One year after shareholders approved a merger to create Alliance Atlantis Communications, the new company’s first annual report shows earnings per share have dropped 25.6% as of the year ended March 31, 1999.

aac’s unaudited financial highlights are pro forma – assuming the merger occurred April 1, 1997.

And while shareholders are likely buoyed by the rosy forecast in the company’s just-released annual report, executives and analysts are left scratching their heads over the stock’s poor performance as prices continue to hover near their 365-day low of $15.25.

Scott Cuthbertson, an analyst at TD Securities, says aac’s stocks are undervalued and has put a ‘buy’ recommendation on the stock.

‘I think Alliance Atlantis, at this point in its life, is a show-me stock,’ he says. ‘I think if we get two or three more good quarters…then investors will have more confidence in the company and may be willing to step up to the plate and buy some stock.’

Part of the problem, Cuthbertson says, lies in the company’s Television Group, which he says may be overstating its earnings potential. ‘Investors, I think it’s safe to say, are not comfortable with the value that some people say is in that division.’

Cuthbertson adds that people will want to see the results of aac’s plans for the coming year to cut back one-hour dramas and increase its productions of children’s programming and mows.

He also points to some minor surprises over the past year that may have undermined investor confidence such as aac’s revised accounting policies which were predicted to write down profits.

aac president Lewis Rose disagrees. He says the new accounting policy is, in fact, more conservative and should enhance the stock’s value.

Rose says events of the past few months, including a recent $400-million financial and operating partnership with Kinowelt Medien ag and the strong showing of several aac-distributed films in Canada, should also help buoy investment.

‘Clearly we’d love the stock price to be higher because we believe that there is significant value that is not being reflected in the current stock price,’ says Rose.

Confident it can spark stock prices, aac has undertaken a wide range of strategic initiatives which include pursuing more international tv and film distribution deals and an expansion in broadcasting services, outlined in the report to stockholders.

On paper, the company looks solid.

Revenues were up nearly 19% to $707.7 million from $596.8 million in 1998, and gross profits were up 16% to $133.4 million from $115 million, the report says.

Earnings before interest, taxes, depreciation and amortization increased by 33% to $67.1 million from $50.3 million. ebitda for the Television Group was $38.7 million in the last fiscal, while the Motion Picture Group brought in $18.2 million and the Broadcasting Group contributed $16.3 million.

‘We’re continuing to grow the company,’ Rose says. ‘It’s a much healthier and more vibrant company today than it was a year ago.’

Aside from cutting back the drama component of its tv productions, aac will begin focusing on productions aimed at the international market. It will also look for greater control of distribution. The idea is to increase profit margins by reducing spending on new production output.

The report trumpets the company’s new tv productions due to premier in the fall, particularly the series Peter Benchley’s Amazon, which aac developed internally and controls for worldwide distribution. The company holds up the commercially oriented Amazon as a model for future aac productions.

In film production, aac plans to continue producing and distributing films with budgets ranging from $2 million to $10 million. Financing will focus on presales, coproductions and various other third-party options, prior to production.

aac will also continue building its chain of Alliance Atlantis Cinemas.

The report also states the company’s intention of expanding its u.k. distribution business.

In the arena of broadcast, plans are underway to submit applications to the crtc for several new networks plus the conversion of aac’s Food Network into an all-Canadian food network with a focus on homegrown programming. Rose says the company has high expectations for the Broadcast Group.

The report also projects the expansion of the company’s activities online and the creation of new media content.

So far the strategy seems to be working. While stock prices remain low, first-quarter revenue was $163.3 million, up from $124.6 million combined between Alliance and Atlantis over the same period last year.

The company credits part of that jump to Austin Powers: The Spy Who Shagged Me, which has brought in $20 million at the box office and is the highest grossing picture in the company’s history. Powers’ strength helped spark first-quarter motion-picture revenues to jump 62% to $61.4 million, up from $38 million in 1998.

Rose says aac will be looking to repeat that type of performance in all divisions throughout the year, and hopefully the stock prices will follow.