DIRECTIONS GROUP, INC.
Dear Fellow Shareholders:
Year 2006 was an unprecedented period of challenges and opportunities for our company. Unfortunately, financial results fell short of our expectations for several reasons, but our spirit is unbroken. The year produced many notable achievements for our diversified operations:
Our flagship business venture and largest subsidiary, New Direction Cruise Line Ventures, broke new ground in 2006 with the establishment of a series of minority partnerships with cruise boat operations from Colombia, Morocco, Paradise Island, Cyprus, and the Kingdom of Liechtenstein. Our new partners have taken an equity position in New Direction in exchange for financial incentives and guaranteed payments. Although revenues streams are not expected until 2007, these new relationships attest to the strength of our business model and promise to deliver financial rewards in due course.
2006 marked the launch of our highly anticipated Internet casino portal, CyberGaming-eBetNetwork.com Online (www.cybergaming-ebetnetwork.com). Development costs, licensing difficulties, and software enhancements delayed the launch until November; further beta testing of the site was required after unexpected payouts occurred under the Caribbean Stud Poker and Craps modules. Full functionality was achieved in mid-December, with revenues reaching $114,000 for the two-month live period. We expect the operation's net 2006 loss of $6.4 million to be substantially reduced in 2007 and future years.
NDG's entertainment arm, Birdhouse Records (formerly Octopus Recordings), continued to make investments in technology and promising new artists, adding a recording facility in Wilsonville, Oregon and licensing recordings from the critically acclaimed Unknown Mystery 60's Group. Birdhouse Records expects to release the Unknown Mystery 60's Group's third CD, Volume III, in mid 2007; early sales projections are promising and should go a long way to diminishing the operations 2006 net loss level of $2.3 million.
Dietary supplements produced by our LifeLovers, Inc. subsidiary enjoyed a significant upswing in shelf exposure in 2006. LifeLovers has negotiated marketing partnerships with three major health food/supplement chains on a nonguaranteed/inventory-returnable basis enabling a wider audience of supplement shoppers to gain exposure to LifeLovers' front line products, including Herbal Blast, ZincBomb 2007, and Vitamin See. Revenues are expected to exceed marketing fees in the foreseeable future.
The Company has settled a number of class action suits, which the Company has consistently contended were without merit. Rather than continue these costly legal battles, NDG has agreed to provide a combination of cash and stock equal to 20% of the market capitalization of the company to settle these nuisance suits. These assets will be placed in escrow until distribution is order by the appropriate courts.
As a result of dilution caused by the class action settlements, equity investments by our Cruise Line partners, and the decrease in the price of NDG stock -- NDG's stock has suffered along with many others during the current bear market -- our Board approved a 1-for-10 reverse stock split plan which was completed in early 2007. NDG management is, of course, sensitive to the impact of this plan on current shareholders, but we are committed to delivering superior value to shareholders over the long haul. We feel strongly that the 92% decrease in the price of NDG stock since our Initial Public Offering in 1997 is in no way reflective of the real underlying value of our diversified business operations.
The net consolidated loss for 2006 increased 40 percent to $24.6 million, or about $0.47 per diluted share (after reflecting the 1-for-10 reverse split). Results include one-time charges of $7.6 million for class action settlements, $3.3 million for acquisition costs associated with our new Wilsonville recording facility, and $2.6 million in severance costs associated with the negotiated termination of our former CFO, Dr. Richard Nidorf. Excluding these one-time costs, NDG's operating loss was $11.1 million, or about $0.21 per diluted share.
Highlights of results of our subsidiaries were:
In accordance with SEC disclosure requirements, the following chart provides comparisons between NDG and relevant market indices over the 5-year period ending December 31, 2006:
As discussed above, NDG management is committed to delivering shareholder value and encourages its shareholders to look beyond short-term measures and focus on our long-term strategy, which promises to provide strong, diversified income streams and corresponding share price appreciation. It is important to remember, however, that this may contain information which is forward-looking and involves risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.
The departure of Dr. Richard Nidorf created a crucial gap in management which NDG set about filling expeditiously. We are please to announce that Mr. Buddy Whelan has accepted the position of Chief Executive Officer of NDG effective June 1, 2006. Mr. Whelan has extensive personal experience in the online gaming, musical entertainment, and dietary supplement markets - experience we feel he can leverage fully in his new position with NDG. Mr. Whelan's educational background includes an eclectic assortment of institutions and areas of intellectual interest that make him perfect for our diverse array of business pursuits. Details of Mr. Whelan's compensation package, which will result in a one-time charge for sign-on payments and stock-based compensation in 2006 of approximately $1.6 million and ongoing SG&A costs of approximately $700,000 per year, will be detailed in NDG's 2007 Proxy filing with the SEC.
Despite the excellent prospects for enhanced shareholder value represented by NDG's current portfolio of companies, NDG management is never reticent in its pursuit of attractive acquisition candidates. Areas of particular interest include:
NDG management is tireless in its pursuit of visionary business developments that will develop shareholder value today, tomorrow, and far into the future. No opportunity is too grand or too far afield; NDG casts a wide net in its quest for excellence in enterprise.
On behalf of the Board of Directors we thank you, as always, for your support.
Joseph Haskell, CPA