Hannover House Inc (HHSE)

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Statements About the Audit at SHM

To iHub: this is my work from a publicly webcast meeting.

With the continuing comments about the audit, I thought it would be useful to have a transcript of what Fred and Eric actually said about the audit at the Shareholders Meeting. The long discussion starting at about minute 46 also includes a lot about the library and cash flow.

http://www.ustream.tv/recorded/12031352

45:55
ERIC: I have from e-mails four questions already and I’m – but Dan has a question.

Q. Yes, John [?] would like to know when the audit will be completed.

ERIC. That was our first question.

FRED: That’s the number one question on almost every phone call, every e-mail, and already today. So…

ERIC: That’s ____ .

FRED. And I – we both have answers to that. Let me at least say what I think. I’ve been primarily – the one primarily dealing with the auditors and the accountants. And there’s been a certain amount of starts and stops and changing direction, both based on the information that we’ve been asked to provide and also based on the advice and the consultation and the discussion between our securities counsels and our accountants and the auditors. That the type of audit has been discussed and changed a couple times, number one. Number two, the starting point for the audit in 2008 is still a bit of a sticking point for the auditors and for our separate independent accounting staff. And…

ERIC. And we’re talking about the starting point not for Hannover House…

FRED. Right.

ERIC. … but for Target Development Group. Because when we acquired what was purported to us to be essentially a shell company with some assets – well, it’s not a shell company – we were not given tax returns, we were not given bank statements, we were just said, “It’s a zero company.” Now, that may be well and good but when you’re trying to do an audit, the auditors want to make sure that there either isn’t a tax liability that hasn’t been disclosed, or maybe a tax loss carryforward that needs to be reported and carried forward into the new venture. So we have had difficulty in getting that zero basis, and I just wanted to explain what he meant by the starting point.

FRED: The Hannover numbers are certainly available. Now when we started the audit process they weren’t available necessarily in the format that the auditors wanted them, but the raw numbers were there, and they’ve been developed and put in a proper format by our accountant before going to the auditor. The auditors still have some questions, although I think that they have the information now, at least our accountant has the information to provide to the auditors to answer all of those questions. So…

ERIC: And then finally the last big piece that was holding up the audit was our library valuation. We had, at Hannover House, a very extensive library valuation done by a highly-respected expert in the field, but it was 12/31/2008. And when we’re asking Hogan & Taylor and Josh Estes, who’s our review accountant, to make that a balance sheet item, they’re saying, “OK, it’s two years old, arguably two and half years old now. It doesn’t take into account Blu-ray, it doesn’t take into account that the DVD market had declined, it doesn’t take into account that Video on Demand has emerged. Some of your titles have fallen out, some of your titles have been added in but you haven’t put them in.” So we were required to do a new library valuation, and we finally had this library valuation that is reflected in the Q4 numbers. You’ll see that the value of the library has changed between Q3 and Q4 to accommodate things that weren’t in it before, such as Twelve, and Racing Dreams, and Chelsea on the Rocks, and new book titles and new DVD titles that weren’t part of the old library, as well as a decreased number for our DVD projections on a going-forward basis. And then they added in new numbers for Blu-ray, Video on Demand, and the – we have a very top industry, highly-respected company that has done the library valuation, and they will be writing the opinion letter that will be posted to the Pinksheets verifying that.

Q. Is that something that the auditors can still question ____ those numbers are the numbers that can be used ______.

ERIC. Yeah, the auditors are allowed to question the library valuation cause it’s the biggest balance sheet item for the company. That’s why we have had three separate highly-respected groups verify the library valuation report. A library valuation is based upon the historical performance of a title over the previous two or three years and a reasonable expectation of how it will perform over the next five years based upon its history. Some titles that haven’t been released yet or don’t have a past history are entirely projection-dependent, and that’s why you need to have somebody who has been in the industry for a long time, that’s not a manager of the company, that can say, hypothetically, “I think a Tom Cruise movie is going to do this, this, and this based upon his other Tom Cruise movies.” And that extrapolates out into a number that can be discounted and added to the valuation of the company’s library.

Q. Is there any debate about the numbers on the part of the auditors at this point?

FRED. Not at this point.

ERIC. The only debate was that the library was stale and that we needed a fresh opinion.

Q. So when will you know whether that _____ or if there are questions?

FRED. Oh, I think that we’ll know very shortly. To get back – and I’m very mindful of the fact – my background is as an attorney – and I’m very mindful of the fact in some meetings people go off and don’t answer the question, and I always want to come back, and now I want to come back, too. Because – come back as best we can. We don’t speak for the auditors. We don’t know, we can’t say when the audit will be finished, but the library valuation was the last significant piece of information that they absolutely, positively needed. So they’ll get that, I’d like to say on Monday, but Monday being a holiday, on Tuesday. On Tuesday I intend to sit with Josh Estes, and depending on Eric’s schedule hopefully he can too, and go through line-by-line, question-by-question, every single item that both he and Hogan & Taylor have asked for, make sure that they have it, and then to follow up probably the week after that, maybe two weeks after, with Hogan & Taylor, and we’ll have a more definitive answer. When we have that definitive answer, we will make that known to all the shareholders. I expect that we’ll have that answer probably the end of January or in early February, and we will make that information known. If I had to simply estimate, I would guess that it would be early spring when the audit would be compete.

ERIC. And I think it’s important for everyone to note that we see the audit as a critical step to becoming fully reporting, so that we have additional opportunities for the company. There’s been a tremendous amount of discussion about the benefits of moving to a higher exchange. And that certainly is a door that opens for us as soon as we get those audits done. And, you know, we are a very small company with staff right now. As Fred pointed out, we do intend to add some staff on in the first quarter that will help free up Fred and I to concentrate more on managerial things and maybe less on day-to-day tasks that would involve the fully-reporting aspects of running a public company. But we’re at the final – I mean the library valuation was something that was the last huge hurdle and it was a very difficult task because of the changing marketplace for Blu-ray and Video on Demand and the lack of a general history within the industry to base projection numbers on those particular formats. So it was a challenge and it took a lot longer than we thought.

Now, when we talked last summer about having an audit, we were talking about a totally different audit than what we are doing now. We were talking about the prospect of taking certain elements of the company, certain assets, and that particular venture was the 2010 assets, and rolling them into an existing Bulletin Board company. And under that scenario all we would have needed to do was an audit of those particular items. As we got further into the discussions with that venture we realized it wasn’t to the benefit of the company and to the shareholders so we decided not to do that. So then we said, “OK, let’s take that hat off and let’s go back to not spinning off assets to another entity but just becoming fully-reporting, and what do we need to do.” And you need to have two years of audited financials, and so we started with 2008, 2009, had a stale library valuation, and no basis to develop the Target side, You know, it’s one thing to say it’s a zero basis company, but you still have to have something to back up for an auditor. And now we have 2010, so we now have potentially three years of audit. But Hogan & Taylor is going to concentrate on 2008/2009.

FRED. That’s right.

ERIC. Josh Estes was an auditor at Hogan & Taylor, recently left the company to become his own CPA firm, and he is our review auditor, I mean review accountant.

FRED. Right,

ERIC. And so he’s doing all of the prep work, which will make it very easy for Hogan & Taylor to bless. So we think that it’s going to be as quick as possible. Yes.

Q. Are we going to see a 2008 audit being released first, and then a 2009 _______ one big package?

FRED. I think one big package. That’s how I…

ERIC. By the way we’re supposed to repeat the questions for the…

FRED. Oh, sorry.

ERIC. The question was, are we going to get a 2008 audit first, later on a 2009, later on 2010. And Fred was answering that.

FRED: My understanding is that it will be 2008/2009 together as one audit, and that’s what we’ve been pointing towards. But again I’m not an accountant, I’m not an auditor. If it’s different than that I will try to find out and let you know.

56:20

Q. Speaking of the library valuation, you had mentioned you had three independent_______ file a letter.

ERIC. That’s right.

Q. Are you able to comment on ________. _________ Hogan & Taylor doing the audit _________.

ERIC. Yeah, you know, there’s – two of them are individuals and one of them is a firm. And the firm that’s, and I’m not even sure what he calls his company, it will be above reproach when you find out the individual that is doing the final audit evaluation. He’s a film industry executive that has over 25 years experience. If I told you his previous positions you would know who it is. But suffice it to say he was president of one of the largest video retail chains, and later on became president of a substantial independent studio. And we’re very happy that – to have somebody with his caliber of history and experience to validate our projections. And it hasn’t been a cakewalk. There’s been a tremendous amount of back and forth discussions as to, “Why do you think you’re going to do that?” And In most cases we had to drop the numbers. In other cases this person was saying, “Have you thought about taking this item to this particular retail account?” And we said, “No, we didn’t know that that retail account carried video.” And that person not only has done the library valuation report but also said, “Here’s the guy to call and maybe that number’s going to be a little bit higher than you’ve got projected there.” So

FRED. Let us do two things before we give that information. First, check with the person and get his permission. Secondly, get it to Hogan & Taylor and get their permission to release that information.

ERIC. Yeah. We – because it’s such a huge balance sheet item, we knew that it would take an opinion letter from someone whose experience is above reproach. It couldn’t just be a video store clerk at you know, you know – we had to get somebody with great experience. Doug, did you have a question?

Q. Someone did ask what the final library valuation is. We also need to repeat questions.

ERIC. OK. The question was what is the library valuation report as of this moment. And it’s still subject to possible adjustments by Hogan & Taylor. It’s $24,276,709. And that covers a lot of items, possibly over 200 items. And I can’t – we’re not authorized to distribute the library in its form right now for a variety of reasons, not the least of which is that we still need to have the final opinion letter, but you’re welcome to look it over while you’re here. 228 items covering DVD, Blu-ray, theatrical, Video on Demand, international, television.

FRED. Is yours a follow up?

Q. Short question ________ as of this moment not as of the end of 2009?

ERIC. That is as of this moment, but we do have it as of the end of 2009. We already have that. There’s going to be an adjustment from what we previously reported in 2009 because these numbers changed. And so, the 2009 library valuation report is going to be reduced, we know that. And it’s going to be reduced because DVD numbers in 2010 have already proven to not be what we thought they were going to be. And so, that’s – when you’re retroactively dong an audit you have the wisdom of having actually gone through that timeframe. And we now had to adjust our DVD numbers down for 2009, which has impacted 2010 and the next four years. Yes.

Q. To stick with the audits. For clarification’s sake, has cash flow been any issue as far as getting the prepaid amounts to Hogan & Taylor or ?

ERIC. Cash flow – the question is, with respect to the audits, has cash flow been an issue with regard to Hogan & Taylor. Absolutely not. We do have daily cash flow issues.

FRED. We have cash flow issues for other reasons but not for that.

ERIC. We have cash flow issues. Yeah. I mean, a nd every dollar that comes in we immediately re-invest it in either payables management, operations, or new titles. So cash flow is an issue for the company but it’s not an issue with Hogan & Taylor. And really, the issues have been the starting point for Target Development Group and the library valuation. Other than that it’s just basically, “Give us your QuickBook’s backup of payables/receivables. Let us see your producer reports, what are your” you know, those kind of housekeeping issues.

Q. ______ just for clarification’s sake because a new company with a cash flow not being quite where you want it _________ I was wondering if that might have been holding us up a little bit.

FRED. Not at all.

ERIC. Hogan & Taylor has made a very fair price quote for us and it hasn’t been an issue.

Q. Great.

ERIC. Yes.

Q. Is it a fixed price?

ERIC. It’s not a fixed price, but there’s a fixed base price that is reasonable. And part of the reason why we want to have the review audit done – the review accounting done by Josh is so that we don’t go into overages.

FRED. I will say that when I asked for a fixed price with the auditors, they pretty much laughed. So…

ERIC. You know, they’re saying if everything is smooth, it’s this price, and if we have a whole bunch of questions and issues then it’s going to be more. So we’re reducing those questions and issues by having it done by a review accountant.

FRED. ______, you had a question.

Q. Is there a prepay with Hogan & Taylor? What are your terms or your relationship with _____?

FRED. The question is whether we’ve prepaid. No, we have not prepaid. Honestly, they have not sent us an invoice. We have an engagement letter with them that does talk about our payment schedule with them. We have – we’re in constant contact with them. One of the questions, not questions, but one of the points of discussion is always, “Where do we stand on the cost of the audit?” And their being comfortable that we’re OK to pay it, and we are. We have no problem with that, they have no problem with it.

ERIC. You know, as they send us invoices, it will be a priority payment.

FRED. Absolutely.

ERIC. You know, we have regular cash flow and we make decisions as managers on a daily basis, you know, which forest fire is hottest. You know, we prioritize. And I wish we could pay every single bill the minute it’s due, but we fortunately have a lot of really supportive vendors, who believe in our business plan, who believe in Fred and I, have extended us substantial lines of credit and just say, “You know what, we trust you guys to pay us when you can. And that’s really – certainly there are some vendors out there that aren’t like that, but for the most part we have a really strong family. And…

FRED. And we stay in touch with them, and they know what we’re doing.

ERIC. Doug, I still have three questions that were asked over the internet that we haven’t addressed, but if you want to ask – present ____. OK, the audit has always been the biggest question that people ask, and the bottom line answer is we have now finally as of now completed everything that we need for the review audit and we’re going to have the meeting with Josh on Tuesday, and within a matter of days thereafter we’re going to be ready to have Hogan & Taylor give us their blessing. Now, how long will they take to give us their blessing depends on how thorough the stuff is that we give them. But we think – we were given a detailed list, and we have complied with that list, and we now have a very legitimate library valuation.

1:03.54
Regarding the library valuation follow-up report, we will find out from the consulting company how they want to be characterized. They are currently also consulting for Warner Home Video, and I’m not sure if it’s the name of the individual or the name of his entity that we paid. So we will find that out and he will issue his opinion. He understands that the opinion letter is the key element of our library valuation announcement. We will post his opinion letter and the bottom line, we probably will not on an individual title basis say exactly how much each item is valued at for proprietary reasons, not the least of which is we don’t want people to know that some of our titles had small distribution fees. You know, as Fred pointed out, our credibility has soared in the last year even though our revenues haven’t soared and we’re now…

FRED. Well, they have soared compared to the starting point.

ERIC. Well. That’s true. But we’re capable of asking for and getting much higher distribution fees so that it improves our bottom line. And if you look at our library and see that in the past this title was a lot less, “How come I can’t get that rate?” We don’t really want to go there. We’re saying, “That’s not an existing market any more. The market now is we have to get this fee.” Doug.

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About minute 1:27.30

Q. From a shareholders perspective, I already understand that it may be as soon as a couple of weeks to get a blessing from Hogan & Taylor on the financials ______ approved for audit. That will bring us up to current reporting on the Pinksheets. Other than that, are we looking forward to at least maybe moving up to the Bulletin Board somewhere in the near future, maybe in this first quarter?

ERIC. The question is the timing of the audit and what the company’s plans are for taking steps to move to a different exchange. Without a doubt, the day after we have Hogan & Taylor’s final audit approval, we’re going to report those to the Pinksheets and file them with the SEC. We have engaged an attorney who’s helping us with our registration statement. There is a possibility that we will be able to quickly proceed with that, but there’s also a possibility, and this is a concern of ours, the history of Target Development Group may result in a lot of SEC questions because it passed through several different entities before they joined us. And we hope we don’t get beat to death with footnotes and questions from the SEC. We’re hoping that the full audit and the clean and transparent way we’re running the company now will carry some weight and that we’ll be able to have that as an option. Fred and I want that. We want the company to become fully reporting. We want to file the registration statement so that we can move up. It’s not up to us to move us up though, but it’s up to us to take the steps that would qualify us.

FRED. We want to do that on an orderly basis. We want to do it properly so that it’s done and it’s ready when it actually happens.

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About minute 1:41.50

Q. Is there a timeframe on when the audit will be complete?

ERIC. Again, we’re starting to get into redundancy, but someone asked is there a timeframe when the audit will be complete. That was asked and answered previously. But I’ll summarize it that we have completed the materials including the library that is going to be given to our review accountant on Tuesday. That was the biggest obstacle because it involves changing projections and media streams. And everything else is going to be turned over to Hogan & Taylor shortly.