Download Form 10-K, 7/15/02

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-14880
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
SUITE 3123, THREE BENTALL CENTRE
595 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (604) 609-6100
Securities registered pursuant to Section 12(b) of the Act
TITLE OF CLASS
-------------Common Stock, without par value
NAME OF EXCHANGE ON WHICH REGISTERED
-----------------------------------Toronto Stock Exchange
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 2, 2002 was approximately $108 million.
As of July 2, 2002, 43,207,399 shares of the registrant's no par value common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO REGULATION 14A AND RELATING TO ITS 2002 ANNUAL MEETING OF STOCKHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III.
TABLE OF CONTENTS
ITEM
----
PAGE
----
PART I
1.
BUSINESS ................................................................
3
2.
PROPERTIES ..............................................................
20
3.
LEGAL PROCEEDINGS .......................................................
21
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .....................
21
5.
MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ....
22
6.
SELECTED FINANCIAL DATA .................................................
24
7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION ....................................................
27
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..............
36
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................
37
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ....................................................
38
PART II
PART III
10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......................
39
11.
EXECUTIVE COMPENSATION ..................................................
39
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ..........
39
13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..........................
40
PART IV
14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ........
1
40
FORWARD LOOKING STATEMENTS
All statements, other than statements of historical fact, contained within this report constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as "may,"
"intend," "might," "will," "should," "could," "would," "expect," "believe," "estimate," "potential," "expect," "plan" or the negative of these
terms, and similar expressions intended to identify forward-looking statements.
These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks
and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for
our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any
future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are
not limited to, those described in "Risk Factors" or in the documents incorporated by reference in this report.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian dollars, except where otherwise indicated. The following table sets forth (1) the rate
of exchange for the United States dollar, expressed in Canadian dollars, in effect at the end of each period indicated; (2) the average exchange
rate for such period, based on the rate in effect on the last day of each month during such period; and (3) the high and low exchange rates
during such period, in each case based on the noon buying rate in New York City for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
Rate at end of period
2002
---------$
1.5958
Fiscal Year Ending March 31,
---------------------------2001
2000
1999
---------------------------$
1.5784
$
1.4828
$
1.5092
1998
---------$
1.4180
Average rate during period
1.5650
1.5041
1.4790
1.5086
1.4060
High rate
1.6128
1.5784
1.5140
1.5770
1.4637
Low rate
1.5102
1.4515
1.4470
1.4175
1.3705
On July 2, 2002, the noon buying rate in New York City for cable transfer in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York was Canadian $1.5263= US$1.00.
2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Lions Gate Entertainment Corp. ("Lions Gate", "Company", "we", "us" or "our") is an integrated North American entertainment company. We
develop, produce and distribute a broad range of motion picture, television and other filmed entertainment content through our operating
divisions (Motion Pictures, Television, Animation and Studio Facilities) as well as our CinemaNow Inc. ("CinemaNow") digital media
platform. We have the following divisions and businesses:
- Motion Pictures, which includes Production and Theatrical, Video, Television and International Distribution;
- Television, which includes One-Hour Drama Series, Television Movies, Non-Fiction Programming and International Distribution;
- Animation, which includes an interest in CineGroupe Corporation ("CineGroupe"), a producer and distributor of animated feature films and
television programming;
- Studio Operations, which includes Lions Gate Studios ("LG Studios") and leased facilities at Eagle Creek Studios;
- a 63% interest in CinemaNow, a video on demand distributor of feature films over the Internet; and
- a 45% interest in Mandalay Pictures, LLC ("Mandalay"), a United States-based producer of class-A motion pictures.
Our registered office and principal executive offices are located at Suite 3123, Three Bentall Centre, 595 Burrard Street, P.O. Box 49139,
Vancouver, British Columbia, V7X 1J1.
BACKGROUND OF THE COMPANY
On May 26, 1986, IMI Computer Corp. ("IMI"), a British Columbia company, incorporated under the Company Act (British Columbia). IMI
underwent name changes in 1987 and 1994, and on November 18, 1996, changed its name to Beringer Gold Corp.
On April 28, 1997, Lions Gate Entertainment Corp. ("Old Lions Gate"), incorporated under the Canada Business Corporations Act using the
name 3369382 Canada Limited. Old Lions Gate amended its articles on July 3, 1997, to change its name to Lions Gate Entertainment Corp.
and on September 24, 1997, continued under the Company Act (British Columbia).
On November 13, 1997, Old Lions Gate and Beringer Gold Corp., merged under the Company Act (British Columbia) to form Lions Gate
Entertainment Corp.
On November 13, 1997 our shares began trading on The Toronto Stock Exchange and on November 17, 1998 our shares began trading on the
American Stock Exchange under the symbol "LGF."
3
On November 12, 1998 we reverse split our common shares from 500 million common shares to 250 million common shares and increased the
authorized number of common shares to 500 million.
On December 21, 1999 we issued a total of 13,000 5.25% convertible, non-voting, redeemable Series A preferred shares. These preferred
shares are entitled to cumulative dividends, as and when declared by the Board of Directors at a rate of 5.25% of the offering price per annum,
payable semi-annually on the last day of March and September of each year. At our option, the dividend may be paid in cash or additional
preferred shares. The preferred shareholders, as a class, have rights related to the election of between one and three directors, depending on the
number of preferred shares outstanding.
On October 13, 2000 we issued a total of 10 Series B preferred shares. Holders of these shares have the right to elect one member of the Board
of Directors of the Company, which can only be Mark Amin.
INDUSTRY BACKGROUND
THE FEATURE FILM INDUSTRY
The feature film industry encompasses the development, production and distribution of feature-length motion pictures and their subsequent
distribution in the home video, television and other ancillary markets. The major studios dominate the industry, some of which have divisions
that are promoted as "independent" distributors of motion pictures, including Universal Pictures, Warner Bros. (including New Line Cinema
and Castle Rock Entertainment), Twentieth Century Fox, Sony Pictures Entertainment (including Columbia Pictures and Columbia Tristar
Motion Picture Group), Paramount Pictures, The Walt Disney Company (including Buena Vista Pictures, Touchstone Pictures and Miramax
Film Corp.) and Metro-Goldwyn-Mayer Inc. (including MGM Pictures and United Artists Pictures Inc). In recent years, however, true
"independent" motion picture production and distribution companies have played an important role in the production of motion pictures for the
worldwide feature film market.
Independent Feature Film Production and Financing. Generally, independent production companies do not have access to the extensive capital
required to make big budget motion pictures, such as the "blockbuster" product produced by the major studios. They also do not have the
capital necessary to maintain the substantial overhead that is typical of such studios' operations. Independent producers target their product at
specialized markets and usually produce motion pictures with budgets of less than US$20 million. Generally, independent producers do not
maintain significant infrastructure. They instead hire only creative and other production personnel and retain the other elements required for
development, pre-production, principal photography and post-production activities on a project-by-project basis. Also, independent production
companies typically finance their production activities from bank loans, pre-sales, equity offerings, co-productions and joint ventures rather
than out of operating cash flow. They generally complete financing of an independent motion picture prior to commencement of principal
photography to minimize risk of loss.
Independent Feature Film Distribution. Motion picture distribution encompasses the exploitation of motion pictures in theatres and in markets,
such as the home video, pay-per-view, pay television, free television and ancillary markets, such as hotels, airlines and streaming films on the
Internet. Independent producers do not typically have distribution capabilities and rely instead on pre-sales to North American and international
distributors as well as equity financing. Generally, the local distributor will acquire distribution rights for a motion picture in one or more of the
aforementioned distribution channels from an independent producer. The local distributor
4
will agree to advance the producer a non-refundable minimum guarantee. The local distributor will then generally receive a distribution fee of
between 20% and 35% of receipts, while the producer will receive a portion of gross receipts in excess of the distribution fees, distribution
expenses and monies retained by exhibitors. The local distributor and theatrical exhibitor generally will enter into an arrangement providing for
the exhibitor's payment to the distributor of a percentage (generally 40% to 50%) of the box-office receipts for the exhibition period, depending
upon the success of the motion picture.
THE TELEVISION INDUSTRY
The North American television industry serves the largest broadcast market in the world, with a population of nearly 300 million people and
more than 120 million homes. Historically, the North American market has been the source of the major portion of the revenues earned by
television producers. However, the broadcasting and cable television markets outside North America have grown in the last decade through the
privatization of broadcasting systems, the proliferation of broadcast licenses and the introduction of sophisticated delivery technology, such as
cable and satellite transmission systems. This growth has led to a higher proportion of revenues from international markets.
Generally, a production company will license the right to broadcast a program to a combination of United States, Canadian and international
broadcasters, including free television and cable networks or individual television stations in the first run syndication market. After the initial
network, cable licensing or first run syndication period, the production company will make the program available for further commercial
exploitation on cable and/or in syndication.
North American Markets. In North America, programming is delivered to the end user through free television networks, cable channels and
networks, individual television stations and satellite delivery services. The following table identifies some of the specific delivery mediums
available in the United States and Canada:
Medium
-----Broadcast television networks
Channels in the United States
----------------------------NBC, CBS, ABC, Fox, PBS, PAXTV, UPN
and The WB
Channels in Canada
-----------------CBC, CTV, the Global Television
Network and CHUM
Basic Cable
USA Network, Lifetime, ABC Family
Channel, TNT, F/X, Hallmark and TBS
Bravo, Canal D, A&E, YTV,
Showcase and Family Channel
Pay Cable
HBO, Showtime, Starz/Encore
Movie Central, TMN and Super
Ecran
Independent commercial television stations often purchase programming from syndicators, including major studios and companies such as
Pearson Television and King World Productions, in exchange for advertising time. This practice is known as barter syndication. Pay-per-view
television allows cable television subscribers to purchase individual programs, including recently released motion pictures and live sporting,
music or other events, on a "per use" basis. The program distributor, the pay-per-view operator and the cable system operator typically divide
the subscriber fees.
Each major free television network in the United States and Canada currently schedules approximately 22 hours of programming in prime time
(from 8
p.m. to 11 p.m. Monday to Saturday, and 7 p.m. to 11 p.m. on Sunday) each week. United States and Canadian network prime time
programming generates the highest license fees and generally consists of a mix of
5
television movies, mini-series, non-fiction/reality, half-hour comedy and hour-length drama or action/adventure series. In recent years, the
market share of the free television networks in the United States has fallen significantly due, in large part, to the expansion of other networks,
cable channels and the development of a first run syndication market.
International Markets. The development of new television broadcasting systems outside of North America has sparked the growth of the
worldwide television industry. These broadcasting systems represent significant new sources of revenue for television producers. European
television is the most striking example of this growth. Over the last 15 years, governments in Europe have encouraged a major expansion of the
public and private broadcasting sector. For example, Germany and France have each added six television services in the last 15 years, and the
United Kingdom has added four. This process is just beginning in the former East Bloc countries and in Japan, Southeast Asia and Australia.
The East Bloc countries represent a potential market of more than 300 million people, with Japan, Southeast Asia and Australia representing an
even greater combined market. Other factors contributing to the growth of the worldwide television industry include the introduction of direct
broadcast satellite services and pay television, increased cable penetration and the growth of home video. Most foreign broadcasters seek out
both indigenous programming, to satisfy the local content regulations of their broadcast licenses, and international programming largely from
North America to appeal to a wide audience.
CANADA'S ROLE IN THE TELEVISION AND FEATURE FILM INDUSTRY
Over the past several years, the Canadian film and television production industry has grown and matured, and at present, represents an
approximately $3 billion annual business. At the same time as the Canadian domestic industry has matured, Canada has become a leading
location for internationally originated productions. Over the past few years, U.S. studios, television networks and cable services have
increasingly produced in Canada, attracted by the low Canadian dollar, first-class Canadian casts, crews, locations and facilities and
government support for the industry. U.S. companies with a strong presence in Canada include:
- major U.S. studios, such as Paramount, The Walt Disney Company, Universal Pictures and Columbia Tri-Star;
- U.S. networks, such as ABC, NBC, CBS, Fox and PAXTV;
- cable services, such as Showtime, TNT, Disney Channel and HBO; and
- film companies, such as The Hearst Corporation.
European and Asian film companies have also found Canada to be an attractive location and have often been able to access Canada's numerous
international film and television co-production treaties. Of Canada's ten provinces and three territories, the provinces of British Columbia,
Ontario and Quebec are most actively involved in the television and motion picture production industries, and many other provinces are
actively soliciting this business.
BUSINESS OF THE COMPANY
We produce, distribute and market feature-length films, television series and mini-series, and television movies, from initial creative
development through principal photography, post-production, distribution and ancillary sales.
6
MOTION PICTURES
We develop and produce theatrical motion picture projects through three separate production entities - Lions Gate Films, Christal Films and
Mandalay. These production units are operated independently with separate management teams, which provide distinct creative talents and
perspectives. Independent operation results in greater diversity within our overall release slate. We produce quality films in the low to
mid-budget range through Lions Gate Films and Christal Films and produce class-A feature films in the US$15 million to US$75 million range
through Mandalay.
Film Production
We produce and distribute English and French-language films generally budgeted at US$20 million or less. In fiscal 2002, we completed
principle photography on seven productions and delivered eleven films, and in fiscal 2001, we completed principle photography on ten
productions and delivered one film. We are expanding our production and co-production of feature films. Our current strategic plan calls for
the production or co-production of ten to twenty features annually. In fiscal 2003, we anticipate our theatrical releases to include the following:
- Frailty - released April 12, 2002, starring Bill Paxton and Matthew McConaughey;
- Rules of Attraction - starring James Vanderbeek, Jessica Biel and Shannyn Sossamon;
- Confidence - starring Ed Burns, Dustin Hoffman, Andy Garcia and Rachel Weitz;
- Shattered Glass - starring Hayden Christensen and Greg Kinnear; and
- Hittin' It - an urban comedy.
Distribution
We also actively distribute feature films for theatrical, television and home video audiences worldwide. In addition to distributing films that we
produce or co-produce, we also acquire distribution rights and licenses for feature films produced by others.
Theatrical Distribution. We distribute major motion pictures theatrically in North America in English, French and other languages and have
been responsible for the release of such prominent films as Monsters Ball, Dogma, American Psycho, The Red Violin, Shadow of the Vampire,
Amores Perros, Gods and Monsters and Affliction. In fiscal 2002 Christal Films has distributed the following prominent films; Le Placard, Les
Boys 3 and Le Collectionneur. Les Boys, Les Boys 2 and Les Boys 3 are the highest grossing films in Quebec history.
Home Video Distribution. Lions Gate Home Entertainment has two United States video distribution labels - Trimark Home Video and Studio
Home Entertainment. We exploit our own films such as Monsters Ball, The Wash and Frailty and we also distribute our acquired theatrical
releases such as O, State Property and Lantana. In addition we have been able to acquire high quality, star-driven films that, while not on par
with a wide theatrical release, are exploitable from a video and ancillary media perspective such as Stephen King's Rose Red and Larry Clark's
Bully.
7
We distribute to the rental market using direct distribution and revenue share output arrangements with Blockbuster, Hollywood Entertainment
Corporation, Movie Gallery, Inc. and Rentrak Corporation.
We distribute or sell directly to mass merchandisers, such as Wal-Mart Stores Inc., Costco Wholesale Corporation, Target Corporation, Best
Buy Co. Inc., and others who buy large volumes of our videos and DVDs to sell directly to the consumer.
In Canada, we release our titles to the home video market through our own labels and currently through a distribution arrangement with
Columbia TriStar Home Video which will expire during the current fiscal year. In Canada we have entered into a distribution overhead sharing
arrangement with TVA International.
Pay and Free Television Distribution. We currently have more than 250 titles in active distribution in the domestic cable, free and pay
television markets.
International Distribution. We license our own productions and productions acquired from third parties to the international marketplace on a
territory-by-territory basis. We currently have approximately 175 films in active international distribution.
Class-A Feature Film Production
Mandalay. Mandalay is a co-venture with Tigerstripes, a company controlled by Peter Guber. Mandalay develops and produces Class A-level
feature length motion pictures with budgets ranging from US$15 to US$75 million. Mandalay is accounted for using the equity method.
In November 1999, Mandalay released its first feature film production - Sleepy Hollow starring Johnny Depp and Christina Ricci. The film was
nominated for three Academy Awards and received an Oscar for Art Direction from the Academy of Motion Picture Arts and Sciences. It
grossed in excess of US$100 million in each of the North American and international box offices.
Enemy at the Gates starring Jude Law, Joseph Fiennes, Ed Harris and Rachel Weitz was released in North America on March 16, 2001. It has
grossed in excess of US$75 million worldwide. Mandalay released The Score, an action suspense thriller starring Robert DeNiro, Marlon
Brando, Ed Norton and Angela Bassett, in July 2001. The Score has grossed in excess of $115 million worldwide. Serving Sara, a romantic
comedy starring Matthew Perry and Elizabeth Hurley, will be released on August 23, 2002. Principal photography on Beyond Borders, a
worldwide epic film starring Angelina Jolie and Clive Owen, has been completed and is expected to be released in early 2003. Numerous other
projects are in various stages of development.
Mandalay has recently terminated its production and distribution arrangement at Paramount, and its output agreements in the United Kingdom,
Germany, France, Japan, Spain, Australia and Greece all expired at the end of 2001. Mandalay has also been experiencing recurring losses over
the past several years. Given the above factors, Mandalay has re-evaluated its business plan. Although Paramount made an offer to renew the
Mandalay deal, the fundamental change in the foreign marketplace for films on an output basis requires that the domestic rights bear a greater
burden of the cost. Therefore, Mandalay has concluded that, in order to maximize the opportunities to produce films and to protect the
downside while maintaining the upside potential, it is best served by primarily relying on major studios to finance 100% of its production costs
by being independent of any one major studio and is embarking on an independent program of placing films at different major studios or
entering into a first look
8
agreement with one studio. Accordingly, Mandalay has revised its business plan with the film program objectives of making two to three
pictures each year with 100% studio financing and at least one picture each year with independent financing.
At March 31, 2002 we have committed to a plan to divest our ownership interest in Mandalay. Given the factors described above, the
investment in Mandalay has been written down to an amount that approximates its fair value at that date. Refer to additional information
included in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations".
TELEVISION
One-Hour Drama Series. In fiscal 2002, we delivered the second 22 episode season of Mysterious Ways, which is broadcast on PAXTV in the
United States and CTV in Canada and is distributed by Columbia Tristar internationally. We have completed production on 13 episodes of No
Boundaries, an adventure reality show for The WB and CanWest Global. We are completing 22 episodes of Tracker, a sci-fi fugitive drama,
sold to the competitive first run syndication market in the United States and to Telemunchen in Germany as well as several international
broadcasters. We are in production on 22 episodes of the show Dead Zone, a series based on Stephen King's novels for USA Network which
premiered on June 16, 2002. We have also recently completed a pilot for Hooters Sports Challenge for Fox Sports Network and The Game for
MTV.
Television Movies. We are actively involved in the development, acquisition, production and distribution of television productions in the
movie-of-the-week and mini-series formats. We produced The Pilot's Wife, a two-hour television movie for CBS starring Christine Lahti and
Campbell Scott based on the best-selling novel by Anita Shreve, which aired in April and was the highest rated two-hour movie of the week
this season and Superfire, a two-hour television movie about smokejumpers battling an inferno in the Oregon backcountry, which aired in April
on ABC starring D.B. Sweeney. We also produced Counterstrike to be aired later this year for TBS, starring Rob Estes and Joe Lando about
two brothers trying to rescue the President who is taken hostage aboard the QEII during a summit meeting. In addition to the television movies
already completed or nearing completion, we have approximately 22 hours of television movie programming in development with U.S.
broadcasters and cable companies.
Non-Fiction Programming. Termite Art Productions ("Termite Art") has created documentary and reality-based programs for such notable
clients as all five Discovery Networks, Bravo, Court TV, MTV, VH1, A&E and The History Channel, as well as CBS, Fox and UPN. Over the
last few years, Termite Art has produced When Good Times Go Bad and Busted on the Job for Fox, Great Streets for PBS, Amazing Animal
Videos for Animal Planet, Hi Tech History for the Discovery Channel, and Ripley's Believe It or Not for TBS. In addition to distributing
Termite Art programs to domestic and international markets, we acquire third party productions for distribution.
ANIMATED MOTION PICTURE AND TELEVISION PRODUCTION
In addition to our live-action film and television productions, we are also involved in animation and interactive production through CineGroupe
located in Montreal.
CineGroupe develops and produces animated and live-action television series and television movies and feature film product using 2D and 3D
computer generated imagery and traditional ink and paint techniques. CineGroupe has produced more than 800 half-hour animated episodes for
television, including such series as Galidor: Defenders of the Outer Dimension,
9
Sagwa, the Chinese Siamese Cat, What's with Andy, Kids from Room 402, Big Wolf on Campus and a made-for-television movie, Lion of Oz.
During fiscal 2002, CineGroupe delivered 113.5 half-hours of programming, including:
- 26 half-hours of What's with Andy to ABC Family and Teletoon;
- 12 half-hours of Wounchpounch to Saban SINV and Radio-Canada;
- 12 half-hours of Kids from Room 402 (Season 3) to ABC Family and Teletoon;
- 9 half-hours of Galidor: Defenders of the Outer Dimension to Fox Kids and YTV;
- 26.5 half hours of Sagwa, the Chinese Siamese Cat to PBS Kids and TV Ontario;
- the live action feature film The Edge of Madness, a co-production with Credo Entertainment that Lions Gate will distribute;
- 21 half-hours of Big Wolf on Campus (Season 3) to ABC Family and YTV; and
- 3 half-hours of Pig City, a co-production with Animakids of France, to Fox Kids Europe and Teletoon.
CineGroupe has entered into an exclusive corporate sponsor agreement with Kellogg Company for the series Sagwa, the Chinese Siamese Cat.
Projects currently in production include:
- 23 half-hours of Pig City;
- 17 half-hours of Galidor: Defenders of the Outer Dimension;
- the animation feature film Pinocchio 3001, a co-production with Credo Entertainment that Lions Gate may distribute;
- 26 half-hours of Seriously Weird to ITV (UK) and YTV;
- 13 half-hours of Daft Planet to Teletoon; and
- 13 half-hours of Tripping the Rift to USA Network (Sci-Fi Channel) and CITY-TV in Canada.
In the coming years, CineGroupe plans to expand production volume in response to heightened international demand for animated product and
plans to build its library.
STUDIO OPERATIONS
Film and television production has increased dramatically over the past five years in Canada. This increase can be attributed to:
- close professional contacts between Canadian and U.S. studios, independent producers, distributors and buyers, resulting from Canada's
geographic proximity to the United States and shared North American values and interests;
10
- lower production costs in Canada than in the United States and other countries due, in part, to lower guild and union minimums;
- the favorable exchange rate of the Canadian dollar;
- government tax incentives;
- the availability of location assistance to film and television producers offered by many Canadian cities and several provinces;
- a large number of highly trained and professional crews, technicians and production personnel;
- intensive training for Canadian directors, writers and producers provided by the Canadian Film Centre;
- flexible trade unions that insist upon less onerous requirements than their United States counterparts; and
- Canada's wide ranging topography (3,400 miles from coast to coast) and small population (approximately 27 million people) that make
Canada ideally suited for location shooting. (Urban centers such as Toronto, Vancouver and Montreal have been disguised as London, Paris,
New York and Chicago.)
We have benefited through our ownership in LG Studios and a lease on the Eagle Creek Studios from the high demand for sound stages and
production office space created by this increase in production. Occupying nearly 14 acres in North Vancouver, British Columbia, LG Studios is
one of the largest film and television studio complexes in Canada. Although the majority of its revenues are generated from the rental of its
sound stages, production offices, construction mills and storage facilities to independent film and television producers, LG Studios is host to a
number of long-term industry tenants, such as:
- Pinewood Sound, a supplier of audio post-production services;
- Sim Video Productions, Ltd., a supplier of cameras and post-production editing equipment;
- the local union of one of the major film and entertainment industry craft guilds; and
- various production companies.
Studio capacity usage is consistently above 90%. Current studio productions include New Line's feature film Willard, Warner Bros.'s feature
Dreamcatchers and the MGM television pilot Dead Like Me.
We expect to have continued high occupancy rates for both our studios and offices for the next year. We have entered into an operating lease
with Eagle Creek Studios in Burnaby, British Columbia. Eagle Creek Studios has two 17,000 square foot sound stages with accompanying
office space. Its current tenant is Warner Bros. The addition of Eagle Creek Studios increases LG Studios' sound stage inventory to ten. We
have also entered into a revenue sharing equipment supply contract with William F. White Limited for equipment on the stages.
11
CINEMANOW
We are involved in video-on-demand distribution over the Internet through our majority ownership in CinemaNow. CinemaNow is accounted
for by the equity method because we do not have the ability to control the strategic operating, investing and financing policies of CinemaNow
as a consequence of our inability to elect a majority of the board of directors of CinemaNow.
CinemaNow distributes feature films on demand over the Internet and is currently delivering over 2.5 million streams to over 1.2 million users
per month via its website, www.cinemanow.com.
CinemaNow currently streams and downloads over 350 feature length films, using the Windows Media Player as its viewing platform.
CinemaNow's fee based, on demand selections are securely streamed using Microsoft's Digital Rights Management. CinemaNow controls
exclusive Internet distribution rights to nearly 2,000 films from 100 licensors including partnerships with Lions Gate, Allied Artists
Entertainment Group, Inc., Tai Seng Video Marketing and Salvation film libraries. CinemaNow makes select CinemaNow movies available
through syndication partners including WindowsMedia.com and numerous international distribution partnerships. In December 2000,
CinemaNow closed its series B round of financing led by Microsoft and included Blockbuster and Kipco.
At March 31, 2002 we fully provided for our investment in CinemaNow. Refer to additional information included in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
INTELLECTUAL PROPERTY
We are currently using the trademarks "TRIMARK HOME VIDEO" in connection with our domestic home video distribution, "LIONS GATE
FILMS" and "TRIMARK PICTURES" in connection with films distributed domestically and licensed internationally and "LIONS GATE
TELEVISION" and "TRIMARK TELEVISION" in connection with licenses to free, pay and cable television. The trademarks "LIONS GATE
ENTERTAINMENT", "LIONS GATE PICTURES" and "TRIMARK PICTURES" have been registered with the Commissioner of Patents and
Trademarks in the United States. Additionally we have registered the trademark "TRIMARK ULTRA SPORTS" which is used in connection
with our extreme sports video releases. We regard our trademarks as valuable assets and believe that our trademarks are an important factor in
marketing our products.
Copyright protection is a serious problem in the video cassette and DVD distribution industry because of the ease with which cassettes and
DVDs may be duplicated. In the past, certain countries permitted video pirating to such an extent that we did not consider these markets viable
for distribution. Our management believes the problem to be less critical at the present time. We and other video distributors have initiated
legal actions to enforce copyright protection when necessary.
COMPETITION
Television and motion picture production and distribution are highly competitive businesses. We face competition from companies within the
entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, outdoor recreation and other cultural
activities. We compete with the major studios, numerous independent motion picture and television production companies, television networks
and pay television systems for the acquisition of literary and film properties, the services of performing artists, directors,
12
producers and other creative and technical personnel and production financing. In addition, our motion pictures compete for audience
acceptance and exhibition outlets with motion pictures produced and distributed by other companies. As a result, the success of any of our
motion pictures is dependent not only on the quality and acceptance of a particular picture, but also on the quality and acceptance of other
competing motion pictures released into the marketplace at or near the same time.
EMPLOYEES
As of June 3, 2002 we had approximately 253 full-time and 13 part-time regular employees in our worldwide operations and CineGroupe has a
further 300 full-time and 10 part-time regular employees. We also hire additional employees on a picture-by-picture basis in connection with
the production of our motion pictures and television programming. We believe that our employee and labour relations are good.
None of our full-time employees are members of unions.
Many film and television productions employ members of a number of unions, including the International Alliance of Theatrical and Stage
Employees and Teamsters. A strike by one or more of the unions that provide personnel essential to the production of motion pictures or
television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time involved, could
cause delay or interruption in our release of new motion pictures and television programs and thereby could adversely affect our cash flow and
revenues. Our revenues from motion pictures and television product in our library should not be affected and may partially offset the effects of
a strike to the extent, if any, that television exhibitors buy more library product to compensate for interruption in their first-run programming.
GOVERNMENT INCENTIVES AND REGULATION
Government Financial Support. The Canadian Film Development Corporation, also known as Telefilm Canada, provides financial assistance in
the form of equity investments, interest free and low interest loans, development and interim financing. Canadian film and television
productions that have significant Canadian creative, artistic and technical content and that meet certain published criteria qualify for such
financial assistance. Telefilm Canada's provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan, British Columbia, Prince Edward
Island, New Brunswick and Nova Scotia also provide financial support to qualifying Canadian content productions. In 1996, the federal
government established the Canada Television and Cable Production Fund (now operating as the CTF), a government-cable industry
partnership that combined the former Cable Production Fund, Telefilm Canada's Canadian Broadcast Program Development Fund and a $100
million contribution from the Department of Canadian Heritage to form an approximately $230 million per year television funding initiative.
"Canadian-Content" Productions. Canadian conventional television broadcasters and specialty and pay television services generally pay higher
license fees for television programs that meet the "Canadian content" criteria established by the Canadian Radio-television and
Telecommunications Commission ("CRTC"), the Canadian counterpart to the U.S. Federal Communications Commission. The CRTC has
broad jurisdiction over communications companies carrying on broadcasting undertakings in Canada.
Broadcasting undertakings, including specialty television services, have been and continue to be, licensed and regulated by the CRTC pursuant
to the Broadcasting Act (Canada) and to the applicable regulations thereunder, the policies and decisions of the CRTC as issued from time to
time and the conditions and expectations established in the license for each
13
undertaking. Under the Broadcasting Act, the CRTC is responsible for regulating and supervising all aspects of the Canadian broadcasting
system with a view to ensuring compliance with certain broadcasting policy objectives set out in the Broadcasting Act. The CRTC is
empowered, for example, under the Broadcasting Act to issue licenses to eligible entities to carry on specialty television programming services.
In addition, the CRTC also imposes restrictions on the transfer of ownership and control of all licensed broadcasting undertakings, including
television programming services.
The Canadian independent television program production industry is assisted by the CRTC requirement that each licensed Canadian
conventional, pay and specialty television service must broadcast certain minimum amounts of Canadian content programming. Such rules and
regulations mandating the broadcast of Canadian content programs enable Canadian producers and distributors to make sales to Canadian
broadcasters that might otherwise have been made by non-Canadian producers and distributors.
Canadian independent television producers are further assisted by the CRTC rule permitting simultaneous substitution in certain circumstances.
Simultaneous substitution enables Canadian conventional television broadcasters to require Canadian cable and direct-to-home ("DTH")
satellite operators to delete the signal of a U.S. television broadcaster and to replace those signals with the signals of the Canadian broadcaster,
including its Canadian television commercials, when the Canadian broadcaster is broadcasting the same program at the same time as the U.S.
broadcaster (more recently, further rules for non-simultaneous substitution have been extended to DTH operators.) The substitution ensures that
Canadian cable and DTH subscribers are exposed to the Canadian broadcasters' commercials. This results in higher commercial revenues to
Canadian broadcasters in general and enhances their financial capacity to license programs.
Tax Credits. The federal government provides a refundable tax credit for eligible Canadian-content film or video productions produced by
qualified taxable Canadian corporations. The federal tax credit is for a maximum amount of approximately 12% of the total production costs of
an eligible production. The federal Canadian-content tax credits have been joined by Canadian-content tax credit programs in most provinces
ranging from 9.6% to 22.5%.
The federal government "production services" tax credit for eligible film and television productions produced in Canada, but which do not
otherwise qualify as Canadian content is equal to 11% of qualifying Canadian labor expenditures. Assuming that Canadian labor expenditures
generally represent approximately 50% of the total production budget, the federal production services tax credit will net applicants
approximately 5.5% of total production costs. Most provincial governments have also introduced refundable production services tax credit
programs at a rate ranging from 5.5% to 17.5% of eligible production costs.
Co-Production Treaties. Canada is a party to film and/or television co-production treaties with over 50 countries, which enables co-productions
to qualify as local content and thus be eligible for government assistance and financing in more than one country, which reduces the cost of
production. The most active relationship has traditionally been with France, but recently the United Kingdom has become a close second in
volume of production.
For financial information about our government incentives for each of the last three fiscal years, refer to the consolidated financial statements
note
16 - Government Assistance.
14
RISK FACTORS
FAILURE TO MANAGE FUTURE GROWTH MAY ADVERSELY AFFECT OUR BUSINESS.
Rapid Growth May Strain Our Resources. We are experiencing a period of rapid growth that could place a significant strain on our resources. If
our management is unable to manage growth effectively, then our operations could be adversely affected. We are currently in the process of
implementing appropriate structures to deal with future growth, including management information systems and internal and external
communication systems. However, there can be no assurance that we will be able to achieve our growth as planned, increase our work force or
implement new systems to manage our anticipated growth, and any failure to do so could have a material adverse effect on our business, results
of operations and financial condition.
We May Not Be Able to Obtain Additional Funding to Meet Our Requirements. Our ability to maintain and expand our development,
production and distribution of feature films and television series and to cover our general and administrative expenses depends upon our ability
to obtain financing through equity financing, debt financing (including credit facilities) or the sale or syndication of some or all of our interests
in certain projects or other assets. If our access to existing credit facilities is not available, and if other funding does not become available, there
could be a material adverse effect on our business.
OUR SUCCESS DEPENDS ON EXTERNAL FACTORS IN THE FILM AND TELEVISION INDUSTRY.
Our Success Depends On the Unpredictable Commercial Success of Films and Television Programs. Operating in the television and feature
film industries involves a substantial degree of risk. Each television program and feature film is an individual artistic work, and unpredictable
audience reactions primarily determine commercial success. The commercial success of a television program or a feature film also depends
upon the quality and acceptance of other competing programs or feature films released into the marketplace at or near the same time, critical
reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and
intangible factors, all of which are subject to change and cannot be predicted with certainty. Our success will depend on the experience and
judgment of our management to select and develop new investment and production opportunities. There can be no assurance that our television
programs and feature films will obtain favorable ratings or reviews or that broadcasters will license the rights to broadcast any of our television
programs in development or renew licenses to broadcast programs currently produced by our predecessors. Even if licenses to broadcast our
television programming are renewed, the popularity of a particular program and its ratings may diminish over time.
We Face Substantial Capital Requirements and Financial Risks. The production, completion and distribution of television programs and feature
films require a significant amount of capital. Although we intend to continue to reduce the risks of our financial involvement in the production
costs of our productions through financial assistance from broadcasters, distributors, government and industry programs and studios, there can
be no assurance that we will continue to successfully implement such arrangements or that we would not be subject to substantial financial
risks relating to the production, completion and release of future television programs and feature films. In addition, a significant amount of time
may elapse between our expenditure of funds and the receipt of revenues from our television programs or feature films.
Budget Overruns May Adversely Affect Our Business. Actual motion picture costs may exceed their budget, sometimes significantly, although
television program costs typically do not. Risks such as labor disputes, death or disability of star performers, rapid high technology changes
relating to special effects or other aspects of production, shortages of necessary equipment,
15
damage to film negatives, master tapes and recordings or adverse weather conditions may cause cost overruns and delay or frustrate completion
of a production. If a film incurs substantial budget overruns, we may have to seek additional financing from outside sources to complete
production of a television program or motion picture. No assurance can be given as to the availability of such financing on terms acceptable to
us. In addition, if a film incurs substantial budget overruns, there can be no assurance that such costs will be recouped, which could have a
significant impact on our business, results of operations or financial condition.
Distributors' Failure to Promote Our Programs May Adversely Affect Our Business. Decisions regarding the timing of release and promotional
support of our television programs, feature films and related products are important in determining the success of a particular television
program, feature film or related product. As with most production companies, for our product distributed by others we do not control the timing
and manner in which our distributors distribute our television programs or feature films. Although our distributors have a financial interest in
the success of any such television programs or feature films, any decision by our distributors not to distribute or promote one of our television
programs, feature films or related products or to promote competitors' programs, feature films or related products to a greater extent than it
promotes ours could have a material adverse affect on our business, results of operations or financial condition.
WE FACE COMPETITION.
Our Lack of Diversification May Make Us Vulnerable to Oversupplies in the Market. Most of the major U.S. studios are part of large
diversified corporate groups with a variety of other operations, including television networks and cable channels, which can provide both
means of distributing their products and stable sources of earnings that offset fluctuations in the financial performance of their motion picture
and television operations. The number of films released by our competitors, particularly the major U.S. film studios, in any given period may
create an oversupply of product in the market, and that may reduce our share of gross box-office admissions and make it more difficult for our
films to succeed.
We May Not Have Access to the Limited Number of Prime Time Slots for Television Programming. We compete for television network time
slots with a variety of companies that produce television programming. The number of prime time slots remains limited, even though the total
number of outlets for television programming has increased over the last decade. As a result, there is intense competition for these prime time
slots. In addition, television networks are now producing more programs internally, and thus possibly reducing such networks' demand for
programming from other parties. There can be no assurance that we will be able to compete successfully against current or future competitors.
Technological Advances May Reduce Demand for Films and Television Programs. The entertainment industry in general, and the motion
picture industry in particular, are continuing to undergo significant changes, primarily due to technological developments. Because of this rapid
growth of technology, shifting consumer tastes and the popularity and availability of other forms of entertainment, it is impossible to predict
the overall effect these factors will have on the potential revenue from and profitability of feature-length motion pictures and television
programming.
WE ARE REQUIRED TO MAKE ESTIMATES AND ASSUMPTIONS WHEN REPORTING OUR FILM OPERATING RESULTS
AND ACTUAL RESULTS MAY DIFFER.
Our Operating Results Depend on Product Costs, Public Tastes and Promotion Success. We expect to generate a substantial majority of our
future revenue from the development and
16
production of feature films and television programs. Our future revenues will depend upon the timing and the level of market acceptance of our
television programs and feature films, as well as upon the cost to produce, distribute and promote these programs and feature films. The
revenues derived from the production of a television program or feature film depend primarily on the television program's or feature film's
acceptance by the public, which cannot be predicted and do not necessarily bear a direct correlation to the production costs incurred. The
commercial success of a television program or a feature film also depends upon promotion and marketing and certain other factors.
Accordingly, our revenues are, and will continue to be, extremely difficult to forecast.
Our Operating Results May Fluctuate Significantly. We expect that our future operating results will fluctuate significantly as a result of, among
other factors:
- the timing of domestic and international releases of current and future television programs or feature films we produce;
- the success of our television programs or feature films;
- the timing of the release of related products into their respective markets;
- the costs to distribute and promote the television programs and feature films;
- the success of our distributors in marketing our television programs and feature films;
- the timing of receipt of proceeds generated by the television programs and feature films from distributors;
- the introduction of new television programs and feature films by our current and future competitors;
- the timing and magnitude of operating expenses and capital expenditures;
- the level of unreimbursed production costs in excess of budgeted maximum amounts;
- the timing of the recognition of advertising costs for accounting purposes under SoP 00-2; and
- general economic conditions, including continued slowdown in advertiser spending.
As a result, we believe that our results of operations may fluctuate significantly, and it is possible that our operating results could be below the
expectations of equity research analysts and investors.
Revenues and Costs Recognized in Certain Periods May be Overstated or Understated Due to Estimates Inherent in the Application of
Entertainment Accounting Policies. In preparing our financial statements in accordance with Canadian generally accepted accounting
principles, we follow the guidance issued by the American Institute of Certified Public Accountants for Accounting by Producers or
Distributors of Films contained in Statement of Position 00-2 ("SoP 00-2"). Under SoP 00-2, we recognize revenue on films at the later of the
following dates: when films are delivered, or access to the film is available to the customer; when the license period begins; and when the film
is unconditionally available to the customers. In addition, the fee must be determinable and collection must be reasonably assured. As a result,
our expected cash flows
17
may not necessarily relate to the revenue recognized in a given period. We capitalize costs of producing and developing films and television
programs. Capitalized costs include costs of film rights and screenplays, direct costs of production, interest and production overhead. We
amortize those costs using the individual film-forecast method, which involves estimating ultimate revenues of each film. We revise our
ultimate revenue estimates on a quarterly basis. The cost of film prints is deferred and charged to expense on a straight-line basis over the
period of theatrical release. We also estimate participation and residual costs each period, which may vary from the actual paid participation
and residual costs. We assess the valuation of our films on a quarterly basis. When events or changes in circumstances indicate that the fair
value of a film is less than its unamortized film costs, we write down the film to fair value. Fair value of a film is determined using the
discounted cash flow approach based on our estimate of the most likely cash flows and an appropriate discount rate. As a result of uncertainties
in these estimation processes, actual results may vary from the estimates.
OUR SUCCESS DEPENDS ON OUR PERSONNEL.
Loss of Key Personnel May Adversely Affect Our Business. Our success depends to a significant extent on the performance of a number of our
senior management personnel and other key employees of Lions Gate and our affiliates. In particular, we will depend on the services of such
personnel as Jon Feltheimer, Tom Ortenberg, Peter Block, Mike Paseornek, Kevin Beggs, Marni Wieshofer, Michael Burns, James Keegan,
Andre Link and Jacques Pettigrew. The loss of the services of key persons could have a material adverse effect on our business, operating
results and financial condition.
WE MAY FACE CHANGES IN REGULATORY ENVIRONMENT.
Failure to Meet Canadian Programming Restrictions May Decrease the Time Slots and Incentive Programs Available to Us. Canadian
broadcasters and cable, pay television and pay-per-view television services are typically required, as a condition of their license, to broadcast
significant minimum amounts of programming, including prime time, with Canadian content programs. The CRTC enforces compliance with
these requirements, and failure to comply can result in fines or the loss of license. The CRTC has issued detailed criteria that must be met for a
television production to qualify as a "Canadian program." The criteria require, among other things, that Canadians perform financial and
creative functions. If our productions cease to qualify as Canadian programs under the regulations and policies of the CRTC, we may find it
more difficult to secure time slots in Canada for our productions. In addition, if our productions cease to meet minimum Canadian content
requirements, we may be unable to access various federal and provincial film and television incentive programs, including refundable tax
credits, as discussed below. There could be an adverse impact on our business, operations and financial condition if any change in the policies
of Canada or the provinces in connection with their incentive programs occurs.
We May Lose Investment Funds and Tax Credits if We Fail to Follow Canadian Statutory Requirements. Certain programs produced by us will
be contractually required to be "Canadian content" programs in accordance with the requirements established from time to time by the CRTC,
the Canadian Audio-Visual Certification Office, the Income Tax Act (Canada) and the regulations thereunder. In the event a program does not
qualify under the applicable requirements, we would be in default of our commitments made in connection with such contracts. Such default
could result in reduction or the elimination of license fees from the Canadian broadcasters, reduced or eliminated government incentives and/or
future ineligibility for Canadian government incentive programs.
18
The Canadian federal government and a number of its provincial counterparts have established refundable tax credit programs based on eligible
labor expenditures of qualifying production entities. We expect that certain film and television productions we will produce will incorporate
such refundable tax credits as elements of production financing. If such productions do not ultimately qualify for anticipated refundable tax
credits, the relevant production may require additional funds for completion, which may not be available from other sources.
For our film and television productions to continue to qualify for several refundable tax credits, we must remain Canadian-controlled pursuant
to the Investment Canada Act, among other statutory requirements. If we cease to be Canadian-controlled under the Investment Canada Act, we
would no longer qualify or be entitled to access such refundable tax credits and other Canadian government and private film industry incentives
which are restricted to Canadian-controlled corporations, including the ability to produce under Canada's official co-production treaties with
other countries. Such a change in status would also negatively affect our eligibility to retain the benefit of refundable tax credits and other
incentives arising prior to a change of control. There are currently no transfer restrictions on our Common Stock as a class, and we accordingly
may not be able to prevent a change of control. In addition, certain provincial refundable tax credits require that the applicable applicant be
provincially-controlled. If any of our affiliates that accesses or intends to access such credits ceases to be provincially controlled, we would no
longer be entitled to access the applicable provincial refundable tax credit.
WE FACE INHERENT INTERNATIONAL TRADE RISKS THAT MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We distribute motion picture and television productions in foreign countries and derive a significant percentage of our revenues from sources
outside the United States and Canada. As a result, our business is subject to certain risks inherent in international trade, many of which are
beyond our control. These risks include:
- changes in local regulatory requirements;
- changes in the laws and policies affecting trade;
- investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes);
- differing degrees of protection for intellectual property;
- instability of foreign economies and governments; and
- cultural barriers.
These factors can adversely affect our business and results of operations.
OUR REVENUES AND OPERATING MARGINS ARE VULNERABLE TO CURRENCY FLUCTUATIONS.
We cannot accurately predict the impact of future exchange rate fluctuations between the Canadian dollar and the U.S. dollar or other foreign
currencies on revenues and operating margins, and fluctuations could have a material adverse effect on our business, financial condition and
results of operations.
Our principal currency exposure is between Canadian and U.S. dollars, although this exposure is mitigated through the structuring of the
US$200 million revolving credit facility as a
19
US$25 million Canadian dollar facility and a US$175 million U.S. dollar credit facility. Each facility is borrowed and repaid in the respective
country of origin, in local currency.
From time to time we may experience currency exposure on distribution and production revenues and expenses from foreign countries. From
time to time we may enter into financial derivative contracts to hedge such exposure. We have no intention of entering into derivative contracts
other than to hedge a specific financial risk.
PROTECTING AND DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
Our ability to compete depends, in part, upon successful protection of our proprietary property. We protect proprietary and intellectual property
rights to our productions through available copyright and trademark laws and licensing and distribution arrangements with reputable
international companies in specific territories and media for limited durations. Despite these precautions, existing copyright and trademark laws
afford only limited practical protection in certain jurisdictions. We distribute our products in other jurisdictions in which there is no copyright
and trademark protection. As a result, it may be possible for unauthorized third parties to copy and distribute our productions or certain portions
or applications of our intended productions.
In addition, litigation may be necessary in the future to enforce intellectual property rights, to protect our trade secrets, to determine the validity
and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in
substantial costs and the diversion of resources and could have a material adverse effect on our business, operating results or financial
condition. From time to time, we may also receive notice of claims of infringement of other parties' proprietary rights. There can be no
assurance that infringement or invalidity claims will not materially adversely affect our business, financial condition or results of operations.
Regardless of the validity or the success of the assertion of claims, we could incur significant costs and diversion of resources in defending
against claims, which could have a material adverse effect on our business, financial condition or results of operations.
ITEM 2. PROPERTIES.
Our corporate head office is located at Suite 3123, Three Bentall Centre, 595 Burrard Street, Vancouver, British Columbia and occupies
approximately 600 square feet of space under a month to month agreement. Our Canadian operations and financial personnel are located in
leased space of 6,000 square feet expiring in 2006 and 1,800 square feet expiring in 2002 in Toronto, Ontario and United States corporate
executives and operations, including CinemaNow, are located in leased space of 35,000 square feet expiring in 2009 in Marina del Rey,
California.
Christal Films' office is located in the borough of Westmount, Montreal, Quebec, and occupies approximately 11,000 square feet under a lease
agreement expiring in 2007. Christal Films leases a further 5,000 square feet of space in St. Laurent for storage facilities on a monthly basis.
CineGroupe operates from two premises in Montreal, Quebec totalling approximately 70,000 square feet, the leases which expire in 2006. They
also have a 1,280 square foot office in Los Angeles which lease expires in 2003.
The LG Studios complex is located at 555 Brooksbank Avenue, North Vancouver, British Columbia. LG Studios' facilities occupy an
approximately 14-acre site in a landscaped, park-like
20
setting. The land on which the facilities are situated is owned by LG Studios and is subject to mortgages under five separate term loans. Loans
in the amount of approximately $7.8 million and $8.6 million mature in May 2003 and June 2003, respectively. Two loans in the amount of
approximately $2.4 million mature in September 2005. The final term loan is in the amount of $1.7 million and matures in May 2007. We have
a five-year operating lease for 50,000 square feet with Eagle Creek Studios in Burnaby, British Columbia expiring in 2005.
Termite Art has leased office space totalling approximately 11,000 square feet in Studio City, California which expires in 2004.
In July 2002 Mandalay moved from the Paramount Studios lot into office space in Los Angeles.
We believe that our current facilities are adequate to conduct our business operations for the foreseeable future. We believe that we will be able
to renew these leases on similar terms upon expiration. If we cannot renew, we believe that we could find other suitable premises without any
material adverse impact on our operations.
ITEM 3. LEGAL PROCEEDINGS.
We know of no actual, threatened or pending legal proceedings to which we or any of our subsidiaries is a party which are material or
potentially material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our Common Stock is listed on the Toronto Stock Exchange (the "TSE") and the American Stock Exchange ("AMEX") and trades under the
symbol "LGF."
TORONTO STOCK EXCHANGE
The following table sets forth the range of high and low closing sale prices for our Common Stock, as reported by the TSE, for our two most
recent fiscal years:
High
----
Year ended March 31, 2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended March 31, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
---
$ 5.25
4.99
4.00
4.10
$ 3.05
2.70
2.00
2.75
4.35
4.24
4.10
4.05
2.50
3.25
2.61
3.20
AMERICAN STOCK EXCHANGE
The following table sets forth the range of high and low closing sale prices for our Common Stock, as reported by AMEX in U.S. dollars, for
our two most recent fiscal years:
Year ended March 31, 2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
----
Low
---
US$ 3.75
3.06
2.69
2.75
US$ 2.00
2.00
1.31
1.75
2.90
2.74
2.57
2.65
1.59
1.95
1.75
2.00
Year ended March 31, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HOLDERS
As of July 2, 2002, there were 43,207,399 shares issued and outstanding and 377 registered holders of our Common Stock as confirmed by our
transfer agent.
DIVIDEND POLICY
We have not paid any dividends on our outstanding common shares since our inception and do not anticipate doing so in the foreseeable future.
The declaration of dividends on our common shares is within the discretion of our Board of Directors and is restricted by the revolving credit
facility and will depend upon the assessment of, among other things, our earnings, financial requirements and operating and financial condition.
At the present time, our
22
anticipated capital requirements are such that we intend to follow a policy of retaining earnings in order to finance further development of our
business.
We are limited in our ability to pay dividends on our common shares by limitations under the Company Act (British Columbia) relating to the
sufficiency of profits from which dividends may be paid. We are also limited in our ability to pay cash dividends on common shares by our
revolving credit facility pursuant to a negative covenant.
The Series A preferred shares are entitled to cumulative dividends, as and when declared by the Board of Directors at a rate of 5.25% of the
offering price per annum, payable semi-annually on the last day of March and September of each year. At our option, the dividend may be paid
in cash or additional preferred shares. We declared, and on September 30, 2001 paid in U.S. dollars, a cash dividend of US$817,000 or
US$66.94 per share and on March 31, 2002 we declared and paid, in kind, a dividend of US$773,600 or US$66.94 per share by the issue of 273
preferred shares and cash payments of US$77,450 (2001 - cash dividends of US$817,000 or US$66.94 per share were paid in US dollars on
each of September 30, 2000 and March 31, 2001).
TAXATION
The following is a general summary of certain Canadian income tax consequences to United States Holders (who deal at arm's length with the
Company) of the purchase, ownership and disposition of Common Shares. For the purposes of this discussion, a "U.S. Holder" means a holder
of Common Shares who
(1) for the purposes of the Income Tax Act (Canada) is not, has not, and will not be resident in Canada at any time while he or she holds
Common Shares, (2) at all relevant times is a resident of the United States under the Canada-United States Income Tax Convention (1980) (the
"Convention"), and (3) does not and will not use or be deemed to use the Common Shares in carrying on a business in Canada. This summary
does not apply to U.S. Holders who are insurers. Such U.S. Holders should seek tax advice from their advisors. An actual or prospective
investor that is a United States limited liability company in some circumstances may not be considered to be a resident of the United States for
the purposes of the Convention and therefore may not be entitled to benefits thereunder.
This summary is not intended to be, and should not be construed to be, legal or tax advice to any prospective investor and no representation
with respect to the tax consequences to any particular investor is made. The summary does not address any aspect of any provincial, state or
local tax laws or the tax laws of any jurisdiction other than Canada or the tax considerations applicable to non-U.S. Holders. Accordingly,
prospective investors should consult with their own tax advisors for advice with respect to the income tax consequences to them having regard
to their own particular circumstances, including any consequences of an investment in Common Shares arising under any provincial, state or
local tax laws or the tax laws of any jurisdiction other than Canada.
This summary is based upon the current provisions of the Income Tax Act (Canada), the regulations thereunder and the proposed amendments
thereto publicly announced by the Department of Finance, Canada prior to the date hereof. It does not otherwise take into account or anticipate
any changes in law, whether by legislative, governmental or judicial action.
The following summary applies only to U.S. Holders who hold their Common Shares as capital property. In general, Common Shares will be
considered capital property of a holder where the holder is neither a trader nor dealer in securities, does not hold the Common Shares in the
course of carrying on a business and is not engaged in an adventure in the nature of trade in respect thereof. This summary does not apply to
holders who are "financial institutions" within the meaning of the mark-to-market rules contained in the Income Tax Act (Canada).
23
Amounts in respect of Common Shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in
satisfaction of, dividends to a shareholder who is not a resident of Canada within the meaning of the Income Tax Act (Canada) will generally
be subject to Canadian non-resident withholding tax. Such withholding tax is levied at a basic rate of 25% which may be reduced pursuant to
the terms of an applicable tax treaty between Canada and the country of residence of the non-resident. Under the Convention, the rate of
Canadian non-resident withholding tax on the gross amount of dividends received by a U.S. Holder is generally 15%. However, where such
beneficial owner is a company which owns at least 10% of the voting stock of the Company, the rate of such withholding is 5%.
A purchase of Common Shares by the Company (other than by a purchase in the open market in the manner in which shares are normally
purchased by a member of the public) will give rise to a deemed dividend equal to the amount paid by the Company on the purchase in excess
of the paid-up capital of such shares, determined in accordance with the Income Tax Act (Canada). Any such dividend deemed to have been
received by a person not resident in Canada will be subject to non-resident withholding tax as described above. The amount of any such
deemed dividend will reduce the proceeds of disposition to a holder of Common Shares for purposes of computing the amount of the holder's
capital gain or loss arising on the disposition.
A U.S. Holder will generally not be subject to tax under the Income Tax Act (Canada) in respect of any capital gain arising on a disposition of
Common Shares (including on a purchase by the Company) unless at the time of disposition such shares constitute taxable Canadian property
of the holder for purposes of the Income Tax Act (Canada) and such holder is not entitled to relief under an applicable tax treaty. If the
Common Shares are listed on a prescribed stock exchange at the time they are disposed of, they will generally not constitute taxable Canadian
property of a U.S. Holder unless, at any time during the five year period immediately preceding the disposition of the Common Shares, the U.S.
Holder, persons with whom he or she does not deal at arm's length, or the U.S. Holder together with non-arm's length persons, had an interest
in or option in respect of 25% or more of the issued shares of any class of the capital stock of the Company. In any event, under the
Convention, gains derived by a U.S. Holder from the disposition of Common Shares will generally not be subject to tax in Canada unless the
value of the Company's shares is derived principally from real or certain other immovable property situated in Canada.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statements of
operations data and other operating data set forth below have been derived from and are qualified by reference to the audited consolidated
financial statements and notes thereto included elsewhere herein. Historical results are not necessarily indicative of the results of operations
which may be expected in the future. See "Currency and Exchange Rates" for historical exchange rate information.
The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and, except as noted, the financial data set forth below is presented in accordance with Canadian GAAP. These principles
differ in some respects from United States GAAP. For a description of the principal differences between Canadian GAAP and United States
GAAP, see note 21, "Reconciliation to United States GAAP" in the Notes to the Consolidated Financial Statements.
24
STATEMENTS OF OPERATIONS DATA:
In accordance with Canadian GAAP:
REVENUES
EXPENSES:
Direct operating
Distribution and marketing
General and administration
Amortization
Severance and relocation costs
Total expenses
OPERATING INCOME (LOSS)
OTHER EXPENSES:
Interest
Minority interests
Unusual losses
Total other expenses
INCOME (LOSS) BEFORE UNDERNOTED
Gain on dilution of investment
in a subsidiary
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
INTERESTS
Income taxes
INCOME (LOSS) BEFORE EQUITY INTEREST
Write-down and equity interest in
Investments subject to significant influence
Other equity interests
NET INCOME (LOSS)
Dividends paid on Series A preferred shares
Accretion on Series A preferred shares
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE
In accordance with U.S. GAAP:
Revenues
Net Loss for the Year
Basic and Diluted Loss Per
Common Share
Fiscal Years Ended March 31,
---------------------------2002
2001
2000
1999
1998
---------------(all amounts in thousands of Canadian dollars, except per share amounts)
$ 426,582
---------
$ 282,226
---------
$ 271,251
---------
$ 118,297
---------
$ 64,149
---------
250,335
119,362
54,272
7,129
--
156,420
51,776
37,710
8,565
--
222,875
-31,388
6,875
1,698
92,931
-23,555
5,279
--
49,175
-10,337
1,781
--
--------254,471
--------27,755
---------
--------262,836
--------8,415
---------
15,386
1,911
2,115
11,605
881
--
4,665
1,308
--
3,655
612
1,647
951
1,019
--
--------19,412
---------
--------12,486
---------
--------5,973
---------
--------5,914
---------
--------1,970
---------
15,269
2,442
3,375
---------
----------
----------
839
---------
----------
(20,553)
503
--------(21,056)
15,269
(3,292)
--------18,561
2,442
2,000
--------442
(8,543)
304
--------(8,847)
886
1,439
--------(553)
(52,506)
---------(73,562)
(2,492)
(3,271)
---------
(9,833)
---------8,728
(2,497)
(3,115)
---------
(5,894)
159
--------(5,293)
(591)
(727)
---------
(5,449)
140
--------(14,156)
-----------
----------(553)
-----------
(79,325)
---------
3,116
---------
6,611
---------
(14,156)
---------
(553)
---------
(1.86)
---------
$
0.09
---------
$
(0.22)
---------
$
(1.05)
---------
$
(.10)
---------
$ 345,313
(71,832)
$ 264,047
$ (50,217)
$
$247,264
(2,424)
$ 114,377
$ (25,697)
$
$
56,942
(1,435)
$
$
$
$
(0.10)
--------431,098
--------(4,516)
---------
(23,928)
(1.78)
25
(1.50)
(0.11)
--------121,765
--------(3,468)
---------
--------61,293
--------2,856
---------
(9,382)
(1.05)
886
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
OTHER OPERATING DATA:
Cash flow from (used in)
operating activities
Cash flow from (used in)
financing activities
Cash flow from (used in)
investing activities
42,753
36,196
30,665
24,575
(95,012)
(51,334)
(42,652)
(31,730)
85,810
82,436
42,079
51,303
(158,012)
11,093
(45,053)
(118,153)
125,036
(6,398)
28,320
42,040
BALANCE SHEET DATA:
Cash and cash equivalents
Accounts receivable
Investment in films and
television programs
Total assets
Bank loans
Production loans
Long-term debt
Shareholders' equity
10,587
186,428
10,485
173,112
19,283
107,344
26,254
60,673
9,064
47,816
288,310
607,600
229,141
38,167
75,565
120,194
224,115
583,545
159,765
24,045
65,987
196,789
128,375
401,973
13,936
41,838
40,607
206,414
88,949
327,612
12,185
48,415
41,145
166,784
56,305
250,514
15,581
30,227
27,414
143,951
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We develop, produce and distribute a targeted range of film and television content in North America and around the world. To reflect our core
businesses, this discussion focuses on Motion Pictures, Television, Animation and Studio Facilities. Please also refer to the information in note
17 to the consolidated financial statements.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto
included in this Form 10-K. The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"). The material differences between the accounting policies used by Lions Gate under Canadian GAAP and
U.S. GAAP are disclosed in note 21 to the consolidated financial statements. Certain reclassifications have been made in the fiscal 2001 and
2000 consolidated financial statements to conform to the fiscal 2002 presentation, as described in note 2(u).
The functional currency of our business, defined as the economic environment in which we primarily generate and expend cash, is the
Canadian dollar and U.S. dollar for the Canadian and U.S.-based businesses, respectively. In accordance with generally accepted accounting
principles in both Canada and the U.S., the financial statements of U.S.-based subsidiaries are translated for consolidation purposes using
current exchange rates, with translation adjustments accumulated as a separate component of shareholders' equity.
On April 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") 133 "Accounting for Derivative Instruments and
Hedging Activities", where the provisions of SFAS 133 are applicable under Canadian GAAP. SFAS 133 requires that all derivative
instruments be reported on the balance sheet at fair value and establishes criteria for the designation and effectiveness of hedging relationships.
The cumulative effect of adopting SFAS 133 was not material to the consolidated financial statements.
On July 10, 2001, a subsidiary of the Company completed an equity financing with a third party for $14.0 million. The gain on dilution of the
Company's investment was $3.4 million (net of income taxes of $nil) and resulted in a decrease of $0.2 million in goodwill.
In November 2001, the Canadian Institute of Chartered Accountants ("CICA") released Handbook Section 3062, "Goodwill and Other
Intangible Assets", to be applied by companies for fiscal years beginning on or after January 1, 2002. Early adoption was permitted for
companies with their fiscal year beginning on or after April 1, 2001, provided the first interim period financial statements had not been
previously issued. The Company elected to early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but is
reviewed annually, or more frequently if impairment indicators arise, for impairment, unless certain criteria have been met. CICA 3062 is
similar, in many respects, to SFAS 142, "Goodwill and Other Intangible Assets", under U.S. GAAP. Goodwill is required to be tested for
impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting
unit below its carrying value. Notes 2(c) and 6 to the consolidated financial statements include additional information relating to the net
carrying value of goodwill and the proforma effect of the adoption of CICA 3062 on the prior years' consolidated statements of operations.
27
On December 20, 2001, we acquired the remaining 50% interest in Eaton Entertainment LLC for $0.2 million. Additionally, we recorded an
unusual loss of $1.3 million relating to the non-continuing assets acquired in the transaction.
CinemaNow is a leader in the IP-delivered video-on-demand market. It is licensing its proprietary Patch-Bay(TM) technology around the
world, and is growing its audience of users and subscribers. However, since it hasn't completed its current efforts to raise capital, has
experienced recurring losses and cannot demonstrate with reasonable certainty that it has twelve months of cash to fund operations, we are
required by Canadian and U.S. GAAP to reassess the carrying value of our investment in CinemaNow. The write-down of the investment of
$21.0 million, which had no impact on the fiscal 2002 cash flows, was expensed, as a component of write-down and equity interests in
investments subject to significant influence, in the consolidated statement of operations.
With the authority granted by the Board of Directors, prior to the close of the fourth quarter, management committed to a plan to divest its
ownership interest in Mandalay. The investment in Mandalay was written down to its estimated fair value of $15.9 million at March 31, 2002.
The fair value of Mandalay takes into account the expiration and non-renewal of Mandalay's international output agreements on December 31,
2001 and the pending expiration of its production and distribution agreement with Paramount Pictures Corp. in fiscal 2003, and is supported by
cash expected to be received from Mandalay in the next 12 to 24 months. The write-down of the investment of $17.0 million, which had no
impact on the fiscal 2002 cash flows, was expensed, as a component of write-down and equity interests in investments subject to significant
influence, in the consolidated statement of operations.
OVERVIEW
It should be noted that due to the retroactive adoption without restatement of CICA 3062 on April 1, 2001 and SoP 00-2 and CICA 3465 on
April 1, 2000, all as described in note 2(c) to the consolidated financial statements, the operating results in each year in the three-year period
ended March 31, 2002 are not comparable.
Net loss as disclosed in the consolidated statements of operations for the year ended March 31, 2002 was $73.6 million, representing a loss of
$1.86 per share (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares) on 42.8 million
weighted average common shares outstanding compared to net income of $8.7 million or $0.09 per share (after giving effect to the Series A
preferred share dividends and accretion on the Series A preferred shares) on 36.2 million weighted average common shares outstanding for the
year ended March 31, 2001 and a net loss of $5.3 million or $0.22 per share (after giving effect to the Series A preferred share dividends and
accretion on the Series A preferred shares) on 30.7 million weighted average common shares outstanding for the year ended March 31, 2000.
Before write-down and equity interests in investments subject to significant influence (Mandalay and CinemaNow), the loss for the year ended
March 31, 2002 of $21.1 million compared to net income of $18.6 million in the year ended March 31, 2001 and $0.4 million in the year ended
March 31, 2000.
EBITDA (defined as earnings before interest, provision for income taxes, amortization, minority interests, unusual losses, write-down and
equity interests in investments subject to significant influence) of $2.6 million for the year ended March 31, 2002 has decreased $33.7 million
or 92.8% compared to $36.3 million for the year ended March 31, 2001, which had increased $19.3 million or 113.5% compared to $17.0
million for the year ended March 31, 2000.
28
While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition
to, but not as a substitute for, operating income, net income and other measures of financial performance reported in accordance with GAAP.
EBITDA does not reflect cash available to fund cash requirements. Not all companies calculate EBITDA in the same manner and the measure
as presented may not be comparable to similarly-titled measures presented by other companies.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues in fiscal 2002 of $426.6 million increased $144.4 million or 51.2% compared to $282.2 million in fiscal 2001.
Revenues increased significantly in all businesses in the current year.
Motion Pictures fiscal 2002 revenue of $251.3 million increased $77.4 million or 44.5% compared to $173.9 million in fiscal 2001. The
increase is due primarily to the integration of Trimark in the current year compared to the inclusion of Trimark's post-acquisition revenue for
the period October 13, 2000 to March 31, 2001 of $50.3 million in fiscal 2001. Theatrical revenue of $43.6 million increased $23.8 million or
120.2% compared to $19.8 million in the prior year. Significant theatrical releases in the current year included: Monster's Ball with revenue of
$11.8 million, "O", with revenue of $8.3 million and The Wash, with revenue of $5.0 million. Other significant theatrical releases included:
Amores Perros, Les Boys 3, Lantana and Songcatcher. Video revenue of $154.5 million increased $55.7 million or 56.4% in the current year
compared to $98.8 million in the prior year. Significant video releases in the current year included: "O", which was released on video on
February 19, 2002 and earned revenue in excess of $22 million in the last six weeks of the current fiscal year, The Wash with video revenue in
excess of $10 million and Shadow of the Vampire with video revenue in excess of $5 million. Video library revenue also increased
significantly year-over-year. International revenues were relatively consistent year-over-year, while television revenue from motion pictures
decreased $5.6 million in fiscal 2002 to $12.7 million due to the timing of the availability of the television windows.
Television production revenue of $110.7 million increased by $39.2 million or 54.8% from $71.5 million in the prior year, due primarily to the
increased number of hours delivered in the current year in all television divisions. In the current year, 48 hours of one-hour drama series were
delivered, contributing revenue of $53.5 million. Deliveries in the current year included: 22 episodes of "Mysterious Ways" to PAXTV, NBC
(eight of 22 episodes), CTV in Canada and Columbia Tristar internationally; 14 episodes of "Tracker" to the US syndication market, Chum TV
in Canada, Telemunchen in Germany and other international broadcasters; eight episodes of "No Boundaries" to WB Network in the U.S.,
CanWest Global in Canada and international broadcasters; two episodes of "Dead Zone" to UPN in the U.S. and Paramount internationally; and
two episodes of "Iron Chef" to UPN in the U.S., City TV and Alliance Atlantis in Canada and international broadcasters. In the prior year, 29
hours of one-hour drama series were delivered for revenue of $44.5 million. Television movies contributed revenue of $31.3 million in the
current year. Current year deliveries included: "Superfire" to ABC and international broadcasters; "The Pilot's Wife" to CBS in the U.S. and
international broadcasters; and "Attack on the Queen" to TBS in the U.S. and international broadcasters. In the prior year, one television movie
was delivered to international territories. In the current year, Termite Art contributed revenue of $23.5 million on the delivery of 78.5 hours of
non-fiction programming including 25.5 hours of "Amazing Animal Videos" to Animal Planet, 13 hours of "Incredible Vacation Videos" to
Travel Channel; 6.5 hours of "Wild Rescues" to Animal Planet and five hours of "MTV Video
29
Party". In the prior year, Termite Art delivered 68.5 hours of non-fiction programming for revenue of $18.4 million. Under Canadian GAAP,
tax credits earned are included in revenue. Under U.S. GAAP, tax credits earned are recorded as an offset to income tax expense. In fiscal
2002, $28.0 million of tax credits earned were included in revenue.
In Animation, CineGroupe's revenue of $55.6 million increased $25.9 million or 87.2% compared to $29.7 million in the prior year. The
increase was primarily due to increased deliveries in the current year. In the current year, a total of 110.5 half-hours of television programming
were delivered (compared to 81.5 half-hours in the prior year) including: 26.5 half-hours of "Sagwa, the Chinese Siamese Cat" to PBS in the
U.S. and TVO in Canada; 26 half-hours of "What's With Andy" to ABC Family in the U.S. and Teletoon in Canada; 21 half-hours of "Big
Wolf on Campus" to ABC Family in the U.S. and YTV in Canada; 12 half-hours of "Wunchpunch" to Radio Canada and Saban internationally;
12 half-hours of "Kids From Room 402" to ABC Family in the U.S. and Teletoon and TQS in Canada; and nine half-hours of "Galidor Defender of the Outer Dimension" to Fox Kids and Lego in the U.S. and YTV in Canada. In addition, the feature film Wilderness Station was
delivered to distribution partners around the world. Library revenue of $4.7 million, interactive revenue of $1.0 million and service and other
revenue of $0.1 million were earned in the current year, compared to $1.2 million, $0.8 million and $1.3 million respectively in the prior year.
Studio Facilities revenue of $6.6 million increased $1.1 million or 20.0% compared to $5.5 million in the prior year due primarily to an
improvement in occupancy levels and revenues generated from additional services now offered at the studios including lighting, equipment and
furniture rentals. Stage and office occupancy levels averaged 96% and 94% respectively for the year compared to 94% and 85% respectively in
the prior year.
CineGate earned commission revenue of $2.3 million in the current year on approximately $270.0 million of production financing arranged
through the Cinegate joint venture compared to revenue of $1.6 million earned in the prior year. CineGate ceased operations in fiscal 2002
upon the rescission of the tax shelter business by the Canadian government.
Direct operating expenses of $250.3 million for the year ended March 31, 2002 were 58.7% of revenue, compared to direct operating expenses
of $156.4 million, which were 55.4% of revenue in the prior year. Direct operating expenses as a percentage of revenue increased in the current
year primarily due to the loss recognized on the delivery of the 14 episodes of "Tracker", the impact of the significant theatrical and video
revenues on "O" - a distribution service deal with 15% fees, and the softening of the European marketplace, which has resulted in increased
provisions for bad debts. In the current year, we increased our provision for doubtful accounts by $11.8 million (including $2.5 million relating
to KirchMedia) and wrote off or cancelled contracts directly against revenue totaling $3.0 million. Excluding tax credits receivable, the
provision for doubtful accounts at March 31, 2002 represents 10.3% of accounts receivable, compared to 4.5% at March 31, 2001.
Distribution and marketing costs (also known as "P&A") of $119.4 million more than doubled, increasing $67.6 million or 130.5% compared
to $51.8 million in the prior year. P&A increased year-over-year primarily due to the advertising expenditures on the more significant theatrical
and video releases in the current year. Theatrical P&A in the current year of $53.1 million compares to $32.8 million in the prior year. Video
P&A of $64.7 million compared to $17.4 million in the prior year due to the significant increase in video activity and video releases being
brought "in-house". Revenues earned on videos released through our Universal output deal, which expires on August 31, 2002, are recorded net
of distribution and marketing expenses.
30
In the current year, our most significant video releases, "O" and The Wash, were released directly by Lions Gate, outside of the Universal
output deal.
General and administrative expenses of $54.3 million increased $16.6 million or 44.0% compared to $37.7 million in the prior year. In Motion
Pictures, general and administrative expenses increased $7.9 million or 34.3% to $30.9 million from $23.0 million in the prior year primarily as
a result of a full year of combined operations with Trimark and the growth of the production and theatrical and video distribution businesses.
Television general and administrative expenses of $5.4 million were virtually unchanged year-over-year. Animation general and administrative
expenses increased $1.3 million or 46.4% to $4.1 million from $2.8 million in the prior year due to the creation of an international sales
department and increased head count at the corporate head office. General and administrative expenses in corporate of $13.6 million increased
$7.4 million or 119.4% from $6.2 million primarily due to increased headcount as a result of growth in corporate administration and support
functions.
Amortization of $7.1 million decreased $1.5 million or 17.4% from $8.6 million in the prior year due primarily to a decrease in goodwill
amortization of $2.7 million year-over-year as a result of the adoption of CICA 3062 partially offset by increased amortization of capital assets
of $1.6 million, primarily in Animation, pertaining to the acquisition of animation and technical services equipment financed through capital
leases.
Year-over-year interest expense of $15.4 million increased by $3.8 million or 32.8% from $11.6 million in the prior year due to borrowings
related to the purchase of Trimark and increased production and acquisition activity and bank charges related to bank facilities, partially offset
by decreased interest rates.
Unusual losses of $2.1 million recorded in the current year related to a $1.3 million loss recorded on the acquisition of the remaining 50% of
Eaton Entertainment, LLC, a $0.6 million loss on disposal related to the demolition of an existing structure to provide room to build a new
20,500 square foot sound stage at Lions Gate Studios and the write-off of capital assets relating to the downsizing of certain offices.
The fiscal 2002 provision for income taxes of $0.5 million consists of a $2.0 million provision for income taxes, partially offset by the
recognition of the benefits of income tax losses of $1.5 million. At March 31, 2002, we have Canadian non-capital losses of approximately
$45.4 million available to reduce Canadian income taxes carried forward for seven years and US$38.1 million (Cdn$60.7 million) for U.S.
income tax losses carried forward for fifteen to twenty years.
In July 2001, Mandalay theatrically released its third feature film, The Score, a US$83 million-budgeted action suspense thriller, starring
Robert DeNiro, Edward Norton, Marlon Brando and Angela Bassett and directed by Frank Oz. The worldwide box office on The Score was
approximately US$115 million (Cdn$180 million). Serving Sara, a US$40 million-budgeted romantic comedy starring Matthew Perry and
Elizabeth Hurley is expected to be released in August, 2002. Principal photography was recently completed on the US$90 million-budgeted
Beyond Borders, starring Angelina Jolie and Clive Owen, directed by Martin Campbell. Beyond Borders is expected to be released in early
2003. In the current year we received cash of $8.4 million from Mandalay as a return on our investment which was recorded as an offset to
investments subject to significant influence on our consolidated balance sheet. The $28.0 million write-down in Mandalay, recorded in the
fourth quarter, was included in write-down and equity interest in investments subject to significant influence.
The $1.8 million equity interest in the loss of CinemaNow represents 63% of the operating losses of CinemaNow for the nine months ended
December 31, 2001 compared to $1.5
31
million in the year ended March 31, 2001. The $21.0 million write-down in CinemaNow, recorded in the fourth quarter, was included in
write-down and equity interest in investments subject to significant influence.
Our consolidated financial statements have been prepared in accordance with Canadian GAAP. The material differences between the
accounting policies used by us under Canadian GAAP and U.S. GAAP are disclosed in note 21 to the consolidated financial statements.
Under U.S. GAAP the net loss for the year ended March 31, 2002 was $71.8 million. The loss under U.S. GAAP is less than under Canadian
GAAP due primarily to the add back of the amortization of pre-operating costs relating to Mandalay and our television one-hour series
business, as described in notes 21(a) and 21(b).
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue in fiscal 2001 of $282.2 million increased $10.9 million or 4.0% compared to $271.3 million in fiscal 2000.
Revenue in fiscal 2001 increased significantly in Motion Pictures and was down slightly in Television and Animation due to the timing of
deliveries.
Motion Pictures revenue in fiscal 2001 of $173.9 million increased $27.0 million or 18.4% compared to $146.9 million in fiscal 2000. The
increase was due primarily to the inclusion of Trimark's post-acquisition revenue for the period October 13, 2000 to March 31, 2001 of $50.3
million, partially offset by decreased revenue in Lions Gate Films of $23.3 million year-over-year. In Lions Gate Films, the majority of the
year-over-year decrease was in theatrical distribution. In fiscal 2000, Dogma (a theatrical distribution service deal) contributed theatrical
revenue of close to $20.0 million and to a large extent explains the decrease in fiscal 2001. The Dogma service deal generated fees of 15%,
which increased the fiscal 2000 direct operating expenses as a percentage of revenue. Significant theatrical releases in fiscal 2001 included:
American Psycho; Shadow of the Vampire; and Big Kahuna. Significant video releases in fiscal 2001 included: American Psycho; Big Kahuna;
and Million Dollar Hotel. Television and international revenues were relatively consistent year-over year. Trimark contributed video revenue of
approximately $30.0 million, international sales revenue of approximately $14.0 million and television revenue of approximately $7.0 million
in fiscal 2001. Significant revenue generators for Trimark included Shriek, Saturday Night Live "Best of" comedy series, and Held Up.
Television production revenue in fiscal 2001 of $71.5 million decreased by $10.3 million or 12.6% from $81.8 million in fiscal 2000, due
primarily to fewer television movie deliveries partially offset by increased deliveries in Termite Art. Trimark contributed Television revenue of
$3.7 million. In fiscal 2001, the one-hour drama series business contributed revenue of $44.5 million. Deliveries in fiscal 2001 included: 22
episodes of "Mysterious Ways" to PAXTV, NBC (13 of 22 episodes), CTV and Columbia Tristar; and seven episodes of "Higher Ground" to
Fox Family, WIC and Paramount. In fiscal 2000, 37 hours of one-hour drama series were delivered for revenue of $46.0 million. Termite Art
contributed revenue of $18.4 million in fiscal 2001 on the delivery of 68.5 hours of non-fiction programming including: 6.5 hours of
"Incredible Vacation Videos" to Travel Channel; 6.5 hours of "After Midnight" to Discovery; six hours of VH1 Confidential" to VH1; five
hours of "MTV Video Party"; and four hours of "Great Streets" to PBS. In addition, producer fees were earned on the delivery of 19 episodes
of "Ripley's Believe It Or Not" to UPN. In fiscal 2001, Termite Art delivered 35 hours of proprietary programming and 12 hours of Ripley's
Believe It or Not for total revenue of $11.3 million. The first Avalanche project, The Void, was delivered to international territories in fiscal
2001 and
32
producer fees were earned on four productions. In fiscal 2000, four television movies were delivered for revenue of $24.3 million. In fiscal
2001, $18.2 million of tax credits earned were included in revenue.
In Animation, CineGroupe's fiscal 2001 revenue of $29.7 million decreased $5.9 million or 16.6% compared to $35.6 million in fiscal 2000.
The decrease was due to the timing of deliveries - several episodes were not available for delivery at March 31, 2001 and were subsequently
delivered in the first quarter of fiscal 2002. In fiscal 2001 a total of 81.5 half-hours of television programming were delivered including: 40
half-hours of "Wunchpunch" to Radio Canada and Saban; 18 half-hours of "Kids From Room 402" to TQS and Fox Family; 13.5 half-hours of
"Sagwa, the Chinese Siamese Cat" to PBS and TVO; and seven half-hours of "Mega Babies" to Teletoon and Fox, as well as the television
movie "Lion of Oz" to Disney Channel and TMN. Library revenue of $1.2 million, interactive revenue of $0.8 million and service and other
revenue of $1.3 million were earned in fiscal 2001.
Studio Facilities fiscal 2001 revenue of $5.5 million decreased $1.5 million or 21.4% compared to fiscal 2000 revenue of $7.0 million due to
the elimination on financial statement consolidation of $1.5 million of intercompany revenue earned from Lions Gate productions filmed at the
Studio Facilities. Stage and office occupancy levels averaged 94% and 85% respectively in fiscal 2001 compared to 96% and 92% respectively
in fiscal 2002.
Since commencing CineGate operations in September 2000, Lions Gate earned commission revenue of $1.6 million on approximately $270.0
million of production financing arranged through the Cinegate joint venture to March 31, 2001.
Direct operating expenses of $156.4 million in fiscal 2001 were 55.4% of revenue, compared to direct operating expenses of $222.9 million in
fiscal 2000, which were 82.2% of revenue. The primary reason for the decrease year-over-year is due to the adoption of SoP 00-2 at the
beginning of fiscal 2001. Commencing in fiscal 2001, distribution and marketing expense was disclosed separately rather than as a component
of direct operating expenses in fiscal 2000.
Fiscal 2001 general and administrative expenses of $37.7 million increased $6.3 million or 20.0% compared to fiscal 2000 general and
administrative expenses of $31.4 million. In Motion Pictures, general and administrative expenses increased $6.8 million or 42.0% to $23.0
million from $16.2 million in the prior year primarily as a result of combining operations with Trimark in fiscal 2001 and the growth of the
production and video distribution businesses in that year. General and administrative expenses in corporate increased primarily due to increased
salaries and benefits expenses. General and administrative expenses decreased in Television as a result of cost savings initiatives and remained
relatively consistent year-over-year in Animation and Studio Facilities.
Year-over-year interest expense increased by $6.9 million due to borrowings related to the purchase of Trimark and increased production and
acquisition activity and bank charges related to bank facilities.
Goodwill arising on the Trimark acquisition contributed to an increase in amortization in fiscal 2001 of $1.7 million.
The fiscal 2001 equity interest in Mandalay consisted of operating losses of $6.4 million and amortization of previously deferred pre-operating
costs of $1.9 million.
The fiscal 2001 equity interest in CinemaNow consisted primarily of our 66.9% of operating losses of $1.2 million and amortization of
goodwill of $0.3 million.
33
In fiscal 2001, we recognized the benefit of previously unrecognized income tax loss carry-forwards of approximately $5.5 million. At March
31, 2001, we had Canadian non-capital losses of approximately $52.8 million available to reduce Canadian income taxes carried forward for
seven years and US$21.3 million for U.S. income tax losses carried forward for twenty years.
Under U.S. GAAP the net loss was $50.2 million. In the year ended March 31, 2001 the earnings under U.S. GAAP were lower than under
Canadian GAAP due primarily to the recognition of the opening SoP 00-2 adjustment as a reduction in net income under U.S. GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities in the year ended March 31, 2002 were $95.0 million compared to cash flows used in operating
activities of $51.3 million in the year ended March 31, 2001 and $42.7 million in the year ended March 31, 2000, all primarily due to the net
increase in investment in films and television programs in fiscal 2002 (increased $69.0 million net in fiscal 2002, $54.8 million net in fiscal
2001 and $40.5 million net in fiscal 2000). Cash flows from financing activities in the year ended March 31, 2002 were $85.8 million
compared to cash flows from financing activities of $82.4 million in the year ended March 31, 2001 and $42.1 million in the year ended March
31, 2000, due primarily to the increase in bank loans and net proceeds from production and distribution loans. Cash flows from investing
activities of $11.1 million in the current year is due to the $14.0 million third party investment in a subsidiary and $8.4 million received from
Mandalay partially offset by additions to animation and studios property and equipment of $12.0 million. In fiscal 2001, the majority of the
$45.1 million use of cash in investing activities was due to the acquisition of Trimark and in fiscal 2000 the entire $6.4 million use of cash was
due to the purchase of property and equipment.
Our liquidity and capital resources were provided during the year ended March 31, 2002 principally through cash generated from operations, a
US$200 million (Cdn$318.8 million) "borrowing base" revolving credit facility with J.P. Morgan Securities which closed in September 2000,
and German tax shelter financing, which has been made available to us on several productions including Frailty, Cat's Meow, Liberty Stands
Still and I Fought the Law, which were all delivered in fiscal 2002. The credit facility is limited by our borrowing base, which includes certain
accounts receivable and "library" credits. Management projects that the difference between the borrowing base and the amount borrowed over
the next four quarters will be positive resulting in excess borrowing capacity. In December 2001, the third party valuation of our borrowing
base films and television programs library was updated as at September 30, 2001. In accordance with the valuation methods used, the
borrowing base excludes unreleased theatrical projects at September 30, 2001 such as Monster's Ball, The Wash and Frailty. At March 31,
2002, the borrowing base assets totaled US$152.1 million (Cdn$242.5 million).
The nature of our business is such that significant initial expenditures are required to produce and acquire films and television programs, while
revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. As our
operations grow, our financing requirements are expected to grow and management projects the continued use of cash in operating activities
and therefore we are dependent on continued access to external sources of financing. We believe that cash flow from operations, cash on hand,
credit lines available and tax shelter financing available will be adequate to meet known operational cash requirements for the foreseeable
future, including the funding of future film and television production, film rights acquisitions, and theatrical and video release schedules. We
monitor our cash flow, interest coverage, liquidity, capital base and debt-to-total capital ratios with the long-term goal of maintaining our
creditworthiness.
34
Our current financing strategy is to finance substantially with equity at the corporate level and to leverage investment in film and television
programs through operating credit facilities and single-purpose production financing. We usually obtain financing commitments, including, in
some cases, funds from government incentive programs and foreign distribution commitments to cover, on average, at least 70% of the
budgeted third-party costs of a project before commencing production.
Our 5.25% convertible, non-voting redeemable Series A Preferred Shares are entitled to cumulative dividends, as and when declared by the
Board of Directors, payable semi-annually on the last day of March and September of each year. We have the option of paying such dividends
either in cash or additional preferred shares. We paid the March 31, 2002 dividend in additional preferred shares. We do not pay and do not
intend to pay, and are restricted from paying by our revolving credit facility, dividends on common shares, giving consideration to our business
strategy and investment opportunities. We believe it to be in the best interest of shareholders to invest all available cash in the expansion of our
business.
CRITICAL ACCOUNTING POLICIES
We believe that the application of the following accounting policies, which are important to our financial position and results of operations,
requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the
accounting policies discussed below, see note 2 to the consolidated financial statements.
We accrue for video returns and allowances in the financial statements based on previous returns and allowances history on a title-by-title basis
in each of the video businesses. There may be differences between actual returns and allowances and our historical experience.
We capitalize costs of production, including financing costs, and distribution to investment in films and television programs. These costs are
amortized to direct operating expenses in accordance with SoP 00-2. These costs are stated at the lower of unamortized film or television
program costs or fair value. These costs for an individual film or television program are amortized in the proportion that current period actual
revenues bear to management's estimates of the total revenue expected to be received from such film or television program over a period not to
exceed ten years from the date of delivery. As a result, if revenue estimates change with respect to a film or television program, we may be
required to write down all or a portion of the unamortized costs of such film or television program. No assurance can be given that unfavorable
changes to revenue estimates will not occur, which may result in significant write-downs affecting our results of operations and financial
condition.
Revenue is driven by audience acceptance of a film or television program, which represents a response not only to artistic merits but also to
critics' reviews, marketing and the competitive market for entertainment, general economic conditions, and other intangible factors, all of
which can change rapidly. Actual production costs may exceed budgets. Risk of labour disputes, disability of a star performer, rapid changes in
production technology, shortage of necessary equipment and locations or adverse weather conditions may cause cost overruns. We generally
maintain insurance policies ("completion bonds" and "essential elements insurance" on key talent), mitigating certain of these risks.
CURRENCY RISK MANAGEMENT
Additionally, as part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency
exchange risks on an ongoing basis. In the current year we entered into foreign currency contracts to hedge foreign currency risk on one
35
television production. These forward exchange contracts do not subject us to risk from exchange rate movements because gains and losses on
the contracts offset losses and gains on the transactions being hedged. No collateral or other security was pledged as security to support these
financial instruments. Other hedges and derivative financial instruments will be used in the future, within guidelines approved or to be
approved by the Board of Directors for counterparty exposure, limits and hedging practices, in order to manage our interest rate and currency
exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.
Our principal currency exposure is between Canadian and U.S. dollars, although this exposure has been significantly mitigated through the
structuring of the US$200 million revolving credit facility as a US$25 million Canadian dollar facility and a US$175 million U.S. dollar credit
facility. Each facility is borrowed and repaid in the respective country of origin, in local currency.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our
exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of
business.
Debt. We are exposed to cash flow risk due to changes in market interest rates related to our outstanding debt. For example, our credit facilities
and some of our long-term debt bears interest on borrowings outstanding at various time intervals and at market rates based on either the
Canadian prime rate or the U.S. prime rate, plus a margin ranging from 0.47% to 4.0%. Our principal risk with respect to our long-term debt is
changes in these market rates.
The table below presents principal debt repayments and related weighted average interest rates for our credit facilities and long-term debt
obligations at March 31, 2002 by expected maturity date.
2003
---BANK LOANS:
Variable (1)
Variable (2)
LONG-TERM DEBT:
Fixed (3)
Fixed (4)
Fixed (5)
Variable (6)
Expected Maturity Date
---------------------Year ending March 31,
--------------------2004
2005
2006
---------(amounts in thousands)
-6,180
---
1,160
-$ 1,894
$ 30,384
$ 32,257
$ 31,628
$ 1,852
$ 9,250
$
$
--$
$
$
146
-924
456
2007
----
$222,961
--
---
$
-----
2,052
----
(1) Revolving credit facilities which expire September 25, 2005. Average variable interest rate on principal of $37,103 equal to Canadian prime
plus 1.5% and average variable interest rate on principal of $185,858 equal to U.S. prime plus 1.5%.
(2) Line of credit due July 31, 2002 at Canadian prime plus 1% and demand loans at Canadian prime plus 0% - 4%.
36
(3) Fixed interest rate equal to 6.43%.
(4) Non interest-bearing. US$19.8 million.
(5) Fixed interest rate equal to 10.8%.
(6) Average variable interest rate equal to Canadian prime plus 1.4%.
Commitments. The table below presents future commitments under contractual obligations and commercial commitments at March 31, 2002 by
expected maturity date.
Expected Maturity Date
----------------------
Year ending
March 31,
---------
2003
----
Operating Leases
$ 4,481
2004
2005
2006
---------(Amounts in thousands)
$3,864
$3,365
$2,411
2007
----
Employment Contracts
$ 6,284
$3,611
--
--
--
Unconditional
purchase obligations
$26,805
$5,117
--
--
--
Distribution and
marketing commitments
$ 7,793
--
--
--
--
Production guarantee
$
159
--
--
--
--
Corporate guarantee
$
500
--
--
--
--
$1,780
Foreign Currency. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from
fluctuations in foreign currency exchange rates. In certain instances, we enter into foreign currency exchange contracts in order to reduce
exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency
cash flows. We currently intend to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks.
We have entered into foreign exchange contracts to hedge future production expenses denominated in Canadian, Australian and New Zealand
dollars. Gains and losses on the foreign exchange contracts are capitalized and recorded as production costs when the gains and losses are
realized. At March 31, 2002, we had contracts to sell US$10.1 million in exchange for Cdn$16.3 million over a period of nine months at a
weighted average exchange rate of 1.5952. During the year, we completed foreign exchange contracts denominated in Australian and New
Zealand dollars. The net loss resulting from the completed contracts amount to $nil. These contracts are entered into with a major financial
institution. We are exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the
contracts, at current market rates. We do not require collateral or other security to support these contracts. Unrecognized gains at March 31,
2002 amounted to Cdn$0.5 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Auditors' Report and our Consolidated Financial Statements and Notes thereto appear in a separate section of this report (beginning on
page 44 following Part IV). The index to our Consolidated Financial Statements is included in Item 14.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PricewaterhouseCoopers LLP ("PwC") were our auditors for the fiscal year ended March 31, 2001 and had been our auditors since November
1997. On July 29, 2001, the Board of Directors, upon the recommendation of the Audit Committee and the Company's senior management,
requested the resignation of PwC as the Company's auditors effective as of July 24, 2001.
PwC's reports on the consolidated financial statements for fiscal years ended March 31, 2001 and 2000 did not contain an adverse opinion,
disclaimer of opinion, or qualification or modification as to uncertainty, audit scope or accounting principles. In addition, there were no
disagreements within the meaning of Item 304(a)(1)(iv) of the Securities and Exchange Commission Regulation S-K for the fiscal years ended
March 31, 2001 and 2000 and the interim period ending July 29, 2001.
PwC has advised the Company and the Audit Committee of the following matters under Item 304(a)(1)(v):
1. The Company does not presently have procedures that are effective in ensuring that the information relevant to international sales revenue
recognition is collected and reported to ensure that the timing of certain revenue recognition is appropriate.
2. A number of material adjustments recorded by management were identified by the auditors during the audit. The auditors advised that while
internal controls over systems were adequate, lack of timely monitoring controls over systems output and accounting entries, such as
reconciliations of account balances, analysis and review of transactions, balances and adjustments, may have contributed to the number of
adjustments. The auditors have advised that they were not able to determine whether the matters raised were related solely to significant events
that occurred during the year ended March 31, 2001 as the auditors were dismissed upon completion of the audit for the year ended March 31,
2001.
3. The Company should undertake additional training and support of its accounting employees and management to ensure employees and
management are able to fulfill their assigned functions.
In response to PwC's comment 1, the Company continues to monitor its international sales revenue recognition practices in light of the
Company's ongoing development.
In response to PwC's comment 2, the Company notes again that PwC advised the Audit Committee at the conclusion of its audit that the
internal controls at the Company were adequate, however, management acknowledges that certain processes could be improved upon. The
Company is committed to a strong internal control environment and related processes.
In response to PwC's comment 3, the Company notes that in fiscal 2001 it had grown substantially and as the Company continues to grow, it
will continue to hire and train staff to support the accounting function.
The Company has filed PwC's letter to the SEC and Canadian commissions as an Exhibit to its Report on Form 8-K/A filed September 4, 2001.
38
The Board of Directors hired Ernst & Young LLP to replace PwC as the Company's independent auditors effective August 18, 2001.
PwC has reissued for inclusion in this report their audit report on our consolidated financial statements as of March 31, 2001 and for each of the
two years in the period then ended. In connection with providing that updated report, we have agreed to indemnify PwC for the payment of all
unrecovered third party legal costs and expenses incurred in PwC's successful defense of any legal action or proceeding that arises as a result of
PwC's previous audit report on our past financial statements in the filing of this report with the SEC. However, this indemnification provision
will be void, and any advanced funds will be returned to us, if a court, after adjudication, finds PwC liable for professional malpractice.
Insofar as indemnification for liabilities arising under the U.S. federal securities laws may be permitted to PwC, we have been advised that in
the opinion of the SEC such indemnification is against public policy as expressed in U.S. federal securities laws and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid
by PwC in the successful defense of any action, suit or proceeding) is asserted by PwC, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the U.S. federal securities laws and will be governed by the final adjudication of such issue.
PART III
The information required by Items 10, 11, 12 and 13 of Part III of this annual report on Form 10-K is incorporated by reference from and will
be contained in our definitive proxy statement for our annual meeting of stockholders to be filed with the SEC by July 29, 2002 except as set
forth under Item 12 below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Equity Compensation Plan Information
As of March 31, 2002
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and
rights
-------------
-------------------------(a)
--------------------------
------------------------(b)
-------------------------
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
-----------------------------(c)
------------------------------
6,768,162
--------------------------
$4.44
-------------------------
1,163,088
------------------------------
-------------------------6,768,162
--------------------------
-------------------------------------------------
-----------------------------1,163,088
------------------------------
Equity compensation plans
approved by shareholders
Equity compensation plans not
approved by shareholders
Total
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements listed on the accompanying Index to Financial Statements are filed as part of this report at pages 44 to 91.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this report at pages 92 to 94.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 2002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
DATE: July 15, 2002
By:
/s/ FRANK GIUSTRA
---------------------------------Frank Giustra
Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
We the undersigned directors and officers of Lions Gate Entertainment Corp. hereby constitute and appoint Frank Giustra and Jon Feltheimer,
or either of them, our true and lawful attorneys and agents, with full power of substitution and resubstitution, to do any and all acts and things
in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the
capacities indicated below, that said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to
comply with the Securities and Exchange Act of 1934, as amended, any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this report, including specifically, but not limited to, power and authority to sign for us or any of us in our
names and in the capacities indicated below, any and all amendments and supplements to this report, and we hereby ratify and confirm all that
the said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof.
Signatures
---------/s/ MARK AMIN
-----------------------------Mark Amin
Title
----Vice Chairman and Director
Date
---July 15, 2002
/s/ THOMAS AUGSBERGER
-----------------------------Thomas Augsberger
Director
July 15, 2002
/s/ MICHAEL BURNS
-----------------------------Michael Burns
Vice Chairman and Director
July 15, 2002
/s/ DREW CRAIG
-----------------------------Drew Craig
Director
July 15, 2002
/s/ ARTHUR EVRENSEL
-----------------------------Arthur Evrensel
Director
July 15, 2002
/s/ JON FELTHEIMER
-----------------------------Jon Feltheimer
Chief Executive Officer and Director
(Principal Executive Officer)
July 15, 2002
41
/s/ DOUGLAS M. HOLTBY
-----------------------------Douglas M. Holtby
Director
July 15, 2002
/s/ JOE HOUSSIAN
-----------------------------Joe Houssian
Director
July 15, 2002
/s/ GORDON KEEP
-----------------------------Gordon Keep
Senior Vice President, Secretary and
Director
July 15, 2002
/s/ HOWARD KNIGHT
-----------------------------Howard Knight
Director
July 15, 2002
/s/ MORLEY KOFFMAN
-----------------------------Morley Koffman
Director
July 15, 2002
/s/ PATRICK LAVELLE
-----------------------------Patrick Lavelle
Director
July 15, 2002
/s/ ANDRE LINK
-----------------------------Andre Link
President and Director
July 15, 2002
/s/ HARALD LUDWIG
-----------------------------Harald Ludwig
Director
July 15, 2002
/s/ G. SCOTT PATERSON
-----------------------------G. Scott Paterson
Director
July 15, 2002
/s/ E. DUFF SCOTT
-----------------------------E. Duff Scott
Director
July 15, 2002
/s/ HARRY SLOAN
-----------------------------Harry Sloan
Director
July 15, 2002
/s/ MARNI WIESHOFER
-----------------------------Marni Wieshofer
Chief Financial Officer
(Principal Accounting and Financial
Officer)
July 15, 2002
42
INDEX TO FINANCIAL STATEMENTS
Description of Financial Statement
---------------------------------Report of Independent Auditors.....................................................
Lions Gate Entertainment Corp. Consolidated Balance Sheets.........................
Lions Gate Entertainment Corp. Consolidated Statements of Operations...............
Lions Gate Entertainment Corp. Consolidated Statements of Shareholders' Equity.....
Lions Gate Entertainment Corp. Consolidated Statements of Cash Flows...............
Lions Gate Entertainment Corp. Notes to the Consolidated Financial Statements......
Report of Independent Auditors.....................................................
Mandalay Pictures, LLC Consolidated Balance Sheets.................................
Mandalay Pictures, LLC Consolidated Statements of Operations.......................
Mandalay Pictures, LLC Consolidated Statement of Changes in Members' Equity........
Mandalay Pictures, LLC Consolidated Statements of Cash Flows.......................
Mandalay Pictures, LLC Notes to Consolidated Financial Statements..................
43
Page
Number
-----44
45
46
47
48
49-79
80
81
82
83
84
85-91
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the accompanying consolidated balance sheet of Lions Gate Entertainment Corp. as of March 31, 2002 and the related
consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We
did not audit the financial statements of CineGroupe Corporation, a consolidated subsidiary (see note 21 (m)) which statements reflect total
assets of $84.4 million as of March 31, 2002, and total revenues of $55.5 million for the year then ended. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for CineGroupe Corporation, is
based solely on the report of the other auditors. The financial statements of Lions Gate Entertainment Corp. for the years ended March 31, 2001
and 2000 were audited by other auditors, whose report dated June 22, 2001 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lions Gate Entertainment Corp. at March 31, 2002, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles generally accepted in Canada.
/s/ERNST & YOUNG LLP
Los Angeles, California
July 1, 2002
44
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
MARCH 31, 2002
ASSETS
Restricted cash
Cash and cash equivalents
Accounts receivable, net of reserve for video returns of $9,387
(2001 - $10,675) and provision for doubtful accounts of $17,931
(2001 - $6,141)
Investment in films and television programs
Investments subject to significant influence
Property and equipment
Goodwill, net of accumulated amortization of $8,093
(2001 - $8,184)
Other assets
Future income taxes
$
1,125
10,587
March 31, 2001
$
-10,485
186,428
288,310
15,942
50,582
173,112
224,115
77,230
44,212
38,816
15,067
743
--------$ 607,600
=========
34,924
19,467
---------$ 583,545
=========
$ 229,141
82,224
26,760
38,167
75,565
22,029
-13,520
--------487,406
=========
$ 159,765
76,297
36,398
24,045
65,987
22,283
757
1,224
--------386,756
=========
45,002
43,538
LIABILITIES
Bank loans
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Production loans
Long-term debt
Deferred revenue
Future income taxes
Minority interests
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred shares, 200,000,000 shares authorized, issued in
series, including 1,000,000 series A (11,830 and 12,205
shares issued and outstanding) and 10 series B (10 and 10
shares issued and outstanding) (liquidation preference $30,167)
Common stock, no par value, 500,000,000 shares authorized,
43,231,921 and 42,296,838 issued and outstanding
Deficit
Cumulative translation adjustments
SEE ACCOMPANYING NOTES.
45
226,130
(159,225)
8,287
--------120,194
--------$ 607,600
=========
222,985
(79,900)
10,166
--------196,789
--------$ 583,545
=========
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
MARCH 31, 2002
$ 426,582
---------
REVENUES
EXPENSES:
Direct operating
Distribution and marketing
General and administration
Amortization
Severance and relocation costs
Total expenses
OPERATING INCOME (LOSS)
OTHER EXPENSES:
Interest on debt initially incurred for a term of
more than one year (net of interest income of $0.4
million (2001-$0.6 million; 2000 - $0.5 million)
Minority interests
Unusual losses
Total other expenses
INCOME (LOSS) BEFORE UNDERNOTED
Gain on dilution of investment in a
subsidiary
INCOME (LOSS) BEFORE EQUITY INTERESTS
Write-down and equity interest in investments subject
to significant influence
Other equity interests
NET INCOME (LOSS)
Dividends on Series A preferred shares
Accretion on Series A preferred shares
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE
156,420
51,776
37,710
8,565
---------254,471
--------27,755
---------
222,875
-31,388
6,875
1,698
--------262,836
--------8,415
---------
15,386
1,911
2,115
--------19,412
---------
11,605
881
---------12,486
---------
4,665
1,308
---------5,973
---------
15,269
2,442
3,375
---------
----------
----------
(20,553)
503
--------(21,056)
15,269
(3,292)
--------18,561
2,442
2,000
--------442
(52,506)
---------(73,562)
(2,492)
(3,271)
--------$ (79,325)
=========
(9,833)
---------8,728
(2,497)
(3,115)
--------$
3,116
=========
(5,894)
159
--------(5,293)
(591)
(727)
--------$ (6,611)
=========
$
(1.86)
=========
$
0.09
=========
$
(0.22)
=========
SEE ACCOMPANYING NOTES.
46
Year Ended
March 31, 2000
$ 271,251
---------
250,335
119,362
54,272
7,129
---------431,098
--------(4,516)
---------
(23,928)
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INTERESTS
Income taxes
Year Ended
March 31, 2001
$ 282,226
---------
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
Balance at March 31,
1999
Public offering
5,525,000 warrants
issued in
conjunction with
public offering
Conversion of Series
A preferred shares
Exercise of stock
options
Net income (loss)
available to common
shareholders
Accretion of Series
A preferred shares
Series B preferred
shares
Foreign currency
translation
adjustment
Balance at March 31,
2000
Effect of adoption
of accounting
pronouncements
Issued upon
acquisition of
subsidiary
Issued pursuant to a
settlement agreement
with employee
Exercise of stock
options
Stock options
granted in
conjunction with
acquisition of a
subsidiary
Net income (loss)
available to common
shareholders
Accretion of Series
A preferred shares
Foreign currency
translation
adjustment
Balance at March 31,
2001
Conversion of Series
A preferred shares
Exercise of stock
options
Issued pursuant to
share bonus plan
Stock dividends
Net income (loss)
available to common
shareholders
Accretion of Series
A preferred shares
Foreign currency
translation
adjustments
Balance March 31,
2002
COMMON STOCK
NUMBER
AMOUNT
30,607,418
$ 177,068
--
5,659
795,000
2,446
58,333
239
SERIES A PREFERRED
SHARES
NUMBER
AMOUNT
-13,000
$
-42,711
SERIES B PREFERRED
SHARES
NUMBER
AMOUNT
--
$
--
DEFICIT
$
(14,709)
CUMULATIVE
TRANSLATION
ADJUSTMENTS
$
4,425
TOTAL
$ 166,784
42,711
5,659
(795)
(2,446)
-239
(6,611)
--
(6,611)
613
613
10
--
----------
---------
------
--------
--------
--------
31,460,751
185,412
12,205
40,878
10
--
--
---------(21,320)
(2,981)
-------1,444
(61,696)
(2,981)
--------206,414
(61,696)
10,229,837
34,976
34,976
600,000
2,250
2,250
6,250
14
14
--
333
333
3,116
--
2,660
2,660
----------
---------
------
--------
--------
--------
42,296,838
222,985
12,205
43,538
10
--
648,000
2,398
87,083
214
200,000
533
(648)
3,116
---------(79,900)
8,722
--------
8,722
---------
10,166
196,789
(2,398)
-214
273
1,110
--
2,752
533
1,110
(79,325)
(79,325)
2,752
----------
---------
------
--------
--------
--------
----------
(1,879)
--------
(1,879)
---------
43,231,921
==========
$ 226,130
=========
11,830
======
$ 45,002
========
10
========
$
-========
$ (159,225)
==========
$ 8,287
========
$ 120,194
=========
SEE ACCOMPANYING NOTES.
47
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
YEAR ENDED
MARCH 31, 2002
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of property and equipment
Amortization of goodwill
Write-off of projects in development
Amortization of pre-operating costs
Amortization of deferred financing costs
Amortization of films and television programs
Gain on dilution of investment in a subsidiary
Unusual losses
Minority interests
Write-down and equity interest in investments subject to
significant influence
Other equity interest
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable
Increase in investment in films and television programs
Other assets
Future income taxes
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Deferred revenue
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of capital stock
Dividends paid on Series A preferred shares
Financing fees
Increase in bank loans
Increase in restricted cash
Proceeds from production and distribution loans
Repayment of production and distribution loans
Proceeds from long-term debt
Repayment of long-term debt
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Minority investment in subsidiary
Cash received from investment in Mandalay Pictures, LLC
Acquisition of Eaton Entertainment, LLC, net of cash acquired
Acquisition of Sterling Home Entertainment, LLC, net of cash
acquired
Acquisition of Trimark Holdings Inc.
Purchase of property and equipment
$
(73,562)
4,873
-1,294
962
1,842
247,618
(3,375)
2,115
1,911
52,506
--
3,309
2,708
1,586
962
1,322
153,797
--881
9,833
--
$
(5,293)
2,584
2,473
856
962
199
220,423
--1,308
5,894
(159)
(46,671)
(260,905)
(3,272)
163
14,888
15,409
8,489
-----------(42,652)
------------
215
(1,382)
(1,976)
66,870
(1,125)
44,228
(30,202)
14,116
(4,934)
-----------85,810
------------
14
(2,497)
(6,876)
86,368
-13,880
(32,661)
26,792
(2,584)
-----------82,436
------------
48,495
(591)
(461)
2,200
-35,900
(42,477)
3,162
(4,149)
-----------42,079
------------
SEE ACCOMPANYING NOTES.
48
8,728
(15,412)
(208,586)
(8,046)
(4,708)
(7,279)
8,289
1,282
-----------(51,334)
------------
--(12,046)
-----------11,093
-----------1,891
(1,789)
10,485
-----------$
10,587
============
CASH AND CASH EQUIVALENTS-END OF YEAR
$
Year Ended
March 31, 2000
(5,314)
(316,591)
673
(1,266)
1,251
(9,638)
(311)
-----------(95,012)
------------
14,000
8,394
745
NET CHANGE IN CASH AND CASH EQUIVALENTS
FOREIGN EXCHANGE EFFECT ON CASH
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR
Year Ended
March 31, 2001
---(3,168)
(39,370)
(2,515)
-----------(45,053)
-----------(13,951)
5,153
19,283
-----------$
10,485
============
-----(6,398)
-----------(6,398)
-----------(6,971)
-26,254
-----------$
19,283
============
1. NATURE OF OPERATIONS
Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") is a fully integrated entertainment company engaged in the development,
production and distribution of feature films, television series, television movies and mini-series, non-fiction programming and animated
programming, as well as the management of Canadian-based studio facilities and management services provided to Canadian limited
partnerships. As an independent distribution company, the Company also acquires distribution rights from a wide variety of studios, production
companies and independent producers.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian
GAAP") which conforms, in all material respects, with the accounting principles generally accepted in the United States ("U.S. GAAP"),
except as described in note 21. The Canadian dollar and the U.S. dollar are the functional currencies of the Company's Canadian and U.S.
based businesses, respectively. These consolidated financial statements are expressed in Canadian dollars, with the translation of financial
statements of individual entities in accordance with note 2(o).
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") include the accounts
of Lions Gate and all of its majority-owned and controlled subsidiaries, with a provision for minority interests, and the Company's
proportionate share of assets, liabilities, revenues and expenses of jointly controlled companies. The Company controls a subsidiary company
through a combination of existing voting interests and an ability to exercise various rights under certain shareholder agreements and debentures
to acquire common shares.
(c) ACCOUNTING CHANGES
GOODWILLOn November 1, 2001, the Canadian Institute of Chartered Accountants ("CICA") released Section 3062, "Goodwill and Other Intangible
Assets", to be applied by companies for fiscal years beginning on or after January 1, 2002. Early adoption was permitted for companies with
their fiscal year beginning on or after April 1, 2001, provided the first interim period financial statements had not been previously issued. The
Company elected to early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but is reviewed annually, or
more frequently if impairment indicators arise, for impairment, unless certain criteria have been met, and is similar, in many respects, to
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", under U.S. GAAP. In accordance with
the adoption provisions of CICA 3062, goodwill is required to be tested for impairment on the date of adoption. Under SFAS 142 goodwill is
required to be tested for impairment within six months of adoption, as of the beginning of the year. At April 1, 2001 and September 30, 2001, it
was determined that the fair value of each of the reporting units was in excess of its carrying value including goodwill and, therefore, no further
work was required and an impairment loss was not required. Goodwill is required to be tested for impairment between the annual tests if an
event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value. The
amortization provisions of CICA 3062 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization and impairment provisions of CICA 3062 are effective upon adoption of CICA
3062. (Refer to note 1(k) for additional information.)
49
ACCOUNTING FOR FILMS AND TELEVISION PROGRAMSIn June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of
Position 00-2 "Accounting by Producers or Distributors of Films" ("SoP 00-2"). SoP 00-2 establishes new accounting standards for producers
or distributors of films, including changes in revenue recognition, capitalization and amortization of costs of acquiring films and television
programs and accounting for exploitation costs, including advertising and marketing expenses. The Company elected early adoption of SoP
00-2 and retroactively adopted SoP 00-2 effective as of April 1, 2000. The Company also elected to adopt SoP 00-2 for Canadian GAAP
purposes. The prior years' financial statements were not restated, as the effect of the new policy on the prior periods was deemed not reasonably
determinable. Accordingly, opening accumulated deficit for the year ended March 31, 2001 was reduced to reflect the cumulative effect of the
accounting change in the amount of $58.9 million (net of income taxes of $2.2 million). The principal changes as a result of applying SoP 00-2
are as follows:
Advertising and marketing costs, which were previously capitalized to investment in films and television programs and amortized using the
individual film forecasts method, are now expensed the first time the advertising takes place.
The capitalization of production costs for episodic television series is limited to revenue that has been contracted for on an episode-by-episode
basis until such time as the criteria for recognizing secondary market revenues are met.
The effect of the change on the income statement for the year ended March 31, 2001 was an increase in net income of approximately $5.4
million. The effect of the change on the balance sheet accounts at March 31, 2000 was to reduce investment in films and television programs
relating to advertising costs, the capitalization of production costs for episodic television series and media holdbacks by $19.9 million, $34.8
million and $6.4 million, respectively.
ACCOUNTING FOR INCOME TAXESIn December 1997, the CICA released Section 3465, "Income Taxes", to be applied by companies for fiscal years beginning on or after January
1, 2000. The standard requires recognition of future income tax assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns, and is similar, in many respects, to SFAS 109, "Accounting for Income Taxes"
under U.S. GAAP. Future income taxes are provided for using the liability method. The Company retroactively adopted Section 3465 effective
as of April 1, 2000, without restatement of prior years' financial statements. Prior to adopting the new standard, the Company used the deferral
method of accounting for income taxes. The application of Section 3465 resulted in increasing future income tax liabilities by $2.7 million as at
April 1, 2000 with an equivalent charge to accumulated deficit. The effect of the change on the income statement for the year ended March 31,
2001 was an increase in the tax recovery of $5.5 million due to the benefit recognized of previously unrecognized income tax assets, where
realization is judged "more-likely-than-not" in accordance with Section 3465 whereas previously realization had to be based on the concept of
"virtual certainty."
EARNINGS PER SHAREIn December 2000, the Canadian Institute of Chartered Accountants released revised Section 3500, "Earnings per share". The revised standard
requires the use of the treasury stock method for calculating diluted earnings per share, consistent with US GAAP. Previously, fully diluted
earnings per share were calculated using the imputed interest method. The Company adopted the new standard for its fiscal 2001 financial
statements. The revised
50
section did not impact previously reported losses per share, as there were no significant potentially dilutive common share equivalents
outstanding.
(d) REVENUE RECOGNITION
Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SoP 00-2.
Revenue from the theatrical release of motion pictures is recognized at the time of exhibition based on the Company's participation in box
office receipts. Revenue from the sale of videocassettes and digital video disks ("DVDs") in the retail market, net of an allowance for estimated
returns, is recognized on the later of shipment to the customer or "street date" (when it is available for sale by the customer). Under revenue
sharing arrangements, rental revenue is recognized when the Company is entitled to receipts. For multiple media rights contracts with a fee for
a single film or television program where the contract provides for media holdbacks, the fee is allocated to the various media based on
management's assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For
multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on management's assessment of the relative fair value of
each title.
Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast.
Rental revenue from short-term operating leases of studio facilities is recognized over the term of the lease.
The Company earns fees from management services provided to Canadian limited partnerships, whose purpose is to assist in the financing of
films produced in Canada, which are recognized as revenue when the financing is completed.
Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met.
(e) RESTRICTED CASH
Restricted cash represents an amount on deposit with a financial institution that is contractually designated for the repayment of a specific bank
loan.
(f) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid debt investments with original maturities of ninety days or less when purchased.
(g) INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs includes the unamortized costs of completed films and television programs which have been
produced by the Company or for which the Company has acquired distribution rights, an acquired library, films and television programs in
progress and projects in development. For films and television programs produced by the Company, these capitalized costs include all
production and financing costs, capitalized interest and overhead. For acquired films and television programs, these capitalized costs consist of
minimum guarantee payments to acquire the distribution rights.
Costs of acquiring and producing films and television programs are capitalized and amortized using the individual-film-forecast-computation
method, whereby capitalized costs are amortized and ultimate participation and residual costs are accrued in the proportion that current revenue
bears to management's estimate of ultimate revenue expected to be
51
recognized from the exploitation, exhibition or sale of the films or television programs. The acquired film library is being amortized over a
period of twenty years.
Investment in films and television programs is stated at the lower of amortized cost or estimated fair value on an individual film basis. The
valuation of investment in films and television programs is reviewed on a title-by-title basis, when an event or change in circumstances indicate
that the fair value of a film or television program is less than its unamortized cost. The fair value of the film or television program is
determined using management's future revenue estimates and a discounted cash flow approach. Additional amortization is recorded in the
amount by which the unamortized costs exceed the estimated fair value of the film or television program. Estimates of future revenue involve
measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may
be required as a consequence of changes in management's future revenue estimates. The potential effect of future changes in management's
future revenue estimates on net income has not been disclosed in these consolidated financial statements as the amount is not readily
determinable.
Films and television programs in development include costs of acquiring film rights to books, stage plays or original screenplays and costs to
adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in
development are written off at the earlier of the date determined not to be recoverable or when projects under development are abandoned, or
three years from the date of the initial investment.
(h) PRINTS, ADVERTISING AND MARKETING EXPENSES
The cost of film prints is included in investment in films and television programs and charged to expense on a straight-line basis over the period
of theatrical release.
The costs of advertising and marketing expenses are expensed the first time the advertising takes place. At March 31, 2002, $2.7 million of
capitalized advertising and marketing costs were included in other assets.
(i) INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
Investments in companies over which the Company can exercise significant influence are accounted for using the equity method. The
Company's investments subject to significant influence are periodically reviewed to determine whether there has been a loss in value that is
other than a temporary decline. Estimates of net future cash flows on an undiscounted basis are used to assess whether there is a loss in value.
(j) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated amortization. Amortization is provided for using the following rates and methods:
Buildings
Computer equipment and software
Automobiles
Furniture and equipment
Leasehold improvements
25 years straight-line
2-4 years straight-line and 30% declining balance
30% declining balance
10 years straight-line and 20%-30% declining balance
Over the lease term or the useful life, whichever is shorter
Equipment under capital lease is amortized using the above rates.
The Company periodically reviews and evaluates the recoverability of property and equipment. Where applicable, estimates of net future cash
flows, on an undiscounted basis,
52
are calculated based on future revenue estimates, if appropriate and where deemed necessary, a reduction in the carrying amount is recorded.
(k) GOODWILL
Goodwill is assessed for impairment at least annually or if an event occurs or circumstances change that more-likely-than-not reduce the fair
value of a reporting unit below its carrying value. The Company completed impairment tests required under CICA 3062 at April 1, 2001 and
under SFAS 142 at September 30, 2001 and determined that the recognition of impairment losses was not necessary, as described in note 6.
(l) PRE-OPERATING PERIOD COSTS
Pre-operating period costs related to the period before commencement of commercial operations of new businesses are deferred and amortized
on a straight-line basis over a period not to exceed five years commencing once the pre-operating period has ended.
(m) INCOME TAXES
The Company recognizes future income tax assets and liabilities for the expected future income tax consequences of transactions that have
been included in the financial statements or income tax returns. Future income taxes are provided for using the liability method. Under the
liability method, future income taxes are recognized for all significant temporary differences between the tax and financial statement bases of
assets and liabilities.
Future income tax assets, after deducting valuation allowances, are recognized to the extent that it is more-likely-than-not that they will be
realized in the foreseeable future. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates at the date
of substantive enactment.
(n) GOVERNMENT ASSISTANCE
The Company has access to several government programs that are designed to assist film and television production and distribution in Canada.
Federal and provincial refundable income tax credits earned with respect to production expenditures are included in revenue in accordance with
the Company's revenue recognition policy for completed films and television programs. Federal and provincial refundable income tax credits
are considered earned when the qualifying expenditures have been incurred provided that there is reasonable assurance that the credits will be
realized (see note 16).
Amounts received with respect to the acquisition of distribution rights are recorded as a reduction of investment in films and television
programs. Amounts received are repayable on a title-by-title basis once the title has achieved cash break-even to the extent of profit earned on
that title. There are no fixed repayment terms, no interest payments and no claims on any assets of the Company or for the recovery of the
amount invested, other than those that might be repayable out of future distribution revenue attached to the film rights. To the extent an
individual film does not perform to pre-agreed levels, no amounts are repayable by the Company.
Government assistance toward distribution and marketing expenses is recorded as a reduction of those expenses.
53
(o) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in currencies other than Canadian dollars are translated at exchange rates in effect at the balance
sheet date. Resulting translation gains and losses are included in the determination of earnings.
Foreign subsidiary assets and liabilities in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the balance
sheet date. Foreign subsidiary revenue and expense items are translated at the average rate of exchange for the year. Gains or losses arising on
the translation of the accounts of foreign subsidiaries are included in cumulative translation adjustments, a separate component of shareholders'
equity.
Effective April 1, 2000 the Company classified its U.S. operations as self-sustaining following a significant change in the economic status of
these operations, including a restructuring of certain operating entities and the ability to self-finance certain operations.
(p) DEBT FINANCING COSTS
Amounts incurred in connection with obtaining debt financing are deferred and amortized, as a component of interest expense, over the term to
maturity of the related debt obligation.
(q) RESEARCH AND DEVELOPMENT
Research and development expenses incurred relating to multimedia products and other interactive software are expensed until all of the
following criteria are met: the product is clearly defined and the costs attributable thereto can be identified; the technical feasibility of the
product as demonstrated by a working model has been established; a decision has been made to produce and market, or use, the product; the
future market for the product is clearly defined; and adequate resources exist, or are expected to be available, to complete the project. All
expenses incurred after technological feasibility is established are capitalized to investment in film and will be amortized against future
revenues generated from the sale of the resulting products; such capitalized amounts are not significant.
(r) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan, which is described in note
11(c). No compensation expense is recognized for this plan when stock or stock options are issued to employees of the Company, its
subsidiaries and equity investees. Consideration paid by employees on exercise of stock options or purchase of stock is credited to share
capital.
(s) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by
management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television programs.
Future results could differ from such estimates.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESOn April 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities", as amended in June 2000
by SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", where the provisions of SFAS 133 were
applicable under Canadian GAAP, which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and
measure such instruments at
54
fair value. The adoption of these standards did not have a material impact on the Company's consolidated financial statements.
(u) RECLASSIFICATIONS
Certain amounts presented in prior years have been reclassified to conform to the current year's presentation.
3. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
FILMS
Released, net of accumulated amortization
Completed and not released
Acquired library, net of accumulated amortization
In progress
In development
MARCH 31,
2002
March 31,
2001
$107,041
15,381
61,225
8,617
3,066
-------195,330
--------
$ 68,706
-63,265
30,690
4,972
-------167,633
--------
60,727
2,938
24,763
4,552
-------92,980
-------$288,310
========
24,343
-27,221
4,918
-------56,482
-------$224,115
========
TELEVISION PROGRAMS
Released, net of accumulated amortization
Completed and not released
In progress
In development
The Company earns revenue from certain productions that have been fully amortized and are not reflected on the balance sheet.
The Company expects approximately 48% of completed and released films and television programs, net of accumulated amortization will be
amortized during the one year period ending March 31, 2003, and approximately 55% of accrued participants' share will be paid during the one
year period ending March 31, 2003.
Additionally, the Company expects approximately 85% of completed and released films and television programs, net of accumulated
amortization will be amortized during the three year period ending March 31, 2005.
The remaining life of the acquired film library as at March 31, 2002 is 18.5 years.
Interest capitalized relating to productions during the year ended March 31, 2002 amounted to $4.6 million (2001 - $2.2 million; 2000 - $3.6
million).
4. INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
MANDALAY PICTURES, LLC ("MANDALAY")With the authority granted by the Board of Directors, prior to the close of the fourth quarter of fiscal 2002, management committed to a plan to
divest its ownership interest in Mandalay. Mandalay was written down to its estimated fair value at March 31, 2002 of $15.9 million taking into
account the expiration and non-renewal of Mandalay's international output agreements on December 31, 2001 and the pending expiration of its
production and distribution agreement with Paramount Pictures Corp. in fiscal 2003. Such estimated fair
55
value is supported by cash expected to be received from Mandalay in the next one or two fiscal periods. The resulting write-down of $17.0
million is included as a component of write-down and equity interest in investments subject to significant influence. The Company's investment
in Mandalay is comprised of a 45% common stock interest, and a 100% interest in preferred stock with a stated value of US$50.0 million.
Lions Gate recorded 100% of the operating losses of Mandalay to March 31, 2002, as it was the sole funder of Mandalay. The Company
received US$2.5 million (Cdn$4.0 million) on December 19, 2001, and US$2.9 million (Cdn$4.6 million) on March 19, 2002 from Mandalay,
which amounts were recorded as reductions in the Company's investment in Mandalay. Pre-operating costs, incurred in fiscal 1998 and fiscal
1999, were being amortized on a straight-line basis of $0.5 million per quarter, and amortization of $1.9 million to March 31, 2002 (2001 - $1.9
million) is also included in the write-down and equity interest in investments subject to significant influence.
Summarized financial information of Mandalay is as follows (all amounts in thousands of Canadian dollars):
ASSETS
Restricted cash
Cash and cash equivalents
Accounts receivable
Other receivables
Film inventory
Due from (to) affiliates
Other assets
LIABILITIES
Accounts payable and accrued expenses
Accrued participations and residuals
Production and bank loans
Contractual obligations
Deferred revenue
NET ASSETS
Revenue
Operating expenses
General and administration expenses
Net loss
YEAR ENDED
MARCH 31,
2002
$ 124,727
$(131,998)
$(6,294)
$(10,941)
56
MARCH 31,
2002
March 31,
2001
$ 21,757
7,719
25,850
-138,290
68
62
-------193,746
--------
$
6,983
22,108
75,613
10,914
49,973
-------165,591
-------$ 28,155
========
1,380
15,522
151,659
57,653
65,032
--------291,246
--------$ 47,345
=========
Year ended
March 31,
2001
$ 64,179
$(64,536)
$(8,677)
$(6,312)
33,336
25,399
45,879
24,000
209,849
(52)
180
--------338,591
---------
Year ended
March 31,
2000
$ 128,053
$(129,458)
$(6,128)
$(3,988)
Mandalay is considered a partnership for income tax purposes and contractually, Lions Gate is entitled to access the tax losses of Mandalay.
Accordingly, the tax effects attributable to the operating losses of Mandalay are included in the Company's tax provision.
Mandalay adopted, on a retroactive basis, SoP 00-2 effective as of April 1, 2000 on a basis consistent with the Company's adoption of
accounting changes as explained in note 2(c). The cumulative adjustment made to the net equity of Mandalay on April 1, 2000 was $5.5
million, net of the benefit of income tax losses attributable to the Company of $nil.
CINEMANOW, INC. ("CINEMANOW")During the quarter ended March 31, 2002, CinemaNow advised the Company of its inability to generate sufficient cash flows from operations
to sustain its operations over the next twelve months, without raising additional capital. Given the uncertain economic climate and
CinemaNow's recurring losses there can be no assurance that further financing will be forthcoming and as a result, the Company wrote down its
investment in CinemaNow to $nil. The write-off of the investment in CinemaNow of $21.0 million is disclosed in the statement of operations
as a component of write-down and equity interest in investments subject to significant influence. The Company's investment in CinemaNow is
comprised of a 90.1% common stock interest, representing 63% voting and economic interests after taking into account the voting rights held
by the holders of preferred shares. The investment in CinemaNow was accounted for using the equity method as the Company did not have the
ability to control the strategic operating, investing and financing decisions of CinemaNow as a consequence of the Company's inability to elect
the majority of the board of directors of CinemaNow.
Prior to the write-off, the Company's investment in CinemaNow consisted of its 63% share of the economic and voting interests, recorded at
the estimated fair value at the time of the Trimark acquisition of $23.6 million, net of the losses of CinemaNow incurred between October 13,
2000 and December 31, 2001. The difference between the net carrying amount of the assets and liabilities of CinemaNow at the date of
acquisition and the fair value of the investment had been allocated as follows:
Investment in films and television programs
Property and equipment
Goodwill
Other assets
57
$ 3,496
14,682
5,366
7
------$23,551
=======
5. PROPERTY AND EQUIPMENT
MARCH 31,
2002
Land held for leasing purposes
Buildings held for leasing purposes
Leasehold improvements
Furniture and equipment
Automobiles
Computer equipment and software
Equipment under capital leases
NET BOOK VALUE
ACCUMULATED
AMORTIZATION
$
-2,992
513
3,458
36
3,895
1,645
----------12,539
----------$
50,582
===========
COST
$ 14,500
24,033
1,527
6,369
49
10,031
6,612
--------$ 63,121
--------=========
March 31,
2001
Cost
$ 14,500
22,692
1,301
5,892
38
7,138
1,197
--------$ 52,758
--------=========
Accumulated
Amortization
$
-2,418
474
2,733
35
2,510
376
----------8,546
----------$
44,212
===========
6. GOODWILL
The net carrying value of goodwill recorded through acquisitions is $38.8 million as at March 31, 2002. Effective April 1, 2001, the Company
adopted CICA 3062, which is similar, in many respects, to SFAS 142. This asset will be assessed for impairment at least annually or upon an
adverse change in operations. Prior to the adoption of CICA 3062 the assets were amortized using the straight-line method over periods ranging
from five to twenty years. The following is the pro forma effect had the years ended March 31, 2001 and 2000 been subject to CICA 3062:
Reported net income (loss)
Amortization
Adjusted net income (loss)
Reported net income (loss)
per share
Amortization per share
Adjusted net income (loss)
per share
YEAR ENDED
MARCH 31, 2002
$ (73,562)
-----------
Year ended
March 31, 2001
$
8,728
2,708
----------
Year ended
March 31, 2000
$
(5,293)
2,473
----------
$ (73,562)
==========
$
11,436
==========
$
(2,820)
==========
$
(1.86)
$
0.00
----------
$
0.09
$
0.07
----------
$
(0.22)
$
0.08
----------
$
(1.86)
==========
$
0.16
==========
$
(0.14)
==========
7. JOINT VENTURES
EATON HOME ENTERTAINMENT, LLC ("EATON") On September 30, 1999 the Company acquired an additional 16.67% interest bringing its total ownership in Eaton at that date to 50%, and
resulting in Eaton becoming a jointly controlled company. Under the agreement the partner's cumulative share of earnings up to September 30,
1999 was paid out in cash. This amounted to $0.2 million and was paid directly from Eaton. Between September 30, 1999 and December 20,
2001 the Company accounted for its
58
investment in Eaton using the proportionate consolidation method. Prior to September 30, 1999, the Company held a 33.33% interest in Eaton
and accounted for the investment using the equity method.
On December 20, 2001 the Company acquired the remaining 50% interest in Eaton for total consideration of $0.2 million, and discontinued the
separate operations of Eaton. The Company recorded an unusual loss of $1.3 million relating to the non-continuing assets acquired in the
transaction.
STERLING HOME ENTERTAINMENT, LLC ("STERLING") On November 27, 2000, the Company acquired the remaining 50% interest in Sterling for total consideration of US$2.8 million (Cdn$4.2
million). The acquisition was accounted for as a purchase, with the incremental 50% of the results of the acquired company consolidated from
November 27, 2000 onwards. Goodwill arising on the acquisition amounted to $0.1 million. Prior to November 27, 2000 the Company had
accounted for its investment in Sterling using the proportionate consolidation method.
The Company's share of the assets, liabilities, revenues, expenses, net income and cash flows of the joint ventures has not been disclosed as the
amounts are not significant.
8. BANK LOANS
The Company has a US$175 million (Cdn $279.0 million) (2001 - US$175 million (Cdn $275.9 million)) U.S. dollar-denominated revolving
credit facility, a US$25 million (Cdn$39.4 million) (2001 - US$25 million (Cdn $39.4 million)) Canadian dollar-denominated revolving credit
facility, a $2.0 million (2001 - $2 million) operating line of credit and $5.0 million (2001 $4.5 million) in demand loans.
As at March 31, 2002, a total of US$139.9 million (Cdn$222.9 million) (2001
- US$97.4 million (Cdn $153.5 million)) was drawn on the revolving credit facilities. The revolving credit facilities expire on September 25,
2005. The U.S. dollar-denominated revolving credit facility bears interest at U.S. prime (4.75 % at March 31, 2002) plus 1.5% or LIBOR
(weighted average of 1.86 % at March 31, 2002) plus 2.5% and the Canadian dollar-denominated revolving credit facility bears interest at
Canadian prime (3.75% at March 31, 2002) plus 1.5% or Bankers Acceptances (weighted average of 2.12 % at March 31, 2002) plus 2.5%. The
availability of funds under the revolving credit facilities is limited by the borrowing base, which is calculated on a monthly basis. The
borrowing base assets at March 31, 2002 totaled US$152.1 million (Cdn$242.5 million) (2001 - US$ 120.1 million (Cdn $189.3 million)). The
Company is required to pay a monthly commitment fee of 0.375% on the total revolving credit facilities of US$200.0 million less the total
amount drawn. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is
being pledged as security for the revolving credit facilities. The revolving credit facilities restrict the Company from paying cash dividends on
its common shares.
The operating line of credit of a subsidiary expires on July 31, 2002 and bears interest at Canadian prime plus 1%. Management of the
subsidiary expects the facility to be extended. As at March 31, 2002, $1.2 million (2001 - $1.7 million) was drawn on the operating line of
credit. The carrying value of certain accounts receivable, investment in films and television programs and capital assets totaling $3.0 million at
March 31, 2002 (2001 - $5.8 million) is being pledged as security for the operating line of credit.
59
Demand loans in the amount of $1.1 million bear interest at Canadian prime, $0.3 million bear interest at Canadian prime plus 2% and $3.6
million bear interest at Canadian prime plus 4%. Certain accounts receivable, guarantees from shareholders of a subsidiary in the amount of
$1.6 million, a corporate guarantee provided by Lions Gate Entertainment Corp. in the amount of $0.5 million (2001 - $1.5 million), and
restricted cash in the amount of $1.1 million are provided as security for the demand loans.
The weighted average interest rate on bank loans at March 31, 2002 was 5.18% (2001 - 8.06%; 2000 - 9.02%).
9. PRODUCTION LOANS
Production loans consist of bank demand loans bearing interest at various rates between Canadian prime and 9.25%. Rights to certain films and
television programs, a floating charge on certain book debts, certain film rights, and certain tangible assets and an assignment of all expected
future revenue from exploitation of certain films and television programs have been provided as collateral. The carrying value of investment in
films and television programs relating to these motion pictures was $49.6 million at March 31, 2002 (2001 - $22.3 million). Federal and
provincial film tax credits receivable with a carrying value of $15.7 million at March 31, 2002 (2001 - $25.0 million), accounts receivable in
the amount of $2.1 million at March 31, 2002 (2001 - $nil), guarantees from SODEC (Societe de Developpement des Enterprises Culturelles),
and general security agreements are also provided as collateral for certain of the loans. Of the outstanding amount, US$11.1 million (Cdn$17.7
million) (2001 - US$2.9 million (Cdn$4.6 million)) is repayable in U.S. dollars.
The weighted average interest rate on production loans at March 31, 2002 was 5.37% (2001 - 8.18%; 2000 - 8.34%).
60
10. LONG-TERM DEBT
Obligations under capital leases, bearing interest at 8.47% to 20.69%,
due fiscal 2003, 2004 and 2005, with certain equipment provided as
collateral.
Loans bearing interest at 5.75% to Canadian prime plus 2%, due in
fiscal 2003 and 2005, with certain equipment provided as
collateral.
Promissory notes, bearing interest at 6.0%, due July 31, 2003. The
outstanding principal is convertible at the option of the holder
into common shares of the Company at $8.10 per share.
Loans bearing interest at Canadian prime plus 1.75%, due in 2003, and
2004, with guarantees from SDI (Societe de Developpement
Industriel de Quebec).
Loans bearing interest at 6.47% to 7.51%, due in fiscal 2004, 2005 and
2008, with property, building and equipment with carrying values
of approximately $36.0 million provided as collateral.
Loans bearing interest at Canadian prime plus 1%, repayable on demand
and due fiscal 2003 and fiscal 2005, with income tax credits
receivable up to $1.3 million provided as collateral.
Non-interest bearing convertible promissory note issued on the
acquisition of a subsidiary.
Non-interest bearing sales guarantees, repayable as US$19.8 million
(2001 US$16.2 million), due fiscal 2004 and 2005.
MARCH 31,
2002
$ 4,670
March 31,
2001
$
491
1,005
1,613
16,487
16,487
21
33
20,857
20,205
897
1,057
--
541
31,628
25,560
------$75,565
=======
------$65,987
=======
Non interest-bearing sales guarantees represent amounts due under production financing arrangements whereby the Company has contracted
with a third party and the third party has financed 100% of the production budgets for certain films, and in turn the Company retains the
worldwide distribution rights for a period of at least twenty-five years. The Company has guaranteed to repay minimum amounts at the dates
indicated. Under the terms of the arrangement, the third party is entitled to participate in future net revenue after deduction of certain specified
items including, without limitation, distribution fees payable to the Company and distribution expenses paid by the Company. A subsidiary of
the Company was out of compliance with one financial covenant under each of the $4.7 million obligations under capital leases and $0.9
million loans at March 31, 2002, for which waivers have been received.
11. CAPITAL STOCK
(a) SERIES A PREFERRED SHARES AND SHARE WARRANTS
On December 21, 1999, the Company issued 13,000 units at a price of US$2,550 per unit. Each unit consisted of one 5.25% convertible,
non-voting (except for the right to elect between one and three directors, depending on the number of preferred shares outstanding) redeemable
Series A preferred share and 425 detachable common share purchase warrants (for a total of 5,525,000 common share purchase warrants). The
proceeds received on the offering were allocated as follows: common share purchase warrants were valued at fair
61
value, using the Black-Scholes option pricing model, of US$0.706 per warrant or US$3.9 million (Cdn$5.7 million) (which have been included
in common stock in the consolidated statements of equity); conversion features were valued at fair value, using the Black-Scholes option
pricing model, of US$3.4 million (Cdn$4.9 million); and the basic preferred shares were valued at the residual value of US$25.9 million
(Cdn$37.5 million). The basic preferred shares and the conversion option are presented on a combined basis in the consolidated statements of
equity. The preferred shares are entitled to cumulative dividends, as and when declared by the Board, payable semi-annually on the last day of
March and September of each year. The Company may pay the dividends in cash or additional preferred shares. On September 30, 2001, the
Company declared and paid cash dividends of US$0.8 million or US$66.94 per share (Cdn$1.3 million or Cdn$103.10 per share). On March
31, 2002 the Company declared dividends of US$0.8 million or US$66.94 per share (Cdn$1.2 million or Cdn$106.72 per share) , which were
paid in cash and additional preferred shares. The Company issued 273 preferred shares with a value of US$0.7 million. The number of shares to
be issued was calculated by using the semi-annual dividend rate of 2.625% multiplied by the number of outstanding preferred shares at March
31, 2002, less applicable withholding taxes. The withholding taxes and fractional shares were paid in cash of US$0.1 million. The preferred
shares have a liquidation preference entitling each holder to receive an amount equal to US$2,550 per share plus the cumulative amount of all
dividends accrued and unpaid. Each holder of the preferred shares may convert all, but not less than all, of the preferred shares at any time into
common shares at a rate of 1,000 common shares for each preferred share, subject to certain anti-dilution adjustments. During the years ended
March 31, 2002, and 2000, 648 and 795 preferred shares were converted, respectively. On or after January 1, 2003, the Company may convert
the preferred shares, in whole or in part, to common shares on the same terms as the holders, subject to certain conditions.
The Company may redeem the preferred shares, in whole or part, on or after January 1, 2005 for a cash payment of 105% of the stated value of
US$2,550 per share plus accrued and unpaid dividends up to the date of redemption. A holder has a right to require redemption of all, but not
less than all, of the preferred shares, for a cash payment of 100% of the stated value of US$2,550 per share in the event that the composition of
the Board of Directors ceases to be in compliance with certain provisions relating to the nomination and election of up to three directors.
Management believes the occurrence of such an event is remote.
The difference between the initial carrying value of the preferred shares of US$25.9 million (Cdn$37.5 million) and the redemption price of
US$34.8 million (Cdn$50.5 million) is being accreted as a charge to accumulated deficit over the five-year period from the date of issuance to
the first available redemption date.
The Company's Series A preferred shares have been included in shareholders' equity as the terms of the instrument do not provide a probable
contractual obligation under which the Company would be required to transfer cash or other financial instruments to the holders under terms
that would be potentially unfavourable to the Company.
Each share purchase warrant entitles the holder to purchase one common share at a price of US$5.00. The warrants expire on January 1, 2004,
and are not transferable except with the consent of the Company.
(b) SERIES B PREFERRED SHARES
As a condition of the purchase of a subsidiary, on October 13, 2000, the Company issued ten shares at US$10 per share to the principal
shareholder of Trimark. The shares are nontransferable and are not entitled to dividends. The shares are nonvoting except that the holder, who
was a principal of the subsidiary acquired, has the right to elect himself to the
62
Board of Directors. The shares are redeemable by the Company if certain events occur. The shares have a liquidation preference equal to the
stated value of US$10 per share.
(c) STOCK-BASED COMPENSATION PLAN
The shareholders have approved an Employees' and Directors' Equity Incentive Plan (the "Plan") that provides for the issue of up to 8.0 million
common shares of the Company to eligible employees, directors and service providers of the Company and its affiliates. Of the 8.0 million
common shares allocated for issuance, up to a maximum of 250,000 common shares may be issued as discretionary bonuses in accordance with
the terms of a share bonus plan. As of March 31, 2002, no shares have been issued under the share bonus plan. The Board of Directors
approved an additional 1.4 million options to be issued outside of the Plan to a certain principal of a subsidiary upon acquisition of that
subsidiary. These shares were issued in fiscal 2001 and are included in the total number of share options granted and outstanding at March 31,
2002.
The Plan authorizes the granting of options to purchase shares of the Company's common stock at an option price at least equal to the weighted
average price of the shares for the five trading days prior to the grant. The options generally vest with the recipient within three years of grant,
and have a maximum term of five years.
On November 13, 2001 the Board of Directors of the Company resolved that 750,000 options, granted to certain officers of the Company, to
purchase shares of the Company's common stock be revised to entitle the holders to receive cash only and not common shares. The amount of
cash received will be equal to the amount that the twenty day average trading price prior to the exercise notice date exceeds the option price of
US$5.00 multiplied by the number of options exercised. These revised options are not considered part of the Plan.
Changes in share options granted and outstanding for fiscal 2000, 2001 and 2002 were as follows:
NUMBER OF
SHARES
3,412,790
1,157,500
(58,333)
(575,213)
(167,081)
--------3,769,663
5,887,334
(6,250)
(149,501)
(605,829)
--------8,895,417
1,000,498
(87,083)
(979,839)
(660,831)
--------8,168,162
=========
Outstanding at March 31, 1999
Granted
Exercised
Forfeited
Expired
Outstanding at March 31, 2000
Granted
Exercised
Forfeited
Expired
Outstanding at March 31, 2001
Granted
Exercised
Forfeited
Expired
Outstanding at March 31, 2002
63
WEIGHTED
AVERAGE
EXERCISE PRICE
$
5.51
5.81
4.09
6.64
5.39
---------5.46
4.35
2.30
4.69
5.08
---------4.82
4.36
2.41
7.28
5.22
---------$
4.50
==========
Outstanding and exercisable options at March 31, 2002 were as follows:
PRICE RANGE
$2.30
$4.00 to $5.50
$6.38
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
LIFE OF OUTSTANDING
OPTIONS
2.34 Years
2.80 Years
3.19 Years
---------2.81 Years
==========
OUTSTANDING
120,000
7,648,162
400,000
--------8,168,162
=========
EXERCISABLE
79,998
2,965,644
--------3,045,642
=========
12. ACQUISITIONS
TRIMARK HOLDINGS INC. (TRIMARK") On October 13, 2000, the Company acquired the shares of Trimark for total consideration of US$49.6 million (Cdn$75.1 million) consisting of
US$22.0 million (Cdn$33.3 million) cash, 10,229,837 common shares with a fair value of US$23.6 million (Cdn$35.7 million) and acquisition
costs of US$4.0 million (Cdn$6.1 million). At March 31, 2002 the remaining liabilities under the restructuring costs totaled $1.0 million. The
acquisition was accounted for as a purchase, with the results of operations of the acquired company consolidated from October 13, 2000
onwards. Goodwill arising on the acquisition amounted to US $8.5 million (Cdn$12.7 million). In fiscal 2002 the allocation of the fair value of
the consideration was amended resulting in a decrease in investment in films and television programs, an increase in goodwill and a decrease in
accounts payable and accrued liabilities of $5.4 million, $2.4 million and $3.3 million respectively.
Identifiable assets acquired:
Accounts receivable
Investment in films and television programs
Investment in CinemaNow
Property and equipment
Other assets
Liabilities assumed:
Bank loans
Accounts payable
Deferred revenue
Future income taxes
$ 31,115
81,696
23,551
400
1,383
-------138,145
-------57,127
57,127
19,999
613
1,170
-------78,909
--------
Net assets acquired:
Previously unrecognized income tax assets of
the Company
59,236
4,600
-------$ 63,836
--------
The supplemental unaudited consolidated statement of operations presented below illustrates the results of operations of the Company
assuming the acquisition of Trimark had occurred at the beginning of the period ended March 31, 2000:
64
March 31,
2001
Unaudited
$ 349,807
March 31,
2000
Unaudited
$ 407,960
214,187
55,462
54,288
10,060
--------333,997
--------15,810
---------
338,301
-49,656
7,388
--------395,345
--------12,615
---------
14,726
881
---------15,607
--------203
(2,190)
--------2,393
8,298
2,006
----------
7,229
1,308
1,698
--------10,235
--------2,380
866
--------1,514
5,894
-(159)
---------
NET LOSS
$ (7,911)
=========
$ (4,221)
=========
BASIC AND DILUTED LOSS PER COMMON SHARE
$
(0.37)
=========
$
(0.18)
=========
REVENUE
EXPENSES:
Direct operating
Distribution and marketing
General and administration
Amortization
Total expenses
OPERATING INCOME
OTHER EXPENSES:
Interest
Minority interests
Unusual losses
Total other expenses
INCOME BEFORE INCOME TAXES AND EQUITY
Income taxes
INCOME BEFORE EQUITY INTERESTS
Equity interest in Mandalay
Equity interest in CinemaNow
Other equity interests
13. GAIN
On July 10, 2001, a third party invested $14.0 million in a subsidiary of the Company to obtain a 35% interest. The gain on dilution of the
Company's investment was $3.4 million (net of income taxes of $nil) and resulted in a decrease of $0.2 million in goodwill.
14. INCOME TAXES
Income before income taxes and equity interests by tax jurisdiction is as follows:
Canada
United States
YEAR ENDED
MARCH 31, 2002
$ 15,681
(36,234)
--------$ (20,553)
=========
Year ended
March 31, 2001
$
5,356
9,913
--------$ 15,269
=========
65
Year ended
March 31, 2000
$
6,587
(4,145)
--------$
2,442
=========
The provision for (recovery of) income taxes is as follows:
Current
Future
Adjustments to opening future income tax
valuation allowances following change in
circumstances
YEAR ENDED
MARCH 31, 2002
$ 2,003
(1,500)
Year ended
March 31, 2001
$ 2,239
--
Year ended
March 31, 2000
$1,510
490
-------$
503
=======
(5,531)
------$(3,292)
=======
------$2,000
======
$ 2,003
-------2,003
-------
$ 1,412
-------1,412
-------
$1,510
490
-----2,000
------
-(1,500)
------(1,500)
------$
503
=======
827
(5,531)
------(4,704)
------$(3,292)
=======
-------------$2,000
======
CANADA
Current
Future
UNITED STATES
Current
Future
Total
The Company's provision for income tax expense differs from the provision computed at statutory rates as follows:
Income tax expense (recovery) computed at
Canadian combined federal and provincial
statutory rates
Foreign and provincial operations subject
to different income tax rates
Expenses not deductible for income tax
purposes
Write-off of investments subject to
significant influence
Tax benefits received from Mandalay
Increase (decrease) of valuation allowances
Minority interests
Other
YEAR ENDED
MARCH 31, 2002
$(31,686)
2,492
346
15,898
-3,495
753
(741)
-------$
503
========
66
Year ended
March 31, 2001
$ 6,928
(606)
1,217
-(6,041)
(5,531)
317
424
------$(3,292)
=======
Year ended
March 31, 2000
$
1,088
(64)
862
--13,441
(636)
584
166
-------$ 2,000
========
The Company has certain income tax loss carry-forwards, the benefits of which have not yet been recognized and an estimated evaluation
allowance has been provided for in the financial statements. These income tax loss carry-forwards amount to approximately $45.4 million for
Canadian income tax purposes, and US$38.1 million (Cdn$60.7 million) for U.S. income tax purposes. The expiration dates of these losses,
which are available to reduce future taxable income in each country, are as follows:
CANADA
Year ending March 31, 2003
2004
2005
2006
2007
2008
2009
2019
2020
2021
2022
$ 1,469
2,486
294
4,776
4,186
26,445
5,742
----
UNITED STATES
US$
$
-300
----7,900
11,600
1,500
16,831
------$38,131
=======
------$45,398
=======
Following are the components of the Company's future income tax assets at March 31:
CANADA
Assets
Net operating losses
Accounts payable
Other assets
Valuation allowance
MARCH 31,
2002
March 31,
2001
$ 16,495
304
281
(12,566)
-------4,514
$ 18,100
304
745
(15,353)
-------3,796
(3,046)
(1,468)
----------------
(1,719)
(2,077)
----------------
Liabilities
Investment in films and television programs
Property and equipment
Net Canada
67
UNITED STATES
Assets
Net operating losses
Accounts payable
Other assets
Investment in Mandalay
Valuation allowance
Liabilities
Investment in films and television programs
Investment in CinemaNow
Net United States
Total
$ 13,666
6,087
1,613
14,617
(23,643)
-------12,345
$
7,304
6,647
1,479
10,544
(6,441)
-------19,533
(2,497)
(9,100)
-------743
--------
(11,190)
(9,100)
-------(757)
--------
$
743
========
$
(757)
========
The Company has recorded a partial valuation allowance against its Canadian future tax assets based on the extent to which it is not
more-likely-than-not that sufficient taxable income will be realized during the carry-forward periods to utilize all the future tax assets. The
valuation allowances recorded against Canadian and United States future income tax assets decreased by $2.8 million and increased by $17.2
million, respectively, during fiscal 2002. Realization of the future tax benefit is based on the Company's ability to generate taxable income in
the applicable jurisdictions within a one year period. It is reasonably possible that changes in circumstances could occur in the future requiring
a significant adjustment to the amount of the valuation allowances against future income tax assets.
The amount of unrecognized future income tax liability for temporary differences related to the Company investments in United States
subsidiaries and its equity investee Mandalay, which are not expected to reverse in the foreseeable future, is $4.1 million (2001 - $4.0 million).
15. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is
calculated as follows:
YEAR ENDED
MARCH 31, 2002
Numerator:
Net income (loss) available to common
shareholders
Denominator:
Weighted average common shares outstanding
(number/'000s)
Basic and diluted income (loss) per common share
68
Year ended
March 31, 2001
Year ended
March 31, 2000
$(79,325)
========
$ 3,116
========
$ (6,611)
========
42,753
========
36,196
========
30,665
========
$ (1.86)
========
$
0.09
========
$ (0.22)
========
Options to purchase 8,168,162 common shares (2001 - 8,895,417 common shares, 2000 - 3,769,663 common shares) at an average price of
$4.50 (2001
- $4.82, 2000 - $5.46) and share purchase warrants to purchase 5,525,000 common shares (2001 - 5,525,000 common shares, 2000 - 5,525,000
common shares) at an exercise price of US$5.00 (2001 - US$5.00, 2000 - US$5.00) were outstanding during the year. 11,830 Series A
preferred share units which are each convertible into 1,000 common shares for no additional consideration were outstanding at March 31, 2002
(2001 - 12,205 units). Additionally, convertible promissory notes with a principal amount of $16.5 million were outstanding at March 31, 2002
(2001 - $16.5 million; 2000 - $16.5 million). These notes are convertible into common shares at a price of $8.10 per share. Under the "if
converted" method of calculating diluted earnings per share, the share purchase options, the share purchase warrants, the Series A preferred
shares and the convertible promissory notes were anti-dilutive in each of the years presented and were not reflected in diluted earnings per
share.
16. GOVERNMENT ASSISTANCE
Revenue includes tax credits earned totaling approximately $25.7 million (2001 - $18.2 million; 2000 - $24.0 million). Accounts receivable at
March 31, 2002 includes $37.4 million with respect to government assistance (2001
- $35.9 million).
Investment in films and television programs as at March 31, 2002 includes a reduction of $3.7 million with respect to government assistance
for acquisition of certain programs, which represents management's estimate of the future liability relating to government assistance, taking
into consideration future revenue estimates, net of repaid amounts. This government assistance is repayable in whole or in part based on profits
generated by certain individual film and television programs, and is forgivable in the event that the individual film and television programs do
ultimately not generate sufficient profits.
Distribution and marketing expenses include a reduction of $1.3 million (2001 - $1.0 million; 2000 - $0.6) with respect to government
assistance towards print and advertising expenses.
The Company is subject to routine inquiries and review by Regulatory authorities of its various incentive claims which have been received or
are receivable. Adjustments of claims, if any, as a result of such inquiries or reviews, will be recorded at the time of such determination.
17. SEGMENT INFORMATION
The Company has five reportable business segments: Motion Pictures; Television; Animation; Studio Facilities; and CineGate. The Company's
reportable business segments are strategic business units that offer different products and services, and are managed separately.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution rights,
North American theatrical, video and television distribution of feature films produced and acquired and worldwide licensing of distribution
rights to feature films produced and acquired.
Television consists of the development, production and worldwide distribution of television productions including television series, television
movies and mini-series and non-fiction programming.
Animation consists of the development, production and worldwide distribution of animated and live action television series, television movies
and feature films.
69
Studio Facilities consists of management of an eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned from
soundstages, office and other services such as furniture, telephones and lighting equipment to tenants that produce or support the production of
feature films, television series, movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project
and the tenant.
CineGate provides management services to Canadian limited partnerships, including accessing tax credits to finance production in Canada.
CineGate ceased operations in fiscal 2002 upon the recision of the tax shelter business by the Canadian government.
Segmented information by business is as follows:
Revenues
Motion Pictures
Television
Animation
Studio Facilities
CineGate
YEAR ENDED
MARCH 31, 2002
Year ended
March 31, 2001
Year ended
March 31, 2000
$251,346
110,696
55,552
6,642
2,346
-------$426,582
========
$173,941
71,452
29,658
5,532
1,643
-------$282,226
========
$146,910
81,758
35,620
6,963
--------$271,251
========
$103,287
101,072
43,259
2,717
--------$250,335
========
$ 73,621
58,954
21,222
2,623
--------$156,420
========
$119,435
74,249
26,739
2,452
--------$222,875
========
$118,025
948
389
---------$119,362
========
$ 51,512
264
----------$ 51,776
========
$-----------$=
$ 30,859
5,361
4,124
344
13,584
-------$ 54,272
========
$ 23,034
5,393
2,778
281
6,224
-------$ 37,710
========
$ 16,184
8,018
2,595
273
4,318
-------$ 31,388
========
Direct operating expenses
Motion Pictures
Television
Animation
Studio Facilities
CineGate
Distribution and marketing
expenses
Motion Pictures
Television
Animation
Studio Facilities
CineGate
General and administration expenses
Motion Pictures
Television
Animation
Studio Facilities
Corporate
70
Revenue by geographic location, based on the location of the customers, is as follows:
YEAR ENDED
MARCH 31, 2002
$ 79,701
282,675
64,206
-------$426,582
========
Canada
United States
Other foreign
Year ended
March 31, 2001
$ 57,223
177,287
47,716
-------$282,226
========
Year ended
March 31, 2000
$ 70,050
131,433
69,768
-------$271,251
========
Assets by geographic location are as follows:
Canada
United States
MARCH 31,
2002
$186,216
421,384
-------$607,600
========
March 31,
2001
$334,713
248,832
-------$583,545
========
18. COMMITMENTS AND CONTINGENCIES
(a) Future minimum annual commitments under contractual obligations and commercial commitments as of March 31, 2002 are as follows:
CONTRACTUAL
OBLIGATIONS:
Long-term debt
Operating leases
Employment contracts
Unconditional
purchase obligations
Distribution and
marketing
commitments
OTHER COMMERCIAL
COMMITMENTS:
Production guarantee
Corporate guarantee
2003
2004
2005
2006
$ 4,025
4,481
6,284
$66,233
3,864
3,611
$1,526
3,365
--
$2,052
2,411
--
26,805
5,117
--
--
7,793
------49,388
-------78,825
------4,891
159
500
------$50,047
=======
--------$78,825
=======
-------$4,891
======
2007
$
-1,780
--
Thereafter
$
1,729
2,549
--
$ 75,565
18,450
9,895
--
--
31,922
------4,463
------1,780
--------4,278
7,793
-------143,625
-------$4,463
======
-------$1,780
======
---------$ 4,278
========
159
500
-------$144,284
========
Unconditional purchase obligations relate to the purchase of film rights for future delivery and advances to producers.
71
Total
Production guarantees relate to guarantees for bank loans used to finance production costs of unrelated production companies, which have been
provided by a subsidiary of the Company in the normal course of business.
Corporate guarantee relates to a guarantee the Company has provided for a demand loan to a subsidiary up to $500,000.
(b) The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business.
The Company does not believe that adverse decisions in any pending or threatened proceedings, or any amount which the Company might be
required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
(c) The Company incurred rental expense of $4.1 million during the year ended March 31, 2002 (2001- $3.0 million, 2000 - $1.9 million).
(d) The Company subleases two locations, which expire on January 31, 2003 and November 30, 2003. Sublease revenue of $1.4 million is
expected to be earned in fiscal 2003 and $0.4 million is expected to be earned in fiscal 2004.
19. FINANCIAL INSTRUMENTS
(a) CREDIT RISK
Accounts receivable includes amounts receivable from Canadian governmental agencies in connection with government assistance for
productions as well as amounts due from customers. Amounts receivable from governmental agencies amounted to 20.0 % of total accounts
receivable at March 31, 2002 (2001 - 19.0%). Concentration of credit risk with the Company's customers is limited due to the Company's
customer base and the diversity of its sales throughout the world. The Company performs ongoing credit evaluations and maintains a provision
for potential credit losses. The Company generally does not require collateral for its trade accounts receivable.
(b) FORWARD CONTRACTS
The Company has entered into foreign exchange contracts to hedge future production expenses denominated in Canadian, Australian and New
Zealand dollars. Gains and losses on the foreign exchange contracts are capitalized and recorded as production costs when the gains and losses
are realized. As at March 31, 2002, the Company had contracts to sell US$10.1 million in exchange for Cdn$16.3 million over a period of nine
months at a weighted average exchange rate of Cdn$1.5952. During the year, the Company completed foreign exchange contracts denominated
in Australian and New Zealand dollars. The net loss resulting from the completed contracts amounted to $nil. These contracts are entered into
with a major financial institution as counterparty. The Company is exposed to credit loss in the event of nonperformance by the counterparty,
which is limited to the cost of replacing the contracts, at current market rates. The Company does not require collateral or other security to
support these contracts. Unrecognized gains as at March 31, 2002 amounted to Cdn$0.5 million.
20. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
(a) Common shares issued in fiscal 2001 in conjunction with a business combination in the amount of $35.0 million are on a non-cash basis and
are, therefore, excluded from the consolidated statement of cash flows.
(b) Interest paid during the year ended March 31, 2002 amounted to $18.8 million (2001 - $10.4 million; 2000 - $7.0 million).
72
(c) Income taxes paid during the year ended March 31, 2002 amounted to $1.4 million (2001 - $2.5 million; 2000 - $0.5 million).
21. RECONCILIATION TO UNITED STATES GAAP
The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences
between the accounting policies used by the Company under Canadian GAAP and U.S. GAAP are disclosed below in accordance with the
provisions of the Securities and Exchange Commission.
Under U.S. GAAP, the net loss and loss per share figures for the years ended March 31, 2002, 2001 and 2000, and the shareholders' equity as at
March 31, 2002 and 2001 are as follows:
73
AS REPORTED UNDER CANADIAN
GAAP
Equity interest in loss of
Mandalay (a)
Adjustment for capitalized
pre-operating costs (b)
Restructuring costs (c)
Accounting for income taxes(d)
Presentation of Series A
preferred Shares outside
shareholders equity (e)
NET INCOME (LOSS) BEFORE
ACCOUNTING CHANGE/
SHAREHOLDERS' EQUITY
UNDER U.S. GAAP
Cumulative effect of
accounting changes, net
of income taxes (f)
NET LOSS/SHAREHOLDERS' EQUITY
UNDER U.S. GAAP
Adjustment to cumulative
translation adjustments
account (net of tax of
$nil) (g)
Other comprehensive loss (net
of tax of $nil)(g)
COMPREHENSIVE LOSS
ATTRIBUTABLE TO COMMON
SHAREHOLDERS UNDER U.S.
GAAP
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE
UNDER U.S. GAAP BEFORE
ACCOUNTING CHANGE
BASIC AND DILUTED LOSS PER
COMMON SHARE UNDER U.S.
GAAP
NET INCOME (LOSS)
---------------------------------------YEAR ENDED
YEAR ENDED
YEAR ENDED
MARCH 31,
MARCH 31,
MARCH 31,
2002
2001
2000
$(73,562)
$
1,150
580
-----------
---------
March 31,
2001
$ 120,194
$ 196,789
$(5,293)
1,150
1,907
(3,419)
(4,569)
962
---
(2,675)
(1,733)
2,754
(3,255)
(1,733)
2,754
--------
(40,387)
---------
(38,986)
---------
---------
8,725
(58,942)
--------
(71,832)
MARCH 31,
2002
8,728
580
(1,733)
--
(71,832)
SHAREHOLDERS' EQUITY
--------------------
(2,424)
--------
74,734
151,000
----------
----------
74,734
151,000
--
--
(50,217)
(2,424)
(1,879)
8,722
(2,981)
(405)
--------
---------
--------
(405)
---------
----------
$(74,116)
========
$(41,495)
========
$(5,405)
=======
$ 74,329
=========
$ 151,000
=========
$
$
$ (0.11)
(1.78)
$ (1.78)
========
0.13
$ (1.50)
========
74
$ (0.11)
=======
Reconciliation of movement in Shareholders' Equity under U.S. GAAP:
BALANCE AT BEGINNING OF THE YEAR
Increase in capital stock
Dividends paid on preferred shares
Accretion on preferred shares (e)
Net loss under U.S. GAAP
Adjustment to cumulative translation adjustments
account
Other comprehensive loss
BALANCE - END OF THE YEAR
MARCH 31,
2002
$ 151,000
1,857
(2,492)
(1,920)
(71,832)
March 31,
2001
$ 158,974
37,573
(2,497)
(1,555)
(50,217)
March 31,
2000
$ 154,361
11,055
(591)
(446)
(2,424)
(1,879)
(405)
--------$ 74,329
=========
8,722
---------$ 151,000
=========
(2,981)
---------$ 158,974
=========
(a) EQUITY INTEREST IN LOSS OF MANDALAY
The Company accounts for Mandalay using the equity method. As described in note 4, under Canadian GAAP, pre-operating costs incurred by
Mandalay were deferred and were amortized to income to December 31, 2001. Under U.S. GAAP, all start-up costs are required to be expensed
as incurred. The amounts are presented net of income taxes of $0.8 million (2001 - $0.8 million; 2000 - $nil).
(b) ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS
Under Canadian GAAP, the Company deferred certain pre-operating costs related to the launch of the television one-hour series business
amounting to $4.8 million. This amount is being amortized over five years commencing in the year ended March 31, 2000. Under U.S. GAAP,
all start-up costs are to be expensed as incurred. The amounts are presented net of income taxes of $0.4 million (2001 - $0.4 million; 2000 $nil).
(c) ACCOUNTING FOR BUSINESS COMBINATIONS
Under Canadian GAAP prior to January 1, 2001, costs related to activities or employees of an acquiring company were considered in the
purchase price allocation. In fiscal 2001, the Company included $2.1 million of such costs in the purchase price for a subsidiary. Under U.S.
GAAP, costs related to the acquiring Company must be expensed as incurred. The amount is presented net of income taxes of $0.4 million.
(d) ACCOUNTING FOR INCOME TAXES
Under Canadian GAAP commencing in the year ended March 31, 2001, the Company used the asset and liability method to recognize future
income taxes which is consistent with the U.S. GAAP method required under SFAS 109 except that Canadian GAAP requires use of the
substantively enacted tax rates and legislation, whereas U.S. GAAP only permits use of enacted tax rates and legislation. For the year ended
March 31, 2000, the Company used the deferral method for accounting for deferred income taxes, which differs from the requirements of SFAS
109. The use of substantively enacted tax rates under Canadian GAAP to measure future income tax assets and liabilities resulted in an increase
in Canadian net future income tax assets (before valuation allowances) by $0.3 million (2001 - $2.3 million), with a corresponding increase in
valuation allowances by $0.3 million (2001
- $2.3 million).
75
SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising in a
business combination. In the year ended March 31, 2000, under U.S. GAAP, goodwill was increased to reflect the additional deferred tax
liability resulting from temporary differences arising on the acquisition of Lions Gate Studios in fiscal 1999. Under Canadian GAAP, the
Company did not restate income taxes for years prior to March 31, 2001, accordingly, there is a difference in the carrying amount of goodwill
arising in the business combination of $2.8 million as at March 31, 2002 (March 31, 2001 - $2.8 million).
(e) ACCRETION ON PREFERRED SHARES
Under Canadian GAAP, the Company's preferred shares have been included in shareholders' equity as the Company considers the likelihood of
redemption by the holders to be remote. Under U.S. GAAP, the preferred shares would be presented outside of shareholders equity.
As explained in note 11(b), under Canadian GAAP, the fair value of the basic preferred shares was determined using the residual value method
after determining the fair value of the common share purchase warrants and the preferred share conversion feature. Under U.S. GAAP, the
carrying amount of the preferred shares at the date of the offering of $40.0 million is the residual value arrived at by taking the $48.0 million
proceeds less the fair value of the share purchase warrants of $5.7 million less share issue costs of $2.4 million.
Under Canadian GAAP, the difference between the carrying amount and the redemption value of $50.5 million is being accreted as a charge to
accumulated deficit on a straight-line basis over five years whereas, under U.S. GAAP, the difference is being accreted using the effective
interest method over five years.
(f) ACCOUNTING CHANGES
In the year ended March 31, 2001, the Company elected early adoption of SoP 00-2. Under Canadian GAAP, the one-time after-tax adjustment
for the initial adoption of SoP 00-2 was made to opening accumulated deficit. Under SoP 00-2, the cumulative effect of changes in accounting
principles caused by adopting the provisions of SoP 00-2 should be included in the determination of net earnings for GAAP purposes. The
cumulative effect of the adjustment comprises $58.9 million net of income taxes of $2.2 million for the Company and its subsidiaries as well as
$5.5 million, net of income taxes of $nil for the Company's equity investee Mandalay.
(g) COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders' equity that, under U.S. GAAP are excluded
from the determination of net income or loss. Adjustment to cumulative translation adjustments comprises foreign currency translation gains
and losses. Other comprehensive loss comprises unrealized losses on investments available for sale based on the market price of the shares at
March 31, 2002 net of income taxes of $nil (2001 - $nil).
(h) ACCOUNTING FOR TAX CREDITS
Under Canadian GAAP, federal and provincial tax credits earned with respect to production costs may be included in revenue. Accounting
Principles Board Opinion No. 4, "Accounting for the Investment Credit," requires tax credits to be presented as reduction of income tax
expense. The corresponding impact would be a reduction of revenue and credit to income tax expense of $25.7 million (2001 - $18.2 million;
2000 - $24.0 million).
76
(i) ACCOUNTING FOR STOCK BASED COMPENSATION
Under U.S. GAAP the Company has elected to use the intrinsic value method in accounting for stock based compensation. In accordance with
SFAS No. 123 accounting for stock based compensation the following disclosures are provided about the costs of stock based compensation
awards using the fair value method.
The weighted average estimated fair value of each stock option granted in the year ended March 31, 2002 was $1.36 (2001 - $1.64; 2000 $1.76). On December 14, 1998 the Company modified the terms of 2,676,414 options outstanding on that date, reducing the exercise price
from $8.10 to $5.25, with the effect that it effectively issued new options with an exercise price of $5.25. The vesting period and remaining
contractual term were unchanged. For proforma purposes, the Company has recognized additional compensation cost for the excess of the fair
value of the modified options issued over the value of the original options at the date of the exchange measured using the Black-Scholes option
pricing model, with the following assumptions: $4.75 market common share price, $5.25 exercise price, 6.0% risk-free interest rate, 35%
volatility, and a 0% dividend yield. The total excess fair value of the stock options affected was estimated to be $1.4 million and is being
recognized over the remaining vesting period of the options. The total stock compensation expense in the year ended March 31, 2002 would be
$3.9 million (2001 - $5.4 million; 2000 - $4.0 million).
For disclosure purposes fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for stock options granted: a dividend yield of 0%, expected volatility of 50% (2001 - 50%; 2000 - $35%),
risk-free interest rate of 2.0% (2001 - 5.5%; 2000 - 6.0%) and expected life of five years.
The resulting pro forma U.S. GAAP loss and loss per share for the year ended March 31, 2002 before the effect of adoption of new accounting
pronouncements was $75.8 million and $1.88 respectively (2001 - net income of $3.3 million and loss per share of $0.02; 2000 - loss and loss
per share $6.4 million and $0.24 respectively).
The resulting pro forma U.S. GAAP net loss and loss per share for the year ended March 31, 2002 was $75.8 million and $1.88 respectively
(2001 - loss and loss per share of $55.6 million and $1.54 respectively; 2000 - loss and loss per share $6.4 million and $0.24 respectively).
77
(j) INCOME (LOSS) PER SHARE
Basic income (loss) per share under U.S. GAAP is calculated as follows:
YEAR ENDED
MARCH 31,
2002
Numerator:
Net income (loss) (before accounting change
in 2001)
Less:
Series A preferred share dividends
Accretion on Series A preferred shares
Income (loss) available to common shareholders
Denominator:
Weighted average common shares outstanding
(number/'000s)
Basic and diluted income (loss) per share
Year ended
March 31,
2001
Year ended
March 31,
2000
$(71,832)
$
8,725
$ (2,424)
(2,492)
(1,920)
-------$(76,244)
========
(2,497)
(1,555)
-------$ 4,673
========
(591)
(1,008)
-------$ (4,023)
========
42,753
========
$ (1.78)
========
36,196
========
$
0.13
========
30,665
========
$ (0.11)
========
(k) PROPORTIONATE CONSOLIDATION
The accounts of all jointly controlled companies are proportionately consolidated according to the Company's ownership interest. Under U.S.
GAAP, proportionate consolidation is not permitted for jointly controlled companies and the cost, equity or full consolidation methods of
accounting must be followed, as appropriate. As permitted by the United States Securities and Exchange Commission, the effect of this
difference in accounting principles is not reflected above.
(l) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company's cash flow statement prepared in accordance with Canadian GAAP complies with U.S. GAAP.
(m) CONSOLIDATED FINANCIAL STATEMENTS
Under Canadian GAAP, the Company consolidates the financial statements of CineGroupe Corporation ("CineGroupe"). On July 10, 2001, as a
condition of a $14.0 million equity financing with a third party, CineGroupe's Shareholders' Agreement was amended to allow for certain
participatory super-majority rights to be granted to the shareholders. Therefore, under U.S. GAAP, the Company is now precluded from
consolidating CineGroupe and will account for CineGroupe, commencing April 1, 2001, using the equity method.
The impact of accounting for CineGroupe using the equity method under U.S. GAAP, would be a reduction in fiscal 2002 revenue to $371.0
million, direct operating expenses to $207.0 million, distribution and marketing costs to $119.0 million and general and administration
expenses to $50.2 million. The impact of using the equity method under U.S. GAAP on the consolidated balance sheet at March 31, 2002
would be a reduction in total assets to $536.3 million and a reduction in debt (including bank loans, production and distribution loans, and
long-term debt) to $300.7 million.
78
22. RECENT PRONOUNCEMENTS
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETSIn August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS 144 will be effective for financial statements issued for fiscal years beginning after December 15, 2001. SFAS 144 supersedes
SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", however, it retains the
fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and
used". In addition, SFAS 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that long-lived
assets to be disposed of other than by sale to be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to
classify an asset as "held for sale". The new standard is not expected to have any affect on the Company.
STOCK-BASED COMPENSATIONIn January 2002, the CICA released Section 3870, "Stock-Based Compensation and Other Stock-Based Payments", to be applied by companies
for fiscal years beginning on or after January 1, 2002 and applied to awards granted on or after the date of adoption. Section 3870 establishes
standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for
goods and services, and is similar, in many respects to APB 25. The new standard is not expected to have any affect on the Company.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below (all amounts in thousands of Canadian dollars, except per share amounts):
2002
Revenues
Direct operating costs
Income (loss) before write-down and equity
interest in investments subject to significant
influence
Net income (loss)
Basic and diluted loss per share
FIRST
QUARTER
SECOND
QUARTER
THIRD
QUARTER
FOURTH
QUARTER
$ 69,549
$ 38,262
$ 92,309
$ 49,759
$ 111,062
$ 63,988
$ 153,662
$ 98,326
$
$
$
$
$
$
$
$
$
$ (19,292)
$ (68,272)
$
(1.63)
1,515
(517)
(0.05)
79
525
220
(0.03)
(3,804)
(4,993)
(0.15)
Report of Independent Auditors
The Members
Mandalay Pictures, LLC
We have audited the balance sheet of Mandalay Pictures, LLC as of March 31, 2002, and the related statements of operations, changes in
members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Mandalay Pictures, LLC for
the year ended March 31, 2001 were audited by other auditors, whose report dated June 22, 2001, expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the change in the Company's method of film accounting discussed in Note 1 to
these financial statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Mandalay Pictures, LLC at March 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that Mandalay Pictures, LLC will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring operating losses and requires additional financing in order to
produce future films. Additionally, the Company has not successfully negotiated distribution arrangements for future films. These matters raise
substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
Los Angeles, California
May 17, 2002
80
Mandalay Pictures, LLC
Consolidated Balance Sheets
(All amounts in US dollars)
2002
----
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable
Other receivables
Film inventory
Due from (to) affiliates
Other assets
Total assets
MARCH 31
2001
----
$
4,841,984
13,647,669
16,214,580
-86,746,444
42,592
38,621
------------$ 121,531,890
=============
$
16,113,095
21,147,617
29,105,253
15,225,000
133,127,349
(32,806)
113,815
------------$ 214,799,323
=============
$
4,380,559
13,867,670
-47,430,000
6,846,491
31,347,078
------------103,871,798
$
44,639,000
(26,978,908)
------------17,660,092
------------$ 121,531,890
=============
50,001,000
(19,966,873)
------------30,034,127
------------$ 214,799,323
=============
LIABILITIES
Accounts payable and accrued expenses
Accrued participations and residuals
Bank loan
Production loans
Contractual obligations
Deferred revenue
Total liabilities
875,163
9,847,001
3,085,380
93,126,648
36,574,600
41,256,404
------------184,765,196
Commitments and contingencies
Members' equity:
Contributions from members
Accumulated deficit
Total members' equity
Total liabilities and members' equity
See accompanying notes.
81
Mandalay Pictures, LLC
Consolidated Statements of Operations
(All amounts in US dollars)
YEAR ENDED MARCH 31
2002
2001
------$ 79,672,559
$ 42,671,932
Revenues
Operating expenses:
Amortization of film costs
Write-off of abandoned film projects
General and administration
Depreciation
Loss from operations
Other income (expense):
Interest income
Interest expense
Gain on contractual settlement
Loss before provision for income taxes and cumulative change in
accounting principle
Provision for income taxes
Loss before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle
Net loss
See accompanying notes.
82
(79,944,752)
(4,371,778)
(4,020,597)
(39,315)
-----------(88,376,442)
-----------(8,703,883)
(42,448,780)
(341,090)
(5,769,015)
(92,262)
-----------(48,651,147)
-----------(5,979,215)
1,197,223
(524,227)
1,042,515
-----------1,715,511
------------
1,972,026
(191,000)
------------1,781,026
------------
(6,988,372)
(4,198,189)
(23,663)
-----------(7,012,035)
------------$ (7,012,035)
============
(22,318)
-----------(4,220,507)
(3,784,000)
-----------$ (8,004,507)
============
Mandalay Pictures, LLC
Consolidated Statements of Changes in Members' Equity
(All amounts in US dollars)
Balance at March 31, 2000
Net loss
Balance at March 31, 2001
Return of capital
Net loss
Balance at March 31, 2002
Tigerstripes,
LLC
--$
550
----------550
-----------$
550
==========
See accompanying notes.
83
LG Pictures,
Inc.
---$ 38,038,084
(8,004,507)
-----------30,033,577
(5,362,000)
(7,012,035)
-----------$ 17,659,542
============
Total
----$ 38,038,634
(8,004,507)
-----------30,034,127
(5,362,000)
(7,012,035)
-----------$ 17,660,092
============
Mandalay Pictures, LLC
Consolidated Statements of Cash Flows
(All amounts in US dollars)
YEAR ENDED MARCH 31
2002
2001
-------
OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of a change in accounting principle
Gain on contractual settlement
Depreciation
Write-off of abandoned film projects
Amortization of film costs
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable
Other receivables
Film inventory
Due to/from affiliates, net
Other assets
Accounts payable and accrued expenses
Accrued participations and residuals
Contractual obligations
Deferred revenue
Net cash provided by (used in) operating activities
$ (7,012,035)
$
-(1,042,515)
39,315
4,371,778
79,944,752
(8,004,507)
3,784,000
-92,262
341,090
42,448,780
7,499,948
12,480,450
-(86,040,522)
(75,398)
35,879
426,778
13,840,676
596,491
(211,894)
-----------31,865,738
-----------24,853,703
10,865,134
(25,542,114)
(11,400,966)
(129,299,198)
276,986
320,321
(6,630,295)
6,647,001
20,402,652
36,150,110
------------(51,544,237)
------------(59,548,744)
53,465
(85,176,648)
39,480,000
13,295,708
(5,362,000)
1,584,661
-----------(36,124,814)
-----------(11,271,111)
284,196
(21,614,163)
84,183,584
(433,352)
--------------62,420,265
------------2,871,521
16,113,095
-----------$ 4,841,984
============
13,241,574
------------$ 16,113,095
=============
$
$
$
$
FINANCING ACTIVITIES
Proceeds (repayments) from bank loan, net
Repayments on production loans
Proceeds from production loans
Proceeds from other financing arrangements
Return of members' capital contributions
Proceeds from contractual settlement
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid
Income taxes paid
See accompanying notes.
84
2,095,347
23,663
5,926,277
22,318
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND BASIS OF PRESENTATION
Mandalay Pictures, LLC (the Company) was incorporated on March 1, 1998 as a Delaware limited liability company. The Company develops,
finances, produces and distributes major motion pictures.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to produce and distribute films. As of March 31, 2002, the Company has
arranged financing and distribution for two films that are currently in production. However, the Company has incurred recurring operating
losses, and has not arranged financing for production of any future films. In addition, although distribution arrangements are in place for films
currently in production, the Company's current distribution arrangements have been terminated or have expired and the Company has not
successfully negotiated other distribution arrangements for future films. If the Company cannot produce future films, the Company will not be
able to continue as a going concern.
Management is actively pursuing other film financing and distribution options. However, there can be no assurance that the Company will be
successful in its efforts to identify additional financing or distribution arrangements on terms acceptable to the Company. The financial
statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of
liabilities that might result from the outcome of the Company's inability to produce future films.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2000, the American Institute of Certified Public Accountants issued Statement of Position 00-2, "Accounting by Producers or
Distributors of Films" (the SOP). The SOP established new accounting standards for producers and distributors of films, including changes in
revenue recognition concepts and accounting for exploitation, development. The SOP requires that advertising costs be expensed in accordance
with SOP 93-7, "Reporting on Advertising Costs," while all other exploitation costs are to be expensed as incurred. In addition, the SOP
provided that development costs for abandoned projects and indirect overhead costs are to be charged to expense instead of being capitalized to
film costs.
The Company adopted the SOP effective April 1, 2000 and recorded a charge for the initial adoption of $3,784,000, which has been reflected
as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of operations. Also as a result of the
adoption, the Company recognized approximately $18,748,000 of revenue in fiscal year 2001, which was recognized in prior years. The effect
on net loss of recognizing these revenues was not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those
estimates.
85
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 2002, the Company entered into an agreement to settle various amounts owed between the Company and
third-party investors in certain films produced by the Company. As a result, contractual obligations of $16,767,000 were offset against film
costs of $16,002,000, other receivables of $723,000 and accounts payable of $42,000. In addition, accrued participation of $4,286,000,
contractual obligations of $3,000,000 and film costs of $2,759,000 were offset against other receivables of $10,045,000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original maturity of three months or less and investments in money market
funds to be cash equivalents. At times, cash balances held at financial institutions are in excess of the Federal Deposit Insurance Corporation's
limits.
RESTRICTED CASH
Restricted cash represents amounts on deposit with financial institutions as collateral for certain distribution agreements and for the payment of
interest and bank fees associated with loans made for the production of certain films. At March 31, 2002 and 2001, the amount of restricted
cash on deposit was $13,647,669 and $21,147,617, respectively. These deposits require third party approvals prior to the disbursement of any
funds. Any unused funds will be returned to the Company upon repayment of the underlying loan.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses, bank and production
loans, contractual obligations, accrued participations and residuals, and amounts due from affiliates as reflected in the financial statements
approximate their carrying value at March 31, 2002 and 2001, respectively.
FILM COSTS
FILM INVENTORY
Film inventory represents the unamortized cost of films which have been developed and produced by the Company or for which the Company
has acquired distribution rights. Such costs include all production costs, including an allocation of direct overhead and financing costs. Included
in film inventory costs are development costs representing expenditures directly attributable to projects which are incurred prior to their
production. Such inventory items are capitalized and, upon commencement of production, are charged to the production. Development costs
not charged to a production are written off when the project is abandoned or when more than three years has passed from the first expenditure.
86
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM COSTS (CONTINUED)
FILM INVENTORY (CONTINUED)
Film inventory is stated at the lower of cost, net of amortization, or fair value. Film inventory costs are amortized against revenues generated by
the delivery and subsequent exploitation of the film. Amortization is determined using the individual film forecast method, whereby costs
accumulated in the development and production of a film are amortized in the proportion that current gross revenues bear to management's
estimate of the total gross revenues expected to be received from all sources within ten years of release. Where applicable, unamortized
inventory is written down to fair value using a discounted cash flow model based on this appraisal.
Participations and Residuals
Estimated liabilities for participations and residuals are amortized in the same manner as film inventory costs.
Based on management's estimates, approximately $6,934,000 of the balance of accrued participations and residuals at March 31, 2002 will be
paid during the year ending March 31, 2003.
REVENUE RECOGNITION
Revenue is recognized in accordance with the provisions of the SOP. The Company licenses certain film rights through international
distribution agreements that provide for the payment of minimum guaranteed license fees (MGs), usually payable on delivery of the respective
completed film, that are subject to further increase based on the actual distribution results in the respective territory. MGs related to contracts
which contain holdback provisions, precluding the distributor from exploiting secondary markets until certain time periods have lapsed, are
allocated across those markets and recognized as revenue when each holdback provision expires and the film is available for exploitation by the
distributor.
Revenue allocated to the primary market, usually the theatrical market, is recognized as revenue on the date the completed film is available for
exploitation in the related territory and certain other conditions of sale have been met pursuant to criteria specified by the SOP.
In March 1998, the Company entered into a financing and distribution agreement (the Paramount Agreement) with Paramount Pictures
Corporation (Paramount) that gave Paramount the option to acquire the distribution rights in all territories other than those covered by the
various international distribution agreements. Any amounts received from Paramount at the commencement of the license period are treated as
MGs with revenue being recognized in a manner similar to the international distribution agreements discussed above. See Note 6.
DEFERRED REVENUE
Deferred revenue represents MGs received from distributors for which holdback provisions have not yet lapsed, thus precluding the distributor
from exploiting the film in markets covered by the holdback provisions. Revenue is recognized by the Company when the holdback has lapsed
and the film is available for exploitation by the distributor.
87
INCOME TAXES
For federal income tax purposes, profits and losses are passed through to the members. Accordingly, no provision has been made in these
financial statements for federal income taxes. For the years ended March 31, 2002 and 2001, the Company recorded a provision related to
California limited liability company taxes of $23,663 and $22,318, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 requires companies to record derivatives on their balance sheets as
assets or liabilities, measured at fair value. Under FAS 133, gains or losses resulting from changes in the values of derivatives are to be
reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The Company adopted FAS 133 on April 1, 2001. The impact on the financial statements of adopting this standard was not
material.
2. FILM INVENTORY
Film inventory consists of the following at March 31:
2002
---$ 34,711,370
50,310,244
1,724,830
-----------$ 86,746,444
============
Projects released, net of amortization
Projects in production
Projects in development/pre-production
2001
---$ 56,885,456
64,948,138
11,293,755
-----------$133,127,349
============
The Company estimates that approximately 29% and 80% of its unamortized released film costs at March 31, 2002 will be amortized within
the next one and three year periods, respectively.
During the years ended March 31, 2002 and 2001, the Company capitalized to film inventory interest of $1,759,453 and $5,200,602,
respectively, and production overhead of $6,003,815 and $7,000,000, respectively.
3. BANK LOAN
On February 12, 1999, the Company entered into a credit facility, which provided a line of credit bearing interest at the rate of LIBOR plus
1.75%. Borrowings under this credit facility were guaranteed by a group of insurance companies, were non-recourse to the Company and were
collateralized by certain revenues and copyrights. The Company had $3,085,380 outstanding under this facility at March 31, 2001. In fiscal
year 2002, in conjunction with a settlement with Paramount (see Note 6), the Company repaid all amounts owed under this credit facility and
negotiated with the insurers for a refund of a portion of the premiums paid. As a result of these negotiated settlements, the Company recorded a
gain of approximately $1,043,000.
4. PRODUCTION LOANS
In order to finance the production of its films, the Company has entered into various non-recourse production loans with its lenders. The credit
facilities each provide a line of credit up to an amount approximating the total budgeted costs of the underlying film and bear interest at the rate
of LIBOR, plus
88
1.5%. Borrowings under the production loans are collateralized by, and will be repaid from, contractual MGs due on certain contracts entered
into with foreign distributors for the distribution of the underlying film. The production loans are cancelled upon repayment. The Company has
entered into the following production loan arrangements:
Production
Production
Production
Production
loan
loan
loan
loan
dated
dated
dated
dated
December 3, 2001, due February 3, 2004
December 15, 2000, due January 7, 2003
May 19, 2000, due July 3, 2002
October 15, 1999, due February 27, 2002
2002
---$27,030,000
20,400,000
------------$47,430,000
===========
$
2001
----
-12,200,000
53,191,730
27,734,918
----------$93,126,648
===========
For each of the production loans discussed above, the bank has required the Company to enter into foreign exchange options to hedge the
Japanese yen translation fluctuation applicable to the distribution contracts entered into with the Japanese distributor. These options, which are
exercisable during 2002, had a fair value of $26,300 and $113,800 at March 31, 2002 and 2001, respectively.
5. FILM FINANCING TRANSACTIONS
In addition to the production loans described in Note 4, the Company has entered into arrangements with a third party (the Film Investor),
whereby the Film Investor contributed a portion of the budgeted costs of certain films in exchange for a share of all distribution proceeds, as
defined, generated by the underlying film. The proceeds of these transactions represent equity investments in the underlying film and were
recorded as a reduction to the costs of the film. During the years ended March 31, 2002 and 2001, the Company received approximately
$9,400,000 and $28,500,000, respectively, from the Film Investor pursuant to these arrangements.
In addition, during the year ended March 31, 2001, the Film Investor paid to the Company $9,250,000 toward the costs of a film, which amount
is collateralized by a subordinated security interest in the underlying film. The amount is guaranteed to be returned to the Film Investor no later
than July 2004, together with interest at LIBOR plus 0.4%. During the year ended March 31, 2002, the Company repaid $3,000,000 to the Film
Investor. The remaining obligation included in contractual obligations in the accompanying consolidated balance sheet.
The Company entered into arrangements with third parties whereby the Company sold its rights to certain films and immediately leased back
the attendant distribution rights for a specified term. Under the terms of these arrangements, the Company has agreed to make certain fixed
annual payments to the purchasers over the length of the term. These payments have been legally assumed by various banks, in exchange for
the Company depositing a certain amount in cash, and the purchasers have relinquished any claim against the Company for the payments. Upon
the payment of the final amount, all rights previously sold revert back to the Company. The deposits and corresponding fixed payment
obligations are not presented in the financial statements, as they are no longer the property nor the responsibility of the Company. During the
years ended March 31, 2002 and 2001, the Company received approximately $2,300,000 and $3,000,000, respectively, which were recorded as
reductions to film costs. In addition, during the year ended March 31, 2001, $10,558,000 was received by the Company and reflected as a
contractual obligation
89
since the film project to which it related had not yet commenced production and certain refund provisions applied under these circumstances.
During the year ended March 31, 2002, the underlying film commenced production and, accordingly, the contractual obligation was offset
against film costs.
The Company avails itself of government programs that are designed to assist film and television production and distribution in Canada.
During the years ended March 31, 2002 and 2001, the Company received approximately $1,000,000 and $500,000, respectively, from these
government programs. Such amounts were recorded as reductions to film costs.
6. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company employs certain of its executives (who are also members of Tigerstripes, LLC) under formal employment agreements. In
January 2001, the executives and the parent company of LG Pictures, Inc., Lions Gate Entertainment Corp. (Lions Gate), entered into an
agreement whereby the executives agreed to defer a portion of their salaries. In November 2001, pursuant to the Reorganization Agreement
(see Note 7), the terms of these employment agreements were extended through December 31, 2004, subject to earlier termination under certain
circumstances. The Reorganization Agreement also provided for payment of a portion of the salaries that had been previously deferred. The
employment agreements provide for minimum annual base compensation of $4,280,000, of which $238,500 was deferred at March 31, 2002.
DISTRIBUTION AGREEMENTS
The Paramount Agreement (see Note 1) provided for a term of the shorter of five years, or commencement of production of 20 motion pictures,
subject to earlier termination under certain circumstances. Pursuant to the Paramount Agreement, Paramount made annual contributions to the
overhead expenses of the Company. These overhead contributions totaled $1,500,000 and $2,000,000 for the years ended March 31, 2002 and
2001, respectively, and are presented as reductions to general and administration expenses in the accompanying consolidated statements of
operations.
In December 2001, the parties agreed to terminate the Paramount Agreement. The termination of the Paramount Agreement will have no
impact on its obligations with respect to the Company's released films, nor with the two films currently in post-production.
Under the Paramount Agreement, the Company assumed responsibility for certain amounts payable to unions and actors based on the
performance in certain territories of one of its motion pictures. Paramount was the primary obligor of these obligations. In May 2001, in
conjunction with repayment of the underlying credit facility (see Note 3), the Company negotiated a settlement of this arrangement with
Paramount, which resulted in the Company transferring its rights in the motion picture to Paramount, in exchange for Paramount's assumption
of all obligations to unions and actors.
7. MEMBERS' EQUITY
Mandalay is governed by an operating agreement (the Operating Agreement), between LG Pictures, Inc. and Tigerstripes, LLC (the Members).
As a limited liability company, the Members of Mandalay are not liable for debts or other obligations of Mandalay. The LLC Agreement
governs the relative rights and duties of the Members.
90
The ownership interests of the Members in Mandalay consist of 44,638,000 Class A Preferred Units, 450 Class B Common Units and 550
Class C Common Units.
Pursuant to the Operating Agreement, LG Pictures, Inc. shares in 100% of Mandalay's losses and 100% of its earning until LG Pictures, Inc.
recovers its original $50,000,000 investment. Thereafter, Tigerstripes and LG Pictures, Inc. are entitled to 55% and 45%, respectively, of the
earnings of Mandalay.
In November 2001, Mandalay and Lions Gate entered into an agreement to reorganize Mandalay (the Reorganization Agreement). Pursuant to
the Reorganization Agreement, certain restrictions were placed on the amounts Mandalay can spend for overhead and development expenses.
In addition, the Reorganization Agreement modified the employment agreements of certain executives of Mandalay (see Note 6) and provided
for returns of capital to Lions Gate under certain circumstances. As security for the payment of all amounts owed to Lions Gate provided for in
the Reorganization Agreement, Mandalay agreed to grant to Lions Gate a security interest in all of its assets, including its films and all
proceeds from the production or exploitation thereof. During the year ended March 31, 2002, Mandalay returned capital of $5,362,000 to Lions
Gate pursuant to the Reorganization Agreement.
The Reorganization Agreement also provides that under certain circumstances (as specified in the Reorganization Agreement), Lions Gate will
have the right to terminate the Reorganization Agreement and wind down the operations of Mandalay at December 31, 2003.
8. RELATED PARTIES
Due (to) from affiliates consists of the following at March 31:
2002
---$ 5,258
37,334
-------$ 42,592
========
Lions Gate
Other Mandalay companies*
2001
---$(84,468)
51,662
-------$(32,806)
========
* Includes various Mandalay named companies in which members of the Company have significant interest.
LG Pictures, Inc. was required to compensate the Company for any interest income foregone on a required equity contribution that was
replaced by the establishment of the bank loan (see Note 3). During the year ended March 31, 2001, the Company received $190,000 under this
agreement, which amount was included in interest income.
91
INDEX TO EXHIBITS
Exhibit
Number
-----3.1(1)
Description of Documents
-----------------------Articles of Incorporation
3.2(3)
Amendment to Articles of Incorporation to Provide Terms of the
Series A Preferred Shares dated as of December 20, 1999
3.3(5)
Amendment to Articles of Incorporation to Provide Terms of the
Series B Preferred Shares dated as of September 26, 2000
3.4(6)
Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 12, 2001
4.1(1)
Trust Indenture between the Company and CIBC Mellon Trust Company
dated as of April 15, 1998
4.2(3)
Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999
10.1(8)
Amended Employees' and Directors' Equity Incentive Plan
10.2(1)
Incentive Plan Stock Option Agreement No. 1
10.3(1)
Incentive Plan Stock Option Agreement No. 2
10.4(1)+
Memorandum of Understanding among the Company, LG Pictures Inc.,
Tigerstripes, Peter Guber, Paul Schaeffer and Adam Platnick dated
March 6, 1998
10.5(1)
Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 29, 1998
10.6(1)
Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 30, 1998
10.7(4)
Agreement and Plan of Merger among the Company, LGE Merger Sub and
Trimark dated June 6, 2000
10.8(4)
Registration Rights Agreement dated as of June 6, 2000, by and
among the Company, Mark Amin and Reza Amin
10.9
Amended and Restated Unanimous Shareholders Agreement of
Corporation CineGroupe dated as of July 10, 2001
10.10(4)
Employment Agreement dated as of June 6, 2000, between the Company
and Mark Amin
10.11(5)
Employment Agreement between the Company and Marni Wieshofer dated
August 26, 2000
10.12(5)
Employment Agreement between the Company and Jon Feltheimer dated
February 27, 2001
10.13(5)
Employment Agreement between the Company and John Dellaverson
dated April 1, 2001
10.14(5)
Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15,
2001
10.15
Amendment #2 dated May 13, 2002 to Ignite, LLC and Lions Gate
Films Inc. deal memo dated February 15, 2001
92
Exhibit
Number
-----10.16(7)
Description of Documents
-----------------------Credit, Security, Guaranty and Pledge Agreement by and among Lions
Gate Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000
10.17(7)
First Amendment dated as of April 4, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.18(7)
Second Amendment dated as of May 30, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.19(7)
Third Amendment dated as of July 31, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.20
Fourth Amendment dated as of February 6, 2002 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
21.1
List of Subsidiaries
23.1
Consent of Independent Accountant
23.2
Consent of Independent Accountant
23.3
Consent of Independent Accountant
23.4
Consent of Independent Accountant
24.1
Power of Attorney (Contained on Signature Page)
(1) Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 1998 (File No. 000-27730).
(2) Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 1999 (File No. 000-27730).
(3) Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 2000 (File No. 000-27730).
93
(4) Incorporated by reference to the Company's Form F-4 Registration Statement under the Securities Act of 1933 dated August 2000.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880).
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period year ended September 30, 2001 (File No.
1-14880).
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period year ended December 31, 2001 (File No.
1-14880).
(8) Incorporated by reference to the Company's Definition Proxy Statement dated August 13, 2001 (File No. 1-14880)
+ Portions of these exhibits have been omitted pursuant to a request for confidential treatment.
94
EXHIBIT 10.9
AMENDED AND RESTATED
UNANIMOUS SHAREHOLDERS AGREEMENT
OF CORPORATION CINEGROUPE
TABLE OF CONTENTS
ARTICLE 1
RECITALS, DEFINITIONS AND INTERPRETATION
4
ARTICLE 2
CONTRIBUTION OF THE SHAREHOLDERS
10
ARTICLE 3
RESTRICTIONS ON TRANSFER OF SHARES
11
ARTICLE 4
ISSUANCE OF SHARES
14
ARTICLE 5
RIGHTS OF FIRST REFUSAL
16
ARTICLE 6
RIGHTS OF PETTIGREW AND PETTIGREW'S CORPORATION TO PURCHASE
ALL SHARES AND/OR CONVERTIBLE DEBENTURE COVERED BY AN
OFFEROR'S OFFER MADE TO CINEPIX (AND ITS SUCCESSORS)
18
ARTICLE 7
FINANCIAL REPORTING
20
ARTICLE 8
FORCED SALE OPTION
21
ARTICLE 9
DEATH OR DISABILITY OF PETTIGREW
23
ARTICLE 10 LIFE INSURANCE AND DISABILITY INSURANCE
23
ARTICLE 11 CHANGE OF CONTROL OF CINEPIX
25
ARTICLE 12 DEFAULT
27
ARTICLE 13 VALUATION
29
ARTICLE 14 CLOSING
30
ARTICLE 15 CONDUCT OF THE AFFAIRS OF THE CORPORATION
31
ARTICLE 16 TRANSFER OF VOTING RIGHTS; CONVERSION OF SHARES; QUEBEC
CONTROL; SHARES IN TRUST
38
ARTICLE 17 FINANCING
41
ARTICLE 18 ADDITIONAL FINANCING
41
ARTICLE 19 UNDERTAKINGS OF THE CORPORATION
43
ARTICLE 20 UNDERTAKINGS IN CASE OF A PUBLIC LISTING
43
ARTICLE 21 REPRESENTATIONS AND WARRANTIES
44
ARTICLE 22 CONFIDENTIALITY
45
ARTICLE 23 NON-SOLICITATION
46
ARTICLE 24 ARBITRATION
47
ARTICLE 25 GENERAL
48
AMENDED AND RESTATED UNANIMOUS SHAREHOLDERS AGREEMENT made as of the
10th day of July, 2001
BETWEEN:
ANIMATION CINEPIX INC., a body corporate, incorporated
under the Canada Business Corporations Act and
represented by Andre Link, its President, duly
authorized as he so declares;
(hereinafter referred to as "CINEPIX")
OF THE FIRST PART
AND:
JACQUES PETTIGREW, businessman, residing at 1835 du
Sommet Trinite Street, St-Bruno, Quebec J3V 6E4;
(hereinafter referred to as "PETTIGREW")
OF THE SECOND PART
AND:
ROBERT PAUL, in his capacity as trustee of the Faire
Trust, a trust governed by the laws of the Province of
Ontario and not in his personal capacity;
(hereinafter referred to as "FAIRE TRUST")
OF THE THIRD PART
AND:
FOX FAMILY WORLDWIDE, INC., a body corporate,
incorporated under the laws of the State of Delaware,
U.S.A., and represented by Mel Woods, its President;
(hereinafter referred to as "FOX FAMILY")
OF THE FOURTH PART
2
AND:
FIDUCIE FAMILLE PETTIGREW, a trust created and governed
by the laws of the Province of Quebec and represented
by Jacques Pettigrew and Jacqueline Pettigrew, duly
authorized as they so declare;
(hereinafter referred to as "FIDUCIE PETTIGREW")
OF THE FIFTH PART
AND:
SGF TECH INC., a body corporate duly incorporated under
the Companies Act (Quebec) and represented by
Jean-Pierre Frechette, its Vice President, Development,
and by Andre Roy, Senior Vice President, Administration
of Societe Generale de Financement du Quebec, duly
authorized as they so declare;
(hereinafter referred to as "SGF TECH")
OF THE SIXTH PART
(Cinepix, Pettigrew, Faire Trust, Fox Family, Fiducie
Pettigrew and SGF Tech and any other shareholder bound
by this Amended and Restated Agreement are collectively
hereinafter referred to as the "SHAREHOLDERS" and each
one of the Shareholders may also be referred to
hereinafter as the "SHAREHOLDER")
AND AS INTERVENING PARTIES:
CORPORATION CINEGROUPE, a corporation duly incorporated
under the Companies Act (Quebec) and represented by
Jacques Pettigrew, its President and by Andre Link, its
Secretary-Treasurer, duly authorized as they so
declare;
(hereinafter referred to as "CORPORATION")
3
LIONS GATE ENTERTAINMENT CORP., a body corporate,
incorporated under the laws of the Province of British
Columbia and represented by Gordon Keep, its Senior
Vice-President, duly authorized as he so declares;
(hereinafter referred to as "LIONS GATE")
WHEREAS the articles of incorporation of the Corporation, as amended, have been amended so as to create Class E Shares which are voting
and participating Shares ranking for some of their rights senior to Class A Shares, Class B Shares, Class C Shares, Class D Shares, Class F
Shares and Class P Shares, are retractable and exchangeable (the "ARTICLES");
WHEREAS the authorized share capital of the Corporation now consists of an unlimited number of Class A Shares, Class C Shares, Class D
Shares, Class E Shares and Class F Shares, a number limited to 100,000 Class B Shares and a number limited to 100,000 Class P Shares, all
without par value, of which, 206,000 Class A Shares, 22,001 Class B Shares, 84,000 Class P Shares and 168,007 Class E Shares are issued and
outstanding;
WHEREAS, as of this date, the following persons are the beneficial owners of the number and Class of issued and outstanding Shares of the
share capital of the Corporation (except in the case of Faire Trust wherein the beneficial owners of the Shares are the beneficiaries of Faire
Trust), as hereinafter set forth.
=================================================================================================================
CLASS A SHARES
CLASS B SHARES
CLASS P SHARES
CLASS E SHARES
----------------------------------------------------------------------------------------------------------------Animation Cinepix Inc.
119,000
22,001
----------------------------------------------------------------------------------------------------------------Jacques Pettigrew
77,520
----------------------------------------------------------------------------------------------------------------Fiducie Famille Pettigrew
6,480
----------------------------------------------------------------------------------------------------------------Fox Family Worldwide, Inc.
58,000
----------------------------------------------------------------------------------------------------------------SGF Tech Inc.
168,007
----------------------------------------------------------------------------------------------------------------Robert Paul, as trustee of
29,000
Faire Trust
----------------------------------------------------------------------------------------------------------------TOTAL
206,000
22,001
84,000
168,007
=================================================================================================================
WHEREAS the Convertible Debenture, as this expression is defined in Subsection 1.2.20 is, as of this date, of a principal amount of Two
Million Eight Hundred Ninety-Nine Thousand and Nine Hundred Fifty Canadian Dollars (CDN$2,899,950);
WHEREAS the Lions Gate Debenture, as defined in Subsection 1.2.34, is, as of this date, of the principal amount of Four Million Canadian
Dollars (CDN$4,000,000);
WHEREAS other than as noted above and for the Option to Faire Trust and the Option to Pettigrew and the anti-dilution right of SGF Tech
provided by the Articles, there are no other issued and outstanding Shares, Securities, debentures or Convertible Securities of the Corporation;
WHEREAS the Corporation carries on the business of producing and distributing movies, television series, mini-series, motion pictures, films,
videotapes, animated productions or other programs
4
produced for television or theatrical release or for release in any other medium, whether theatrically released or shown on network, free or
cable, pay and/or other television medium or in the home-movie market, and all ancillary activities relating thereto, specifically within the
fields of animation, children and family, and documentary products and activities as well as numeric studios, interactive and multi-media
products (hereinafter the "BUSINESS");
WHEREAS each of the Shareholders wishes to provide for the manner in which the affairs of the Corporation shall be conducted, their
obligations with respect to the Corporation and the disposition of their Shares in the Corporation on the happening of certain events as well as
various other issues;
WHEREAS a unanimous shareholders' agreement was entered into on June 23, 1998 by the Shareholders, except Fiducie Pettigrew and SGF
Tech, the Corporation, Lions Gate, Lions Gate Films Corp., Cinepix Films Inc. and Cinepix Inc. (the "FORMER
AGREEMENT");
WHEREAS Fiducie Pettigrew, who subsequently to June 23, 1998 became a Shareholder, has agreed by an instrument in writing to be bound
by and to benefit of the provisions of the Former Agreement;
WHEREAS the Former Agreement was amended as of September 8, 2000 by way of incorporating said amendments therein (the "FIRST
AMENDMENT");
WHEREAS the Former Agreement was further amended on September 8, 2000 (the
"SECOND AMENDMENT");
WHEREAS the Shareholders wish to restate and amend the Former Agreement, as amended by the First Amendment and the Second
Amendment, so as to reflect the provisions of the letter of intent executed by SGF Tech and the Corporation on December 8, 2000, as amended
on February 16, 2001, and by subsequent discussions and the subscription made by SGF Tech under the Subscription Agreement.
Article 1 RECITALS, DEFINITIONS AND INTERPRETATION
1.1 The recitals and the following schedules form an integral part of this Amended and Restated Agreement:
Schedule 1.2.20 : Convertible Debenture
Schedule 1.2.26 : Employment Agreement of Pettigrew
Schedule 1.2.34 : Lions Gate Debenture
Schedule 1.2.37 : Option to Faire Trust
Schedule 1.2.38 : Option to Pettigrew
Schedule 3.1
: Put Agreement between Lions Gate and Fox Family, as
amended, and Put Assignment Agreement, as amended
Schedule 15.1
: List of Competitors
1.2 In this Amended and Restated Agreement, unless something in the subject matter or context is inconsistent therewith:
1.2.1
"ACCEPTABLE SECURITIES" means securities listed on an Acceptable
Stock Exchange, where, at the relevant time:
(1)
such securities will be immediately freely tradeable upon
their acquisition;
(2)
the market capitalization of all such securities of an
issuer shall be not less than one hundred million Canadian
dollars (CDN $100,000,000);
5
(3)
such securities are securities of a corporation of which not
less than twenty percent (20%) of all its outstanding
securities are so listed and freely tradeable; and
(4)
the monthly weighted average trading volume of such
securities exceeds five percent (5%) of the total issued and
outstanding securities of a corporation; or
(5)
securities which are immediately freely tradeable in Canada
upon their acquisition where, at the time of their
acquisition, a positive liquidity opinion as provided by
Rule 61-501 of the Ontario Securities Commission from a
member of the Acceptable Stock Exchange where the securities
are listed is given to the Corporation and its Shareholders.
1.2.2
"ACCEPTABLE STOCK EXCHANGE" means The Toronto Stock Exchange, the
New York Stock Exchange, NASDAQ or the Canadian Venture Exchange
Inc. (CDNX), or any successor thereto;
1.2.3
"AFFILIATE" has the meaning ascribed to such term in the
Securities Act (Quebec) as in effect at the date hereof;
1.2.4
"AMENDED AND RESTATED AGREEMENT" means, unless the context
otherwise requires, this Amended and Restated Unanimous
Shareholders Agreement and the schedules attached hereto;
1.2.5
"APPLICABLE FISCAL LAW" means the Income Tax Act (Canada), as
amended or replaced;
1.2.6
"APPLICABLE LAW" means any domestic or foreign statute, law,
ordinance, regulation, by-law or order that applies to the
Corporation or any of its Subsidiaries;
1.2.7
"AUDITORS" means the auditors of the Corporation and shall be
deemed to include the accountants of the Corporation where the
Corporation has not appointed auditors;
1.2.8
"BOARD" means the board of directors of the Corporation;
1.2.9
"BUSINESS" has the meaning ascribed to such term in the recitals
hereto;
1.2.10
"BUSINESS DAY" means a day which is not Saturday, Sunday or a
civic or statutory holiday in Montreal, Quebec;
1.2.11
"CANADIAN TAX CREDITS" includes any and all tax credits,
benefits, capital cost allowances, advantages, grants or
subsidies of any sort, existing or not at the date hereof, which
are or may become available to the Corporation and which relate
directly and are available exclusively to businesses that conduct
the Business (in whole or in part), including those currently
provided by, or arising from (without limitation), Sections 125.4
and 125.5 of the Income Tax Act (Canada), Regulation 1100 and
Proposed Regulation 1106 of the Income Tax Regulations, as
amended from time to time, or any replacement legislation or
regulation, as the case may be;
1.2.12
"CLASS A SHARE(S)" means one or more Class A Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
6
1.2.13
"CLASS B SHARE(S)" means one or more Class B Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.14
"CLASS C SHARE(S)" means one or more Class C Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.15
"CLASS D SHARE(S)" means one or more Class D Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.16
"CLASS E SHARE(S)" means one or more Class E Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.17
"CLASS F SHARE(S)" means one or more Class F Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.18
"CLASS P SHARE(S)" means one or more Class P Share(s) in the
share capital of the Corporation as constituted at the date of
this Amended and Restated Agreement;
1.2.19
"CONTROL" (and "CONTROLLING"), whether used as a noun or verb,
means the de jure and/or de facto control of a partnership, joint
venture, corporation, trust or other entity (hereafter in this
definition the "ENTITY"), consisting of (i) the right (whether
through agreements or by law) to a majority of the votes in the
election of the board of directors of the Entity; or (ii) the
right (whether through agreements or by law) to direct the
majority of members of the board of directors of the Entity in
the exercise of their discretion and powers;
1.2.20
"CONVERTIBLE DEBENTURE" means the non-secured and convertible
debenture of a value of Two Million Eight Hundred Ninety-Nine
Thousand and Nine Hundred Fifty Canadian Dollars (CDN$2,899,950),
in capital, issued by the Corporation to Cinepix, which under
certain conditions, is convertible for each Fifty Canadian
Dollars (CDN$50) of capital into one (1) Class B Share or Class A
Share, as the case may be; copy of said Convertible Debenture is
attached hereto as Schedule 1.2.20;
1.2.21
"CONVERTIBLE SECURITY" means a security of a body corporate,
including a debt obligation, which is convertible into,
exchangeable for or which carries a right or obligation to
purchase, one or more Shares, voting securities or participating
securities of such body corporate, including, for greater
certainty, options and warrants;
1.2.22
"DIRECTOR" or "DIRECTORS" means a member or members of the Board;
1.2.23
"DISABILITY" means, in respect of Pettigrew, (a) the physical or
mental disability of Pettigrew, whether caused by accident,
illness or otherwise, arising during the time Pettigrew is an
employee of the Corporation and resulting in the fact that
Pettigrew cannot for any consecutive period of two (2) years
perform all his then duties and responsibilities as employee of
the Corporation, as determined in
7
writing by a doctor jointly retained by SGF Tech (if it is a
Shareholder), the Corporation and Pettigrew, or (b) the fact that
a court of competent jurisdiction has declared Pettigrew to be
mentally incompetent or incapable of managing his affairs, or (c)
if the Corporation has disability insurance, the definition of
permanent disability as provided in such disability insurance;
1.2.24
"DISPOSE" and "DISPOSITION" means to sell, transfer, exchange,
give, dispose of or otherwise assign in any manner whatsoever
(including, without limitation, the grant of rights with respect
to property) or any attempt to perform any of the foregoing
actions;
1.2.25
"EMERGENCY LOAN" has the meaning ascribed to such terms in
Subsection 18.1.1;
1.2.26
"EMPLOYMENT AGREEMENT" means the employment agreement entered
into by the Corporation and Pettigrew under the agreement
reproduced in Schedule 1.2.26 as amended from time to time;
1.2.27
"ENCUMBER" means to hypothecate, mortgage, encumber with a
charge, lien, priority, appropriation or option or otherwise to
give as security or to encumber in any manner whatsoever, or any
attempt to perform any of the foregoing actions;
1.2.28
"FAIR MARKET VALUE" means the price determined in an open and
unrestricted market between informed and prudent parties, acting
at arm's length and under no compulsion to act, expressed in
terms of money; the Fair Market Value shall be determined by
reference to the aggregate price at which the Corporation (i.e.
the Corporation and its Subsidiaries, as a whole), as a going
concern, could be sold in an arm's length transaction to an
unaffiliated bona fide third party in an orderly sale without
regard to the lack of liquidity of its capital stock;
specifically, no discount or premium will be applied (including
for majority or minority stake);
1.2.29
"GAAP" means generally accepted accounting principles from time
to time approved by the Canadian Institute of Chartered
Accountants, or any successor institute, applicable as at the
date on which any calculation or determination is required to be
made in accordance with generally accepted accounting principles,
and where the Canadian Institute of Chartered Accountants
includes a recommendation in its Handbook concerning the
treatment of any accounting matter, such recommendation shall be
regarded as the only generally accepted accounting principle
applicable to the circumstances that it covers;
1.2.30
"GOOD FAITH OFFER" means:
(1)
an offer which is addressed in writing by a Third Party or
any Shareholder to a Shareholder for the Disposition of all,
and not less than all, of the Shares held by such
Shareholder; or
(2)
an offer which is addressed in writing by a Shareholder to a
Third Party or any other Shareholder for the Disposition of
all and not less than all of his or its Shares;
(3)
in respect of which, the purchase price of the Shares, if
any, is payable as follows:
8
A) not less than 75% in cash;
B) not more than 25% in Acceptable Securities; for the
purposes of the rights of first refusal pursuant to Article
5 of this Amended and Restated Agreement, such portion of
the purchase price which is payable in Acceptable Securities
shall be deemed to be payable in cash and to be equal to the
weighted average of the closing price of such Acceptable
Securities for the past twenty (20) trading days as at the
date immediately preceding the date of the Good Faith Offer;
and in respect of which there accrues to the Shareholder no
collateral benefit other than the purchase price of the
Shares; and which contains no conditions (except with
respect to the amount of the purchase price and its payment)
which one or more of the Parties, as the case may be, would
be unable to meet; or
(4)
an offer which is addressed in writing by a Third Party or
any Shareholder to a Shareholder for the Disposition of all
and not less than all, of the Shares held by such
Shareholder, which offer is duly accepted by all
Shareholders.
1.2.31
"GROUP" means the Corporation and its Subsidiaries;
1.2.32
"INTER-CORPORATION ARRANGEMENTS" has the meaning ascribed to such
terms in Subsection 15.1.22;
1.2.33
"LENDING SHAREHOLDER" has the meaning ascribed to such terms in
Section 18.1;
1.2.34
"LIONS GATE DEBENTURE" means the non-secured convertible
debenture expiring no later than June 30, 2004, unless such
debenture is repaid by the Corporation, of a face value of Four
Million Canadian Dollars (CDN$4,000,000), in capital, issued by
the Corporation to Lions Gate, as amended as of the date hereof;
a copy of the Lions Gate Debenture is attached hereto as Schedule
1.2.34;
1.2.35
"MATERIAL" or "MATERIALLY" means, if convertible into an amount
of money, an event having an adverse financial consequence of at
least One Hundred Thousand Canadian Dollars (CDN$100,000) with
respect to the Corporation and, if the context does not permit an
evaluation of materiality in a monetary sense, a circumstance or
event which would reasonably be considered to adversely affect
the decision of a Third Party, acting reasonably;
1.2.36
"OFFICER" means a person holding a management or executive
position, including a position considered as such in accordance
with the then existing rules and practices applicable in the
Business of the Corporation, within the Corporation, and includes
a Senior Officer;
1.2.37
"OPTION TO FAIRE TRUST" means the option granted to Faire Trust
under the agreement, a copy of which is attached hereto as
Schedule 1.2.37;
1.2.38
"OPTION TO PETTIGREW" means the option granted to Pettigrew under
the agreement, a copy of which is attached hereto as Schedule
1.2.38;
1.2.39
"PARTIES" means, collectively, the Shareholders, Lions Gate and
the Corporation;
9
1.2.40
"PERSON" shall be broadly interpreted and includes an
individual, body corporate, partnership, joint venture, trust,
association, unincorporated organization, the Crown, any
governmental authority or any other entity recognized by law;
1.2.41
"PETTIGREW'S CORPORATION" has the meaning ascribed to such term
in Section 3.2;
1.2.42
"PROPORTIONAL SHARE OF THE EMERGENCY LOAN" has the meaning
ascribed to such term in Section 18.3;
1.2.43
"PRO RATA BASIS" means the proportion that the number of Class A
Shares, Class B Shares, Class P Shares and Class E Shares held
by a Shareholder bears to the total number of outstanding Class
A Shares, Class B Shares, Class P Shares and Class E Shares,
established as if Class E Shares held by SGF Tech would have
been exchanged into Class A Shares, pursuant to the Articles;
1.2.44
"PUBLIC LISTING" means an underwritten treasury initial public
offering of Class A Shares or any other event resulting in the
Class A Shares being traded on an Acceptable Stock Exchange and
having total net proceeds to the Corporation (prior to
underwriting commissions and offering expenses) of at least
CDN$10,000,000;
1.2.45
"PURCHASER", unless the context otherwise requires, means the
acquirer of Shares pursuant to this Amended and Restated
Agreement;
1.2.46
"QUEBEC OFFICER" means an Officer who is a Quebec Resident;
1.2.47
"QUEBEC RESIDENT" means a person domiciled in the Province of
Quebec who also complies with all the requirements to qualify
the Corporation and its Business for the Quebec Tax Credits and,
for greater certainty, excludes any person who is not resident
in Quebec for purposes of Section 1029.8.34 and following of the
Taxation Act (Quebec) (R.S.Q., c. I-3) and any person not
domiciled in the Province of Quebec for the prescribed periods
under the Regulation respecting the recognition of films as
Quebec films, adopted pursuant to the Cinema Act (Quebec)
(R.S.Q., c. C-18.1), as amended or replaced;
1.2.48
"QUEBEC TAX CREDITS" includes any and all tax credits, benefits,
capital cost allowances, advantages, grants or subsidies of any
sort, existing or not at the date hereof, which are or may
become available to the Corporation and its Subsidiaries
relating directly and available exclusively to the Business
conducted by each of the Corporation and its Subsidiaries (in
whole or in part), including those currently provided by, or
arising from (without limitation), Sections 1029.8.34 through
1029.8.36.0.16 (inclusive) as well as 1129.1 through 1129.4.3.17
(inclusive) of the Taxation Act (Quebec) and Regulations 130 R
55.3.1 through 130 R 55.6.1 (inclusive), 1029.8.34R1 as well as
1029.8.34R2 of the Regulation respecting the Taxation Act
(Quebec), as amended from time to time, or any replacement
legislation or regulation, as the case may be;
1.2.49
"RELATED PARTY" with respect to another Person (the "Other
Person") means (i) a Person who/which does not deal at arm's
length with the Other Person or with the Person described in
subparagraph (ii) of this definition, within the meaning of the
Applicable Fiscal Law; (ii) a Subsidiary of the Other Person;
(iii) a Person in relation to whom/which the Other Person is a
Subsidiary or (iv) a Person
10
who/which is an Affiliate of the Other Person. Notwithstanding
the foregoing, a Related Party of the Corporation shall
exclude the Subsidiaries of the Corporation and their
Subsidiaries;
1.2.50
"SECURITIES" means any rights, warrants or options to acquire
Shares or other Convertible Securities of the Corporation or
which are exchangeable or convertible into Shares or Convertible
Securities of the Corporation;
1.2.51
"SENIOR OFFICER" means an Officer holding a senior position
within the Corporation, including the offices of chairman of the
board, president, chief executive officer, chief operating
officer, general manager, chief financial officer,
vice-presidents and treasurer;
1.2.52
"SHAREHOLDERS" has the meaning ascribed to it in the preamble
and any other Person bound by this Amended and Restated
Agreement which becomes a holder of Shares;
1.2.53
"SHARES" means any share or shares in the share capital of the
Corporation now or at any time hereafter owned by the
Shareholders and excludes options to buy Shares pursuant to the
Option to Pettigrew, the Option to Faire Trust and the Stock
Option Plan;
1.2.54
"STOCK OPTION PLAN" means the stock option plan for Directors
and Senior Officers of the Corporation and its Subsidiaries
which shall be put into place on or before December 31, 2001, as
provided in Section 6.12 of the Subscription Agreement;
1.2.55
"SUBSCRIPTION AGREEMENT" means the subscription agreement
entered into by SGF Tech and the Corporation, as of the date
hereof, and to which intervened Cinepix, Pettigrew and Fiducie
Pettigrew pursuant to which SGF Tech subscribed for one hundred
sixty-eight thousand and seven (168,007) Class E Shares;
1.2.56
"SUBSIDIARY" has the meaning ascribed to such term in the
Securities Act (Quebec) as in effect as the date hereof;
1.2.57
"THIRD PARTY" means any Person who is not a Shareholder, the
Corporation, an Affiliate of the Corporation or a Related Party
of a Shareholder, the Corporation or an Affiliate of the
Corporation.
Article 2 CONTRIBUTION OF THE SHAREHOLDERS
2.1 Subject to Section 2.2 in the case of Fox Family, the Shareholders of the Corporation hereby undertake to contribute, on a reasonable basis,
to the Business of the Corporation, to enable the Corporation to have access to their own network of contacts and markets and, subject to
execution of appropriate agreements, to allow the Corporation to benefit from their own expertise in so far as it can be useful to the Corporation
in the operation of the Business.
2.2 Fox Family acknowledges that the Corporation has issued Shares of its Class A capital to Fox Family in order to induce Fox Family to
continue to contract with the Corporation to produce or co-produce animated, children and family movies, televisions series, mini-series,
motion pictures, films, videotapes, or other programs to be procured for television exhibition or theatrical release. Fox Family and the
Corporation have entered into similar business arrangements in the past and currently intend to explore additional productions and
11
co-productions in the future, it being understood and agreed, however, that Fox Family is under no obligation to deal with the Corporation on
an exclusive basis and that it has no obligation to enter into any additional production or co-production whatsoever.
Article 3 RESTRICTIONS ON TRANSFER OF SHARES
3.1 Except as expressly provided in this Amended and Restated Agreement and except (i) with respect to Pettigrew's and Pettigrew's
Corporation's (as defined in Section 3.2 below) right to borrow and hypothec Shares and/or Convertible Debenture (then held and/or to be
purchased) to finance purchases of Shares or of the Convertible Debenture, which may be acquired by Pettigrew (and/or Pettigrew's
Corporation, as the case may be) under the Option to Pettigrew or under Article 6, and for the transfer of Shares or of the Convertible
Debenture bought by Pettigrew (and/or Pettigrew's Corporation, as the case may be) under the Option to Pettigrew or under Article 6 if a
creditor having funded the acquisition of the said Shares or the Convertible Debenture enforces its rights and for the sale or transfer of the said
Shares or the Convertible Debenture by such creditor to a Third Party in case of enforcement of said creditor's rights, (ii) with respect to Fox
Family, A Faire Aujourd'hui Inc. ("A FAIRE") and Faire Trust, for the pledge of Fox Family's Shares pursuant to the Share Pledge Agreement
entered into on June 23, 1998, between Fox Family and A Faire of fifty-eight thousand (58,000) Class A Shares as security for a Three Million
Canadian Dollars (CDN$3,000,000) loan made by A Faire to Fox Family, as amended (the "PLEDGED SHARES"), for the transfer of the
Pledged Shares by Fox Family to A Faire, if A Faire enforces the Pledge Agreement or pursuant to the loan agreement entered into by Fox
Family and A Faire, for the sale or transfer of Pledged Shares by A Faire to a Third Party or to Faire Trust, following an enforcement of the
Pledge Agreement, for the transfer of the Pledged Shares to Lions Gate pursuant to the Put Agreement entered on June 23, 1998 by Fox Family
and Lions Gate, as amended (the "PUT AGREEMENT") and for the transfer of the Pledged Shares to Lions Gate by A Faire or Faire Trust
pursuant to the Put Agreement, as amended, which has been assigned to A Faire by Fox Family pursuant to the Put Agreement Assignment
entered into on June 23, 1998, by Fox Family and A Faire, as amended,
(iii) except under Section 5.2 herein and Sections 6.3 and 6.4 of the Employment Agreement and (iv) with respect to Lions Gate Debenture or
any shares acquired by Lions Gate pursuant to the Put Agreement, which may be Encumbered in favour of Lions Gate's bankers, subject to the
provision of this Agreement, Pettigrew and Fiducie Pettigrew shall not dispose of any Shares, Securities and/or the Convertible Debenture on
or before the earlier of (i) July 8, 2004 or (ii) the day on which occurs a Public Listing of the Corporation, and no Shareholder (or Lions Gate
with respect to the Lions Gate Debenture) shall Encumber any Shares, Securities and/or the Convertible Debenture and the Lions Gate
Debenture, without the prior written consent of the other Shareholders acting reasonably, it being agreed that such consent may be withheld
unreasonably if the Encumbrance is made to a competitor of the Corporation. Except under Section 3.2 hereunder, Shareholders and Lions Gate
may only Dispose of the totality, and not part, of their Shares, Securities, Convertible Debenture or the Lions Gate Debenture.
12
3.2 Notwithstanding Section 3.1 above, each of the Shareholders (hereinafter in Article 3, the "TRANSFEROR") shall, at all times, have the
right to Dispose of all or part of its Shares, Securities and/or the Convertible Debenture pursuant to this Amended and Restated Agreement to
one of its Affiliates or Subsidiaries or, in the case of Pettigrew, to a corporation that he Controls and/or to Fiducie Pettigrew (except if
stipulated otherwise, hereinafter collectively "PETTIGREW'S Corporation"), provided that prior to such a transfer (with respect to transferred
Shares, Securities and/or the Convertible Debenture), the given Affiliate or Subsidiary or Pettigrew's Corporation shall be previously required
to confirm in writing to the other Shareholders its irrevocable consent to be bound by the provisions of this Amended and Restated Agreement
relative to the Transferor (with respect to transferred Shares, Securities and/or the Convertible Debenture) and to succeed in all of the
Transferor's rights, advantages, obligations and liabilities hereunder (with respect to transferred Shares, Securities and/or the Convertible
Debenture) and is deemed to substitute itself for the Transferor as if it were named in each provision of this Amended and Restated Agreement
(other than this Section 3.2) (with respect to transferred Shares, Securities and/or the Convertible Debenture), it being understood however that
the Transferor shall remain solidarily liable for the entire compliance with this Amended and Restated Agreement by such an Affiliate or a
Subsidiary or Pettigrew's Corporation. The Shares, Securities and/or the Convertible Debenture will remain subject to the provisions of this
Amended and Restated Agreement within the hands of such an Affiliate or a Subsidiary or Pettigrew's Corporation. The Transferor must give
notice of its intention to effect a transfer pursuant to this Section 3.2 at least fifteen (15) days before the transfer. Before a transfer is effected
and once a year thereafter, the other Shareholders may require from the president of the Affiliate or Subsidiary or Pettigrew's Corporation (or in
the case of Fiducie Pettigrew, from the trustees thereof) who is to receive Shares, Securities and/or the Convertible Debenture from the
Transferor or, as the case may be, has been transferred Shares, Securities and/or the Convertible Debenture of the Corporation, a sworn
affidavit as to the name of its Controlling shareholders and the percentage of voting shares they hold in the capital of the Affiliate or Subsidiary
or Pettigrew's Corporation (or in the case of Fiducie Pettigrew, a sworn affidavit to the effect that Pettigrew is one of the trustees thereof). Any
default in producing this sworn affidavit and any loss of Control of the Affiliate or Subsidiary or Pettigrew's Corporation by the Transferor (or
in the case of Fiducie Pettigrew, any default in producing the sworn affidavit or the fact that Pettigrew is no longer a trustee of Fiducie
Pettigrew) shall be deemed to be a default under this Amended and Restated Agreement and shall give rise to the application of Article 12 of
this Amended and Restated Agreement.
3.3 Notwithstanding any other provision hereof to the contrary, SGF Tech may freely transfer its Shares, as part of a transfer of its investment
portfolio or any substantial part thereof such as required by law or by the Quebec Government, to any of its Affiliates or to the Quebec
Government, any agency thereof or any other institutional investor designated by the Quebec Government, including without limitation, any
direct or indirect Subsidiary of SOCIETE GENERALE DE FINANCEMENT DU QUEBEC, upon notice to the other Shareholders and the
Corporation but without having to obtain their consent thereto, provided that at the time of such transfer, the transferee shall forthwith and in
writing become a party to this Amended
13
and Restated Agreement in lieu and place of SGF and shall be assigned, and shall assume all rights and obligations of SGF hereunder and
under the Subscription Agreement.
3.4 In the event of a Disposition of any Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture to a person who is not a
party to this Amended and Restated Agreement, including for greater certainty in the circumstances described in Section 3.1, as a condition
precedent to being registered as a holder of such Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture and to the
exercise by such transferee of any rights attaching to such Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture, the
transferee of such Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture, deliver an agreement, in form and on terms
reasonably satisfactory to the Shareholders, whereby such transferee agrees to be bound by the provisions hereof as if he were an original party
hereto. After the execution of such agreement and subject to all other relevant provisions of this Amended and Restated Agreement, except as
otherwise provided herein, the transferee shall have the same rights and obligations with respect to such Shares, Securities, the Convertible
Debenture and/or the Lions Gate Debenture as the Party from whom it acquired such Shares, Securities, the Convertible Debenture and/or the
Lions Gate Debenture.
3.5 The Corporation shall cause all share certificates now or later authorized or issued to have printed thereon:
"The right of the holder of this certificate to sell, transfer, assign or otherwise dispose, mortgage, pledge, hypothecate, charge or otherwise
encumber the Shares represented by this certificate is governed by an amended and restated unanimous shareholders' agreement, dated as July
10, 2001, as may be amended from time to time, and by the Articles, as may be amended from time to time."
3.6 No Disposition of Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture in violation of this Amended and
Restated Agreement shall be valid, and no such Disposition shall be recorded in the securities register, minute book or corporate records of the
Corporation or be opposable to the Corporation and the other Parties herein and any Person acquiring Shares, Securities, the Convertible
Debenture and/or the Lions Gate Debenture shall previously execute an intervention to declare having taken cognizance of this Amended and
Restated Agreement and to be bound by its provisions.
3.7 The Shareholders and the Corporation expressly consent to any Disposition of Shares, Securities, the Convertible Debenture and/or the
Lions Gate Debenture, pursuant to this Amended and Restated Agreement and carried out in accordance with the provisions of this Amended
and Restated Agreement and any Disposition of Shares, Securities, the Convertible Debenture and/or the Lions Gate Debenture permitted by
Sections 3.1, 3.2 and 3.3 of this Amended and Restated Agreement. Notwithstanding anything else in this Amended and Restated Agreement,
other than the transfer of the Pledged Shares to Lions Gate by Fox Family under the Put Agreement, the Corporation hereby undertakes not to
give effect to, any Disposition of any of the Pledged Shares without first obtaining the written consent of A Faire to such Disposition.
3.8 Notwithstanding Section 3.1, but subject to Sections 3.2 and 6.2, and as long as SGF Tech is a Shareholder, Pettigrew and/or Pettigrew's
Corporation and Fiducie Pettigrew undertake
14
not to dispose of any of their Shares, Securities or Convertible Securities until the earlier of the following dates: (i) July 8, 2004; or (ii) 180
days following the day on which occurs a Public Listing of the Corporation or any lesser period agreed by SGF Tech.
Article 4 ISSUANCE OF SHARES
4.1 Subject to Sections 4.7 to 4.12, no Shares of any classes, Securities or Convertible Securities shall be issued by the Corporation, unless
Subsection 15.1.21 of this Amended and Restated Agreement was complied with, and furthermore, when an issue of Class A Shares, Securities
or Convertible Securities directly or indirectly convertible into or exchangeable for Class A Shares (the "CONVERTIBLE SECURITIES INTO
CLASS A SHARES") is involved, unless the Class A Shares or Convertible Securities into Class A Shares to be issued have been first offered
on equal terms to the Shareholders holding, either Class A, Class B, Class P and Class E Shares each of whom hold a pre-emptive right to
acquire the offered Class A Shares or Convertible Securities into Class A Shares on a Pro Rata Basis immediately prior to the date of such
offer.
4.2 The pre-emptive right provided for in Section 4.1 may be exercised by each Shareholder holding either Class A, Class B, Class P or Class E
Shares within forty-five (45) days of receipt of a written notice by the Corporation with respect to the said contemplated issue of Class A
Shares or Convertible Securities into Class A Shares; such notice must inform each such Shareholder of the number of Shares Class A Shares
or Convertible Securities into Class A Shares he may acquire and all conditions of the issue, including the issue price. Failure by a Shareholder
to notify the Corporation within the ten (10) day delay that he accepts to exercise his pre-emptive right is deemed a refusal.
4.3 Each Shareholder may exercise his pre-emptive right by notifying the Corporation in writing of the exercise of his pre-emptive right
acceptance and by notifying the Corporation (in the same notice) of the maximum number of Class A Shares and/or Convertible Securities into
Class A Shares he would acquire if one (or more) Shareholder does not exercise his pre-emptive right.
4.4 If one (or more) Shareholder refuses to exercise his pre-emptive right, his pre-emptive right will accrue on a Pro Rata Basis in favour of
those Shareholders who have duly exercised their pre-emptive rights and have duly notified the Corporation of their consent to acquire
additional Class A Shares and/or Convertible Securities into Class A Shares under their accrued pre-emptive rights. If more than one
Shareholder want to exercise their accrued pre-emptive rights, the additional Class A Shares and/or Convertible Securities into Class A Shares
shall be divided between the Shareholders exercising the said accrued pre-emptive rights on a Pro Rata Basis.
4.5 Failure by Shareholders to accept to acquire all or part of the contemplated issue of Class A Shares and/or Convertible Securities into Class
A Shares and to duly comply with their acceptance shall allow the Corporation to issue the non-subscribed Class A Shares and/or Convertible
Securities into Class A Shares to Third Parties who do not have any pre-emptive rights, at terms and conditions including the price of issue, not
more advantageous than those offered to the Shareholders in the notice to exercise the pre-emptive rights, provided however that such Third
Parties must agree to be bound by the terms of this Amended and Restated Agreement as provided in Section 3.3. Such issuance must take
place no sooner than fifteen
15
(15) days and no later than sixty (60) days after the expiry of the above process provided for in Sections 4.1 to 4.3, failing which, the provisions
of these Sections shall again apply to the said issuance.
4.6 Notwithstanding the foregoing and Subsection 15.1.21, the Corporation shall be entitled to issue the following Shares from its treasury,
with the resolution of the directors of the Corporation obtained at a board meeting duly held to this effect or by execution of a resolution in
writing without, if applicable, having to first offer to all the Shareholders by virtue of their pre-emptive rights:
4.6.1
such number of Shares to Faire Trust as required following any
exercise by Faire Trust of the Option to Faire Trust;
4.6.2
the Shares that may be issued pursuant to the Convertible
Debenture and the Lions Gate Debenture;
4.6.3
such number and types of Shares to Pettigrew as required
following any exercise by Pettigrew of the Option to Pettigrew;
4.6.4
such number of Class D Shares as required by any stock option
exercise pursuant to the Stock Option Plan;
4.6.5
Shares issued following the automatic conversions provided for
in Section 16.2;
4.6.6
such number of Class C Shares that may be issued pursuant to
Sections 16.3 and 16.6;
4.6.7
such number of Class A Shares that maybe issued to SGF Tech
pursuant to the Articles and pursuant to Section 3 of the
Subscription Agreement.
4.7
No Class B Shares may be issued except upon a conversion of part or all
of the Convertible Debenture or in accordance with the automatic
conversion provided for in Section 16.2 and in the Articles.
4.8
No Class P Shares may be issued except to Pettigrew or Pettigrew's
Corporation.
4.9
No Class C Shares may be issued except to Pettigrew or Pettigrew's
Corporation, or if Pettigrew is no longer an Officer of the Corporation,
subject to SGF prior approval, to the highest ranking Quebec Officer of
the Corporation pursuant to the terms of the Option to Pettigrew or the
provisions of Section 16.3 or 16.6 of this Amended and Restated
Agreement, as the case may be.
4.10
No Class D Shares may be issued except pursuant to the Stock Option
Plan.
4.11
No Class E Shares and no Class F Shares may be issued except to SGF Tech
or its successors and assignees pursuant to Section 3.3 of the Amended
and Restated Agreement.
4.12
Except in compliance with this Amended and Restated Agreement and with
the Option to Pettigrew and the Option to Faire Trust and without
restricting the provisions of Article 16 of this Amended and Restated
Agreement, the Corporation hereby agrees not to issue any additional
voting Shares and not to approve any transfer of voting Shares, unless
an affirmative written unrestricted legal opinion is obtained from an
independent counsel jointly retained by the Corporation, Pettigrew,
Cinepix and SGF Tech (or their successors and assigns), at the
Corporation's costs, which states that said issuance or transfer, as the
case may be, would not result in the loss for the Corporation of any of
the Quebec Tax Credits and Canadian Tax Credits for a given financial
year, it being provided however that this Section 4.12 shall cease to
apply (without retroactive effects) if the aggregate of the Quebec
16
Tax Credits and the Canadian Tax Credits (without taking into account
any expected loss of these credits resulting from said issue or
transfer) represent for a given financial year (of twelve (12) months)
and are expected to represent for the following financial year (of
twelve (12) months) (according to the then approved budget) less than
five percent (5%) of the Corporation's annual revenues.
It is also agreed that this Section 4.12 shall not apply to said issue
or transfer (but may apply to subsequent issues or transfers): (1) in
the case of an expected loss of the Quebec Tax Credits only, resulting
from said issue or transfer, if the Quebec Tax Credits (without taking
into account the expected loss of the Quebec Tax Credits) represent for
a given financial year (of twelve (12) months) and are expected to
represent for the following financial year (of twelve (12) months)
(according to the then approved budget) less than two percent (2%) of
the Corporation's annual revenues; or (2) in the case of an expected
loss of the Canadian Tax Credits only, resulting from said issue or
transfer, if the Canadian Tax Credits (without taking into account the
expected loss of the Canadian Tax Credits) represent for a given
financial year (of twelve (12) months) and are expected to represent for
the following financial year (of twelve (12) months) (according to the
then approved budget) less than two percent (2%) of the Corporation's
annual revenues.
Article 5 RIGHTS OF FIRST REFUSAL
5.1
Subject to Article 6 hereunder, when this Article 6 is applicable, if,
at any time for all the Shareholders, except Pettigrew and/or
Pettigrew's Corporation and Fiducie Pettigrew, or if at any time after
the earlier of the two (2) dates provided for in Section 3.8, for
Pettigrew and/or Pettigrew's Corporation and Fiducie Pettigrew any
Shareholder or Lions Gate with respect to the Lions Gate Debenture (the
"VENDOR") wishes to Dispose of all but not less than all of his or its
Shares or the Lions Gate Debenture pursuant to a Good Faith Offer (the
"OFFERED SHARES"), he or it first shall offer to the other Shareholders
(the "OFFEREE") an opportunity to purchase such Shares or the Lions Gate
Debenture on a Pro Rata Basis (excluding the Shares of the Vendor) at
the price and on the terms set out in the Good Faith Offer; such said
notice of the Good Faith Offer must include a copy of the Good Faith
Offer and an undertaking that the Vendor will accept the Good Faith
Offer and complete the transactions contemplated thereby, if
Shareholders do not exercise their rights of first refusal (hereinafter
in this Article and in Article 6 hereafter the "NOTICE").
In the event that Article 6 is not applicable by reasons of (A) the Good
Faith Offer is not exclusively covering the Shares and/or Convertible
Debenture of Cinepix (and its successors); or (B) if Pettigrew and
Pettigrew's Corporation refuse or fail to exercise their rights to
purchase under Article 6, the Shareholders (other than the Vendor but
including Pettigrew and Pettigrew's Corporation) may accept in writing
the offer of the Vendor within (i) sixty (60) days after the receipt of
the Notice if Section 6.1 is not applicable because the Good Faith Offer
does not exclusively cover Shares and/or Convertible Debenture of
Cinepix (and its successors); or (ii) ninety (90) days after the receipt
of the Notice if Pettigrew and Pettigrew's Corporation advise that they
do not wish, or if they fail, to exercise their rights pursuant to
Article 6 hereunder; or (iii) one hundred twenty (120) days after the
receipt of the Notice if Pettigrew and Pettigrew's Corporation, after
having exercised their rights to purchase under Article 6 hereunder,
fail to purchase at the Closing, as outlined in Section 6.2
17
hereunder or (iv) thirty (30) days when the Notice is with respect to
only of the Lions Gate Debenture. Any acceptance must notify the Vendor
of the additional number of Shares or additional proportion of the Lions
Gate Debenture, that any accepting Shareholder is willing to purchase
pursuant to the Vendor's offer in the event one or more other
Shareholders shall not accept the Vendor's offer. Any Shareholder not
responding within the applicable delay shall be deemed to have refused
the offer of the Vendor. In the event that one or more of the other
Shareholders do not accept to purchase all of the Vendor's Shares or the
Lions Gate Debenture pursuant to the Good Faith Offer as contained in
the Notice, the Vendor shall be obliged to sell his or its Shares or the
Lions Gate Debenture, as the case may be, to the other Shareholders or
to the Third Party who made the Good Faith Offer or who received the
Good Faith Offer at the price and on the terms set out in the Good Faith
Offer within the next sixty (60) days, provided however that the Third
Party who made the Good Faith Offer agrees to be bound by the terms of
this Amended and Restated Agreement as provided in Section 3.4. In the
event that more than one Shareholder accepts the Vendor's offer as
contained in the Notice and expresses its acceptance to purchase
additional Shares, or an additional proportion of the Lions Gate
Debenture, not bought by other Shareholders, if the accepting
Shareholders offer to purchase more than one hundred percent (100%) of
the Vendor's Shares, or the Lions Gate Debenture, pursuant to this
Article 5, those Shareholders who accept such offer or any of them,
having expressed their consent to acquire an additional number of Shares
or an additional proportion of the Lions Gate Debenture, shall be
entitled to purchase the remainder of the Vendor's Shares or the
Vendor's Lions Gate Debenture on a Pro Rata Basis (excluding the Shares
of the Vendor, the Shares of any other Shareholder refusing the offer
pursuant to this Article 5 and the Shares of any other Shareholder
accepting the offer made pursuant to this Article on a Pro Rata Basis
but refusing to purchase additional Shares or an additional proportion
of the Lions Gate Debenture) at the price and on the terms set out in
the Good Faith Offer. In the event that none of the other Shareholders
accepts to purchase all of the Vendor's Shares or Vendor's Lions Gate
Debenture pursuant to the Good Faith Offer or if the Vendor's Shares or
the Vendor's Lions Gate Debenture are not sold to the Third Party who
made the Good Faith Offer within the sixty (60) days next following the
completion of the above process, the provisions of this Article 5 shall
again apply from that time forward and from time to time.
5.2
Without limiting Section 5.1 above and when Section 6.1 hereafter does
not apply or if Pettigrew and Pettigrew's Corporation refuse or fail to
exercise their rights to purchase or refuse or fail to purchase at
Closing under Article 6, should a Shareholder holding more than fifty
percent (50%) of the votes in the issued and outstanding Shares of the
share capital of the Corporation (a "MAJORITY SHAREHOLDER") or Pettigrew
(including Pettigrew's Corporation) receive a Good Faith Offer, all
other Shareholders, and, as the case may be, Lions Gate for the Lions
Gate Debenture, have the right (but not the obligation), under said Good
Faith Offer to sell their Shares and Securities on the same terms and
conditions as those offered to the Majority Shareholder or Pettigrew
(including Pettigrew's Corporation), otherwise the Majority Shareholder
or Pettigrew (including Pettigrew's Corporation), may not accept the
Good Faith Offer. The Good Faith Offer made to the Majority Shareholder
or Pettigrew (including Pettigrew's Corporation) must be open for
acceptance by all other
18
Shareholders for a period of not less than one hundred twenty (120) days
from the receipt of the Notice by all other Shareholders.
Notwithstanding this Section 5.2, when Pettigrew and/or Pettigrew's
Corporation exercise their rights provided by Section 6.1 herein on the
sale of Shares of a Majority Shareholder, this Section 5.2 is not
applicable, unless the closing of such transaction by Pettigrew and/or
Pettigrew's Corporation, as purchaser, does not take place.
5.3
Notwithstanding the provisions of Section 5.2 above and when Section 6.1
hereafter does not apply or if Pettigrew and/or Pettigrew's Corporation
refuses or fails to exercise its rights to purchase or refuses or fails
to purchase at Closing under Article 6, it is understood that all
Shareholders will have at all times, the right to sell all their Shares
on a Pro Rata Basis, if:
(6)
Pettigrew, Pettigrew's Corporation or one or more Shareholder(s)
holding more than thirty percent (30%) of the voting Shares of
the share capital of the Corporation agree(s) to sell his, its
or their Shares pursuant to a Good Faith Offer, provided that
the other Shareholders have refused to exercise their rights of
first refusal; or
(7)
a transaction or series of transactions would result in a change
of Control of the Corporation; concurrently with the event
described in (i) and (ii) and on the same terms and conditions
as those offered to Pettigrew, Pettigrew's Corporation or the
Shareholder(s) holding more than thirty percent (30%) of the
voting Shares, otherwise the Shareholder(s) holding more than
thirty percent (30%) of the voting Shares, Pettigrew or
Pettigrew's Corporation may not accept the Good Faith Offer.
Notwithstanding this Section 5.3, when Pettigrew and/or
Pettigrew's Corporation exercises its rights under Section 6.1
with respect to the sale of Shares to Shareholder(s) holding
more than thirty percent (30%) of the voting Shares, this
Section 5.3 is not applicable, unless the closing of such
transaction by Pettigrew and/or Pettigrew's Corporation, as
purchaser, does not take place.
5.4
Subject to Pettigrew's and Pettigrew's Corporation's rights outlined in
Article 6 hereafter, any Disposition of the Convertible Debenture and
Lions Gate Debenture shall be subject to this Article 5. For greater
certainty, no partial sale of the Convertible Debenture or of the Lions
Gate Debenture is permitted.
5.5
Article 5 shall cease to apply should the Corporation successfully
complete a Public Listing, except for an event giving rise to the first
refusal rights mechanism which has occurred prior to the completion of
said Public Listing and which is still existing when the Corporation
completes its Public Listing.
Article 6 RIGHTS OF PETTIGREW AND PETTIGREW'S CORPORATION TO
PURCHASE ALL SHARES AND/OR CONVERTIBLE DEBENTURE COVERED BY AN
OFFEROR'S OFFER MADE TO CINEPIX (AND ITS SUCCESSORS)
6.1
Without restricting the provisions of Article 16 hereinafter, in the
event Cinepix (and its successors) receives a Good Faith Offer (other
than from Pettigrew or Pettigrew's Corporation) (hereinafter in this
Article, the "OFFEROR") to purchase all of its Shares and/or the
Convertible Debenture (in its entirety) which it desires to accept,
Pettigrew and/or Pettigrew's Corporation (at Pettigrew's choice) shall,
notwithstanding the provisions of Section 5.1 above, have the exclusive
right to purchase all the Shares and/or the Convertible Debenture
mentioned in the Offeror's offer made to Cinepix (and its successors) at
the price
19
and on the terms set out therein. The parties agree that, provided that
a sale by Cinepix (or its successors) to a Third Party or a Shareholder
has taken place after giving rise to this Article 6, this priority right
of first refusal shall not apply thereafter and Pettigrew and
Pettigrew's Corporation shall only benefit from the rights of first
refusal provided in Article 5.
Pettigrew and/or Pettigrew's Corporation may accept in writing to
purchase all the Shares and/or the Convertible Debenture mentioned in
the Offeror's offer within sixty (60) days from receipt of the Notice by
forwarding acceptance in writing to Cinepix (or its successors) together
with (i) a letter or other documents from a bona fide financial
institution, lender or investor (or a combination thereof) approving
with or without conditions to finance such an eventual acquisition by
Pettigrew and/or Pettigrew's Corporation or (ii) evidence of sufficient
funding by Pettigrew and/or Pettigrew's Corporation to finance such an
eventual acquisition. Failure to respond as aforesaid within this delay
shall be deemed to be a refusal of Pettigrew and/or Pettigrew's
Corporation to exercise their rights pursuant to this Section 6.1 and
then Cinepix (and its successors), as Vendor, shall be required to
continue the process already commenced pursuant to Article 5 above.
6.2
Notwithstanding any provision to the contrary, to finance the
acquisition of the Shares and/or the Convertible Debenture covered by an
Offeror's offer pursuant to this Article 6, Pettigrew and/or Pettigrew's
Corporation shall be entitled to sell its Shares to raise the sum
required for the purchase as long as Pettigrew and Pettigrew's
Corporation remain the owners of Shares representing at least ten
percent (10%) of equity (exclusive of votes) at closing of the
acquisition. Closing shall occur within thirty (30) days of the
forwarding of written acceptance (accompanied with appropriate documents
as provided for in the second paragraph of Section 6.1) by Pettigrew
and/or Pettigrew's Corporation; if for any reason whatsoever Pettigrew
and/or Pettigrew's Corporation, acting in good faith, cannot close the
transaction, Cinepix (and its successors), the other Shareholders, the
Offeror and any other party involved will have no recourse against
Pettigrew and Pettigrew's Corporation and then, Cinepix (and its
successors), as Vendor, shall be required to continue compliance with
the provisions of Article 5 above. It is agreed that even in the cases
of failure to respond to the Notice or if, after acceptance of the
Offeror's offer contained in the Notice, a closing does not occur in
accordance with this Section 6.2, Pettigrew and Pettigrew's Corporation
shall have the benefit of the provisions of Section 5.1.
6.3
The rights to purchase given to Pettigrew and Pettigrew's Corporation
pursuant to this Article 6 shall continue to exist even if the
Corporation successfully completes a Public Listing. However, if the
sale of Shares and/or the Convertible Debenture by Cinepix (and its
successors) would not result in a loss of Control of the Corporation by
Cinepix (and its successors), these rights to purchase would only cover
the Class B Shares and the Convertible Debenture held by Cinepix (and
its successors) which are intended to be sold, if any, and not the Class
A Shares of the Corporation which are intended to be sold. For greater
certainty, if, after a Public Listing, the sale of Shares and/or
Convertible Debenture would result in a loss of Control of the
Corporation by Cinepix (and its successors), these rights to purchase
would cover all the Shares and/or Convertible Debenture which are
intended to be sold.
20
6.4
In the event Section 6.1 applies and Pettigrew and/or Pettigrew's
Corporation exercises the exclusive right to purchase all the Shares
and/or Convertible Debenture mentioned in the Offeror's offer, all other
Shareholders have the right (but not the obligation) to sell to
Pettigrew and/or Pettigrew's Corporation, their Shares in the
Corporation on the same terms and conditions as those offered to Cinepix
(and its successors) by the Offeror. The other Shareholders will have a
period of not less than sixty (60) days from the receipt of the Notice
(as defined in Section 5.1) to exercise this option to sell. For greater
certainty, Section 6.2 shall apply mutatis mutandis when other
Shareholders exercise their option to sell hereunder.
6.5
The Shareholders agree that this Article 6 shall apply as long as
Pettigrew (i) is a Senior Officer, subject to what is provided
hereunder in case of wrongful dismissal of Pettigrew; and (ii) has
(considering any anti-dilution option he has under the Option to
Pettigrew, as deemed exercised) either a) at least five percent (5%) of
the equity of the Corporation (exclusive of voting rights) provided he
has at least eighty-four thousand (84,000) Shares of the Corporation,
whether in Class A, Class B and/or Class P Shares or b) at least ten
percent (10%) of equity of the Corporation (exclusive of voting rights)
if he has less than eighty-four thousand (84,000) Shares of the
Corporation, whether in Class A, Class B and/or Class P Shares. The
Shareholders agree that if Pettigrew alleges, in writing, within ten
(10) Business Days of his knowledge of his dismissal, to have been
wrongfully dismissed, his option pursuant to this Article 6 shall
remain in full force and effect (subject to compliance with this
paragraph) until a final arbitration award has been rendered on this
matter by the arbitration tribunal of which the members shall have been
nominated pursuant to the Employment Agreement declaring that the
dismissal of Pettigrew was not a wrongful dismissal or the execution of
an out of court settlement to this effect.
Article 7 FINANCIAL REPORTING
7.1
The Corporation shall provide to the Shareholders:
7.1.1
As soon as available, and in any event not more than 45 days
after the end of each fiscal quarter (other than the last
quarter) of each fiscal year of the Corporation, the unaudited
consolidated and non-consolidated Financial Statements of the
Corporation and of such Important Subsidiaries (as these terms
are defined in the Subscription Agreement) that may be
identified by any of the Shareholders;
7.1.2
as soon as available, and in any event not more than 90 days
after the end of the fiscal year of the Corporation, the audited
consolidated and non-consolidated Financial Statements of the
Corporation and of such Important Subsidiaries that may be
identified by any of the Shareholders, as at the end of each
such year;
7.1.3
as soon as available, but in any event at least 90 days before
the beginning of the Corporation's fiscal years, a business plan
and budget for the Corporation's and for such Important
Subsidiaries that may be identified by any of the Shareholders,
next fiscal year including a balance sheet forecast, operating
forecast and capital expenditures budget, and a detailed
forecast for the next year's operations;
7.1.4
within 30 days following each meeting of the Board and of such
Important Subsidiaries that may be identified by any of the
Shareholders, a copy of the minutes of such board meeting, in
draft form for comments;
21
7.1.5
promptly following the receipt thereof, a copy of any notice,
letter or other document informing the Corporation of the
institution or dispute of any Material legal proceeding
involving the Corporation and its Subsidiaries, as the case may
be;
7.1.6
promptly following the receipt thereof, a copy of all
confirmations of renewal or non-renewal, as the case may be, of
the insurance of the Corporation and its Subsidiaries, as the
case may be;
7.1.7
promptly following the receipt thereof, a copy of any notice,
letter or other document advising the Corporation and/or its
Subsidiaries, as the case may be, of the occurrence of an event
of default (not remedied or waived within five (5) days of its
occurrence) pursuant to any contract to which the Corporation or
its Subsidiaries, as the case may be, is a party or any
financial undertaking of the Corporation and/or of its
Subsidiaries;
7.1.8
promptly following the receipt thereof, a copy of any notice,
letter or other document advising the Corporation and its
Subsidiaries, as the case may be, of any potential or actual
breach of any Applicable Law applicable to the Corporation or
its Subsidiaries or to any of their operations;
7.1.9
every 6 months upon demand by any of the Shareholders, the
Corporation shall provide forthwith such data, reports,
statements, documents and other additional information
pertaining to the Business, assets, liabilities, financial
position, operating results or prospects of the Corporation and
its Important Subsidiaries as such Shareholders may request,
acting reasonably, except if the financial situation of the
Corporation is deteriorating, in which case such Shareholders
may make more than one demand at every 6 months; and
7.1.10
the Shareholders shall at all times have full access to the
Corporation and its Important Subsidiaries' books and records.
Article 8 FORCED SALE OPTION
8.1 Should the Corporation be unable to pay the retraction price of the Class E Shares to the holders of Class E Shares, pursuant to Section F of
the Articles for more than six (6) months following the notice requesting the retraction of Class E Shares given pursuant to Section F of the
Articles, for whatever grounds including that it fails to comply with the provisions of the Companies Act (Quebec) after giving a thirty
(30) day prior written notice to the other Shareholders and the Corporation, the holder of Class E Shares shall have the option of:
8.1.1
putting up for sale all issued and outstanding Shares and
Convertible Securities held in the share capital of the
Corporation and requiring forthwith that, should a Third Party
offer to purchase all of the issued and outstanding Shares and
Convertible Securities of the share capital of the Corporation
and the holder of Class E Shares choose to accept such offer,
all other Shareholders of the Corporation shall sell all Shares
and Convertible Securities they hold in the share capital of the
Corporation to such Third Party according to the same terms and
conditions as those accepted by the holder of Class E Shares;
being understood
22
by the parties that in such case the right of first refusal set
forth in Article 5 of this Amended and Restated Agreement will
not be applicable; or
8.1.2
putting up for sale all assets of the Corporation, it being
understood that all other Shareholders of the Corporation
undertake to exercise their voting rights so as to approve such
sale;
(options under Sections 8.1 and 8.2 being collectively referred
to hereinafter as the "FORCED SALE OPTION")
8.2 The Forced Sale Option shall be exercised by the holder of Class E Shares by sending a written notice to all other Shareholders and the
Corporation setting out the contents of the offer made by the Third Party and the identity thereof. A copy of any offer made by a Third Party
shall also be remitted to all other Shareholders and the Corporation at the same time.
8.3 Upon receiving the above notice, the other Shareholders shall reasonably co-operate with the holder of Class E Shares for the purposes of
completing the transfer of Shares and, where applicable, Convertible Securities or assets, as the case may be, as soon as possible following
receipt of such notice.
8.4 The Corporation undertakes to co-operate with the holder of Class E Shares selling its Shares and, where applicable, Convertible Securities
or assets of the Corporation pursuant to Section 8.1.1 by providing, inter alia, any financial, accounting, technical, commercial or other relevant
information normally required by an eventual purchaser of a business so that the holder may, in turn, send such information to any potential
purchaser (provided such potential purchaser agrees to enter into an acceptable confidentiality agreement with the Corporation and give a
restrictive covenant in favour of the Corporation in order to protect key-employees of the Corporation and its Subsidiaries from direct
solicitation during a reasonable lapse of time if individual and personal information on those key-employees is required);
8.5 Where the holder of Class E Shares identifies a Third Party (or a Shareholder) that wishes to purchase the issued and outstanding Shares
and Convertible Securities of the share capital of the Corporation or all of the assets thereof, the Corporation shall have the option, during a
forty-five (45) day period following receipt by the Corporation from the holders of Class E Shares of the notice provided for in Section 8.2
notifying the Corporation of the contents of the Third Party (or the Shareholder) offer and the identity thereof, to identify a Third Party (or a
Shareholder) purchaser to purchase the Shares and Convertible Securities of the share capital or all of the assets thereof, and the Shareholders
shall be required, upon request by the Corporation, to sell to such Third Party (or the Shareholder) purchaser all Shares and Convertible
Securities they hold; the Corporation may, where applicable, sell to such Third Party (or the Shareholder) purchaser all assets of the
Corporation provided that the price and terms and conditions of purchase proposed by such Third Party (or the Shareholder) purchaser be, for
the Shareholders of the Corporation, at least equal to the price and terms and conditions of purchase of the Third Party identified by the holder
of Class "E" Shares;
8.6 Where the holder of Class E Shares having identified a Third Party purchaser and the Corporation failing to reach an agreement as to
whether the offer obtained by the Corporation from such other Third Party purchaser is at least equal, for the Shareholders of the Corporation,
to the price and terms and conditions of purchase offered by the Third Party
23
identified by the holder of Class E Shares, such matter shall be
determined by any Canadian accounting or valuation firm operating
nation-wide having a place of business in Quebec, designated jointly by
the holder of Class E Shares and the Board or, should they fail to do so
within five (5) days of the date on which the Corporation obtained the
Third Party offer, by a judge of the Superior Court of the District of
Montreal at the request of the holder of Class E Shares or the board of
directors of the Corporation (the "VALUATOR"). The decision of the
Valuator as to whether the price and terms and conditions of purchase
proposed by the Third Party purchaser identified by the Corporation is
at least equal to those proposed by the Third Party identified by the
holder of Class E Shares having requested the redemption of its Shares
shall be final and binding upon all Shareholders of the Corporation.
8.7
The holder of Class E Shares shall have the right to receive, from the
purchase price paid by the Third Party purchaser, in priority to any
other shareholder the higher of the following amounts: (i) an amount
equal to the subscription price paid for said Class E Shares plus the
declared and unpaid dividends on such Class E Shares; and (ii) the "Fair
Market Value" of each Class E Share as this expression is defined in the
Articles.
Article 9 DEATH OR DISABILITY OF PETTIGREW
9.1
Pettigrew and, as the case may be, Pettigrew's Corporation and
Pettigrew's estate, hereby irrevocably offer to sell to the Corporation,
which irrevocably accepts to buy, at the price stipulated in Article 13
hereof and upon the terms and conditions set forth hereinafter all of
his (its) Shares and Convertible Debenture (in its entirety) then held
in the event of the death or Disability of Pettigrew, whichever comes
first, which events are each a suspensive condition to this offer.
9.2
Article 9 shall cease to apply should the Corporation successfully
complete a Public Listing, unless the death or Disability of Pettigrew
has occurred prior to the closing of the Public Listing.
9.3
The closing of the sale of Shares and Convertible Debenture provided for
in Section 9.1 shall occur within six (6) months of the death or
Disability of Pettigrew.
Article 10 LIFE INSURANCE AND DISABILITY INSURANCE
10.1
In order to fulfil the Corporation's obligations in the event of
Pettigrew's death or Disability pursuant to Article 9, the Corporation
shall use its best efforts to subscribe and maintain in full force and
effect throughout the term of this Amended and Restated Agreement a
policy or policies of life insurance on the life of Pettigrew for an
aggregate coverage amount of at least Six Million Canadian Dollars
(CDN$6,000,000) payable upon the death of Pettigrew, and the Corporation
shall use its best efforts to subscribe and maintain in full force and
effect throughout the term of this Amended and Restated Agreement a
policy or policies on the Disability of Pettigrew for such reasonable
available coverage (hereinafter collectively the "POLICIES") and
Pettigrew hereby accepts to submit himself to, as may be reasonably
required at any time and from time to time, any medical examination for
the purposes of subscribing for and maintaining in full force and
effect, the Policies. The owner of the Policies and the beneficiary
(hereinafter the "BENEFICIARY") of the proceeds of the Policies
(hereinafter the "PROCEEDS") shall be the Corporation. On a yearly
basis, subject to Subsection 10.1.2, the Corporation shall review and
increase or decrease, if necessary, the Proceeds payable under the
Policies to ensure that the amount of life insurance in such year is at
least equal to the
24
value of the Shares, Securities and the Convertible Debenture held by
Pettigrew or Pettigrew's Corporation calculated as if the obligations to
purchase those Shares, Securities and the Convertible Debenture was
created on the first day of January of any year this Amended and
Restated Agreement is in force, starting January 1, 2002 and make the
necessary adjustments to any policies payable upon the Disability of
Pettigrew.
Notwithstanding anything to the contrary in this Amended and Restated
Agreement:
10.2
10.1.1
When upon Pettigrew's death or Disability, the Corporation must
buy Shares, Securities and the Convertible Debenture from
Pettigrew, Pettigrew's estate or Pettigrew's Corporation
(hereinafter in this Article "PETTIGREW'S SHARES") owned by
them, the first One Million Canadian Dollars (CDN$1,000,000)
payable out of the Proceeds shall be used by the Corporation to
buy Pettigrew's Shares, Securities and Convertible Debenture,
the next One Million Two Hundred and Fifty Thousand Canadian
Dollars (CDN$1,250,000) payable out of the Proceeds shall be
kept by the Corporation and the remainder of the Proceeds shall
be used by the Corporation to fund the purchase of Pettigrew's
Shares, Securities and Convertible Debenture.
10.1.2
Unless all Shareholders consent to the contrary, in any
financial year of the Corporation, the Corporation shall not
pay, as premiums excluding applicable taxes, more than Fifty
Thousand Canadian Dollars (CDN$50,000) for the Policies. If the
Corporation has to pay more than Fifty Thousand Canadian Dollars
(CDN$50,000) for the Policies, then the insurance coverage shall
be diminished to such an amount where the insurance premiums
shall not be more than Fifty Thousand Canadian Dollars
(CDN$50,000).
Upon the death of Pettigrew or his Disability, subject to Section 9.1
and Subsection 10.1.1, all or part of the Proceeds shall be used by the
Beneficiary to fund the purchase of Pettigrew's Shares, directly or
indirectly, held and/or controlled by Pettigrew, Pettigrew's Corporation
or the estate of the deceased Pettigrew (Pettigrew, Pettigrew's
Corporation and the estate of the deceased Pettigrew, as the case may
be, in this Article, the "SELLING SHAREHOLDER"), so that the purchase
price payable by the Corporation to the Selling Shareholder in respect
of Pettigrew's Shares be funded by all or part of the Proceeds, as the
case may be. Notwithstanding anything to the contrary herein, in the
event that the Proceeds (distributed in accordance with Section 10.1)
are not sufficient to fund or fully fund the payment of the purchase
price, then the Corporation shall only buy and the Selling Shareholder
shall only sell to Corporation such number of Pettigrew's Shares which
may be legally paid out of the Proceeds; any part of Pettigrew's Shares
which have not been bought by the Corporation because the Proceeds were
insufficient shall be bought by the Corporation and sold by the Selling
Shareholder as follows for each financial year ended after the foregoing
purchase:
10.2.1
within three (3) months after the approval of the Corporation's
financial statements, the Auditors shall determine the
Corporation's after tax profit for that year, as determined by
the Auditors applying generally accepted accounting principles
applicable in Canada and the Board shall cause, to the extent
permitted by the Companies Act (Quebec), the Corporation to use
twenty-five percent
25
(25%) of said amount to fund purchase of additional Pettigrew's
Shares from the Selling Shareholder. The purchase price of these
additional Pettigrew's Shares shall be equivalent to the
purchase price per Pettigrew's Share which had been paid out of
the Proceeds to the Selling Shareholder.
The Corporation shall make all such commercially reasonable efforts
which may be required to designate or qualify any and all part of the
purchase price paid out of the Proceeds as a "capital dividend" or such
other designation qualifying the payment of the purchase price as tax
free to the recipients to the extent available under prevailing tax laws
at the relevant time.
10.3
The premiums payable in respect of the Policies in any financial year
shall be assumed by the Corporation. In the event the Corporation fails
to maintain the Policies, any Shareholder may do so for the account of
the Corporation, and the Corporation shall consequently reimburse any
insurance premiums paid by a Shareholder.
10.4
If Pettigrew ceases to be a direct or indirect Shareholder of the
Corporation or if the Corporation completes a Public Listing prior to
the death or Disability of Pettigrew, the Corporation shall relinquish
all of its interest in and under all Policies held on the life and
Disability of Pettigrew and shall take such steps as are necessary or
expedient to assign such interest in accordance with Pettigrew's
instructions. The Corporation shall pay all premiums for said Policies
until the date such assignment is effective.
11.1
Without limiting the provisions of Article 16 and as long as Cinepix,
Cinepix Films and/or Cinepix Inc., directly or indirectly, Control the
Corporation, in the event of a direct or indirect change of Control of
Cinepix, Cinepix Films, Cinepix Inc. Pettigrew and SGF Tech, on a Pro
Rata Basis, shall each have, in their sole discretion, the option to
purchase, directly or through Pettigrew's Corporation for Pettigrew'
portion, all but not less than all of the issued and outstanding Shares
and the Convertible Debenture of the Corporation held by Cinepix (and
its successors pursuant to Section 3.2) (the Shares and the Convertible
Debenture are collectively designated in this Article the "PURCHASED
SHARES AND DEBENTURE").
Article 11 CHANGE OF CONTROL OF CINEPIX
Pettigrew and SGF Tech must exercise this option forty-five (45) days
following the earlier of (a) their receipt of a notice containing all
relevant details of such a transaction or (b) their knowledge of the
occurrence of the transaction with all relevant details of such
transaction by sending to the owner of the Purchased Shares and the
Debenture a notice stating that Pettigrew, Pettigrew's Corporation or
SGF Tech exercises their option under this Section 11.1. Pettigrew and
SGF Tech together may, at their discretion, but without any obligation
to do so, renounce, in writing, to the term provided above in (a) or
(b), and exercise this option even if they have not received a notice of
the transaction or all relevant details of such a transaction.
Pettigrew and SGF Tech shall have an additional ten (10) days after the
Fair Market Value of the Purchased Shares and Debenture has been
determined in accordance with Article 13 (which Article 13 shall be
applicable in its entirety except that the delay of thirty (30) days
within which Pettigrew, Pettigrew's Corporation or SGF Tech (as the
Purchaser as defined in Article 13) and the Vendor (as defined in
Article 13) shall try to reach an agreement as to the purchase price
shall start from the occurrence of the earlier of either of the events
26
described in (a) or (b) above in this Section 11.1 and the renunciation
of both Pettigrew and SGF Tech together to the term provided above in
(a) or (b)) to obtain the requisite financing to buy the Purchased
Shares and Debenture. The terms of payment for the Purchased Shares and
Debenture (as the case may be) shall be those stated in Subsection
14.2.3 of this Agreement. If for any reason whatsoever Pettigrew,
Pettigrew's Corporation and/or SGF Tech, together, acting in good faith,
cannot close the transaction after having exercised their option, the
Shareholders and any other party involved will have no recourse against
Pettigrew, Pettigrew's Corporation and SGF Tech, however, in such a
case, this Article will cease to receive application for the future
unless SGF Tech or Pettigrew agrees to close the transaction without SGF
Tech, Pettigrew or Pettigrew's Corporation or any of them.
Section 6.2 of this Agreement shall apply mutatis mutandis in favour of
Pettigrew and Pettigrew's Corporation to finance an acquisition pursuant
to this Section 11.1.
This Section 11.1 applies whether or not the change of Control
contemplated herein would result in the loss for the Corporation of the
Quebec Tax Credits and/or Canadian Tax Credits, or would have a negative
impact thereon.
The Shareholders agree that Section 11.1 shall apply as long as
Pettigrew (i) is a Senior Officer of the Corporation, subject to what is
provided hereunder in case of a dismissal of Pettigrew without Cause, as
this term is defined in the Employment Agreement; and (ii) has
(considering any anti-dilution option he has under the Option to
Pettigrew, as deemed exercised) either (a) at least five percent (5%) of
the equity of the Corporation (exclusive of voting rights) provided he
has at least eighty-four thousand (84,000) Shares of the Corporation,
whether in Class A, Class B and/or Class P Shares; or (b) at least ten
percent (10%) of equity of the Corporation (exclusive of voting rights)
if he has less than eighty-four thousand (84,000) Shares of the
Corporation, whether in Class A, Class B and/or Class P Shares.
The Shareholders agree that if Pettigrew alleges, in writing, within ten
(10) Business Days of his knowledge of his dismissal, to have been
dismissed without Cause as this term is defined in the Employment
Agreement, his option pursuant to this Section 11.1 shall remain in full
force and effect (subject to compliance with the above paragraph) until
a final arbitration award has been rendered on this matter by the
arbitration tribunal of which the members shall have been nominated
pursuant to the Employment Agreement declaring that the dismissal of
Pettigrew was not a dismissal without Cause, as this term is defined in
the Employment Agreement or the execution of an out of court settlement
to this effect.
This Section 11.1 applies even after the Corporation successfully
completes a Public Listing if the option provided in this Section 11.1,
prior to such Public Listing, has been exercised and not waived and
applies regardless of the fact that the change of Control may have
resulted into conversion of Class P Shares into Class B Shares.
27
Article 12 DEFAULT
12.1
The occurrence of any of the following events shall constitute an event
of default (an "EVENT OF DEFAULT") hereunder on the part of the
Shareholder with respect to whom such event occurs (the "DEFAULTER"),
if, within the number of Business Days, provided in the notice of such
default sent by any other party in the manner set forth in this Article
12, following receipt of said notice, the Defaulter fails to cure the
default; provided, however, that the occurrence of any event described
in Subsections 12.1.1 to 12.1.4, 12.1.7 and 12.1.9 shall constitute an
Event of Default immediately upon such occurrence without any
requirement of notice or passage of time, except as specifically set
forth in any such Subsections:
12.1.1
the institution by a Shareholder of proceedings of any nature
under any laws of Canada, of any province of Canada, of the
United States of America or of any American State for the relief
of debtors wherein such Shareholder is seeking relief as debtor
including the taking of any action by a Shareholder to
participate in, or commence any proceeding relating to,
insolvency or bankruptcy or the seeking of reorganisation,
arrangement, protection, relief or composition of a Shareholder
or any of his or its property or debt or the making of a
proposal under any law relating to bankruptcy, insolvency,
reorganisation or compromise of debt;
12.1.2
a general assignment by a Shareholder for the benefit of its
creditors in general;
12.1.3
the institution against a Shareholder of a petition of
bankruptcy under any section of the Bankruptcy and Insolvency
Act (Canada) or any similar act under the U.S. or any American
State laws, which proceeding is not dismissed, stayed or
discharged within a period of sixty (60) days after the filing
thereof or, if stayed, which stay is thereafter lifted without a
contemporaneous discharge or dismissal of such proceeding;
12.1.4
any admission by a Shareholder in writing of its inability to
pay its debts as they become due or any acknowledgement of
insolvency;
12.1.5
any material breach or violation of this Amended and Restated
Agreement by a Shareholder;
12.1.6
except as provided for in Section 3.1 of this Amended and
Restated Agreement, the registration of any legal hypothec on
all or part of the Shares, Convertible Debenture or Securities
held by a Shareholder where such hypothec remains registered for
a period of more than twenty (20) days after the registration
thereof or the rendering of any judgment against any Shareholder
as a result of any action taken by any Third Party, which
condemns the Shareholder to the payment of an amount of One
Hundred Thousand Dollars ($100,000) or more unless an appeal is
taken therefrom within the period of time permitted by law to
appeal from such judgment, and as long as said appeal is not
partly or fully dismissed, or the amount payable under such
judgment (as modified by an out of court settlement) is paid and
discharged in full and evidence of such appeal or of such
payment and discharge is provided to all the other parties
hereto within the aforesaid period of time or if no appeal may
be taken from such judgment unless the amount payable under such
judgment is paid and discharged in full and evidence of such
payment
28
and discharge is provided to all the other parties hereto within
a period of thirty (30) days following the date such judgment is
rendered;
12.1.7
private appointment of a receiver, trustee or similar official
for a Shareholder's property and assets or any part thereof,
which appointment is not dismissed, stayed or discharged within
a period of sixty (60) days after the filing thereof or, if
stayed, which stay is thereafter lifted without a
contemporaneous discharge or dismissal of such appointment;
12.1.8
seizure of his or its Shares, Securities or Convertible
Debenture, including execution, distress or other enforcement
process (in this Subsection 12.1.8, the "SEIZURE"), not opposed
within five (5) days of such Seizure or if after such opposition
the Seizure is not quashed and the seizing party could become
owner of the Shares, Securities or Convertible Debenture; or
12.1.9
any Shareholder or any of its directors and officers commits a
fraud against the Corporation or one of its Subsidiaries.
12.2
Should any of the events described in Subsection 12.1.5, 12.1.6 or
12.1.8 occur, any Shareholder may send a notice to the Defaulter and to
all the other Shareholders hereto, setting forth the details of the
default, and, if any, the manner in which such default may be cured by
the Defaulter within a fifteen (15) Business Days delay of sending of
said notice to the Defaulter.
12.3
If a default under Subsections 12.1.1 to 12.1.4, 12.1.7 and 12.1.9
arises or if a default arises under Subsection 12.1.5, 12.1.6 or 12.1.8
which is not cured following the notice of default sent pursuant to
Section 12.2 within the delay therein stipulated, which default is a
suspensive condition of this offer, then the Defaulter irrevocably
offers to sell to other Shareholders at the price stipulated in Article
13 his or its Shares and Convertible Debenture as determined at the
occurrence of the condition of this offer.
12.4
In the event that any Shareholder wants to accept the offer made
pursuant to Section 12.3 within thirty (30) days of his knowledge of an
Event of Default, he shall send a notice of his acceptance to the other
Shareholders, the Defaulter and the Corporation. After receipt of this
notice, if one or more of the other Shareholders also want to accept the
offer made pursuant to Section 12.3, within thirty (30) days of receipt
of the acceptance of the offer from the first accepting Shareholder,
said other Shareholders shall give notice of their acceptance to the
Defaulter, the Corporation and all other Shareholders, including the
first accepting Shareholder, failing which all other Shareholders are
deemed not to have accepted the offer. If more than one Shareholder
accepts the offer made pursuant to Section 12.3, the accepting
Shareholders shall acquire the Shares of the Defaulter on a Pro Rata
Basis (excluding the Shares of all other Shareholders and of the
Defaulter).
12.5
The closing of the sale provided for in this Article must occur within
sixty (60) days of the last acceptance of the offer by the other
Shareholders.
12.6
The Shareholders and the Corporation hereby renounce to Article 1392 of
the Civil Code of the Province of Quebec.
12.7
Any Event of Default by Pettigrew shall be deemed to be an Event of
Default by Pettigrew's Corporation and vice versa.
29
Article 13 VALUATION
13.1
The value (or purchase price) of the Shares and the Convertible
Debenture pursuant to Article 9 and Article 12 of this Amended and
Restated Agreement shall be the amount agreed to by the Purchaser
acquiring the Shares and the Convertible Debenture and the vendor of
said Shares and the Convertible Debenture (hereinafter the "VENDOR")
within the thirty (30) day period following request by the Purchaser or
the Vendor to establish the purchase price. In the event agreement is
not reached within such thirty (30) day period, each of the Vendor and
the Purchaser shall, within fifteen (15) days following the expiry of
such thirty (30) day period, appoint a business valuator member of the
Canadian Institute of Chartered Business Valuators and having experience
in the Business to determine the Fair Market Value of the Shares and the
Convertible Debenture as at the date of the event giving rise to the
sale. Each such valuator (the "ORIGINAL VALUATORS") shall be instructed
to deliver its valuation as soon as practicable, and in any event within
thirty (30) days of his appointment. Each party to valuation and the
Corporation (when the Corporation is not the Purchaser) must collaborate
to promptly give all relevant information to the Original Valuators. If
a party to valuation does not so appoint such a valuator, then the
valuation determined by the valuator appointed by the other party shall
be the purchase price for the Shares and Convertible Debenture. For
greater certainty, the costs and expenses of each Original Valuator
shall be paid by the party retaining such valuator. For the purposes of
this Article 13, Pettigrew and Pettigrew's Corporation (if such a
corporation is a Vendor) shall be deemed to be one party to valuation
and if more than a Person is the Purchaser, said Persons shall be deemed
to be one party to valuation.
13.2
If the lowest of the two (2) valuations of the Original Valuators is at
least ninety percent (90%) of the highest valuation of the Original
Valuators, the purchase price for the Shares and Convertible Debenture
shall be equal to the mid-point of the two (2) original valuations. If
the lowest of the two (2) valuations is less than ninety percent (90%)
of the highest valuation, the Original Valuators shall, within ten (10)
days of the delivery of the last of the valuations, mutually agree upon
a third valuator having experience in the Business (the "THIRD
VALUATOR") who shall determine the Fair Market Value of the Shares and
the Convertible Debenture as aforesaid which valuation shall be the
purchase price for the Shares and the Convertible Debenture and which
shall be final and binding upon the Purchaser and the Vendor, unless the
valuation of the Third Valuator is lower than the lower of the two (2)
valuations of the Original Valuators, in which case the lowest valuation
of the Original Valuators shall be deemed to be the Fair Market Value of
the Shares and Convertible Debenture and shall be final and binding upon
the Purchaser and the Vendor. If the Original Valuators fail to appoint
a Third Valuator within such ten (10) day period, the Third Valuator
shall be appointed by the Auditors of the Corporation. The Third
Valuator shall be instructed to deliver its valuation as soon as
practicable, and in any event within thirty (30) days of his
appointment. Each party and the Corporation (when the Corporation is not
the Purchaser) must collaborate to promptly give all relevant
information to the Third Valuator. The costs of the Third Valuator shall
be paid by the party whose Original Valuator provided a valuation which
is furthest from the valuation determined by the Third Valuator.
13.3
For the purposes of valuation under Article 11, the Original Valuators
and the Third Valuator should not consider that Pettigrew and/or
Pettigrew's Corporation (if such a Corporation is
30
a Vendor) have exercised any option under the Option to Pettigrew or the
Stock Option Plan except to the extent Pettigrew and/or Pettigrew's
Corporation have exercised such options.
Article 14 CLOSING
14.1
Unless otherwise agreed by the Purchaser and the vendor of the Shares
(hereinafter in this Article the "VENDOR"), the closing of any sale and
purchase contemplated in this Amended and Restated Agreement shall be at
a place (in Montreal, Quebec) and time as determined by the Purchaser;
provided, however, the date is within the time limit set for the sale,
purchase and payment of the purchase price for the first part thereof.
14.2
Unless otherwise agreed by the Purchaser and the Vendor, the Purchaser
shall deliver to the Vendor:
14.2.1
In the circumstances contemplated by Section 9.1, when
Pettigrew, Pettigrew's Corporation and/or Pettigrew's estate is
the Vendor, in the case of Proceeds being payable to the
Corporation in respect of the death of Pettigrew or his
Disability, the Corporation (acting as Purchaser) shall, subject
to Section 10.1, remit to the Vendor the lesser of (i) the
purchase price for such Shares and (ii) up to the amount of life
insurance Proceeds paid to the Corporation, a certified cheque
for the full amount payable under Section 9.1;
14.2.2
In the circumstances contemplated by Article 12 and also subject
to the provisions set forth in the Articles:
(1)
a certified cheque in an amount equal to forty percent
(40%) of the purchase price, except in case of
bankruptcy where the amount of certified cheque shall be
limited to ten percent (10%) of the purchase price; and
(2)
a Promissory Note of the Purchaser of the balance of the
purchase price, payable over three (3) years in equal
annual instalments of principal and interest with
interest at the prime commercial lending rate of the
Corporation's bankers determined as at the Closing,
except in case of bankruptcy where the purchase price
shall be payable over seven (7) years in equal annual
instalments of principal and interest at the prime
commercial lending rate of the Corporation's bankers
determined as at the Closing.
14.2.3
In all other circumstances, including without limitation, a sale
of shares pursuant to Section 11.1, one hundred percent (100%)
of the purchase price shall be paid at closing;
14.2.4
In the case where a Promissory Note is issued by the Purchaser,
a hypothecation, of the Shares or Convertible Debenture which
are the subject matter of the sale and purchase, to the
Corporation's legal counsel in each case to be held in trust for
the Vendor and the given Purchaser as their interests appear
under the terms of this Amended and Restated Agreement;
14.2.5
Any on demand or no term indebtedness owing by the Corporation
to the Vendor shall be repaid by the Corporation to the Vendor
within a one (1) year period of the closing of the sale of the
Shares or Convertible Debenture, it being understood that this
term of payment is in favour of the Corporation;
31
14.2.6
14.3
14.4
A release of all guarantees given by the Vendor (including
Pettigrew's wife, Luz Dary Quintero, if Pettigrew is the Vendor
and including Pettigrew and his wife Luz Dary Quintero, if the
Vendor is Pettigrew's Corporation) in respect of the
Corporation's indebtedness and all collateral security relating
thereto. If the Purchaser is unable to obtain such releases by
Closing, the Purchaser shall indemnify, in writing, the Vendor
(and Pettigrew if the Vendor is Pettigrew's Corporation) against
all claims on such guarantees and shall continue to use best
efforts to obtain the release of such guarantees.
Unless otherwise agreed by the Purchaser and the Vendor, at the Closing,
the Vendor shall deliver to the Purchaser the following:
14.3.1
Share certificates for all Vendor's Shares duly endorsed for
transfer in blank;
14.3.2
Resignation of Vendor's nominee directors from the board of
directors of the Corporation.
Unless otherwise agreed by the Purchaser and the Vendor and subject to
Subsection 14.2.4, after closing provided in Article 14, the Vendor
shall not, thereafter, be entitled to any dividends or other
distributions which may be declared and become payable on those Shares
being sold and in the event that such Shares are hypothecated, such
dividends or other distribution shall be paid by the Corporation to its
legal counsel, who shall in turn apply such dividends or other
distributions in payment of the purchase price to the extent that such
dividends or other distributions are in cash. To the extent that such
dividends or other distributions are not in cash, they shall be held by
the legal counsel of the Corporation on the same terms and subject to
the same conditions as those on which the Shares on which the dividends
or other distributions have been made are held.
Article 15 CONDUCT OF THE AFFAIRS OF THE CORPORATION
15.1
Notwithstanding any other provision of this Amended and Restated
Agreement, no obligation of the Corporation will be binding on it, and
no action will be taken by or with respect to the Corporation in respect
of any of the matters set forth below, without the prior written consent
of Shareholders holding not less than eighty percent (80%) in aggregate
of the voting rights in issued Shares and also, without the specific
prior written consent of SGF Tech (provided that such specific veto
right of SGF Tech shall cease to apply if more than 50% of the Class "E"
shares issued and outstanding are transferred to a Person identified in
Schedule 15.1); the powers of the Board are removed and exercised by the
Shareholders accordingly; this Section 15.1 constitutes a Unanimous
Shareholders' Agreement in accordance with Sections 123.91 to 123.93 of
the Companies Act (Quebec).
15.1.1
Subject to the provisions of this Article 15 and Section 16.4 of
this Amended and Restated Agreement, any change in the number of
directors and any action which would impair the rights of any
Shareholder to nominate their representatives to the Board;
15.1.2
the salary, bonuses or other compensation to be paid by the
Corporation to the President and Chief Executive Officer, except
as agreed in the Employment Agreement or in the Stock Option
Plan or bonus plan to be put in place by the Corporation for its
Senior Officers;
32
15.1.3
the adoption, replacement, repeal or modification of any
remuneration policy and the payment of any remuneration which is
not in accordance with such policy;
15.1.4
subject to the provisions of this Article 15 and Section 16.4 of
this Amended and Restated Agreement, any change of the quorum of
the meetings of the Board and of Shareholders;
15.1.5
the approval of the annual audited consolidated and
non-consolidated financial statements of the Corporation;
15.1.6
any change in the Auditors of the Corporation;
15.1.7
the appointment of the President and the determination of the
conditions hereof;
15.1.8
any change to the nature of the Corporation or of the Business,
as currently carried on by the Corporation, except as set out in
the business plan of the Corporation, as may be modified
pursuant to this Article 15 (the "BUSINESS Plan");
15.1.9
the approval of the annual Business Plan;
15.1.10 any change in the head office and principal place of business of
the Corporation outside the Metropolitan Region of Montreal;
15.1.11 the adoption or modification of annual comprehensive operating
budgets and capital expenditure budgets of the Corporation and
of its Subsidiaries, including, without limitation, all
inter-corporation charges among the Corporation, its
Subsidiaries and its Affiliates, and the authorization of any
derogations from such budgets which, in the case of the
operating or capital expenditure budget, as the case may be,
exceed individually or in the aggregate ten percent (10%) of the
amounts provided under the main headings of the operating budget
or globally under the capital expenditure budget, as the case
may be;
15.1.12 the adoption or material modification of the annual marketing
plan of the Corporation;
15.1.13 the establishment of any committee of the Board;
15.1.14 any acceptance and go-ahead on a production of the Corporation
which exceeds One Million Canadian Dollars (CDN$1,000,000) in
budget (excluding direct and indirect producer and
administrative fees and profits of Corporation's Subsidiaries),
except:
(1)
when the total budget production is between One Million
Canadian Dollars (CDN$1,000,000) and Five Million
Canadian Dollars (CDN$5,000,000) if at least eighty
percent (80%) of the production budget (excluding direct
and indirect producer and administrative fees and
profits of Corporation's Subsidiaries) is covered by
financings, commitments, agreements, tax credits and tax
advantages, by among others, co-producers, distributors,
sponsors, bankers, lenders, financial partners,
governments and/or other parties; and
(2)
when the total budget production is more than Five
Million Canadian Dollars (CDN$5,000,000), if at least
ninety percent (90%) of the production budget (excluding
direct and indirect producer and administrative fees and
profits of Corporation's Subsidiaries) is covered
33
by financings, commitments, agreements, tax credits and
tax advantages by, among others, co-producers,
distributors, sponsors, bankers, lenders, financial
partners, governments and/or other parties.
For the purposes of this Subsection 15.1.14 deferred payments
may be considered as financings when said differed payments
shall be made out of the production revenues.
15.1.15 The voluntary liquidation, dissolution, winding-up of the
Corporation, its consolidation, amalgamation, reorganization or
merger with another Person, or the creation of a Subsidiary of
the Corporation, except a Subsidiary created for the purposes of
developing, producing or co-producing a project.
15.1.16 Any assignment of the assets of the Corporation in bankruptcy,
deposit of a proposal in bankruptcy and any other recourse for
the protection of debtors.
15.1.17 The approval of transactions out of the ordinary course of
business of the Corporation including, without limiting the
generality of the foregoing, the following:
(1)
any sale, acquisition or lease of immovable property of
more than One Hundred Thousand Canadian Dollars
(CDN$100,000);
(2)
the borrowing of money or the giving of security where
the total amount, in each case, exceeds, singly or in
the aggregate, Five Hundred Thousand Dollars ($500,000)
in any one year, except if already in the Corporation's
budgets or Business Plans approved by the Board;
(3)
the granting of a loan or other financial aid of more
than Twenty-Five Thousand Canadian Dollars (CDN$25,000)
to or the guaranteeing of more than Twenty-Five Thousand
Canadian Dollars (CDN$25,000) of a debt of a Shareholder
or an Affiliate of a Shareholder;
(4)
any acquisition or Disposition by the Corporation,
including by way of license of any asset of the
Corporation worth more than One Hundred Thousand
Canadian Dollars (CDN$100,000) if not already in the
Corporation's budgets or Business Plans approved by the
Board or the granting by the Corporation of an option to
the same effect;
(5)
the acquisition of capital assets not provided for in
the annual budget when the total amount, in each case,
exceeds, singly or in the aggregate or one hundred
thousand Canadian Dollars ($100,000) in any one year;
(6)
any sale of shares of any Subsidiaries, except in the
normal course of business to a co-producer of a project;
(7)
the sale of all or substantially all of the assets of
the Corporation;
(8)
the acquisition of an interest in another corporation,
partnership, firm or business for an amount of more than
One Hundred Thousand Canadian Dollars (CDN$100,000);
(9)
the entering into or modification of a contract where
the term of such contract, including any renewal options
in favour of the other party, exceeds one (1) year or
where the total consideration thereunder exceeds Two
Hundred and Fifty Thousand Canadian Dollars
(CDN$250,000); and
34
(10) any licensing agreement where the total consideration hereunder exceeds CDN$250,000.
15.1.18 Any change in the Articles or By-Laws of the Corporation and of its Subsidiaries.
15.1.19 Except as provided in the Articles, any matters relating to the payment of dividends, distribution of surplus, repurchase or redemption
of Shares of the Corporation, except as provided in this Amended and Restated Agreement or the Employment Agreement.
15.1.20 Any sale, transfer, assignment or other disposal of Shares of the Corporation, except if made in accordance with the provisions of this
Amended and Restated Agreement, the Option to Pettigrew, the Convertible Debenture, the Lions Gate Debenture or the Stock Option Plan.
15.1.21 The allotment, issue, redemption or repurchase of Shares, Securities or the entering into of any agreement or the making of an offeror,
the granting of any right or option which may constitute an undertaking to do any of the foregoing transactions or any amendment to the Stock
Option Plan, any issuance of Shares and options and other Securities of the Corporation, except for those issued under:
(1) the Option to Pettigrew;
(2) the Option to Faire Trust;
(3) the Stock Option Plan;
(4) the Convertible Debenture;
(5) if in the reasonable opinion of a majority of members of the Board of the Corporation and subject to pre-emptive rights herein an issue of
Shares is necessary because the Corporation has a cash balance of Five Hundred Thousand Canadian Dollars (CDN$500,000) or less after
reserving cash to meet the Corporation's short-term then outstanding obligations, debts and liabilities and no other source of financing is
reasonably acceptable and available (including without limitation issues of Shares to Shareholders), at standard business terms;
(6) Shares issued following the automatic conversions provided for in Section 16.2 and Shares issued pursuant to Sections 16.3 and 16.6;
(7) the Lions Gate Debenture;
(8) adjustment mechanism, as provided in Article 3 of the Subscription Agreement; and
(9) the privilege of exchange of SGF Tech, the automatic exchange of Class E shares and the adjustments to the exchange ratio, the public
listing exchange ratio and the issuance of Class F shares as described in the Articles of Amendment of the Corporation dated July 9, 2001.
15.1.22 Any Material transaction between the Corporation and a Related Party of the Corporation, any Shareholder of the Corporation or any of
their Affiliates or their Subsidiaries (the "INTER-CORPORATION ARRANGEMENTS"); all Inter-corporation Arrangements must be
reflected in writing;
35
15.1.23 The institution of any legal proceeding material to the Business
and operations of the Corporation or the settlement of any such
legal proceeding (excluding, in both cases, actions on accounts
and lawsuits in respect of the rights and obligations of the
Parties pursuant to this Amended and Restated Agreement or
otherwise as well as any emergency recourse of the nature of an
injunction such as the Anton Pillar remedy and Mareva
injunction) when the amount in question exceeds Fifty Thousand
Canadian Dollars (CDN$50,000).
In addition, the parties hereto covenant and agree that any change in
the name of the Corporation shall require the consent of Pettigrew as
long as Pettigrew shall be the President and Chief Executive Officer of
the Corporation or hold (directly and/or through Pettigrew's
Corporation) more than ten percent (10%) of the aggregate of Class A,
Class B and Class P Shares and that a Public Listing shall require the
specific prior consent of SGF Tech or any listing or posting of the
Shares on any stock market.
15.2
Subject to the terms of the Employment Agreement, the parties hereto
covenant and agree that the President and Chief Executive Officer of the
Corporation choses and dismisses senior executives (excluding the
president, chief executive officer, vice-presidents, secretary,
assistant-secretary and treasurer who are appointed by the Board) and
employees of the Corporation and its Subsidiaries and establishes their
remuneration.
15.3
The Shareholders hereto covenant and agree that there shall be nine (9)
members to be elected to the Board; a majority of said directors must be
Quebec Residents, except if Section 16.7 becomes applicable.
15.4
The parties here covenant and agree that each of the Shareholders shall
be entitled to nominate Directors to the Board as follows and each
Shareholder covenant and agree to exercise his or its voting rights
consequently:
15.4.1
As long as Cinepix shall own fifty percent (50%) or more of the
voting rights in issued Class A, Class B, Class E and Class P
Shares of the Corporation, it may elect five (5) directors to
the Board;
15.4.2
If Cinepix shall own between twenty percent (20%) and fifty
percent (50%) of the voting rights in issued Class A, Class B,
Class E and Class P Shares of the Corporation, it may elect two
(2) directors to the Board;
15.4.3
If Cinepix shall own between five percent (5%) and twenty
percent (20%) of the voting rights in issued Class A, Class B,
Class E and Class P Shares of the Corporation, it may elect one
(1) director to the Board;
15.4.4
If Pettigrew and/or Pettigrew's Corporation shall own fifty
percent (50%) or more of the voting rights in issued Class A,
Class B, Class E and Class P Shares of the Corporation, he/it
may elect five (5) directors to the Board;
15.4.5
If Pettigrew and/or Pettigrew's Corporation shall own between
twenty percent (20%) and fifty percent (50%) of the voting
rights in issued Class A, Class B, Class E and Class P Shares of
the Corporation, he/it may elect two (2) directors to the Board;
15.4.6
As long as Pettigrew and/or Pettigrew's Corporation shall own
between three percent (3%) and twenty percent (20%) of the
voting rights in issued Class A, Class B, Class E and Class P
Shares of the Corporation or as long as Pettigrew
36
is a Senior Officer of the Corporation, he/it may elect one (1)
director to the Board;
15.4.7
If Faire Trust shall own six percent (6%) or more of the voting
rights in issued Class A, Class B, Class E and Class P Shares of
the Corporation, it may elect one (1) director to the Board. As
long as Faire Trust shall own Shares with voting rights, if
Faire Trust does not have the right to nominate a director, it
shall have the right to appoint a non-voting observer on the
Board;
15.4.8
As long as Fox Family shall own six percent (6%) or more of the
voting rights in issued Class A, Class B, Class E and Class P
Shares of the Corporation, it may elect one (1) director to the
Board. As long as Fox Family shall own Shares with voting
rights, if Fox Family does not have the right to nominate a
director, it shall have the right to appoint a non-voting
observer on the Board;
15.4.9
As long as SGF Tech shall own thirty five percent (35%) or more
of the voting rights in issued Class A, Class B, Class E and
Class P Shares of the Corporation, it may elect two (2)
directors and appoint one (1) non-voting observer to the Board;
15.4.10 If SGF Tech shall own five percent (5%) or more, but less than
thirty five percent (35%) of the voting rights in issued Class
A, Class B, Class E and Class P Shares of the Corporation, it
may elect one (1) director to the Board.
For greater certainty, subject to Section 15.5, only the Shareholder
having appointed his or its Director to the Board may remove him from
office and in the event of a vacancy to the board of directors, the
Shareholder who appointed the director may only fill the vacancy and all
the other Shareholders agree to vote in favour of the appointment of
such new nominee.
15.5
In the event that a Shareholder loses the right to nominate a Director
on the Board, such Shareholder shall cause his Director or one of its
Directors, as the case may be, to resign in a timely manner.
15.6
Prior to the making of any Material Inter-corporation Arrangement out of
the normal course of business, except an Inter-Corporation Arrangement
involving the Corporation and one of the Subsidiaries or involving two
direct or indirect Subsidiaries of the Corporation, the nature of the
contract, the parties thereto and any Person receiving any commission or
consideration in respect of the proposed contract shall be fully
disclosed to the Shareholders and each Party shall disclose to all the
other Shareholders any Material interest in the proposed contract or the
identity of any Related Party or any Third Party who would receive any
commission or consideration in respect thereof. The consents of the
Shareholder with an interest in any such Related Party shall not be
required in respect of any resolution relating thereto, and no
representative of any such interested Shareholder on a Board shall be
entitled to vote in respect of any resolution relating thereto. The
determination of the rights to be asserted and course of action to be
taken by the Corporation, if any, with respect to a Material
Inter-corporation Arrangement out of the ordinary course of business,
shall be made without the participation, approval or consent of any
Shareholder having a direct or indirect interest in such Related Party,
and the Directors and other Shareholder in making any determination with
respect thereto shall act strictly in the best interests of the
Corporation.
37
15.7
A report listing all inter-corporation charges among, on the one part,
the Corporation and its Subsidiaries and, on the other part, their
Related Parties for the immediately preceding financial year shall be
presented annually to the Board for ratification no later than the 60th
day following the end of the financial year. Such report shall include
(i) the description of services who provided to or by a Related Party of
the Corporation and a description of the nature and extent of such
services and charges therefor, and (ii) details of all transfers of
funds between the Corporation and Persons who/which are Related Parties
thereto, including their purpose and amounts.
15.8
The Board shall hold meetings not less than four (4) times in each
fiscal year, which quarterly meetings shall take place within forty-five
(45) days of the end of each quarter of the financial year, except the
fourth quarter which shall take place within seventy-five (75) days of
the year end. Each Director and any observer appointed by Faire Trust
pursuant to Section 15.4.7 shall be reimbursed his out-of-pocket
expenses to attend each meeting of the Board and outside Directors will
have the right to receive a reasonable Director's fee.
15.9
Notices of meetings of the Board shall be sent not less than ten (10)
days in advance. They shall be accompanied by a brief but complete
summary of all business on the agenda of the meeting. Not later than
five (5) days prior to the date of the meeting, each director shall have
received copies of all documents necessary or useful to allow the
directors to make an informed decision.
15.10
The parties covenant and agree that the quorum for meetings of the Board
shall require a majority of the Directors to be present and that, within
that majority, at least one (1) representative of each of Cinepix,
Pettigrew and SGF Tech, if any at all relevant time, must be present. In
the event that the absence of one representative of Cinepix, Pettigrew
or SGF Tech causes a meeting of the Board to be adjourned to a date
which may not be earlier than five (5) Business Days (or not to be
earlier than two (2) Business Days in case of urgency) or later than ten
(10) Business Days after the originally convened meeting, quorum for
such adjourned meeting shall only require a majority of the directors to
be present.
15.11
A Director of the Corporation may participate at a meeting of the Board
by means of conference call or other telecommunication means allowing
all participants to the meeting to communicate between themselves. Such
a Director is deemed to be present at such a meeting as any other
Director present physically.
15.12
Each Party hereto shall at all times carry out and use its best efforts
to cause the Corporation and, to the extent permitted by Applicable Law,
its nominees on the Board to carry out the provisions of this Amended
and Restated Agreement. Each Party hereto shall duly and punctually do,
or cause to be done, all such things, including without limitation,
voting or causing to be voted all the Shares held by such Party as shall
be necessary or desirable to give effect to this Amended and Restated
Agreement.
15.13
The Parties covenant and agree that the quorum for meetings of
Shareholders shall be a majority in votes of the Shareholders present
personally or by proxy including the vote of Cinepix, Pettigrew, Fiducie
Pettigrew and SGF Tech. In the event that the absence of Cinepix,
Pettigrew, Fiducie Pettigrew and SGF Tech causes a meeting of the
Shareholders to be adjourned to a date which may not be earlier than
five (5) Business Days (or not to be earlier than two (2) Business Days
in case of urgency) or later than ten (10) Business Days
38
after the originally convened meeting, quorum for such adjourned meeting
shall only require a majority (in number of the Shareholders to be
present personally or by proxy). The quorum for special meetings of
class of shareholders shall require a majority in votes of the
shareholders of said class to be present personally or by proxy, except
as otherwise provided in the Articles.
15.14
Unless otherwise stipulated in this Amended and Restated Agreement or in
the Articles, the parties covenant and agree that questions to be
decided by any meeting of Shareholders or the Board shall be decided by
a majority vote.
15.15
No Shareholder or Director, whether chairman of a Shareholders' meeting
or chairman of the Board or otherwise shall exercise a casting vote.
15.16
Unless otherwise decided by the Board and subject to Pettigrew's rights
provided for in the Employment Agreement, Pettigrew is the President and
Chief Executive Officer. The vice-presidents, the secretary and the
treasurer as well as an assistant-secretary of the Corporation shall be
nominated by resolutions of the Board.
15.17
Until replaced by decision of the Shareholders pursuant to Section 15.1,
Samson Belair Deloitte & Touche of Montreal are chosen as Auditors of
the Corporation and its Subsidiaries.
15.18
The parties covenant and agree that unless decided otherwise by the
Board, the President shall exercise the voting rights of the
Corporation as shareholder of any of its Subsidiaries or any other
company and shall be authorized signatory of the Corporation for such
purposes in accordance with the instructions of the Board.
Article 16 TRANSFER OF VOTING RIGHTS; CONVERSION OF SHARES;
QUEBEC CONTROL; SHARES IN TRUST
16.1
In the event of any transaction or agreement of any sort whatsoever
(including a transfer of Shares) to which either or both Cinepix Films,
Cinepix (and their successors or assigns) or their direct or indirect
shareholders are party, that but for the provisions of this Article 16,
would result in the loss of the Quebec Tax Credits and/or Canadian Tax
Credits by the Corporation, the Shareholders and the Corporation agree
that a voting trust with respect to Cinepix's Shares in the Corporation
and its successors' or assigns' Shares in the Corporation will be
granted to Pettigrew (or, if he is no longer an Officer of the
Corporation, to the highest ranking Quebec Officer of the Corporation)
and this voting trust will automatically become effective immediately
prior to the occurrence of such event and shall remain in effect for a
period of ninety (90) days from the earliest of a) the receipt of any
notice of such a possible transfer, transaction or other agreement to
the Corporation and to Pettigrew (or to said highest ranking Quebec
Officer) or b) the day the Corporation and/or Pettigrew (or said highest
ranking Quebec Officer) finds out about such possible transfer,
transaction or other agreement by any other means. During the period of
the voting trust, Cinepix and Cinepix Films shall be entitled (but not
obliged) to take such steps as each of them determines necessary or
advisable to ensure that the Corporation continues to be eligible for
the Quebec Tax Credits and/or Canadian Tax Credits (as applicable). The
Shareholders and the Corporation hereby undertake and agree to do all
reasonable acts and to provide such assistance as may be requested of
them by Cinepix in this regard. The Corporation's eligibility for such
tax credits will be determined pursuant to an affirmative written
39
unrestricted legal opinion obtained from an independent Quebec legal
counsel retained jointly by the Corporation, Pettigrew, (or the highest
ranking Quebec Officer, if Pettigrew is no longer an Officer of the
Corporation), SGF Tech and Cinepix at the Corporation's costs. Provided
such an affirmative written unrestricted legal opinion is obtained
within the said 90-day period, the voting trust will terminate.
16.2
If at the end of such 90-day period while the voting trust is in force,
no such affirmative written unrestricted legal opinion has been obtained
or the then shareholder(s) of Cinepix Films and/or Cinepix (or its
successors and assigns), as the case may be, has (have) not rectified
or, as the case may be, may not rectify, the situation to the
satisfaction of the independent Quebec legal counsel (as confirmed by
such counsel in a written unrestricted legal opinion) in such a way that
the Corporation will not lose the benefit of the Quebec Tax Credits
and/or the Canadian Tax Credits, then all of the following events will
occur simultaneously:
16.2.1
all Class P Shares held by Pettigrew and Pettigrew's Corporation
and their successors or assigns in the Corporation will be
automatically converted into Class B Shares;
16.2.2
thereafter, the Convertible Debenture, if still held by Cinepix
or any other person (other than Pettigrew and Pettigrew's
Corporation or their successors or assigns), automatically
ceases to be convertible into Class B Shares and can only be
converted into Class A Shares; and
16.2.3
all Class B Shares of the Corporation (except for the Class B
Shares held by Pettigrew and Pettigrew's Corporation or their
successors or assigns following the conversion of the Class P
Shares into Class B Shares which are being converted
simultaneously) will be automatically converted into Class A
Shares.
16.3
In addition to the provisions of Section 16.2 above, if Pettigrew and/or
Pettigrew's Corporation does not own enough Shares to obtain (with other
holders who are Quebec Residents) a 51% voting Control of the
Corporation (or such control of the Corporation by Quebec Residents as
is necessary for the Corporation to remain eligible for the Quebec Tax
Credits and/or Canadian Tax Credits), (or if Pettigrew is no longer an
Officer of the Corporation, if the highest ranking Quebec Officer of the
Corporation does not have with other holders who are Quebec Residents
such a fifty-one percent (51%) voting Control of the Corporation (or
such control of the Corporation by Quebec Residents as is necessary for
the Corporation to remain eligible for the Quebec Tax Credits and/or
Canadian Tax Credits)), Pettigrew or the highest ranking Quebec Officer
of the Corporation, as the case may be, shall have the right to receive,
at no cost, except a nominal value of One Dollar ($1.00) (and without
tax consequences), a sufficient number of Class C Shares to achieve the
required control, it being understood that such Class C Shares will be
redeemed by the Corporation if holders who are Quebec Residents
eventually come to achieve the required control . Any tax consequences
will be borne by the Corporation.
16.4
When the voting trust mechanism provided in this Article 16 is
triggered, Pettigrew (or the highest ranking Quebec Officer of the
Corporation, if Pettigrew is no longer an Officer of the Corporation) is
automatically granted the right to appoint such number of Directors to
obtain a majority in Board members (if necessary, the number of
Directors will be increased
40
to such number required, notwithstanding the provisions of Section15.3),
it being understood that the Shareholders (except Pettigrew and
Pettigrew's Corporation if Pettigrew is benefiting of the voting trust
mechanism provided for in this Article 16) shall maintain their rights
to appoint the same number of directors they had the right to appoint as
of the date of beginning of the voting trust mechanism, as outlined in
Section 15.4.
16.5
Given the fact that eligibility of the Corporation for the Quebec Tax
Credits is based on a Control of the Corporation by Quebec Residents,
the Shareholders, the Corporation, Cinepix Inc. and Cinepix Films agree
that the Shares owned by Cinepix in the Corporation as well as Shares
owned by Cinepix Films in Cinepix from time to time (collectively the
"VOTING TRUST Shares") may not be directly or indirectly transferred or
agreements with respect to exercise of voting rights of the Voting Trust
Shares cannot be entered into before a 45-day prior written notice has
been given to the Chief Executive Officer of the Corporation. This
Section 16.5 will cease to apply if Pettigrew and/or Pettigrew's
Corporation have Control of the Corporation.
16.6
Any issuance of voting Shares (to Persons other than to SGF Tech)
occurring after Article 16 has given voting Control to Pettigrew or to
the highest ranking Quebec Officer of the Corporation shall require
additional and simultaneous issues of Class C Shares to Pettigrew or, as
the case may be, the highest ranking Quebec Officer of the Corporation,
to the extent necessary to ensure that the Control of the Corporation be
preserved in the hands of Quebec Residents. Such additional issues of
Class C Shares shall be made at nominal value and without tax
consequences for their holder.
16.7
This Article 16 shall cease to apply (without retroactive effects) if
the aggregate of the Quebec Tax Credits and the Canadian Tax Credits
(without taking into account any expected loss of these credits
resulting from any transaction or agreement contemplated in Section
16.1) represent for a given financial year (of twelve (12) months) and
are expected to represent for the following financial year (of twelve
(12) months) (according to the then approved budget) less than five
percent (5%) of the Corporation's annual revenues.
16.8
It is also agreed that this Article 16 shall not apply to said
transaction or agreement (but may apply to subsequent transactions or
agreements): (1) in the case of an expected loss of the Quebec Tax
Credits only, resulting from said transaction or agreement, if the
Quebec Tax Credits (without taking into account the expected loss of the
Quebec Tax Credits) represent for a given financial year (of twelve (12)
months) and are expected to represent for the following financial year
(of twelve (12) months) (according to the then approved budget) less
than two percent (2%) of the Corporation's annual revenues; or (2) in
the case of an expected loss of the Canadian Tax Credits only, resulting
from said transaction or agreement, if the Canadian Tax Credits (without
taking into account the expected loss of the Canadian Tax Credits)
represent for a given financial year (of twelve (12) months) and are
expected to represent for the following financial year (of twelve (12)
months) (according to the then approved budget) less than two percent
(2%) of the Corporation's annual revenues.
16.9
The Shareholders and the Corporation agree that the spirit of the
provisions of Article 16 should be preserved in as much as possible
after the Corporation has successfully completed a Public Listing and,
in this respect, to execute any agreement or other instrument reasonably
required for such purpose.
41
Article 17 FINANCING
17.1
Except for existing investments, loans or guarantees by the Shareholders
with respect to the Corporation, none of the Shareholders shall have any
obligation to provide, or to arrange for or to cause others to provide,
any financing to the Corporation, whether by way of subscription for
Shares, the making of loans, the giving of guarantees or otherwise.
17.2
Except as provided for in Subsection 15.1.21(e), nothing contained in
this Amended and Restated Agreement restricts the right of the
Corporation to obtain financing through loans and other financial
instruments.
17.3
Without restricting Section 17.1, and except as provided in Article 18
or in any agreement duly accepted by the Corporation, any loans and
advances made by a Shareholder to the Corporation (and its Subsidiaries
or Affiliates) shall bear from the date of execution of this Amended and
Restated Agreement an annual rate of interest equal to the prime
commercial lending rate of the Corporation's banker plus one percent
(1%).
17.4
Without restricting Section 17.1, any Shareholder who guarantees the
debts or obligations of the Corporation (and its Subsidiaries and
Affiliates) shall have a right to receive from the Corporation (or, as
the case may be, its Subsidiaries and Affiliates): a) upon execution of
any guarantee, a fee equivalent to one percent (1%) of the amount of
guarantee plus the reimbursement by the Corporation of any reasonable
bank fees as accepted by the Corporation; and b) from April 1st 2000 an
annual fee equivalent to one percent (1%) of the averaged yearly amount
of guarantees which is in place during each financial year of the
Corporation (or, as the case may be, its Subsidiaries and Affiliates'
financial year). For greater certainty, for purposes of Section 17.4,
guarantees of Corporation's debts and obligations by a Shareholder,
existing as of April 1st 2000 shall be deemed to be executed as of the
date of this Amended and Restated Agreement. Notwithstanding anything to
the contrary herein, this Section is not applicable, and shall not
modify the terms and conditions of that certain Guarantee and
Acknowledgement executed on December 22, 2000 by the Corporation,
Cinegroupe SaGwa Inc., Pettigrew and Faire Trust.
Article 18 ADDITIONAL FINANCING
18.1
In the event an injection of funds in the Corporation becomes necessary
in order to prevent cessation or material curtailment of its
consolidated activities, including, without limitation, in order to
prevent the Corporation being in default under its Material agreements
(including pursuant to financial covenants), to prevent a petition in
bankruptcy being filed against the Corporation or to prevent a seizure
of a substantive portion of its assets, and provided the Corporation has
exhausted all other avenues and recourses and no sources of conventional
financing are reasonably available, should additional funds be required
by the Corporation, upon reasonable conditions, any Shareholder shall be
entitled, in his or its sole discretion, to contribute the funds
required by the Corporation by way of a loan made by such Shareholder
(the "LENDING SHAREHOLDER"), which loan the Corporation shall be
required to accept, subject to the terms and conditions set out below:
18.1.1
the loan made by the Lending Shareholder shall be repayable on
demand and shall bear interest at an annual rate equal to the
prime rate of the principal banker financing the ongoing
operations of the Corporation, plus a four percent (4%)
42
premium computed daily, payable monthly on the first day of each
month following disbursement (the "EMERGENCY LOAN");
18.1.2
the repayment of the Emergency Loan shall be secured, as of
disbursement, by a first-ranking mortgage on all the property of
the Corporation or its Subsidiaries, as the case may be, or a
mortgage having the then best-available rank for each class of
property; provided that such security shall also enure to the
benefit of all Shareholders having contributed their
Proportional Share of the Emergency Loan, as defined below;
18.1.3
the Lending Shareholder may, in this respect, pay a creditor of
the Corporation or its Subsidiaries, as the case may be,
directly, for and on behalf, and to the discharge, of the
Corporation or its Subsidiaries.
18.2
The Corporation shall notify the other Shareholders in writing as soon
as it shall have been granted the Emergency Loan, indicating the
identity of the Lending Shareholder and the amount of the Emergency
Loan.
18.3
Within thirty (30) days following receipt of notice from the Corporation
pursuant to the preceding Section, each other Shareholder shall have the
option of making an additional contribution of funds in an amount equal
to his or its proportional share of the Emergency Loan, computed on a
Pro Rata Basis (the "PROPORTIONAL SHARE OF THE EMERGENCY LOAN"). Such
additional contribution of funds to the Corporation shall be used to
repay unto the Lending Shareholder loan to the latter's Proportional
Share of the Emergency Loan.
18.4
Should a Shareholder refuse to contribute to the Corporation his or its
whole Proportional Share of the Emergency Loan within said 30-day time
period, he or it shall be deemed to have refused to exercise the option
of contributing funds to the Corporation equal to his or its
Proportional Share of the Emergency Loan; such Shareholder shall not be
deemed in default hereunder for his refusal to contribute to the
Emergency Loan.
18.5
If, upon expiry of the time limit set out in Section 18.3, a Shareholder
has not exercised, or is deemed to have refused to exercise, his or its
option to contribute his or its Proportional Share of the Emergency Loan
in its entirety, the Corporation shall then notify forthwith the other
Shareholders who sent the notice referred to in Section 18.3 and the
latter shall have fifteen (15) Business Days following receipt of the
notice of the Corporation, in order to confirm their intention to
contribute funds in excess of their respective Proportional Share of the
Emergency Loan according to the same conditions and pro rata to the
number of Shares held by each of the Shareholders having contributed his
or its entire Proportional Share of the Emergency Loan.
18.6
Should a Shareholder refuse to contribute his or its Proportional Share
of the Emergency Loan in full to the Corporation, and, as a result, one
or several of the Shareholders (including the Lending Shareholder)
agrees to assume more than their Proportional Share of the Emergency
Loan, then such Shareholders shall each, at any time, within three (3)
years following disbursement of the Emergency Loan, in their discretion,
be entitled to request the conversion of all or part of the funds
contributed by them by way of Emergency Loan, both in principal and
interest, into Class E Shares for SGF Tech and Class A Shares to the
other Shareholders, at a conversion price equal to the Fair Market Value
of the Class E Shares or the Class A Shares of the Corporation, as the
case may be, at the time of disbursement of the
43
Emergency Loan, as determined in accordance with Section 18.7 hereof,
notwithstanding the effective date of the conversion.
18.7
Where any option to contribute granted pursuant to Article 18 is
exercised by one or several Shareholders, or where a Shareholder
exercises his or its right of conversion in accordance with Section
18.6, the parties involved shall close the transaction within thirty
(30) days following expiry of all the time limits set out in Section
18.5, or following the request for conversion of the loan into Shares of
the Corporation, as provided for in Section 18.6 hereof.
Article 19 UNDERTAKINGS OF THE CORPORATION
19.1
The Corporation undertakes not to directly or indirectly encumber or
grant any hypothec in or to its Securities issued or to be issued by it.
19.2
For the purpose of Section 19.1, hypothec shall mean any hypothec,
charge, pledge, lien or other encumbrance of any nature however arising,
but excluding rights of set-off or compensation (other than rights of
set-off or compensation in respect of cash or other assets deposited or
pledged for the purpose of securing any liability) in favour of any bank
or any other person arising in the ordinary course of business whether
by operation of law or by contract as regards cash management, netting
or derivative products (including swaps) arrangements of the Corporation
or any of its Subsidiaries.
19.3
For so long as SGF Tech holds at least ten percent (10%) of the issued
and outstanding Shares of the share capital of the Corporation, each of
the Corporation and its Subsidiaries (except foreign Subsidiaries
created in the normal course of business, with the consent of SGF Tech,
and CINE-GROUP U.S. Inc., ANIMATOON CO. Ltd. and CHILIANIMACION
LIMITADA) undertakes to keep its head office and principal place of
business in Quebec and to provide SGF Tech with financial information on
a timely and regular basis as provided in Sections 6.9 and 6.10 of the
Subscription Agreement.
Article 20 UNDERTAKINGS IN CASE OF A PUBLIC LISTING
20.1
In the case of Public Listing, the Shareholders (other than Pettigrew
and/or Pettigrew's Corporation and SGF Tech) covenant and agree that
they will consent in favour of Pettigrew (and/or Pettigrew's
Corporation) that the latter may sell, if the underwriter or lead agent
so accepts, in priority to all other Shareholders up to an aggregate
value of One Million Canadian Dollars (CDN$1,000,000) of value of Shares
in all such public offering(s) (including the Public Listing).
20.2
In the case of Public Listing, the Shareholders (other than Fox Family
and Faire Trust) covenant and agree that they consent in favour of Fox
Family and Faire Trust that Fox Family and Faire Trust may sell, if the
underwriter or lead agent so accepts, in priority to all other
Shareholders, but after the priority right provided for in Section 20.1,
up to an aggregate value equivalent to, on a Pro Rata Basis between Fox
Family and Faire Trust:
20.2.1
in the case of Fox Family, Three Million Canadian Dollars
(CDN$3,000,000) plus interest paid or payable pursuant to the
loan agreement entered into between Faire Trust and Fox Family
on June 23, 1998, as amended, referred to in Section 3.1; and
20.2.2
in the case of Faire Trust, one half (1/2) the amount provided
above in Subsection 20.2.1 plus, the amount provided in
Subsection 20.2.1 if Faire Trust acquires all of Fox Family's
Shares, directly or indirectly, by any means whatsoever;
in all such offering(s) (including the Public Listing).
44
Article 21 REPRESENTATIONS AND WARRANTIES
21.1
21.2
Each Shareholder hereby represents and warrants the following to the
other Shareholders, as of the date hereof:
21.1.1
except in the case of Pettigrew who is an individual, and in the
cases of Faire Trust and Fiducie Pettigrew which are trusts, it
is a corporation duly organized, validly existing and in good
standing under the laws pertaining to its incorporation;
21.1.2
it (he) has all requisite power and authority to own and operate
its assets, properties and business and to carry on its business
as now conducted;
21.1.3
it (he) has all requisite power, authority and approval required
to enter into, execute and deliver this Amended and Restated
Agreement and to perform fully its obligations hereunder;
21.1.4
it (he) has taken all actions necessary to authorize it to enter
into and perform its obligations under this Amended and Restated
Agreement and this Amended and Restated Agreement is a legal,
valid and binding obligation of it (him); and
21.1.5
neither the execution and delivery of this Amended and Restated
Agreement by it (him), nor the performance of its (his)
obligations hereunder, will conflict with, or result in a breach
of, or constitute a default under any provision of its
constating documents or its by-laws, if applicable, or any law,
judgment, order or decree of any Court or of any contract,
agreement or other instrument to which it (he) is a party or by
which it (he) is bound.
Other representations and warranties:
21.2.1
Faire Trust represents and warrants to the other Shareholders
that it is a duly organized, validly existing and a good
standing trust under the laws of Ontario and Robert Paul is its
sole trustee;
21.2.2
Fiducie Pettigrew represents and warrants to the other
Shareholders that it is a duly organized, validly existing and a
good standing trust under the laws of Quebec and Pettigrew and
Jacqueline Pettigrew are its sole trustees, and as long as
Pettigrew shall remain a trustee of Fiducie Pettigrew, there
shall be only Two (2) trustees of Fiducie Pettigrew.
45
21.3
Each of the Shareholders hereby covenants and agrees to do, and to use
its (his) best efforts in order to cause to be done by any other person,
all things or acts necessary or desirable so that its (his)
representations and warranties contained in this Article remain in full
force and effect at any time hereafter during the term of this
Agreement.
Article 22 CONFIDENTIALITY
22.1
All confidential records, material and information and copies thereof,
and all trade secrets (and without restricting the generality of the
foregoing, including all confidential information and documentation
relating to the products in which the Corporation and all its
Subsidiaries have an interest and all intellectual property of the
Corporation and all its Subsidiaries) concerning the Business of the
Corporation and of all its Subsidiaries obtained by any of the
Shareholders of the Corporation shall remain the exclusive property of
the Corporation or of its Subsidiaries, as the case may be. During the
term of this Amended and Restated Agreement, or at any time thereafter,
each such persons shall not divulge the contents of such confidential
records or any of such confidential information or trade secrets to any
person other than to the Corporation or the Corporation's qualified
employees, except as may be required by law or otherwise in the proper
discharge of their duties for the Corporation and for the Corporation's
Subsidiaries, and each such persons shall not, following the termination
of this Amended and Restated Agreement and for a period of three (3)
years thereafter, for any reason, use the contents of such confidential
records or such confidential information or trade secrets for any
purpose whatsoever. Under no circumstances shall any such persons remove
any books, records or documents or copies thereof (whether or not
confidential) from the offices of the Corporation or of the
Subsidiaries, nor shall they make any copies of any such books, records
or documents or copies thereof for use outside the offices of the
Corporation or of the Subsidiaries, except as specifically authorized by
the Board or into the Subscription Agreement or except in the proper
discharge of their duties for the Corporation and for the Subsidiaries.
22.2
For the purposes hereof, confidential records, material and information
include confidential or proprietary information known or used by the
Corporation and/or its Subsidiaries in connection with the Corporation's
and the Subsidiaries' Business, including but not limited to any matters
relating to products owned by or in which the Corporation or its
Subsidiaries has any interest including any scripts, all intellectual
property owned by the Corporation or its Subsidiaries or in which it has
an interest, information and documentation relating to output and/or
distribution arrangements, compilation of information, data, program,
code, method, technique or process, information about or relating to
suppliers or customers of the Corporation and of its Subsidiaries and
markets and marketing plans of the Corporation and of its Subsidiaries,
present and future, information about or relating to potential business
ventures of the Corporation and/or its Subsidiaries, financial
information of all kinds relating to the Corporation and to its
Subsidiaries and its activities, all inventions, ideas, and related
material, but does not include any of the foregoing which is not of a
confidential or proprietary nature or becomes a matter of public
knowledge through no fault of any such persons concerned by this
Article.
22.3
Without intending to limit the remedies available to the Corporation and
to its Subsidiaries, the Shareholders of the Corporation acknowledge
that damages at law will be an insufficient
46
remedy to the Corporation and its Subsidiaries in view of the
irreparable harm which will be suffered if the terms of Article 22 are
violated by any of them, as the case may be, and agree that the
Corporation and its Subsidiaries may apply for and have injunctive
relief in any court of competent jurisdiction specifically to enforce
any such covenants upon the breach or threatened breach of any such
provisions, or otherwise specifically to enforce any such covenants and
hereby waives all defences to the strict enforcement thereof by the
Corporation and its Subsidiaries.
22.4
In the event that any provision, clause or covenant herein, or part
thereof, shall be deemed void or invalid or unenforceable by a court of
competent jurisdiction, the remaining provisions, clauses and covenants,
and parts thereof, shall be and remain in full force and effect. If, in
any judicial proceeding, any provision, clause or covenant of this
Amended and Restated Agreement is found to be so broad as to be
unenforceable, it is hereby agreed that such provision, clause or
covenant shall be interpreted to be only so broad as it may be to be
enforceable.
22.5
Notwithstanding Section 22.1, Shareholders are entitled to disclose to
any potential buyer of their Shares and Convertible Debentures all
relevant information in order to give to such potential buyer the
opportunity to estimate the relevancy to acquire such Shares and
Convertible Debenture subject to the fact that such potential buyer
shall previously enter into a confidentiality agreement in favour of the
Corporation and its Subsidiaries and copy of same is remitted to the
Corporation.
22.6
Notwithstanding any provision to the contrary and any confidentiality
undertaking or fiduciary duty, the Parties recognize that directors
designated by SGF Tech to the Board shall be authorized to disclose
information to the SOCIETE GENERALE DE FINANCEMENT as long as this
information is used in good faith and not disclosed to a direct
competitor of the Corporation and or any of its Subsidiaries.
Article 23 NON-SOLICITATION
23.1
Each of the Shareholders, except for SGF Tech, undertakes in favour of
the other Shareholders, the Corporation and its Subsidiaries for so long
as they or any Person which is a Related Party of any of them remains a
Shareholder of the Corporation and for a period of at least three (3)
years hereafter whether directly or indirectly, alone or in partnership
or in association or jointly with any other Person, as principal, agent,
shareholder, lender, guarantor, employee, partner, consultant or
subcontractor or in any other manner, not to:
23.1.1
except for Lions Gate, Fox Family and Faire Trust, solicit,
interfere or endeavour to direct or entice away from the
Corporation or its Subsidiaries any customer, client, supplier
or any Persons in the habit of dealing with the Corporation or
its Subsidiaries or other customers, clients, suppliers or
Person, approached by the Corporation or its Subsidiaries during
the year preceding the end of such Shareholder's relationship
with the Corporation or its Subsidiaries; or
23.1.2
encourage any employee, consultant, officer or Director of the
Corporation or its Subsidiaries or of a Person offering
management services to the Corporation or its Subsidiaries to
leave the Corporation or employ or solicit for employment any
employee, consultant, officer or Director who is at the time of
employment
47
or solicitation employed or rendered services to the
Corporation, its Subsidiaries or to a Person offering management
services to the Corporation or its Subsidiaries.
23.2
Each of the
commitments
Corporation
addition to
remedies of
Shareholders acknowledges that its failure to respect its
and obligations set out in Section 23.1 would cause the
and its Subsidiaries sufficient prejudice to justify, in
the consequences contemplated in Article 23, recourse to the
injunction and seizure before judgment.
23.3
Each of the Shareholders recognizes that the restrictions contemplated
in Section 23.1 are reasonable and valid, particularly with regard to
their duration, their extent and the Persons contemplated thereby, and
that these restrictions are essential in order to enable the Corporation
and its Subsidiaries to protect their position adequately in the field
where they carry on business, operate or pursue their activities and
therefore exempts the Shareholders, the Corporation and its Subsidiaries
from establishing the validity of these restrictions before any
arbitration board or other court.
23.4
The Parties acknowledge that if the extent of any restriction contained
in this Article 23, is judged to be unreasonable, which is not the
opinion of the Parties on the date hereof, such a restriction shall then
be applicable up to the maximum permitted by the Applicable Law and the
Parties hereby agree and accept that the extent of this restriction may
be modified accordingly by any arbitration board or other court within
the context of any procedure to enforce and give effect to such
restriction.
Article 24 ARBITRATION
24.1
In the event of any dispute between the parties (including the
intervening parties) relating to this Amended and Restated Agreement,
whether such dispute is relating to the interpretation or application of
its provisions or to the existence of any of their respective rights and
obligations hereunder or to the nature or the amount of the obligations
and responsibilities resulting from this Amended and Restated Agreement,
such dispute shall be submitted to arbitration, to the exclusion of any
court of law having otherwise competent jurisdiction, in accordance with
the provisions of the Code of Civil Procedure of the Province of Quebec,
modified as follows, it being understood that this Article 24 shall
constitute an arbitration agreement within the meaning of the Civil Code
of the Province of Quebec:
24.1.1
the dispute shall be submitted to the arbitration of three
arbitrators, the party requiring the arbitration designating the
first arbitrator and the other party or the other parties to the
dispute having a conflicting interest with the requiring party
designating the second arbitrator and the third arbitrator being
designated jointly by the two first arbitrators so designated.
All arbitrators must be lawyers qualified to practise law within
the Province of Quebec;
24.1.2
a party requiring arbitration shall give notice thereof to the
other party or the other parties to the dispute having a
conflicting interest and shall provide in such notice the name
and address of the arbitrator for the purposes of this Amended
and Restated Agreement as well as the details of the dispute;
24.1.3
within ten (10) Business Days after a notice of arbitration has
been sent pursuant to Subsection 24.1.2 above, all of the other
parties to the dispute having a conflicting interest with the
party submitting the issue to arbitration shall agree on the
name of the second arbitrator and shall give notice of the name
and
48
address of such second arbitrator to the requesting party and the first arbitrator within such ten (10) Business Days period, failing which all of
such other parties shall be deemed to have waived their rights to designate an arbitrator, and the arbitration shall be held by one arbitrator only,
namely the arbitrator designated pursuant to 24.1.2 above;
24.1.4 subject to the provisions of the preceding paragraph relating to
the resolution of the dispute by one arbitrator, the third
arbitrator shall be designated by the other two arbitrators
within five (5) Business Days following receipt by the requiring
party and the first arbitrator of the notice described in 24.1.3
above in respect of the designation of a second arbitrator;
24.1.5
the hearing of the arbitration shall be held on the territory of
the Metropolitan Region of Montreal, at such place and at such
time as shall be determined jointly by the arbitrators and
within a delay of ten (10) Business Days of the nomination of
the third arbitrator or sole arbitrator, as the case may be;
24.1.6
the arbitrators are authorized to determine their own procedure
and shall render their decision in writing in such form as they
shall decide; the arbitrators shall allocate the expenses
relating to the arbitration in the manner which they shall see
fit which for such purposes shall take into account, inter alia,
the relative success of the arguments of each of the parties to
the arbitration;
24.1.7
the arbitrators shall, to the extent possible, render their
decision and give notice thereof to the parties within a period
of ten (10) Business Days following the hearing of the parties
involved in the arbitration or, as the case may be, such period
of time (which shall not be more than five (5) Business Days)
which they shall grant to the parties involved to the
arbitration to submit in writing their arguments following the
hearing;
24.1.8
the decision of the arbitrators shall be final and binding on
the parties to the arbitration and the provisions of Sections
946 to 946.6 inclusively of the Code of Civil Procedure of the
Province of Quebec relating to the homologation of arbitration
decisions shall apply;
24.1.9
the arbitrators shall resolve the dispute in accordance with the
rules of law and shall not act as "aimables compositeurs";
24.1.10 the English and French languages shall be the languages of arbitration, as requested by the parties to arbitration; and
24.1.11 nothing in this Article 24 shall be interpreted or construed so as to affect or limit the rights of any parties hereto of seeking any
injunction, constraining order, or other mandatory
relief available to them under the law from any court having
jurisdiction with respect to any breach or violation or
anticipated breach or violation of any of the covenants provided
in this Amended and Restated Agreement.
Article 25 GENERAL
25.1
A copy of this Amended and Restated Agreement shall be filed with the
Corporate Records of the Corporation at the office of the Corporation.
25.2
Time shall be of the essence of this Amended and Restated Agreement.
49
25.3
Any notices, demand or other communication required or permitted to be
given to any party or intervening party hereunder shall be in writing
and shall be either:
25.3.1
personally delivered;
25.3.2
sent by same-day or next-day courier; or
25.3.3
sent by facsimile
Any notice so given shall be sent to the parties or intervening parties
at their respective addresses set out below:
25.3.4
If to Cinepix:
ANIMATION CINEPIX INC. 3600 Thimens Boulevard
St-Laurent, Quebec Canada H4H 1V6
Fax: (514) 336-6606 Attention: The President
25.3.5
if to Pettigrew:
JACQUES PETTIGREW 1835 du Sommet Trinite Street
St-Bruno, Quebec Canada J3V 6E4
25.3.6
if to Faire Trust:
FAIRE TRUST 45 Charles Street Suite 702
Toronto, Ontario Canada M4Y 1S2
Fax: (416) 920-5140
with a copy to:
FOLEY, BRODERICK, C.A. 130 Adelaide Street West 32nd Floor
Toronto, Ontario Canada M5H 3P5
Fax: (416) 863-1510 Attention: Mr. Brent Insley
25.3.7
If to Fox Family:
FOX FAMILY WORLDWIDE, INC. 10960 Wilshire Boulevard
Los Angeles, California United States of America 90024
Fax: (310) 235-5552 Attention: The President
25.3.8
if to Fiducie Pettigrew:
FIDUCIE FAMILLE PETTIGREW 1835 du Sommet Trinite Street
St-Bruno, Quebec Canada J3V 6E4
Attention: Mr. Jacques Pettigrew and Mrs. Jacqueline Pettigrew,
Trustees
25.3.9
If to SGF Tech:
SGF TECH INC. c/o Societe generale de financement du Quebec
600 de La Gauchetiere West Suite 1500
Montreal, Quebec H3B 4L8
Attention: The President Fax: (514) 876-1656
25.3.10 if to the Corporation:
CORPORATION CINEGROUPE 1151 Alexandre-de-Seve
Montreal, Quebec Canada H2L 2T7
Fax: (514) 524-1997 Attention: The President
25.3.11 if to Lions Gate:
LIONS GATE ENTERTAINMENT CORP. Suite 3123, Three Bentall Centre
595 Burrard Street
Vancouver, British Columbia Canada V7X 1J1
Fax: (604) 609-6145 Attention: The Senior Vice President
Either party and intervening party may from time to time change its
address by written notice to the other party and intervening party given
in accordance with the provisions
50
hereof. Any notice or communication shall be deemed to have been
received on the next Business Day after which it was delivered, if
personally delivered or sent by courier, or on the next Business Day
after it was sent by facsimile, if it was so sent.
25.4
The provisions of this Amended and Restated Agreement shall apply to any
Shares issued pursuant to an option granted by the Corporation, to
Shares issued pursuant to a convertible debenture, to any Shares
resulting from the reclassification, subdivision, consolidation or
corporate reorganization and to any Shares of the Corporation received
by the holders as a stock dividend and to any Shares or other securities
of the Corporation which may be received by the holder of such Shares on
amalgamation, reorganization or reconstruction of the Corporation or to
any other Shares which may hereafter be issued to the Shareholders.
25.5
Subject to the Articles and By-Laws of the Corporation, this Amended and
Restated Agreement constitutes the entire agreement between the Parties
hereto with respect to the subject matters herein contained and
supersedes and replaces any provisions of any other document heretofore
entered into by them with respect to the subject matters herein,
including the Former Agreement, the First Amendment, the Second
Amendment and the Letter of Intent.
25.6
Unless otherwise stipulated, all amounts expressed in this Amended and
Restated Agreement are in the Canadian currency. If any of the
provisions of this Amended and Restated Agreement are ever held illegal
or invalid for any reason, such illegality or invalidity shall not
affect the remaining parts of the Amended and Restated Agreement, and
the Amended and Restated Agreement shall be construed and enforced as if
such illegal and invalid provisions had never been inserted therein. If,
in any judicial proceeding, any provision, clause or covenant of this
Amended and Restated Agreement is found to be so broad as to be
unenforceable, it is hereby agreed that such provision, clause or
covenant shall be interpreted to be only so broad as it may be to be
enforceable.
25.7
This Amended and Restated Agreement may be executed in counterparts,
each of which, when so executed and delivered to all other parties and
intervening parties, shall be deemed to be an original and when taken
together shall be deemed to be one and the same agreement.
25.8
The Shareholders, the Corporation and the other intervening parties
agree to do all things and execute any and all documents, upon the
request of any of the other, to better effect complete consummation of
the transactions contemplated by this Amended and Restated Agreement as
well as the true intent and purposes of this Amended and Restated
Agreement including to vote Shares which any one of them may hold or
have Control over and to use its best efforts so as to cause to be done,
executed, acknowledged or delivered by any other person, all such
further acts or other things, deeds, documents, assignments, transfers,
conveyances, powers of attorney and assurances as may be reasonably
necessary or desirable.
25.9
Section 15.1 of this Amended and Restated Agreement is an unanimous
shareholders' agreement within the meaning of Sections 123.91 and
following of the Companies Act (Quebec) and must be interpreted as such.
No by-law or resolution of the Board and of the Shareholders of the
Corporation or Articles (with respect to transfer of shares only)
51
may contradict or modify the provisions of this Amended and Restated
Agreement and, should this occur, this Amended and Restated Agreement
shall prevail. This Amended and Restated Agreement is governed by the
laws of the Province of Quebec, Canada.
25.10
The preamble forms an integral part of this Amended and Restated
Agreement.
25.11
This Amended and Restated Agreement has been drawn up and executed in
the English language at the request of the Parties. La presente
convention a ete redigee et executee dans la langue anglaise a la
demande des parties. This Agreement shall be prepared and executed in
French version if requested by SGF Tech. The parties hereto expressly
agree that in the event of any misunderstanding, dispute or controversy,
among them with respect to any of the provisions of this Agreement, the
executed French version, if it exists, shall prevail.
25.12
The trustee of Faire Trust incurs no personal liability under this
Amended and Restated Agreement and his liability is limited to the
assets of Faire Trust. The trustees of Fiducie Pettigrew incur no
personal liability under this Amended and Restated Agreement and their
liability is limited to the assets of Fiducie Pettigrew.
25.13
This Agreement shall enure to the benefit of and be binding upon the
parties and intervening parties, their respective heirs, executors,
administrators, successors and permitted assigns as the case may be.
IN WITNESS WHEREOF THE PARTIES HERETO HAVE DULY EXECUTED THIS AGREEMENT
ANIMATION CINEPIX INC.
Per: ___________________________________
Andre Link
JACQUES PETTIGREW
FAIRE TRUST
Per: ___________________________________
Robert Paul, in his capacity as
trustee, without personal liability
FOX FAMILY WORLDWIDE, INC.
Per: ___________________________________
Mel Woods
FIDUCIE FAMILLE PETTIGREW
Per: ___________________________________
Jacques Pettigrew, in his capacity
as Trustee, without personal
liability
Per: ___________________________________
Jacqueline Pettigrew, in her
capacity as Trustee, without
personal liability
SGF TECH INC.
Per: ___________________________________
Jean-Pierre Frechette
Per: ___________________________________
Andre Roy
52
AND INTERVENING HERETO
CORPORATION CINEGROUPE
Per: ___________________________________
Andre Link
Per: ___________________________________
Jacques Pettigrew
LIONS GATE ENTERTAINMENT CORP.
Per: ___________________________________
Gordon Keep
1
SCHEDULE 1.2.20
CONVERTIBLE DEBENTURE
1
SCHEDULE 1.2.26
EMPLOYMENT AGREEMENT OF PETTIGREW
1
SCHEDULE 1.2.34
LIONS GATE DEBENTURE
1
SCHEDULE 1.2.37
OPTION TO FAIRE TRUST
1
SCHEDULE 1.2.38
OPTION TO PETTIGREW
1
SCHEDULE 3.1
PUT AGREEMENT BETWEEN LIONS GATE ENTERTAINMENT CORP.
AND FOX FAMILY, AS AMENDED,
AND PUT ASSIGNMENT AGREEMENT BETWEEN A FAIRE D'AUJOURD'HUI INC.,
FOX FAMILY AND LIONS GATE, AS AMENDED
2
SCHEDULE 15.1
LIST OF COMPETITORS
EXHIBIT 10.15
AMENDMENT #2 TO IGNITE LLC/LIONS GATE FILMS, INC. AGREEMENT
OF FEBRUARY 15, 2001
Amendment made as of this 13th day of May, 2002 between Ignite LLC and Lions Gate Films, Inc.
Reference is hereby made to the February 15, 2001 Agreement between Ignite LLC and Lions Gate Films, Inc. (the "Agreement").
Section 2.c. shall hereby be deemed deleted from the Agreement and the following shall hereby be inserted into the Agreement in its place.
2.c. FEES TO IGNITE LLC. Any Project optioned, acquired or developed by the Fund and subsequently produced by the Company shall result
in:
(i) FLAT FEE: A flat fee ("Producing Fee") equal to $150,000 being paid to Ignite LLC, on a 20/60/10/10 basis, increasing at a rate of 15% per
Project produced hereunder on an annual basis (February to February (the "Annual Period") with increase based on the basic $150,000 such
that it goes to $172,500 and then $195,000) with the fee reverting back to $150,000 at the beginning of each succeeding year; and
(ii) CASH-BREAKEVEN CONTINGENT COMPENSATION: Contingent compensation to Ignite LLC as follows: (a) 2% of Gross Receipts
at Cash-Breakeven up to the amount which is two times the Producing Fee payable to Ignite in connection with the subject Project; (b)
thereafter, 2% of Gross Receipts at Cash-Breakeven (inclusive of Breakeven Fees of 10%) up to an additional amount which is equal to two
times the Producing Fee payable to Ignite in connection with the subject Project. In no event shall the contingent compensation payable
pursuant to this subsection exceed a cap equal to four times the Producing Fee payable to Ignite in connection with the subject Project. For
purposes of this Agreement, "Cash-Breakeven" shall be defined as that point in time, if ever, when a sum equal to one hundred percent (100%)
of the Total Gross Receipts, less the "Breakeven Expenses" and the "Breakeven Fees" (if any), both on an accrual and rolling basis, equals zero.
For purposes of this Agreement, "Breakeven Expenses" shall mean all actual, direct, third party expenses including, without limitation the
negative cost of the Picture, all P&A expenses related to the domestic release of the Picture, all foreign distribution expenses, a reasonable
reserve for residuals and supplemental payments, home video marketing and duplication costs, plus actual interest (on all of the foregoing
except reserves), creative participations actually paid and deferments actually paid prior to Cash Breakeven. For purposes of this Agreement,
"Breakeven Fees" (if applicable) shall mean the specified percentage of the Total Gross Receipts; and
(iii) AGR CONTINGENT COMPENSATION: Contingent compensation to Ignite LLC equal to 15% of Lions Gate's Adjusted Gross Receipts
(all gross revenues received by or credited to Lions Gate, its parent, affiliates and subsidiary companies arising from the
exploitation of the Project in any and all media (now known or hereafter devised) after deduction by Lions Gate on a continuous basis of (i)
distribution fees calculated as follows: 20% of U.S. Gross receipts and 20% of foreign receipts (provided that if Lions Gate engages a third
party distributor with respect to any foreign territory, in no event shall the aggregate distribution fees exceed 35%); (ii) all actual third-party
out-of-pocket distribution expenses (including a reasonable reserve for guild residuals) plus actual interest thereon; (iii) recoupment of Lions
Gate contribution to the negative cost of the Project (i.e., all costs related to the development and production of the Project, specifically
excluding overhead charges or allocations) plus actual interest thereon; (iv) all other mutually approved deferments paid to third-parties; and
(v) any Flat Fee and Cash-Breakeven Contingent Compensation amounts paid or payable to Ignite LLC pursuant to subsections 2.c.(i) and
2.c.(ii) hereinabove.)
Ignite LLC shall receive fees and contingent compensation on any subsequent production based on any Project as set forth herein.
Notwithstanding the foregoing, on any Project with a budget less than $3.0 million, the parties hereto agree to negotiate Ignite LLC's fee in
good faith. The Producer Fees are for the exclusive benefit of Ignite LLC's shareholders.
ACCEPTED AND AGREED:
LIONS GATE FILMS, INC.
By: _________________________________
Its: _________________________________
IGNITE LLC
By: _________________________________
Its: _________________________________
EXHIBIT 10.20
AMENDMENT NO. 4 dated as of February 6, 2002 to the Credit, Security, Guaranty and Pledge Agreement dated as of September 25, 2000
among Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. (together, the "Borrowers"), the Guarantors named therein, the
Lenders referred to therein, The Chase Manhattan Bank, as Administrative Agent and as Issuing Bank for the Lenders (the "Agent"), National
Bank of Canada as Canadian Facility Agent and Dresdner Bank AG as Syndication Agent (as the same may be amended, supplemented or
otherwise modified, the "Credit Agreement").
INTRODUCTORY STATEMENT
The Lenders have made available to the Borrowers a credit facility pursuant to the terms of the Credit Agreement.
The Lenders and the Agent have agreed to amend the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth.
Therefore, the parties hereto hereby agree as follows:
Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit
Agreement.
Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit
Agreement is hereby amended as of the Effective Date (as hereinafter defined) as follows:
(A) The definition of "Eligible Library Amount" appearing in Article 1 of the Credit Agreement is hereby amended by adding the following at
the end thereof:
"and (iv) the Eligible Library Amount may be adjusted in accordance with the terms of Section 5.25 of this Credit Agreement."
(B) The definition of "Print and Advertising Expenditures" appearing in Article 1 of the Credit Agreement is hereby deleted in its entirety.
(C) The definition of "Unrecouped Print and Advertising Expenses" appearing in Article 1 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Unrecouped Print and Advertising Expenses" shall mean with respect to an item of Product produced for domestic theatrical release, the
amount, if any, by which (a) print and advertising expenses exceeds the sum of (i) total receipts from all domestic media and markets plus (ii)
receipts from all media and markets other than domestic media and markets after recoupment of negative costs."
(D) Section 5.1(a) is hereby amended by deleting the words "one hundred and twenty (120)" and inserting in lieu thereof, "one hundred (100)".
(E) Section 5.1(b) is hereby amended by deleting the words "sixty (60)" and inserting in lieu thereof "fifty-five (55)".
(F) Section 5.1(c) of the Credit Agreement is hereby amended by adding the following clauses (iv), (v), (vi) and (vii) at the end thereof:
"(iv) setting forth the actual sources and uses of cash by LGEC and its Consolidated Subsidiaries on a business segment by business segment
basis for the reporting period covered by such statements, with an explanation of the variations from projections delivered in the previous
year."
"(v) setting forth for each of the next four quarters all projected payments to be made by any Credit Parties of minimum guarantees and other
Off-Balance Sheet Commitments."
"(vi) setting forth a schedule of all feature film, television and video product released during the reporting period covered by such statements
with actual print and advertising expenses and budget for each such feature film, television and video product, to the extent applicable and"
"(vii) setting forth a schedule of all feature film, television and video product to be released during the current and the next three quarters with
estimated release date, budget, and print and advertising expenses, to the extent applicable."
(G) Section 5.1(h) is hereby amended in its entirety to read as follows:
"not later than January 31, 2002 and thereafter each January 31st, the calculation of the Eligible Library Amount computed as of the last
Business Day of September of the prior fiscal year".
(H) Article 5 is hereby amended by adding a new Section 5.25 at the end thereof to read as follows:
"SECTION 5.25. Interim Library Valuation. Allow an independent consultant selected by the Agent to conduct a quarterly variance analysis
comparing projections to actual performance on twenty (20) library titles to be chosen by Agent. If such quarterly variance analysis indicates
that the actual performance is greater than ten percent (10%) less than projected for such titles, the Agent may require a recalculation of the
Eligible Library Amount."
(I) Section 6.19 of the Credit Agreement is hereby amended in its entirety to read as follows:
"SECTION 6.19. Fixed Charges Coverage Ratio. For each rolling four quarter period, permit the ratio (the "Fixed Charges Coverage Ratio") of
(i) the sum of EBIT plus amortization of goodwill and capitalized financing costs plus thirty percent (30%) of print and advertising expenses
for such period minus
2
Unrecouped Print and Advertising Expenses for any motion picture for which the second anniversary of its theatrical release occurred during
such period to (ii) the sum of Total Interest (excluding non-cash interest expense) plus dividends actually paid (other than dividends consisting
of shares of common stock in LGEC or Permitted Preferred Stock) to be below 2.25 to 1."
(J) Section 6.25 of the Credit Agreement is hereby deleted in its entirety.
Section 3. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions
precedent (the date on which all such conditions have been satisfied being herein called the "Effective Date"):
(A) the receipt by the Agent of counterparts of this Amendment which, when taken together, bear the signatures of the Borrowers, each
Guarantor, the Agent and the Required Lenders;
(B) the receipt by the Agent of all fees as set forth in Section 5 of this Amendment;
(C) the payment of all fees and expenses (including, without limitation, fees and disbursements of counsel and consultants retained by the
Agent) due and payable by any Credit Party to the Agent and/or the Lenders; and
(D) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius, counsel for the Agent.
Section 4. Representations and Warranties. Each Credit Party represents and warrants that:
(A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to
the extent that any such representations and warranties specifically relate to an earlier date); and
(B) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof.
Section 5. Fees. The Borrowers agree to pay the Agent for the account of each of the Lenders who executes this Amendment on or before
February 13, 2002, a fee equal to 0.25% of the aggregate Commitment of each such Lender under the Credit Agreement.
Section 6. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each
Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the
Agent reasonably deems necessary to effect the purposes of this Amendment.
Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent.
3
Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall
continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms
"Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise
requires, mean the Credit Agreement as amended by this Amendment.
Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
Section 11. Expenses. The Borrowers agree to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation,
execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent.
Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be
taken into consideration in interpreting this Amendment.
IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above:
BORROWERS:
LIONS GATE ENTERTAINMENT CORP.
LIONS GATE ENTERTAINMENT INC.
By:__________________________________________
Name:
Title:
GUARANTORS:
LIONS GATE FILMS CORP.
LIONS GATE FILMS INC.
AVALANCHE HOME ENTERTAINMENT LLC.
LIONS GATE MUSIC CORP.
LIONS GATE FILMS PRODUCTION CORP./
PRODUCTIONS FILMS LIONS GATE S.A.R.F.
LIONS GATE TELEVISION CORP.
569147 B.C. LIMITED
4
408376 B.C. LIMITED
LIONS GATE STUDIO MANAGEMENT LTD.
LIONS GATE TELEVISION INC.
LGE MERGER SUB INC.
CINEPIX FILMS INC./FILMS CINEPIX INC.
CINEPIX ANIMATION INC./ANIMATION CINEPIX INC.
PRISONER OF LOVE PRODUCTIONS CORP.
PSYCHO PRODUCTIONS SERVICES CORP.
AM PSYCHO PRODUCTIONS, INC.
SHUTTERSPEED PRODUCTIONS CORP.
HIGHER GROUND PRODUCTIONS CORP.
M WAYS PRODUCTIONS CORP.
HIGH CONCEPT PRODUCTIONS INC.
LG PICTURES INC.
TRIMARK PICTURES, INC.
TRIMARK HOLDINGS, INC.
CIVIL PRODUCTIONS, INC.
TRIMARK TELEVISION INC.
TRIMARK MUSIC, INC.
FRAILTY PRODUCTIONS, INC.
DEAD ZONE PRODUCTIONS CORP.
TERRESTRIAL PRODUCTIONS CORP.
TRACKER PRODUCTIONS CORP.
VOID PRODUCTIONS CORP.
PRESSURE PRODUCTIONS CORP.
MONSTER PRODUCTIONS, INC.
PROFILER PRODUCTIONS CORP.
THE WASH, LLC
CBV, INC.
By:__________________________________________
Name:
Title:
5
LENDERS:
JPMORGAN CHASE BANK,
individually and as Administrative Agent
By:__________________________________________
Name:
Title:
6
NATIONAL BANK OF CANADA
individually and as Canadian Agent
By:__________________________________________
Name:
Title:
DRESDNER KLEINWORT BENSON BANK AG
By:__________________________________________
Name:
Title:
UNION BANK OF CALIFORNIA
By:__________________________________________
Name:
Title:
BNP-PARIBAS
By:__________________________________________
Name:
Title:
WESTDEUTSCHE LANDESBANK
By:__________________________________________
Name:
Title:
7
THE BANK OF NOVA SCOTIA
By:__________________________________________
Name:
Title:
FLEETBOSTON FINANCIAL
By:__________________________________________
Name:
Title:
U.S. BANK
By:__________________________________________
Name:
Title:
VEREINS-UND WESTBANK AG
By:__________________________________________
Name:
Title:
BANQUE INTERNATIONALE A LUXEMBOURG
By:__________________________________________
Name:
Title:
THE FUJI BANK LTD.
By:__________________________________________
Name:
Title:
8
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________________
Name:
Title:
NATEXIS BANQUE-BFCE
By:__________________________________________
Name:
Title:
FAR EAST NATIONAL BANK
By:__________________________________________
Name:
Title:
COMERICA BANK
By:__________________________________________
Name:
Title:
9
EXHIBIT 21.1
EXHIBIT 21.1
LIONS GATE ENTERTAINMENT CORP. AND SUBSIDIARIES
March 31, 2002
408376 B.C. Ltd.
Christal Films Distribution Inc. (1)
CineGroupe Corporation (2)
CinemaNow, Inc. (3)
Cinepix Animation Inc.
Cinepix Films Inc. (4)
LG Pictures Inc.
Lions Gate Entertainment Corp.
Lions Gate Entertainment Inc.
Lions Gate Films Corp.
Lions Gate Films Inc.
Lions Gate Studio Management Ltd.
Lions Gate Studios BC Partnership
Lions Gate Television Corp.
Lions Gate Television Inc.
Mandalay Pictures, LLC (5)
British Columbia
Quebec
Quebec
California
Canada
Quebec
Delaware
British Columbia
Delaware
Canada
Delaware
British Columbia
British Columbia
British Columbia
Delaware
Delaware
(1) Lions Gate Films Corp. owns 75% of the Class A (equity) shares which represents 30% of the votes and 100% of Class C (financing)
shares.
(2) Cinepix Animation Inc. holds 26% of the Class A Common Shares (one vote) and 100% of the Class B Common Shares (10 votes),
representing a 29% equity interest and a 50.01% voting interest.
(3) Lions Gate Films, Inc. holds 90% of the common shares which represents 63% of the total equity shares.
(4) Lions Gate Films Corp. owns 75% of the Class B (equity) shares, 25% of the Class C (control) shares and 100% of the Class D shares.
Cinepix Inc., owned by John Dunning and Andre Link, owns the remaining 25% of the Class B and 75% of the Class C shares.
(5) 55% of Mandalay Pictures, LLC is held by Tigerstripes Inc., a corporation owned by Peter Guber, Paul Schaeffer and Adam Platnick.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm in the Registration Statements (Forms S-8 No. 333-9830 and No. 333-12800) pertaining to the
Employees' and Directors Equity Incentive Plan of Lions Gate Entertainment Corp. and to the incorporation by reference therein of our report
dated July 1, 2002, with respect to the consolidated financial statements of Lions Gate Entertainment Corp. included in its Annual Report
(Form 10-K) for the year ended March 31, 2002, filed with the Securities and Exchange Commission.
/S/
Los Angeles, California
July 15, 2002
ERNST & YOUNG LLP
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm in the Registration Statements (Forms S-8 No. 333-9830 and No. 333-12800) pertaining to the
Employees' and Directors Equity Incentive Plan of Lions Gate Entertainment Corp. and to the incorporation by reference therein of our report
dated May 17, 2002, with respect to the consolidated financial statements of Mandalay Pictures, LLC included in the Annual Report (Form
10-K) of Lions Gate Entertainment Corp. for the year ended March 31, 2002, filed with the Securities and Exchange Commission.
/S/ ERNST & YOUNG LLP
Los Angeles, California
July 15, 2002
Exhibit 23.3
PRICEWATERHOUSECOOPERS LLP
SECURITIES & EXCHANGE COMMISSION
PricewaterhouseCoopers LLP
Chartered Accountants
PO Box 82
Royal Trust Tower, Suite 3000
Toronto Dominion Centre
Toronto, Ontario
Canada M5K 1G8
Telephone +1 416 863 1133
Facsimile +1 416 365 8215
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-9830) and on Form S-8 (No.
333-12800) of Lions Gate Entertainment Corp. of our report dated June 22, 2001 relating to the consolidated financial statements of the
Company which appears in this Annual Report on Form 10-K.
(signed) PricewaterhouseCoopers LLP
Toronto, Canada
July 15, 2002
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide
PricewaterhouseCoopers organization.
EXHIBIT 23.4
(PRICEWATERHOUSECOOPERS LOGO)
PRICEWATERHOUSECOOPERS LLP
1880 Century Park East
Century City
West Los Angeles CA 90067
Telephone (310) 201 1700
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-9830 and 333-12800) of Lions Gate
Entertainment Corp. of our report dated June 22, 2001 relating to the financial statements of Mandalay Pictures, LLC for the year ended March
31, 2001, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Century City, California
July 15, 2002