% over the second quarter 2007

- The Games segment's Adjusted EBITDA totaled $2.1 million for the third quarter 2007 as compared to an Adjusted EBITDA loss of $2.8 million in the third quarter 2006 and $1.9 million of Adjusted EBITDA for the three months ended June 30, 2007

Commenting on today's results, Lorne Abony, Chief Executive Officer of FUN, said, "Operationally, FUN Technologies had another strong quarter marked by record revenues and its second consecutive quarter of free cash flow. The company is well positioned for continued success for the remainder of 2007 and beyond due to several key content and distribution partnerships inked by the Games segment with leading brands, including MSN, Fremantle and Playfirst."



Summary Financial Data (US 000's):

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Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
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Revenue $ 18,508 $ 13,154 $ 49,997 $ 25,527

Cost of sales 7,937 6,284 21,701 10,057
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Gross profit 10,571 6,870 28,296 15,470

Operating expenses:
Software development 1,516 2,334 5,281 5,152
Selling, general and
administrative 6,847 8,740 19,897 17,843
Depreciation and amortization 4,932 4,735 14,743 11,802
Restructuring charges - 363 653 363
Stock-based compensation 418 146 737 146
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13,713 16,318 41,311 35,306
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Loss before undernoted (3,142) (9,448) (13,015) (19,836)

Other items:
Impairment of goodwill and
indefinite lived intangible
assets (24,062) - (29,100) -
Impairment of intangible
assets (7,240) - (7,240) -
Other (141) (65) (524) (1,972)
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(31,443) (65) (36,864) (1,972)
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Loss before income taxes (34,585) (9,513) (49,879) (21,808)

Future income tax recovery (5,246) (1,613) (7,835) (3,982)

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Loss for the period $ (29,339) $ (7,900) $ (42,044) $ (17,826)
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Loss per common share:
Basic and diluted $ (0.46) $ (0.12) $ (0.66) $ (0.28)
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Adjusted EBITDA $ 2,208 $ (4,204) $ 3,118 $ (7,525)
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Free cash flow $ 1,692 $ (5,592) $ 1,900 $ (9,701)
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Results of Operations:

The results of operations for the third quarter represented a continued improvement from prior year operating results and sequential growth in 2007, lead primarily by the Games segment. Revenue for the Games segment totaled $11.3 million for the quarter, representing an increase of $0.9 million or 9% over the second quarter 2007. FUN's Games segment generally records revenue net of prizes and other promotions paid. Where the Company guarantees an overall prize regardless of participation levels, the Company records revenue as the total entry fees in the tournament, and records the corresponding prize expense in cost of sales. The Company's revenue growth, treating all skill games net of prizes and other promotions paid and pro forma to include WorldWinner.com, Inc. and SkillJam Technologies Corporation as if they were acquired on January 1, 2006, was 70% over the first nine months of 2006 and 91% over the third quarter 2006. Revenue for the Games segment also continues to strengthen with increases in the average entry fee per game, number of active players and number of games played per active player. In addition to the increase in Games revenue, Fantasy Sports revenue increased $0.9 million over the second quarter 2007 due primarily to the seasonality of the Fantasy Sports operations.

The third quarter results were also impacted by continued integration and cost containment efforts across all of the Company's operating segments. As compared to the second quarter 2007, the Company marginally increased the combined software development and selling, general and administrative expenses by $0.4 million, including approximately $0.6 million of one-off costs associated with Liberty Media Corporation's tender offer. Combined software development and selling, general and administrative expenses, excluding tender costs decreased by $0.2 million or 3%. The primary reason for this decrease is restructuring in the Games, International Games and Fantasy Sports segments, through integration within the businesses.

The Sports Information operating segment experienced the loss of a major information provider and customer, as well as increased competition generally that is anticipated to result in declines in revenue and adjusted EBITDA for the segment. As a result, the Company carried out an impairment test of the reporting segment and determined that the carrying amount of the segment exceeded the implied fair value. Accordingly, in the third quarter of 2007, the Company recorded an impairment of goodwill and indefinite lived intangible assets of $24.0 million and an impairment of intangible assets of $7.2 million.

Adjusted EBITDA:

In addition to disclosing results in accordance with GAAP, FUN also provides supplementary non-GAAP measures as a method of evaluating the Company's operating performance. Management uses Adjusted EBITDA as a measure of enterprise-wide performance. Adjusted EBITDA is defined as earnings before interest income, taxes, depreciation and amortization, stock-based compensation, gains (losses) on sale of capital assets, restructuring and impairment charges. Management believes Adjusted EBITDA is a useful measure that facilitates period-to-period operating comparisons. Adjusted EBITDA does not have any standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Adjusted EBITDA should not be considered in isolation or as a substitute for net earnings (loss) prepared in accordance with GAAP. The Company has provided a reconciliation of Adjusted EBITDA to GAAP net loss below.



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Three months ended Nine months ended
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September 30, September 30,
2007 2006 2007 2006
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Loss for the period $ (29,339) $ (7,900) $ (42,044) $ (17,826)
Future Income tax recovery (5,246) (1,613) (7,835) (3,982)
Interest expense, net 141 65 508 17
Stock-based compensation 418 146 737 146
Depreciation and amortization 4,932 4,735 14,743 11,802
Impairment of investments - - - 1,955
Impairment of goodwill and
indefinite lived intangible
assets 24,062 - 29,100 -
Impairment of intangible
assets 7,240 - 7,240 -
Restructuring charges - 363 653 363
Other - - 16 -
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Adjusted EBITDA $ 2,208 $ (4,204) $ 3,118 $ (7,525)
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Adjusted EBITDA by operating segment is as follows:

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Three months ended Nine months ended
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September 30, September 30,
2007 2006 2007 2006
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Games $ 2,110 $ (2,798) $ 5,313 $ (4,617)
Fantasy Sports 320 (235) (1,331) (1,247)
Sports Information 1,264 1,408 4,758 3,484
International Games (15) (769) (1,245) (1,083)
Corporate and other (1,471) (1,810) (4,377) (4,062)
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Adjusted EBITDA $ 2,208 $ (4,204) $ 3,118 $ (7,525)
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The Company continues to see positive improvement in the Adjusted EBITDA primarily due to growth in the games division coupled with the integration and cost curtailment efforts. As can be seen the consolidated Adjusted EBITDA improved $6.4 million over the 2006 third quarter led by a $4.9 million improvement in the games division.

With the completion of the migration of players from the SkillJam platform, the finalization of the Fanball arbitration, and the curtailment of the Company's loss-making international operations, costs of approximately $1.9 million in the first nine months of 2007 are not anticipated to reoccur. In addition, the Company incurred approximately $0.6 million of costs associated with the Liberty Media Plan of Arrangement, which increase the negative adjusted EBITDA of the Corporate and other segment.

Outlook

As can be seen from the above operating results, the Company's year-to-date results represent a significant improvement from those of 2006 with solid sequential growth in 2007. The restructuring efforts in the past year have provided a significant reduction in operating costs. Management is focused on extracting revenue synergies from the assets acquired, as can be seen by the significant returns on the skill games platform migrations. Management anticipates that these efforts together with the elimination of certain non-recurring expenses referred to above will continue to provide further positive Adjusted EBITDA returns in future periods.

On November 8, 2007, the Company announced that it had entered into a definitive arrangement agreement pursuant to which Liberty will indirectly acquire all of the outstanding common shares of the Company not already owned by Liberty at a price per share of GBP 1.75 payable in cash. The transaction will proceed by way of a statutory Plan of Arrangement that must be approved by court order and two-thirds of the votes cast at a special meeting of FUN shareholders. The transaction must also be approved by a majority of votes cast by FUN's shareholders, other than Liberty and its affiliates. Completion of the transaction will be conditional upon, among other things, obtaining the requisite shareholder and court approvals. Upon completion of the transaction, FUN will become an indirect wholly-owned subsidiary of Liberty.

The proposed transaction is expected to be completed in late 2007 or early 2008, following receipt of shareholder and court approvals. There can be no assurance that the transaction will be completed on the terms described above or at all.

Forward Looking Statements

This press release contains forward-looking statements regarding, among other things, FUN's beliefs, plans, objectives, strategies, estimates, intentions and expectations. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "believe", "potential", "expect", "estimate", "would", "could", "intend", "will", "if" and "may". These forward-looking statements are based on a number of assumptions which may prove to be incorrect, involve certain risks and uncertainties that are difficult to predict and, accordingly, are not guarantees of future performance. The future results of the Company or developments may differ materially from those expressed in the forward-looking statements contained in this press release, due to, among other factors, the risks and uncertainties inherent in the business and operations of the Company and the risk factors set out in the "Risk Factors" section of FUN's 2006 Annual Information Form and in other documents published or filed by, or on behalf of, FUN from time to time with the Canadian securities regulatory authorities. Other than as required by law, FUN undertakes no obligation to publicly update or revise any such forward-looking statements or information, whether as a result of new information, future events or otherwise.

The Company's quarterly financial statements and Management Discussion and Analysis are available on its website at www.funtechnologies.com and through the System for Electronic Document Analysis and Retrieval at www.sedar.com and should be read in conjunction with this press release.

About FUN Technologies

FUN Technologies Inc. is one of the world's leading providers of online and interactive casual and fantasy sports games and sports information. FUN is 53% owned by Liberty Media Corporation (NASDAQ:LINTA)(NASDAQ:LCAPA), and FUN's common shares are listed on both the Toronto Stock Exchange and the AIM Market of the London Stock Exchange under the symbol "FUN." For more information on FUN Technologies' offerings, visit www.funtechnologies.com.

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