-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lzkrr2K/nitWj/nJFFfXWzQyUV8XlFfw68zdj2PMWT2FXEHNO/6OECqbJNLYZgcd nS1HtcrX95UW+aKh/SCixw== 0000902595-01-500107.txt : 20010725 0000902595-01-500107.hdr.sgml : 20010725 ACCESSION NUMBER: 0000902595-01-500107 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIONS GATE ENTERTAINMENT CORP /CN/ CENTRAL INDEX KEY: 0000929351 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14880 FILM NUMBER: 1686964 BUSINESS ADDRESS: STREET 1: 3 BENTALL CENTER SUITE 3123 595 BURRARD STREET 2: PO BOX 49139 VANCOUVER, BRITISH COLUMBIA CITY: CANADA STATE: A1 BUSINESS PHONE: 6046096110 FORMER COMPANY: FORMER CONFORMED NAME: BERINGER GOLD CORP DATE OF NAME CHANGE: 19970618 FORMER COMPANY: FORMER CONFORMED NAME: GUYANA GOLD CORP DATE OF NAME CHANGE: 19960212 10-K 1 form_10k.txt FORM 10-K ________________________________________________________________________ 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, 2001 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) _________________________ 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: None Title of class Name of exchange on which registered ------------------------------- ------------------------------------ Common Stock, without par value 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. __X__ The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 1, 2001 was approximately $100 million. As of June 1, 2001, 42,449,496 shares of the registrant's no par value common stock were outstanding. ________________________________________________________________________ TABLE OF CONTENTS ITEM PAGE PART I 1. BUSINESS......................................................... 4 2. PROPERTIES....................................................... 22 3. LEGAL PROCEEDINGS................................................ 23 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 23 PART II 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.......................................................... 24 6. SELECTED FINANCIAL DATA.......................................... 26 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION..................... 30 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 41 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 42 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 42 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 42 11. EXECUTIVE COMPENSATION........................................... 46 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 51 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 52 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................... 53 Page 2 UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO "LIONS GATE," "THE COMPANY," "WE," "US," AND "OUR" REFER COLLECTIVELY TO LIONS GATE ENTERTAINMENT CORP. AND ITS SUBSIDIARIES. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. WE CAUTION YOU THAT THE MATTERS SET FORTH UNDER "RISK FACTORS," CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. 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 U.S. 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.
Fiscal Year Ending March 31 ------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Rate at end of period $1.5784 $1.4828 $1.5092 $1.4180 $1.3835 Average rate during period 1.5041 1.4790 1.5086 1.4060 1.3634 High rate 1.5784 1.5140 1.5770 1.4637 1.3835 Low rate 1.4515 1.4470 1.4175 1.3705 1.3310
On June 1, 2001, 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 $1.5324 = US$1.00. Page 3 PART I ITEM 1. BUSINESS. OVERVIEW Lions Gate Entertainment Corp. 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, Studio Facilities and CineGate) as well as our CinemaNow Inc. ("CinemaNow") digital media platform. We have the following divisions and partners: o Motion Pictures, which includes Production and Theatrical, Video, Television and International Distribution; o Television, which includes One-Hour Drama Series, Television Movies, Non Fiction Programming and International Distribution; o Animation, which includes an interest in CineGroupe Corporation ("CineGroupe"), a producer and distributor of animated feature films and television programming; o Studio Facilities which includes Lions Gate Studios ("LG Studios") and leased facilities at Eagle Creek Studios; o a joint venture with CineGate Production Management Services 2001 Inc. ("CineGate"), a Canadian production services company; o a 63% interest in CinemaNow, a video on demand distributor of feature films over the Internet; and o a 45% interest in Mandalay Pictures, LLC ("Mandalay"), a U.S.-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. Page 4 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." 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, as consolidated, 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. RECENT DEVELOPMENTS Since our incorporation in April 1997, we have pursued a strategy of acquiring and integrating existing companies in the entertainment business. To this end, we have made several important acquisitions and have raised equity capital to pursue our acquisition and development strategies. In September 2000 we entered into a joint venture with Cinegate Holdings Inc. to provide services to CineGate, which provides management services to Canadian limited partnerships utilizing the Film or Video Production Services Tax Credit and the Canadian Federal Tax Act to finance productions in Canada. On September 27, 2000 we arranged a US$200 million revolving credit facility with a syndicate of global financial institutions. J.P. Morgan Securities and Dresdner Kleinwort Wasserstein Securities LLC arranged the five-year financing commitment. J.P. Morgan Securities is the Administrative Agent, Dresdner Bank AG is the Syndication Agent, and National Bank of Canada is the Canadian Facility Agent. On October 13, 2000 we acquired Trimark Holdings, Inc ("Trimark") by the issuance of 10,229,836 common shares and the payment of approximately US$22 million in cash and US$4 million of acquisition costs. Trimark is a worldwide distributor of entertainment software that primarily distributes feature films in the domestic home video and theatrical markets and licenses distribution rights to motion pictures for international markets. On November 27, 2000 we acquired the 50% remaining interest in Sterling Home Entertainment (referred to as "Studio Home Entertainment"). The total consideration of US$2.8 million for the acquisition consisted of cash consideration of US$2.0 million, forgiveness of an account receivable of US$0.7 million and US$0.1 million of acquisition costs. On December 5, 2000 CinemaNow received financing of US$5.3 million from Microsoft Corp., Blockbuster, Inc., Kuwait Investment Projects Co. ("Kipco") and others. Page 5 On April 1, 2001 we acquired a 75% equity interest in Christal Films Distribution Inc. ("Christal Films"), an independent producer and distributor of French and English language feature films, by providing working capital. We continue to integrate our existing operations and to seek out other acquisition opportunities to complement our growing entertainment operations. INDUSTRY BACKGROUND THE FEATURE FILM INDUSTRY The feature film industry encompasses the development, production and exhibition 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 Turner Pictures, 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, United Artists Pictures Inc., Orion Pictures Corporation and Goldwyn Entertainment Company). 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$25 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. 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 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. Page 6 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 Channels in the Channels in Canada United States -------------- ---------------------- -------------------- Free NBC, CBS, ABC, Fox CBC, CTV and the television and PBS Global Television networks Network Broadcast PAXTV, UPN and The WB networks Cable HBO, Showtime, USA TMN, Super Ecran, Network, Lifetime, SuperChannel, Fox Family Channel, Canal D and TNT, F/X, Odyssey and Showcase TBS 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 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 Page 7 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 industry has grown and matured, and at present, it represents approximately a $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: o major U.S. studios, such as Paramount, The Walt Disney Company, Universal Pictures and Columbia Tri-Star; o U.S. networks, such as ABC, NBC, CBS, Fox and PAXTV; o cable services, such as Showtime, TNT, Disney Channel and HBO; and o film companies, such as The Hearst Corporation and Saban Entertainment, Inc. 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. MOTION PICTURES We develop and produce theatrical motion picture projects through three separate production entities-Lions Gate Films, Christal Films and Mandalay. We operate these production units 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. Page 8 FILM PRODUCTION We produce and distribute English and French-language films generally budgeted at US$20 million or less. In fiscal 2001, we produced or co-produced and delivered two films, and in fiscal 2000, we produced or co-produced and delivered five films. 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 2002 we anticipate our theatrical releases to include the following: o FRAILTY, Bill Paxton's directorial debut, which stars Bill Paxton and Mathew McConaughey; o THE CAT'S MEOW, from award-winning director Peter Bogdanovich, which stars Kirsten Dunst, Jennifer Tilly, Eddie Izzard, Edward Herrmann and Cary Elwes; o THE WASH, starring Dr. Dre and Snoop Dogg and written and directed by DJ Pooh, the creator of the number-one urban box office film Friday; and o MONSTERS BALL, starring Billy Bob Thornton, Heath Ledger and Halle Berry. 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 Dogma, American Psycho, The Red Violin, Shadow of the Vampire, Big Kahuna, Gods and Monsters, Affliction, Amores Perros and Elvis Gratton II-Miracle in Memphis. Our releases - Les Boys and Les Boys II - are the highest grossing films in Quebec history, and video sales of these films have also set records. HOME VIDEO DISTRIBUTION. Lions Gate Home Entertainment has three U.S. video distribution labels - Trimark Home Video, Avalanche Home Entertainment and Studio Home Entertainment. In addition to exploiting our own films, 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. These films include Million Dollar Hotel with Mel Gibson, Dwight Yoakam's South of Heaven, West of Hell, Legionnaire with Jean-Claude Van Damme, Storm of the Century by Stephen King and the creature feature Komodo. We have an agreement with Universal Studios Home Video for the licensing of select Lions Gate theatrical releases for distribution in the United States as well as pay-per-view and non-theatrical rights. 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 a distribution arrangement with Columbia TriStar Home Video and through our own label, Avalanche Home Entertainment. Page 9 PAY AND FREE TELEVISION DISTRIBUTION. We exploit a library of more than 1,500 titles in the cable, free and pay television markets. We have an output deal with HBO expiring December 31, 2001, for our theatrical releases. The deal grants the network exclusive pay-television rights to our line-up. 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 55 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 A-level feature length motion pictures with budgets ranging from US$15 to US$75 million. Mandalay is accounted for by the equity method and not on a consolidated basis. 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 markets. ENEMY AT THE GATES starring Jude Law, Joseph Fiennes, Ed Harris and Rachel Weiss was released in North America on March 16, 2001. As of June 1, 2001, it has grossed in excess of US$75 million worldwide. Mandalay has scheduled The Score, an action suspense thriller starring Robert DeNiro, Marlon Brando, Ed Norton and Angela Bassett, for release in July 2001. Servicing Sarah, a romantic drama starring Mathew Perry and Elizabeth Hurley, is currently in post-production with an anticipated release in early 2002. Other projects currently in development include Beyond Borders, Kung Fu Theatre and End Game. FINANCING, PRODUCTION AND DISTRIBUTION AGREEMENT WITH PARAMOUNT. Mandalay entered into a long-term, multi-picture financing, production and distribution agreement with Paramount, pursuant to which Paramount will market and distribute Mandalay's feature films worldwide, except in the United Kingdom, Italy, Germany, France, Japan, Spain, Australia and Greece. In these territories, companies with which Mandalay's executives have had a previous relationship will handle distribution. These foreign distributors include Constantin Film Gmbh & Co. Verleigh KG, Nippon Herald Films Inc., Tri-Pictures S.A., Medusa Film SPA, Village Roadshow Netherlands B.V., Le Studio Canal Plus and Pathe. Together with Paramount, they contribute approximately 85% to 90% of the cost of each film produced by Mandalay and make significant contributions to overhead costs. The Paramount agreement also provides Mandalay with rights to "put" film projects to Paramount in certain circumstances. In addition, it gives Paramount a limited reciprocal put, with Mandalay obligated to distribute the resulting films in its territories. Other features of the Paramount agreement include a sharing between Paramount and Mandalay of worldwide merchandising rights and a provision providing Mandalay with office space on the Paramount studio lot to use as executive and motion picture production offices. Although significant financial risks relating to the production, completion and release of Mandalay's film projects remain, we expect that Mandalay's distribution arrangements with Paramount and the foreign distributors will lower our economic risk profile for these film projects and result in a more consistent and varied flow of motion pictures with decreased capital requirements from Mandalay. Page 10 TELEVISION ONE-HOUR DRAMA SERIES. We are currently in production of the second season on twenty-two episodes of Mysterious Ways, which is broadcast on PAXTV in the United States and CTV in Canada. NBC has broadcast thirteen episodes of the first season and has ordered eight additional episodes from season two. In July 2001, we anticipate starting production on the first thirteen episodes of No Boundaries, an adventure reality show for The WB and CanWest Global. We have presold twenty-two episodes of Tracker, a sci-fi fugitive drama, to the competitive first run syndication market in the United States and to Telemunchen in Germany and anticipate starting production in July 2001. In February 2001 we completed a one hour pilot and a subsequent one hour show of Dead Zone, a series based on Stephen King's novels. It has been announced as a mid-season replacement for UPN, and we are currently negotiating the terms of the UPN sale with the network and our partner Paramount International Television. 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 Linda McCartney Story for CBS that aired in May 2000. We have recently completed principal photography on 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, and Attack on the Queen, a two-hour suspense thriller for TBS starring Rob Estes and Joe Lando. Superfire, a three-hour television movie about smokejumpers battling an inferno in the Oregon backcountry for ABC starring D.B. Sweeney, is currently in post-production. In addition to the television movies already completed or nearing completion, we have approximately eight projects, representing an aggregate of 18 hours of television programming, in development with U.S. broadcasters and cable companies. NON-FICTION PROGRAMMING. Termite Art Productions ("Termite Art"), a Television division, created a number of documentary and reality-based programs for such notable clients as the Discovery Network, Travel Channel, MTV, The Learning Channel, PBS, A&E, The History Channel, The Health Channel and Fox Prime Time. Termite Art produced When Chefs Attack for UPN, the Amazing Animal Videos series for Animal Planet, Incredible Vacation Videos for the Travel Channel, Ripley's Believe It or Not for TBS, It's Burlesque! for A&E and assorted other non-fiction programming. In addition to distributing Termite Art programs to the 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 our partner 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 575 half- hour animated episodes for television, including such series as Sagwa, the Chinese Siamese Cat, Mega Babies, Wounchpounch and Kids from Room 402, and a made-for-television movie, Lion of Oz. During fiscal 2001, CineGroupe delivered 81.5 half-hours of programming, including: o 40 half-hours of Wounchpounch to Saban SINV and Radio- Canada; o 18 half-hours of Kids from Room 402 (Season 2) to Fox Family and Teletoon; o 7 half-hours of Mega Babies to Fox Family and Teletoon; Page 11 o 13.5 half hours of Sagwa, the Chinese Siamese Cat to PBS Kids and TV Ontario; and o the made-for television movie Lion of Oz to Disney Channel and Super Ecran. Projects currently in production include: o 26 half-hours of What's With Andy; o 12 half-hours of Kids from Room 402 (Season 3) for Fox Family and Teletoon; o the live action feature film Wilderness Station, a co- production with Credo Entertainment that Lions Gate will distribute; o 12 half-hours of Wounchpounch; o 26 hours of Sagwa, the Chinese Siamese Cat; and o complimentary web activities for both Sagwa, the Chinese Siamese Cat and Mega Babies. In the coming years, CineGroupe plans to expand production volume and interactive production 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: o 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; o lower production costs in Canada than in the United States and other countries due, in part, to lower guild and union minimums; o the favourable exchange rate of the Canadian dollar; o government tax incentives; o the availability of location assistance to film and television producers offered by many Canadian cities and several provinces; o a large number of highly trained and professional crews, technicians and production personnel; o intensive training for Canadian directors, writers and producers provided by the Canadian Film Centre; o flexible trade unions that insist upon less onerous requirements than their U.S. counterparts; and o 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. Page 12 (Urban centers such as Toronto, Vancouver and Montreal have been disguised as London, Paris, New York and Chicago.) We have benefited from the high demand for sound stages and production office space created by this increase in production through our ownership in LG Studios and a lease on the Eagle Creek Studios. 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: o William F. White Limited, Canada's largest supplier of cinematic lighting, power and grip equipment; o Pinewood Sound, a supplier of audio post-production services; o Sim Video Productions, Ltd., a supplier of cameras and post-production editing equipment; o the local union of one of the major film and entertainment industry craft guilds; and o production companies. Studio capacity usage is consistently above 90%. Current studio productions include Lions Gate's one hour drama series Mysterious Ways, the James Cameron television series Dark Angel and Universal Pictures feature film 24 Hours. LG Studios' industry tenants complement each other in providing a broad range of production and post-production services to the independent producers who regularly make use of LG Studios' facilities. These facilities consist of seven state-of-the-art sound stages, ranging from 11,000 to 20,500 square feet in area, and over 130,000 square feet of production, office and support space, including a state of the art mixing theatre. We anticipate building our eighth stage, a second 20,500 square foot stage, at LG Studios this fiscal year. LG Studios owns its own telephone system and rental furniture and can therefore provide a fully operational production office to independent producers in a timely manner. LG Studios' office space has film set facade exteriors suitable for filming, including commercial and residential districts, a courthouse and a small-town main street. Producers can also take advantage of a variety of filming locations situated in close proximity to the studio complex, including mountain and ocean settings, ethnic neighbourhoods and downtown cityscapes. We expect to have continued high occupancy rates for both our studios and offices for the next year. We have entered into a five-year 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 the Warner Bros. feature film Insomnia. The addition of Eagle Creek Studios increases LG Studios' sound stage inventory to nine. We have also entered into a revenue share equipment supply contract with William F. White Limited for equipment on the stages. CINEGATE Through a joint venture with CineGate, we provide services to a production services company that facilitates the production of feature length films and television programs in Canada. CineGate Page 13 provides management services to Canadian limited partnerships utilizing the Film or Video Production Services Tax Credit and the Canadian Federal Tax Act to fund productions in Canada. 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, not on a consolidated basis, 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 million streams to over 500,000 users per month via its website, www.cinemanow.com. CinemaNow currently streams over 250 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 and iBeam Broadcasting's proprietary platform. CinemaNow controls exclusive Internet distribution rights to over 1,000 films from 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 Hollywood.com and WindowsMedia.com. In December, CinemaNow closed its series B round of financing led by Microsoft and included Blockbuster and Kipco. After the series B financing we own 63% of CinemaNow. 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. 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, 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 Page 14 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 1, 2001 we had approximately 250 full-time and 25 part-time regular employees in our worldwide operations and CineGroupe has a further 265 full-time and 75 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 without limitation 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 financial assistance. Telefilm Canada's provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan, British Columbia, 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 $200 million per year television funding initiative. "CANADIAN-CONTENT" PRODUCTIONS. Canadian television broadcasters and cable 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 Canadian domestic communications. Since 1968 broadcasting undertakings, including specialty television network licensees, 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 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 Page 15 licenses to eligible entities to operate specialty television networks. In addition, the CRTC also imposes restrictions on the transfer of ownership and control of television network licenses. The Canadian independent television program production industry is assisted by the CRTC requirement that each Canadian over-the-air private broadcaster 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 a Canadian broadcaster to require Canadian cable 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. The substitution ensures that Canadians are exposed to the Canadian broadcasters' commercials. This result is 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 12% of eligible production costs. 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 operating segments for each of the last three fiscal years, refer to "Notes to the Consolidated Financial Statements Note 21. Segment Information." For financial information about the results for our geographic areas for each of the last three fiscal years, refer to "Notes to the Consolidated Financial Statements Note 21. Segment Information." Page 16 RISK FACTORS FAILURE TO COMBINE THE OPERATIONS OF RECENT ACQUISITIONS AND MANAGE FUTURE GROWTH MAY ADVERSELY AFFECT OUR BUSINESS. FAILURE TO INTEGRATE OUR DIVERSE OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS. We have acquired several entities over the last few years. While most of these companies have previously operated in their respective fields, we face the problems inherent in combining their different operations. Any failure by us to do so could have an adverse effect on our potential profitability. 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 films 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 Page 17 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, 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 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. Page 18 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 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 does 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: o the timing of domestic and international releases of current and future television programs or feature films we produce; o the success of our television programs or feature films; o the timing of the release of related products into their respective markets; o the costs to distribute and promote the television programs and feature films; o the success of our distributors in marketing our television programs and feature films; o the timing of receipt of proceeds generated by the television programs and feature films from distributors; o the introduction of new television programs and feature films by our current and future competitors; o the timing and magnitude of operating expenses and capital expenditures; o the level of unreimbursed production costs in excess of budgeted maximum amounts; o the timing of the recognition of advertising costs for accounting purposes under SoP 00-2; and o 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. WE MAY OVERSTATE OR UNDERSTATE OUR TOTAL REVENUES AND COSTS BECAUSE 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 Page 19 dates: when films are delivered, or access to the film is available, to the customer; when the license period begins; when the fee is determinable and when collection is reasonably assured. As a result, our expected cash flows may not necessarily relate to the revenue recognized in a given period. We capitalize costs of producing and developing films and television episodes. Capitalized costs include costs of film rights and screenplays, direct costs of production, interest and production overhead. We amortize those costs using the film-forecast-computation method, which involves estimating unrecognized 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 costs each period, which may vary from the actual participation 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, Kevin Beggs, Marni Wieshofer, Michael Burns and Jacques Pettigrew. The loss of the services of key persons could have a material adverse effect on the Company's 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. We could have 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 even no government incentives and/or future ineligibility for Canadian government incentive programs. The 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 Page 20 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 U.S. 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: o changes in local regulatory requirements; o changes in the laws and policies affecting trade; o investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes); o differing degrees of protection for intellectual property; o instability of foreign economies and governments; and o 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. In addition, currency and exchange control regulations imposed by the country in which a production is exploited may also adversely affect our ability to repatriate to Canada funds arising in connection with our foreign operations. Page 21 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 5,401 square feet of space under a lease agreement that expires on April 30, 2002. Our Canadian operations and financial personnel are located in leased space of 7,800 square feet expiring in 2006 in Toronto, Ontario and U.S. corporate executives and operations are located in leased space of 35,000 square feet expiring in 2009 in Los Angeles, California. Christal Films' office is located in Ville St. Laurent, Quebec, and occupies approximately 15,000 square feet under a lease agreement expiring in August 2001. Christal Films leases on a monthly basis a further 5,000 square feet of space in St. Laurent for storage facilities. CineGroupe operates from two leased premises in Montreal, Quebec totalling approximately 70,000 square feet the leases for which expire in 2006 and also has a 1,280 square feet office in Los Angeles which lease expires October 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 setting. The land on which the facilities are situated is owned by LG Studios and is subject to mortgages under four separate term loans. Loans in the amount of approximately $8.3 million and $9.2 million mature in April 2003 and July 2003, respectively. Loans in the amount of approximately $2.6 million mature in October 2005. 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 10,000 square feet in Studio City, California which expires on August 1, 2001. Page 22 Mandalay occupies space on the Paramount Studios lot in Los Angeles pursuant to the Paramount Agreement. See "Business - Financing, Production and Distribution Agreement with Paramount." 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 2001. Page 23 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 Low ------ ------ Year ended March 31, 2000 First Quarter.................... $5.50 $2.85 Second Quarter................... 3.00 2.20 Third Quarter.................... 3.65 2.50 Fourth Quarter................... 6.90 3.40 Year ended March 31, 2001 First Quarter.................... 5.25 3.05 Second Quarter................... 4.99 2.70 Third Quarter.................... 4.00 2.00 Fourth Quarter................... 4.10 2.75
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, for our two most recent fiscal years:
High Low ------ ------ Year ended March 31, 2000 First Quarter....................US$3.75 US$1.94 Second Quarter................... 2.06 1.50 Third Quarter.................... 2.56 1.63 Fourth Quarter................... 4.94 2.31 Year ended March 31, 2001 First Quarter.................... 3.75 2.00 Second Quarter................... 3.06 2.00 Third Quarter.................... 2.69 1.31 Fourth Quarter................... 2.75 1.75
HOLDERS As of June 1, 2001, there were 42,449,496 shares issued and outstanding and 395 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 will depend upon the assessment of, among other things, our earnings, financial requirements and operating and financial condition. At the present time, Page 24 our anticipated capital requirements are such that it intends 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 dividends 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, 2000 and March 31, 2001, respectively, paid in U.S. dollars, cash dividends of US$817,000 or US$66.94 per share ($1.2 million or $99.08 per share) and US$817,000 or US$66.94 per share ($1.3 million or $105.51 per share). (2000 - US$406,000 or US$33.29 per share, $591,000 or $48.40 per share). RECENT SALES OF UNREGISTERED SECURITIES On March 7, 2001, we issued 600,000 unregistered shares of our Common Stock to Peter Strauss pursuant to a Settlement and Partial Release Agreement dated March 6, 2001. Mr. Strauss has served as President of LG Pictures, International Movie Group, Inc. and The Movie Group since June 30, 1998. Subsequent to the commencement of such employment, we became involved in a dispute with Mr. Strauss. As part of the Settlement and Partial Release Agreement, pursuant to which we and Mr. Strauss settled and resolved all claims against each other, we agreed to issue Mr. Strauss 600,000 shares of our Common Stock. The issuance was exempt from registration under Section 4(2) of the Securities Act of 1933 as amended, as a sale of securities not involving a public offering. TAXATION The following is a general summary of certain Canadian income tax consequences to U.S. 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 U.S. 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. Page 25 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). 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 beneficially owned 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 FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Financial Statements and the Notes thereto and Item 9, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statement of operations data and balance sheet data set forth below have been derived from and are qualified by reference to the Page 26 Consolidated Financial Statements and Notes thereto for the year ended March 31, 2001, which have been audited by PriceWaterhouseCoopers, LLP, 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 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 25, "Reconciliation to United States GAAP" in the Notes to the Consolidated Financial Statements. Page 27 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT (all amounts in thousands of Canadian dollars, except per share information)
Fiscal Years Ended March 31, ------------------------------------------ 2001 2000 1999 1998 --------- --------- --------- --------- In accordance with Canadian GAAP: Revenue........................... $282,226 $271,251 $118,297 $ 64,149 Direct Operating Expenses......... 156,420 222,875 92,931 49,175 --------- --------- --------- --------- Gross Profit...................... 125,806 48,376 25,366 14,974 --------- --------- --------- --------- Other Expenses Distribution and marketing costs.......................... 51,776 - - - General and administrative...... 37,710 31,388 23,555 10,337 Amortization.................... 9,887 7,074 5,279 1,781 Interest........................ 10,283 4,466 3,655 951 Non-controlling interest........ 881 1,308 612 1,019 Severance and restructuring costs......................... - 1,698 1,647 - --------- --------- --------- --------- 110,537 45,934 34,748 14,088 --------- --------- --------- --------- Income (Loss) Before Undernoted 15,269 2,442 (9,382) 886 Gain on dilution of investment in a subsidiary............... - - 839 - --------- --------- --------- --------- Income (Loss) Before Income Taxes and Equity Interests.... 15,269 2,442 (8,543) 886 Income taxes.................... (3,292) 2,000 304 1,439 --------- --------- --------- --------- Income (Loss) Before Equity Interest...................... 18,561 442 (8,847) (553) Equity interest in loss of Mandalay Pictures, LLC........ (8,298) (5,894) (5,449) - Other equity interests.......... (1,535) 159 140 - --------- --------- --------- --------- Net Income (Loss) for the Year.. 8,728 (5,293) (14,156) (553) Dividends paid on preferred shares........................ (2,497) (591) - - Accretion on Series A preferred shares........................ (3,115) (727) - - Adjusted Deficit, Beginning of Year.......................... (83,016) (14,709) (553) - --------- --------- --------- --------- Deficit, End of Year............ $(79,900) $(21,320) $(14,709) $ (553) ========= ========= ========= ========= Basic and Diluted Income (Loss) Per Common Share....... $ 0.09 $ (0.22) $ (0.58) $ (0.04) ========= ========= ========= ========= Deficit, Beginning of Year........ $(21,320) $(14,709) $ (553) $ - Effect of change in accounting policy.......................... (61,696) - - - --------- --------- --------- --------- Adjusted Deficit, Beginning of Year............................ $(83,016) $(14,709) $ (553) $ - ========= ========= ========= ========= In accordance with U.S. GAAP: Revenue......................... $264,047 $247,264 $114,377 $ 56,942 ========= ========= ========= ========= Net Loss for the Year........... $(28,805) $ (2,424) $(25,697) $ (1,435) ========= ========= ========= ========= Basic and Diluted Loss Per Common Share.............. $ (0.99) $ (0.11) $ (1.05) $ (0.10) ========= ========= ========= =========
Page 28 CONSOLIDATED BALANCE SHEETS (all amounts in thousands of Canadian dollars)
At March 31, ------------------------------------------ 2001 2000 1999 1998 --------- --------- --------- --------- In accordance with Canadian GAAP Assets Cash and equivalents............. $ 10,485 $ 19,283 $ 26,254 $ 9,064 Accounts receivable.............. 183,787 107,344 60,673 47,816 Investment in films and television programs............. 228,349 128,375 88,949 56,305 Long term investments... ........ 77,230 64,058 72,932 71,048 Capital assets................... 44,212 44,505 40,691 38,757 Goodwill, net of accumulated amortization.................... 34,924 29,163 31,636 27,207 Other assets..................... 15,233 8,960 6,029 317 Future income taxes.............. - 285 448 - --------- --------- --------- --------- $594,220 $401,973 $327,612 $250,514 ========= ========= ========= ========= Liabilities Bank loans....................... 159,765 13,936 $ 12,185 15,581 Accounts payable and accrued liabilities..................... 123,370 74,965 44,668 26,441 Production and distribution loans........................... 24,045 41,838 48,415 30,227 Long-term debt................... 65,987 40,607 41,145 27,414 Deferred revenue................. 22,283 19,269 10,780 4,999 Future income taxes.............. 757 - - 1,255 Non-controlling interest......... 1,224 4,944 3,635 646 --------- --------- --------- --------- 397,431 195,559 160,828 106,563 Shareholders' Equity Capital stock.................... 266,523 226,290 177,068 144,524 Deficit.......................... (79,900) (21,320) (14,709) (553) Cumulative translation adjustments..................... 10,166 1,444 4,425 (20) --------- --------- --------- --------- 196,789 206,414 166,784 143,951 --------- --------- --------- --------- $594,220 $401,973 $327,612 $250,514 ========= ========= ========= ========= In accordance with U.S. GAAP: Total assets...................... $599,170 $395,219 $318,089 $263,621 ========= ========= ========= =========
Page 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion and analysis for the years ended March 31, 2001, 2000 and 1999 should be read in conjunction with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements included in this report. The functional currency of our business, defined as the economic environment in which we primarily generate and expend cash, is the Canadian dollar and United States dollar for the Canadian and United States-based businesses respectively. In accordance with generally accepted accounting principles in both Canada and the United States, the financial statements of United States-based subsidiaries are translated for consolidation purposes using current exchange rates, with translation adjustments accumulated in a separate component of shareholders' equity. 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, Studio Facilities and CineGate. Please also refer to the table in note 21 to the consolidated financial statements. In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SoP 00-2. SoP 00-2 establishes new accounting standards for producers or distributors of films, including changes in revenue recognition and accounting for exploitation costs, including advertising and marketing expenses. Additionally, in June 2000, the Financial Accounting Standards Board ("FASB") issued Statement 139 ("SFAS 139") that rescinded SFAS 53 "Financial Reporting by Producers and Distributors of Motion Picture Films." Companies that were previously subject to the requirements of SFAS 53 must now comply with SoP 00-2. We elected to adopt SoP 00-2 early and, as a result, recorded a one-time after-tax adjustment to opening retained earnings at April 1, 2000 of $58.9 million (including $5.5 million relating to Mandalay) for the initial adoption of SoP 00-2. The new rules require that advertising costs be expensed as incurred as opposed to the old rules, which generally allowed advertising costs to be capitalized as part of film costs, and amortized using the "individual film forecasts" method. All other exploitation costs, including marketing costs, must also now be expensed as incurred. Due to the significant advertising and other exploitation costs incurred in the early stages of a film's release, we anticipate that the new rules will significantly impact its results of operations for the foreseeable future. For example, in the financial quarter where we release a film theatrically it is likely that significant losses would be realized on that film. In subsequent financial quarters when the film is released into other media, such as video and television, it is likely that a significantly favorable gross margin would be recorded on that film. In the current year, "pre-SoP" EBITDA would have been approximately $46.2 million, a $9.9 million difference, compared to "post-SoP" EBITDA of $36.3 million. A significant portion of the decline due to the SoP adjustment relates to the allocation of the fair value of Trimark's library on acquisition under the SoP and advertising costs relating to the fiscal 2001 theatrical releases of American Psycho and Shadow of the Vampire. The $9.9 million decrease in EBITDA equates to a decrease in net income of $5.9 million or $0.16 per share. Advertising and other exploitation costs expensed in the year are now separately disclosed in the Consolidated Statements of Operations and Deficits as "distribution and marketing costs." Additionally, under SFAS 53, we classified additions to films costs as an investing activity in the Consolidated Statement of Cash Flows, which must now be disclosed as an operating activity in the Consolidated Statement of Cash Flows. Page 30 In September 2000, we announced that we had entered into a joint venture with Cinegate Holdings Inc. to provide services to CineGate. CineGate provides management services to Canadian limited partnerships using the Film or Video Production Services Tax Credit and the Canadian Federal Tax Act to finance production in Canada. We also elected early adoption of CICA Handbook Section 3465 - - Income Taxes - which is similar in many respects to FAS 109 under U.S. GAAP. A onetime adjustment to opening retained earnings at April 1, 2000 of $2.7 million was recorded as described in note 2(r) to the consolidated financial statements. In September 2000, we announced we had closed a US$200 million five-year revolving credit facility arranged by J.P. Morgan Securities, agented by Chase Manhattan Bank in a syndicate of fifteen nationally and internationally significant banks. Dresdner Bank AG acted as Syndication Agent and National Bank of Canada acted as the Canadian Facility Agent. In October 2000, we announced we had completed the acquisition of Trimark. The total consideration of US$49.6 million consisted of cash consideration of US$22.0 million, 10.2 million Lions Gate common shares with an estimated fair value of US$23.6 million and US$4.0 million of acquisition costs. The acquisition was accounted for as a purchase, with the results of Trimark consolidated from October 13, 2000 onwards. The transaction generated goodwill of $8.5 million. We have successfully integrated Trimark into our operations and the synergies are expected to exceed the projected US$7 million in annual costs savings. As part of the reorganization of our operations as a result of the acquisition of Trimark the New York office was closed in January 2001 and the Toronto office was downsized in March 2001. In November 2000, we acquired the 50% remaining third party interest in Sterling Home Entertainment (referred to as "Studio Home Entertainment"). The total consideration of US$2.8 million consisted of cash consideration of US$2.0 million, forgiveness of an account receivable of US$0.7 million and US$0.1 million of acquisition costs. The acquisition gave us access to 100% of the Studio Home Entertainment library that consists of many significant straight-to-video titles including Legionnaire, Letters From a Killer, Murder of Crows, and New Rose Hotel, as well as distribution rights to the top-selling Komodo. In December 2000, CinemaNow, our Internet video on demand business, acquired with Trimark, announced the completion of a second round of preferred share financing consisting of 5.3 million shares for US$4.5 million. Significant participants in this round of financing included Blockbuster, Microsoft and private venture funds. This transaction resulted in a dilution of our interest from 77.2% to 63%. OVERVIEW Including the non-cash equity interests in the operating losses of Mandalay and CinemaNow, totaling $9.8 million as disclosed in the Consolidated Statements of Operations and Deficits, net income for the year ended March 31, 2001 was $8.7 million or $0.09 per share (including the Series A preferred share dividends and accretion on the Series A preferred shares) on 36.2 million weighted average commons shares outstanding compared to a net loss of $5.3 million or $0.22 per share (including 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 and a net loss of $14.2 million or $0.58 per share on 24.6 million weighted average common shares outstanding for the year ended March 31, 1999. Our $8.3 million (2000-$5.9 million) non-cash equity interest in the loss of Mandalay is comprised of 100% of the operating losses of Mandalay for the year of $6.4 million, plus Page 31 amortization of previously capitalized pre-operating period costs of $1.9 million. Our $1.5 million non-cash equity interest in the loss of CinemaNow comprises 66.9% of the non-cash operating losses of CinemaNow for the period October 13, 2000 to March 31, 2001 of $1.2 million, plus amortization of goodwill amounting to $0.3 million, which arose at the time of the purchase of Trimark. Excluding the non-cash equity interests in the operating losses of Mandalay and CinemaNow, we generated earnings for the year ended March 31, 2001 of $18.6 million, an improvement of $18.2 million compared to the equivalent earnings amount of $0.4 million in the year ended March 31, 2000 and a loss of $8.8 million in the year ended March 31, 1999. These results are equivalent to earnings per share of $0.32 in fiscal 2001, loss per share of $0.02 in fiscal 2000 and a loss per share of $0.35 in fiscal 1999, all other things being equal. Excluding the adoption of SoP 00-2, net income for the year ended March 31, 2001 would have been $14.6 million or $0.25 per share (including the Series A preferred share dividends and accretion on the Series A preferred shares). EBITDA (defined as earnings before interest, provisions for income taxes, amortization, non-controlling interests, equity interests in losses and severance and relocation costs) of $36.3 million for the year ended March 31, 2001 has increased $19.3 million or 113.5% compared to $17.0 million for the year ended March 31, 2000 and increased $34.5 million or more than twenty- fold compared to $1.8 million for the year ended March 31, 1999. EBITDA 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 generally accepted accounting principles. RESULTS OF OPERATIONS 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 increased significantly in Motion Pictures and was down slightly in Television and Animation due to the timing of deliveries. Motion Pictures fiscal 2001 revenue of $173.9 million increased $34.9 million or 18.4% compared to $146.9 million in fiscal 2000. The increase is 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 put negative pressure on the prior year's gross margin. Significant theatrical releases in the current year included: American Psycho; Shadow of the Vampire; and Big Kahuna. Significant video releases in the current year included: American Psycho; Big Kahuna; and Million Dollar Hotel. Television and international sales revenue 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. Significant revenue generators for Trimark included Shriek, Saturday Night Live "Best of" comedy series, and Held Up. Television revenue of $71.5 million decreased by $10.3 million or 12.6% from $81.8 million in the prior year, due primarily to fewer television movie deliveries partially offset by increased deliveries in Page 32 Termite Art. Trimark contributed Television revenue of $3.7 million. In the current year, the one-hour drama series business contributed revenue of $44.5 million. Deliveries in the current year included 22 episodes of Mysterious Ways to PAX TV, NBC (13 of 22 episodes), CTV and Columbia Tristar and 7 episodes of Higher Ground to Fox Family, WIC and Paramount. In the prior year, 37 hours of one-hour drama series were delivered for revenue of $46.0 million. Termite Art contributed revenue of $18.4 million in the current year 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; 6 hours of VH1 Confidential to VH1; 5 hours of MTV Video Party; and 4 hours of Great Streets to PBS. In addition, producers fees were earned on the delivery of 19 episodes of Ripley's Believe It Or Not to UPN. In the prior year, 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 the current year and producer fees were earned on four productions. In the prior year, four television movies were delivered for revenue of $24.3 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 2001, $18.2 million of tax credits earned were included in revenue. In Animation, CineGroupe's revenue of $29.7 million decreased $5.9 million or 16.6% compared to $35.6 million in the prior year. The decrease was due to the timing of deliveries - several episodes were not available for delivery at March 31 and were subsequently delivered in the first quarter of fiscal 2002. In the current year a total of 81.5 half-hours of television programming were delivered - 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 7 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 was earned in the current year. Studio Facilities revenue of $5.5 million decreased $1.5 million or 21.4% from the prior year's revenue of $7.0 million due to the elimination on financial statement consolidation of $1.5 million of intercompany revenue earned from our productions filmed at our Studio Facilities. Stage and office occupancy levels averaged 94% and 85% respectively for the year compared to 96% and 92% respectively in the prior year. Since commencing CineGate operations in September 2000, Lions Gate has earned commission revenue of $1.6 million on approximately $270.0 million of production financing arranged through the Cinegate joint venture. An additional $200.0 million of production financing is expected to be completed in the first quarter of fiscal 2002. Gross profit for the year ended March 31, 2001 was $125.8 million with a 44.6% gross margin, compared to gross profit of $48.4 million with a gross margin of 17.8% in the prior year. Gross profit increased $77.4 million while the gross margin increased 26.8 percentage points year-over-year. The primary reason for the increase year-over-year is due to the adoption of SoP 00-2 whereby advertisering expenses are now disclosed as a component of other expenses rather than as a component of gross profit. In addition, the gross margin by business improved year-over-year in all businesses, with the exception of Studio Facilities, which decreased primarily due to the revenue elimination relating to our productions. The most significant influence on the gross margin compared to the prior year was in Motion Pictures, where the gross margin of 28.1% earned in the current year exceeded the gross margin of 18.7% earned in the prior year by 9.4 percentage points. The majority of the increase is due to the contribution of the Trimark library post acquisition, which accounts for 5.1% of the increase and favorable gross margins earned on library sales during the year, partially offset by the net impact of the adoption of SoP 00-2 of $8.3 million. Page 33 Television's gross margin of 17.1% compares favorably to the prior year's gross margin of 9.2%. Gross margin improvement can be attributed partially to the elimination of intercompany studio costs (see above) which contributed to a favorable gross margin achieved on Mysterious Ways, partially offset by the net impact of the adoption of SoP 00-2 of $2.5 million. The gross margin in Animation improved to 28.4% in the current year from 24.9% in the prior year as in the prior year the gross margin was negatively impacted by the delivery of the feature film Heavy Metal, which generated a gross margin of approximately 15% compared to animation television series, which typically generate gross margins in the 25% to 30% range. In addition, CineGroupe recognized a favorable SoP adjustment in the year of $0.7 million. Cinegate revenues are at a 100% gross margin due to the nature of the services provided, and did not exist in the prior year. Other expenses, which consist primarily of distribution and marketing costs of $51.8 million and general and administrative expenses of $37.7 million, increased $58.1 million or 185.0% over other expenses in the prior year of $45.9 million. In prior years, distribution and marketing costs were expensed as a component of gross profit. 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 the current year and the growth of the production and video distribution businesses. 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 $5.4 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 of $2.8 million. Partially offsetting these increases, in the prior year $1.6 million of severance and relocation costs were expensed, which did not exist in the current year. On March 16, 2001 Mandalay delivered its second feature film, Enemy at the Gates starring Jude Law, Joseph Feinnes, Ed Harris and Rachel Weicz, directed by internationally-acclaimed director Jean Jacques Annaud and filmed in Germany. Enemy at the Gates generated a domestic box office in excess of US$50 million and has performed well overseas. Mandalay's investment in Enemy at the Gates is not significant and Mandalay expects it to generate a favorable cash return. Mandalay's next release is The Score, an action suspense thriller, starring Robert DeNiro, Edward Norton, Marlon Brando and Angela Basset and directed by Frank Oz, filmed in Montreal. The Score is expected to be released theatrically in the U.S. in July 2001. Principal photography was recently completed on Servicing Sarah, a romantic comedy starring Matthew Perry and Elizabeth Hurley. Servicing Sarah is expected to be released next winter. Other Mandalay projects currently in development include: Beyond Borders, Kung Fu Theatre and End Game. The non-cash equity interest in the loss of Mandalay consists of operating losses of $6.4 million and amortization of previously deferred pre-operating costs of $1.9 million. We regularly investigate opportunities that would enable us to realize the value added to our investment in Mandalay. Other equity interests consists primarily of our 66.9% non-cash equity interest in CinemaNow's operating loss of $1.2 million and amortization of goodwill of $0.3 million. In the current year, we recognized the benefit of previously unrecognized income tax loss carry forwards of approximately $5.5 million. At March 31, 2001, we have 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. Page 34 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 25 to the financial statements. Under U.S. GAAP the net loss was $50.2 million (2000 - - $2.4 million net loss; 1999 - $25.7 million net loss). The U.S. GAAP net loss per share in the current year including the equity interest in the non-cash operating loss of Mandalay, the accounting change and dividends and accretion relating to the preferred shares issued in the current year would have been $1.50 (2000 - $0.11). In the year ended March 31, 2001 the earnings under U.S. GAAP are lower than under Canadian GAAP due primarily to the recognition of the opening SoP adjustment as a reduction in net income under U.S. GAAP. FISCAL 2000 COMPARED TO FISCAL 1999 Revenue in fiscal 2000 of $271.3 million, increased $153.0 million or 129% compared to $118.3 million in fiscal 1999. Revenue increased significantly in all businesses. The most significant year-over-year percentage increase was in Television where revenue of $81.8 million increased $69.3 million or more than 5-fold over the prior year's revenue of $12.5 million. The one-hour series business, which did not exist in the prior year, contributed revenue in excess of $46 million. Fiscal 2000 deliveries included: 15 hours of the drama series Higher Ground to Paramount, Fox Family and WIC; and 22 hours of the one hour drama series Hope Island to Paramount, PAX and Showcase Television. Television movie revenue of $24.3 million increased $22.9 million over fiscal 1999 revenue of $1.4 million as the prior year's revenue consisted of producer fees and revenue participations compared to license fees earned on proprietary productions delivered in the current year. Television movies delivered in fiscal 2000 included Final Run to CBS, King of the World to ABC, Shutterspeed to TNT and First Daughter to TBS. 47 hours of non-fiction programming were delivered in fiscal 2000 by Termite Art including 13 hours of Wild Rescues to Discovery and 12 hours of Ripley's Believe It or Not. 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 2000, $24.0 million of tax credits earned were included in revenue. In Motion Pictures, revenue of $146.9 million also increased $69.3 million, or 89.3% on a percentage basis, over the prior year's revenue of $77.6 million. In Lions Gate Films revenue in all divisions increased year-over-year. The most significant increases were in theatrical distribution where revenue increased $24.5 million or 213% to $36.0 million compared to $11.5 million in the prior year and video distribution where revenue increased $24.0 million or 61.5% to $63 million compared to $39.0 million in the prior year. Significant theatrical releases in fiscal 2000 included: Dogma and Red Violin (Oscar winner for Best Original Score) in the U.S. and Elvis Gratton in Canada. Significant video releases in fiscal 2000 included: Affliction; Gods and Monsters; Red Violin and Dinner Game. The most significant production in fiscal 2000 was American Psycho, which was delivered in several international territories prior to March 31, 2000. American Psycho was released theatrically in North America on April 14 and achieved North American box office in excess of US$15 million. Revenue generated in North America and the majority of the international territories was recognized in fiscal 2001. In Animation, CineGroupe's revenue of $35.6 million increased $13.6 million or 61.8% over the prior year's revenue of $22.0 million. This increase occurred despite the fact that CineGroupe delivered 79 half-hours of animation programming in fiscal 2000 compared to 135 half-hours in the prior year. Fiscal 2000 deliveries included: 22 half-hours of Kids From Room 402 to Fox Family; 20 half-hours of Jim Bouton to Radio Canada and Television France (TF1); 19 half-hours of Mega Babies and 14 half- Page 35 hours of Bad Dog to Fox Family and Teletoon and the feature film Heavy Metal. The fiscal 2000 revenue per half-hour was significantly increased by the delivery of Heavy Metal which was distributed by Columbia Tristar in the U.S. and Lions Gate Films in Canada. In addition, the prior year's deliveries included 44 half-hours of Funamble, which had a relatively low average revenue per half hour, and several co-productions. Studio Facilities revenue of $7.0 million increased $800,000 or 13% over the prior year's revenue of $6.2 million. This was due in part to the opening of a seventh sound stage in September 1999. Stage and office occupancy levels averaged 96% and 92% respectively for the year. Gross profit for the year ended March 31, 2000 was $48.4 million with a 17.8% gross margin compared to gross profit of $25.4 million with a 21.4% gross margin in fiscal 1999. Gross profit increased $23.0 million or 91% and the gross margin decreased 3.67 percentage points compared to the prior year. The most significant influence on the gross margin compared to the prior year was in Television where the gross margin came in at 9.2% in fiscal 2000 compared to 20.4% in the prior year. In the prior year, a significant portion of Television revenue consisted of producer-for-hire fees and revenue participations relating to television movies, not proprietary productions. As noted in fiscal 1999's Management Discussion and Analysis, as a result of our strategy to concentrate on proprietary productions rather than earning producer-for-hire fees only, Television revenue was expected to increase going forward, however, it would not be possible to maintain a gross margin for the Television business at the rate that was enjoyed in fiscal 1999. We expected the ongoing gross margin for this business to be in the 11% to 12% range in the short term. We were in the process of expanding its international television distribution capabilities and expected that the Television gross margin would improve in the future when we were able to more accurately assess international sales risk. The gross margins in the other businesses were essentially flat, except that Motion Pictures gross margin increased from 17.3% in 1999 to 18.7% in fiscal 2000 primarily due to growth in the video distribution business and a reduction in the required provision for investment in film. Other expenses of $45.9 million increased $11.2 million or 32.2% over other expenses in fiscal 1999 of $34.7 million, primarily due to an increase in general and administrative expenses of $7.8 million year-over-year. Approximately half of the year-over-year increase in general and administrative expenses was in Motion Pictures where general and administrative expenses increased $4.2 million to $16.2 million in fiscal 2000 compared to $12.0 million in the prior year. This increase was due to the significant growth experienced in all divisions of Lions Gate Films. Television general and administrative expenses increased $3.9 million over the prior year. However, excluding $4.6 million of capitalized costs in fiscal 1999 relating to the pre-operating period of the one hour series business that otherwise would have been classified as general and administrative expenses, general and administrative expenses on a gross basis in Television decreased year-over-year. Animation general and administrative expenses increased $0.7 million over fiscal 1999 due to head count increases as a result of the creation of the new media department and the opening of offices in Toronto and Los Angeles. Corporate overhead decreased $1 million year-over-year due to the consolidation of administrative functions and cost saving initiatives instituted at head office. Severance and relocation costs recorded in fiscal 2000 primarily related to severance for several senior executives compared to severance and relocation costs recorded in fiscal 1999 that related to severance and relocation associated with the centralizing of certain head office functions in Toronto. Overall, as a percentage of revenue, general and administrative expenses decreased to 11.6% of revenue in fiscal 2000 compared to 19.9% in fiscal 1999. Page 36 In fiscal 2000 Mandalay delivered its first feature film, Sleepy Hollow starring Johnny Depp and Christina Ricci. Sleepy Hollow generated North American box office and foreign box office each in excess of US$100 million and was nominated for three Academy Awards. In March 2000 Sleepy Hollow won the Oscar for Art Direction. The fiscal 2000 provision for income taxes consisted of a $1.7 million provision at CineGroupe and a $0.3 million tax provision at LG Studios. In fiscal 1999, the tax recovery was due primarily to the benefit of approximately $3.6 million of losses arising in the U.S. operations and at corporate, which were not tax effected. At March 31, 2000 we had income tax losses in excess of $13.8 million available to reduce future income taxes payable. Income tax losses can be carried forward seven years in Canada and twenty years in the U.S. In fiscal 2000 the financial statements were restated to be in compliance with Item 18 of Form 20-F, which includes full U.S. GAAP disclosure not required under Item 17, the basis of previous filings. This change was required due to the filing requirements of an F-4 registration statement in the U.S. in connection with the Trimark acquisition. Comparative amounts for the year ended March 31, 1999 were restated to conform to Item 18 disclosure. Under U.S. GAAP the fiscal 2000 net earnings excluding the equity interest in the non-cash operating loss of Mandalay would have been $3.5 million (1999 - $20.4 million net loss). The U.S. GAAP net earnings per share in fiscal 2000 including the equity interest in the non-cash operating loss of Mandalay and dividends and accretion relating to the preferred shares issued in the current year would have been $0.11. This represented a significant improvement over the prior year's loss per share of $1.05. In fiscal 2000 the net loss under U.S. GAAP was lower than the net loss under Canadian GAAP due to the reversal of the amortization of deferred pre-operating costs under Canadian GAAP, which were expensed under U.S. GAAP in the year ended March 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Earnings before interest, provision for income taxes, deprecation, amortization, minority interest and equity interests ("EBITDA") before severance and relocation costs more than doubled to $36.3 million from $17.0 million in fiscal 2000 and increased more than twenty-two-fold from $1.8 million in fiscal 1999. Cash flows from operating activities before working capital decreased $2.0 million or 6.3% to negative $29.7 million in fiscal 2001 from negative $31.7 million in fiscal 2000 and decreased $2.8 million or 9.7% to negative $31.7 million in fiscal 2000 from negative $28.9 million in fiscal 1999, all primarily due to the increased investment in films and television programs. Working capital (defined as cash and equivalents, accounts receivable and investment in films and television programs less bank loans and accounts payable and accrued liabilities) as at March 31, 2001 of $139.5 million decreased $26.6 million from $166.1 million at March 31, 2000 and increased $47.1 million over working capital of $119.0 million at March 31, 1999. Working capital as of March 31, 2001, excluding the effects of the adoption of SoP 00-2, would have been $149.4 million, a decrease of $16.7 million compared to working capital of $166.1 million at March 31, 2000. The decrease in working capital from fiscal 2001 to fiscal 2000 is primarily the result of incremental financing relating to the Trimark acquisition and, in addition, at March 31, 2001 there are several significant productions in work-in- progress which we expect to be delivered in the first and second quarters of fiscal 2002. Page 37 Our liquidity and capital resources were provided during the year ended March 31, 2000 principally through cash generated from operations, a US$200 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, all scheduled for fiscal 2002 delivery. The credit facility is secured by our borrowing base, which includes accounts receivable, and "library" credits, which is projected over the next four quarters to allow for borrowing base excesses. In February 2001, we completed a third party valuation of our films and television programs library. Trimark completed a third party valuation of its library in August 2000. At March 31, 2001 the borrowing base assets totaled US$120.1 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 and acquisition. As our operations grow, its financing requirements are expected to grow. 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 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. At March 31, 2001 our subsidiaries have entered into unconditional purchase obligations relating to the purchase of motion picture rights for future delivery and to pay advances to producers amounting to approximately $39.1 million that are payable over the next twelve months (2000 - $10.2 million). One of our subsidiaries has provided guarantees up to a maximum of $6.8 million (2000 - $2.1 million) for bank loans used to finance productions costs of unrelated production companies. 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 hard costs of a project before commencing production. At March 31, 2001, we had total net debt, consisting of bank loans, production and distribution loans, and long-term debt net of cash and short-term deposits, of $239.3 million (2000 - $77.1 million). Our net debt to equity ratio at March 31, 2001 of 1.21:1.0 (0.93:1.00 excluding the effect of the one-time non-cash opening retained earnings adjustments) compares to 0.37:1.00 a year earlier. The increase in the net debt to equity ratio is due to the significant ramping up of feature film production, the financing of the Trimark acquisition and the debt assumed as a result of the Trimark acquisition. At March 31, 2001 we had drawn US$97.4 million ($153.5 million) of our US$200.0 million revolving operating credit facility. Bank loans consist of a five-year revolving credit facility and demand loans bearing interest at rates not exceeding Canadian prime plus 4.0%. Production loans consist of bank demand loans bearing interest at various rates between Canadian prime and 9.25%. The distribution loan, a revolving credit facility of US$10 million bearing interest at U.S. prime, was repaid in the current year. Long-term debt consists primarily of mortgages on the Studio Facility at interest rates ranging from 6.63% to 7.51%, convertible promissory notes bearing interest at a rate of 6% and non-interest bearing sales guarantees with respect to the German tax shelter financings. For the year ended March 31, 2001 the weighted average interest rates on bank loans and productions loans were 8.06% and 8.18% respectively (2000 - 9.02% and 8.34% respectively). Page 38 We do not pay and do not intend to pay 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. In the current year we paid dividends totaling $2.5 million on the convertible preferred shares issued in the prior year. RISKS AND UNCERTAINTIES We capitalize costs of production and distribution to investment in films and television programs. These costs are amortized to direct operating expenses in accordance with SoP 00- 2. Under SoP 00-2, costs incurred in connection with an individual film or television program, including production and financing costs, are capitalized to investment in film and television programs. These costs are stated at the lower of unamortized film or television program costs and fair value. These costs for an individual film or television program are amortized in the proportion that current period actual revenue realized relates 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, resulting in significant write downs affecting our results of operations and financial condition. We currently finance a portion of our production budgets from third parties, from Canadian government agencies and incentive programs as well as international sources in the case of our co-productions, and from German tax shelter arrangements. There can be no assurance that third party financing, government incentive programs and German tax shelter arrangements will not be reduced, amended or eliminated. Any change in these programs may have an adverse impact on our 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 labor 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. Profitability depends on revenue and on the cost to acquire or produce a film or television program and the amount spent on the prints and advertising campaign used to promote it. Results of operations for any period are significantly dependent on the timing and number of films or television programs produced. Our operating results may fluctuate materially from period to period, and the results for any one period are not necessarily indicative of results for future periods. Our five-year revolving operating credit facilities are either alternate base rate loans or Eurodollar loans as we may request. Significant increases in the base interest rates could have an unfavorable impact on us, and vice versa. A significant portion of our revenue and expenses are in U.S. dollars, and, are therefore subject to fluctuation in exchange rates. Significant fluctuations in exchange rates may have a favorable or unfavorable impact on our results of operation. Page 39 CURRENCY RISK MANAGEMENT Additionally, as part of its 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 two productions. 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 may be used in the future, within guidelines 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. The principal currency exposure is between Canadian and U.S. dollars, although this exposure has been significantly mitigated in the current year. Our US$200 million revolving credit facility is structured as two separate facilities - 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. From time to time there will be currency exposure on distribution revenue from foreign, principally European countries. We do not intend to enter into financial derivative contracts, other than to hedge its financial risks. OUTLOOK We are a fully integrated independent entertainment company with film and television production, worldwide distribution capabilities and studio facilities. Management's long-term strategy is to expand film, television and animation libraries and increase its production slate and distribution reach to become the first new independent mini-major in years. The following growth pillars will fuel this expansion: o Diversified content - We have a reputation for producing and distributing independent, edgy, sophisticated films; o North American distribution network - We are the only Canadian company that distributes class-A theatrical and video titles in the U.S.; o International television product - We produce one-hour drama series and non-fiction programming for the international marketplace; o Merger and acquisition strategy - We propose to acquire high quality film and television assets, such as Trimark, that complement our existing assets; o Additional strategic partners; and o New complementary businesses - We received approval from the CRTC for a Canadian English language digital specialty channel - Jackpot TV - with third parties (a game and gaming channel). We believe that the success we have achieved in producing and distributing high quality product, and in raising the necessary capital, positions us to achieve our growth objectives. Page 40 ITEM 7A. QUANTITIVE 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 1.2% to 4.0%. Our principal risk with respect to our long-term debt is changes in these market rates. The table below presents principal cash flows and related weighted average interest rates for our credit facilities and long-term debt obligations at March 31, 2001 by expected maturity date.
Expected Maturity Date ------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 ---- ---- ---- ---- ---- ---- (Amounts in thousands) Credit Facilities: Variable(1) $ 40,858 Variable(2) $118,907 Long-term Debt: Fixed (3) $ 38,277 $2,665 $1,156 $32,249 $143 $2,064 Fixed (4) $ 25,560 $25,560 Variable (5) $ 26,195 $24,211 $751 $486 $405 $114 - ------------------- (1) Variable interest rate equal to Canadian Prime Plus 4.0%. (2) Variable interest rate equal to U.S. Prime plus 1.2%. US$75.4 million. (3) Fixed interest rate equal to 6%. (4) Non interest-bearing. US$16.2 million. (5) Variable interest rate equal to Canadian Prime plus 1.4%.
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 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, 2001, the Company had contracts to sell $7.0 million in exchange for 10.4 million New Zealand dollars over a period of three months at a weighted average exchange rate of Cdn$0.67 and to sell $3.5 million in exchange for 4.4 million Australian Dollars over a period of three months at a weighted average exchange rate of Cdn$0.79. 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, 2001 amounted to $0.5 million. Page 41 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 57 following Part IV). The index to our Consolidated Financial Statements is included in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. We have nothing to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information concerning the directors, executive officers and key employees of the Company.
Name and Place of Residence Position (1) Age (2) - ------------------------------- ------------------------------ ------- Mark Amin...................... Vice Chairman and Director 51 Los Angeles, California Bill Boersma................... Vice President of Finance 43 Los Angeles, California Michael Burns.................. Vice Chairman and Director 42 Los Angeles, California Drew Craig..................... Director 43 Calgary, Alberta John Dellaverson............... Executive Vice President 55 Los Angeles, California Jon Feltheimer................. CEO and Director 50 Los Angeles, California Frank Giustra (4).............. Chairman and Director 43 West Vancouver, British Columbia Joe Houssian................... Director 52 West Vancouver, British Columbia Gordon Keep.................... Senior Vice President and Director 44 Vancouver, British Columbia Herbert Kloiber................ Director 54 Munich, Germany Howard Knight(3) (4)........... Director 59 Stamford, Connecticut Morley Koffman (3)(5).......... Director 71 Vancouver, British Columbia Patrick Lavelle................ Director 62 Toronto, Ontario Wayne Levin.................... Executive Vice President, Legal & 38 Los Angeles, California Business Affairs Andre Link..................... President and Director 69 Montreal, Quebec Page 42 Harald Ludwig (4).............. Director 47 West Vancouver, British Columbia James Nicol (5)................ Director 47 Aurora, Ontario G. Scott Paterson(3)(5)........ Director 37 Toronto, Ontario Julie Rennie................... Secretary 34 Vancouver, British Columbia Marni Wieshofer................ Chief Financial Officer 38 Los Angeles, California Cami Winikoff.................. Executive Vice President 38 Los Angeles, California ______________________________ (1) The term of office of each director concludes at the Company's next annual general meeting of shareholders, unless the director's office is earlier vacated in accordance with the articles of the Company. Each officer serves at the pleasure of the Board of Directors. (2) As of June 1, 2001. (3) Member of Audit Committee. (4) Member of Compensation Committee. (5) Member of Corporate Governance Committee.
MARK AMIN. Mr. Amin has been our Vice Chairman since October 2000. From 1984 to October 2000, Mr. Amin served as Chief Executive Officer or Chairman of Trimark, which he founded. Mr. Amin became a director in October 2000. BILL BOERSMA. Mr. Boersma has been our Vice President of Finance since November 2000. From April 1995 to November 2000, Mr. Boersma served as Controller or Division Controller of AMC Film Marketing, a motion picture exhibitor. MICHAEL BURNS. Mr. Burns has been our Vice Chairman since March 2000. From 1991 to March 2000, Mr. Burns served as Managing Director and Head of Prudential Securities Inc.'s Los Angeles Investment Banking Office. Mr. Burns became a director in August 1999. DREW CRAIG. Mr. Craig became a director in September 2000. Mr. Craig has served as President of Craig Broadcast Systems Inc., a broadcasting company, since September 1997 and prior thereto was a Vice President since 1985. JOHN DELLAVERSON. Mr. Dellaverson has been our Executive Vice President since April 2000. Prior to joining us, Mr. Dellaverson was a partner, Loeb & Loeb LLP, a law firm based in Los Angeles, CA. Mr. Dellaverson, who is currently Of Counsel, has practiced at Loeb & Loeb since 1981. JON FELTHEIMER. Mr. Feltheimer has been our Chief Executive Officer since March 2000. From 1997 to 1999, Mr. Feltheimer served as Executive Vice President of Sony Pictures Entertainment. From 1995 to 1997, Mr. Feltheimer served as President of Columbia Tri-Star Television Group. Mr. Feltheimer became a director in January 2000. Page 43 FRANK GIUSTRA. Mr. Giustra has been our Chairman since April 1997. From 1995 to December 1996, Mr. Giustra served as Chairman and Chief Executive Officer of Yorkton Securities Inc., an investment banking firm ("Yorkton"). Mr. Giustra became a director in April 1997. JOE HOUSSIAN. Mr. Houssian has been a director since October 2000. Mr. Houssian has been Chairman, President & Chief Executive Officer of Intrawest Corporation, a developer and operator of mountain resorts, since 1975. GORDON KEEP. Mr. Keep has been our Senior Vice President since October 1997. From 1987 to October 1997, Mr. Keep served as Vice President, Corporate Finance of Yorkton. Mr. Keep has been a director since June 2000. HERBERT KLOIBER. Mr. Kloiber has been a director since January 2000. Mr. Kloiber has served as Managing Director of Tele-Muchen Group, an integrated media company, since 1977. HOWARD KNIGHT. Mr. Knight has been a director since January 2000. Mr. Knight has served as Executive Vice Chairman of SBS Broadcasting SA, a European commercial television and radio broadcasting company, since February 2001, having previously served as Chief Operating Officer since January 1998 and as Vice Chairman since September 1996. MORLEY KOFFMAN. Mr. Koffman has been a director since November 1997. Mr. Koffman is a partner with the law firm of Koffman Kalef, where he has practiced since 1993. PATRICK LAVELLE. Mr. Lavelle has been a director since October 2000. Mr. Lavelle has been Chairman and a director of Export Development Corporation, a commercial financial institution, since December 1997. From 1994 to December 1997, Mr. Lavelle served as Chairman of the Business Development Bank of Canada. WAYNE LEVIN. Mr. Levin as been our Executive Vice President, Legal and Business Affairs since November 2000. From September 1996 to November 2000 Mr. Levin was General Counsel or Vice President for Trimark Pictures, Inc. and from 1991 to September 1996 was Senior Partner of the Law Offices of Wayne Levin. ANDRE LINK. Mr. Link has been our President since April 2000. Since 1962 Mr. Link has been Chief Executive Officer of LG Films. Mr. Link has been a director since November 1997. HARALD LUDWIG. Mr. Ludwig has been a director since November 1997. Since 1985 Mr. Ludwig has served as President of Macluan Capital Corporation, a leverage buy-out company. JAMES NICOL. Mr. Nicol has been a director since August 1999. Mr. Nicol has been President and Chief Operating Officer of Magna International, an automotive parts manufacturer, since February 2001. From May 1998 to February 2001, Mr. Nicol served as Vice Chairman of Magna International. From February 1994 to July 1998, Mr. Nicol was Chairman and Chief Executive Officer of TRIAM Automotive, Inc., an automotive parts manufacturer. G. SCOTT PATERSON. Mr. Paterson has been a director since November 1997. Mr. Paterson has served as Chairman and Chief Executive Officer of Yorkton since October 1998. From May 1997 to October 1998, Mr. Paterson served as President of Yorkton. From May 1995 to May 1997, Mr. Paterson served as Executive Vice President of Yorkton. Page 44 JULIE RENNIE. Ms. Rennie has been our Executive Assistant since April 1997. From January 1996 to April 1997, Ms Rennie was Executive Assistant at Yorkton. MARNI WIESHOFER. Ms. Wieshofer as been our Chief Financial Officer since April 1999. From February 1999 to April 1999, Ms. Wieshofer was our Vice President, Finance. From October 1995 to January 1999, Ms. Wieshofer served as Vice President, Finance of Alliance Atlantis Communications, an entertainment company. CAMI WINIKOFF. Ms. Winikoff has been our Executive Vice President since November 2000. From 1990 to November 2000, Ms. Winikoff was a Senior Vice President, Executive Vice President and Vice President of Production of Trimark. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 While Lions Gate was a foreign private issuer our officers, directors and ten percent beneficial owners were exempt from Section 16 of the Securities Exchange Act of 1934. Before the end of fiscal 2001, we became a domestic issuer. The following individuals filed a Form 3 later than the tenth day after we became a domestic issuer: Mark Amin, Bill Boersma, Michael Burns, Drew Craig, John Dellaverson, Jon Feltheimer, Frank Giustra, Joe Houssian, Gordon Keep, Herbert Kloiber, Howard Knight, Morley Koffman, Patrick Lavelle, Wayne Levin, Andre Link, Harald Ludwig, James Nicol, G. Scott Paterson, Julie Rennie, Marni Wieshofer and Cami Winikoff. Page 45 ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes the compensation paid or accrued to our Chief Executive Officer and our four most highly compensated executive officers, other than the Chief Executive Officer, who served as executive officers and whose salary plus bonus exceeded $100,000 (the "Named Executive Officers"). The position identified in the table for each person is their current position with us unless we indicate otherwise. SUMMARY COMPENSATION TABLE
Long Term Officer Annual Compensation Compensation(1) - ----------------- ---------------------------- --------------- Name and Position Year Salary Bonus Other Securities ($) ($) Annual Underlying Compen- Options sation (#) ($) - ----------------- ---- ------- ------- ------- ----------- Jon Feltheimer, 2001 846,000 376,000 9,289 1,000,000 Chief Executive 2000 65,077 125,333 1,321 1,375,000 Officer (2)(3) 1999 - - - - Michael Burns, 2001 752,000 520,384 - - Vice Chairman 2000 62,667 125,333 6,072 1,425,000 (2)(4) 1999 - - - - Marni Wieshofer, 2001 382,333 37,600 - 75,000 Chief Financial 2000 175,555 - - - Officer (5) 1999 29,167 - - 100,000 John Dellaverson, 2001 376,000 - - 100,000 Executive Vice 2000 17,113 37,600 - - President (2)(6) 1999 - - - - Gordon Keep, 2001 312,500 74,950 - 75,000 Senior Vice 2000 285,115 - 4,957 - President 1999 255,000 - 2,131 100,000 (1) The Company has not granted any Restricted Stock Awards, SARs or LTIPs to any of the Named Executive Officers. (2) The named executive officer is compensated in U.S. dollars. The figures presented are converted to Canadian dollars at a rate of 1.504 Canadian dollars per U.S. dollar. (3) Mr. Feltheimer was appointed CEO on March 21, 2000. (4) Mr. Burns was appointed Vice Chairman on March 21, 2000. (5) Ms. Wieshofer was compensated in Canadian and U.S. dollars. The figures presented are converted to Canadian dollars at a rate of 1.504 Canadian dollars per U.S. dollar. (6) Mr. Dellaverson was appointed Executive Vice President on April 28, 2000.
Page 46 STOCK OPTION GRANTS. The following table provides details regarding stock option grants to our Named Executive Officers in fiscal 2001 pursuant to our Employees' and Directors' Equity Incentive Plan ("the Plan"). Option Grants - Last Fiscal Year (1)
Potential Realizable Value Number of % of Total Exercise at Assumed Annual Rates Securities Options Price of Stock Price Underlying Granted to Per Appreciation for Option Options Employees in Share Expiration Term Name Granted (#) Fiscal Year (US$) Date 5%(US$) 10%(US$) - ----------------- ------------ ------------ --------- ---------- ----------- ----------- Jon Feltheimer 1,000,000(2) 25.3% 3.00 2/26/06 - 543,122 Marni Wieshofer 75,000 1.9% 2.55 8/15/05 36,088 95,622 John Dellaverson 100,000 2.5% 2.55 8/15/05 48,117 127,496 Gordon Keep 75,000 1.9% 2.55 8/15/05 36,088 95,622 _________________ (1) We did not grant any SARs in fiscal 2001 to any of the Named Executive Officers. (2) A portion of these options are subject to shareholder approval to increase the size of the Plan.
OPTION EXERCISES AND HOLDINGS. The following table provides information for the Named Executive Officers concerning options they exercised during fiscal 2001 and unexercised options that they held at the end of fiscal 2001. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Securities Number of Securities on Value Underlying Unexercised Value of Unexercised In-the- Exercise Realized Options at FY-End Money Options at FY-End Name (#) ($) Exercisable/Unexercisable(#) Exercisable/Unexercisable($) - ---------------- -------- -------- ---------------------------- ---------------------------- Jon Feltheimer - - 125,000 2,250,000 - Michael Burns - - 141,666 1,283,334 - Marni Wieshofer - - 66,666 108,334 - John Dellaverson - - 100,000 - - Gordon Keep - - 125,000 50,000 -
COMPENSATION OF DIRECTORS Persons elected at our annual general meetings as directors and who hold no executive office with us or any of our affiliates are entitled to receive an annual retainer of $5,000 and a further retainer of $2,500 if such director acts as a chairman of a committee of directors. Also, each non-executive director is entitled to receive a fee of $500 per meeting of the directors or any committee thereof, and to be reimbursed for reasonable fees and expenses incurred in connection with their service as directors. During the last fiscal year, nine directors received the annual retainer. Non-employee directors are granted options to purchase 50,000 common shares when they join the Board of Directors. In fiscal 2001 Page 47 we granted options to purchase 250,000 common shares to persons who served as directors during that period pursuant to our Plan. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN- CONTROL ARRANGEMENTS During the fiscal year ended March 31, 2001 we were a party to an employment agreement with each of the Named Executive Officers. JON FELTHEIMER. We entered into an employment agreement with Mr. Feltheimer effective January 1, 2001, which provides that he will serve as Chief Executive Officer for an initial term that ends March 31, 2004. Mr. Feltheimer's annual base salary under his agreement is US$750,000. Mr. Feltheimer is also entitled to an annual discretionary bonus determined by the Board of Directors. In addition, Mr. Feltheimer will receive a stock price bonus of US$1,000,000 if our share price exceeds US$6.00 for any consecutive six months during the term. If he terminates his employment for "Good Reason," which includes a change of control, he will be entitled to continue to receive his annual salary and all other benefits for the remainder of the employment agreement. Upon a change of control, 50% of his unvested options vest immediately if the share price is below US$4.00 and 100% of his options vest immediately if the share price exceeds US$4.00. MICHAEL BURNS. Mr. Burns's employment agreement has expired. We currently have an oral agreement with Mr. Burns that entitles him to receive an annual base salary of US$300,000 and a bonus based on potential investment banking fees earned in excess of US$300,000. We are currently negotiating in good faith with Mr. Burns and expect to sign a written agreement with him that formalizes our oral agreement. MARNI WIESHOFER. We have entered into an employment agreement with Ms. Wieshofer effective August 26, 2000, which provides that she will serve as Chief Financial Officer for an initial term that ends August 26, 2003. Ms. Wieshofer's annual base salary under her agreement is US$310,000. If a change of control occurs all of her options will vest immediately. JOHN DELLAVERSON. We have entered into an employment agreement with Mr. Dellaverson effective April 1, 2001, which provides that he will serve as Executive Vice President for an initial term that ends April 1, 2003. Mr. Dellaverson's annual base salary under his agreement is US$300,000. Mr. Dellaverson is also entitled to a bonus of 20% of any amount that the CineGate joint venture's net income exceeds US$1.5 million. Mr. Dellaverson's contract has no change of control provisions and if terminated without cause he is entitled to continue to receive his salary and benefits. GORDON KEEP. We have entered into an employment agreement with Mr. Keep effective October 1, 2000, which provides that he will serve as Senior Vice President for an initial term that ends September 30, 2001. We have an option to renew for a subsequent year. Mr. Keep's annual base salary under his agreement is $325,000. Mr. Keep is also entitled to an annual discretionary bonus determined by the Board of Directors. If a change of control occurs all of his options will vest immediately. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION This section of this report will not be deemed incorporated by reference of any general statement incorporating by reference this report in any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under such Acts. Page 48 The Compensation Committee consists of Messrs. Giustra, Knight and Ludwig, each of whom is a non-employee director. The Compensation Committee determines the Chief Executive Officer's salary and the equity awards for all executive officers under the Plan. Our executive compensation program is designed to attract, retain and motivate the senior executive talent required to ensure our success. The program also aims to support the creation of shareholder value and ensure that pay is consistent with performance. BASE SALARY. In fiscal 2001 the Compensation Committee negotiated an employment agreement with Mr. Feltheimer, our Chief Executive Officer. For more information, see "Employment Contracts, Termination of Employment and Change-in-Control Arrangements." In determining his compensation, the Compensation Committee considered Mr. Feltheimer's experience and responsibilities, as well as other subjective factors. Mr. Feltheimer established the base compensation paid to our executives in fiscal 2001 based on each executive's experience, responsibilities and other subjective factors. EQUITY BASED COMPENSATION. We established the Plan in order to award equity-based incentives to our employees and directors. The Compensation Committee believes in linking long-term incentives to an increase in stock value as it awards stock options at the fair market value or higher on the date of grant that vest over time. The Compensation Committee believes that stock ownership in the Company is a valuable incentive to executives that (1) aligns their interests with the interests of shareholders as a whole, (2) encourages them to manage the Company in a way that seeks to maximize its long-term profitability, and (3) encourages them to remain an employee of the Company. Generally, the Plan requires vesting over a three year period. Some options are also subject to market price targets prior to vesting. The Compensation Committee may consider other forms of compensation, both short-term and long-term, in addition to those described above. THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the Internal Revenue Code does not permit us to deduct cash compensation in excess of US$1 million paid to the Chief Executive Officer and the four other most highly compensated executive officers during any taxable year, unless such compensation meets certain requirements. We believe that the Plan complies with the rules under Section 162(m) for treatment as performance based compensation, allowing us to fully deduct compensation paid to executives under the Plan. COMPENSATION COMMITTEE Frank Giustra Howard Knight Harald Ludwig COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Giustra served as a member of the Compensation Committee during fiscal 2001 and was formerly our Chief Executive Officer. Mr. Giustra's tenure as Chief Executive Officer ended on March 21, 2000. No member of our Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. STOCK PRICE PERFORMANCE GRAPH The following graph compares our cumulative total shareholder return with those of the TSE 300 Total Return Index and the TSE Cable and Entertainment Total Return Index for the period commencing November 17, 1997 (the first day of trading of the common shares on the Toronto Stock Exchange) and ending March 31, 2001. All values assume that $100 was invested on November 13, 1997 in our Page 49 Common Stock and each applicable index and all dividends were reinvested. Note: We caution that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance. This section of this report will not be deemed incorporated by reference of any general statement incorporating by reference this report in any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under such Acts. [PERFORMANCE GRAPH APPEARS HERE]
Company/Index 11/17/97 3/31/98 3/31/99 3/31/00 3/31/01 - ----------------------------- -------- ------- ------- ------- ------- Lions Gate Entertainment $100 $ 81 $ 53 $ 54 $ 31 TSE 300 Total Return Index 100 117 104 151 123 TSE Cable & Ent. Total Return 100 123 221 272 208
Page 50 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table presents certain information about beneficial ownership of our Common Stock as of June 1, 2001, by (1) each person (or group of affiliated persons) who is known by us to own beneficially more than 5% of our Common Stock, (2) each director, each officer named on the Executive Officer Compensation Table and (3) all directors and executive officers as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws, where applicable. Name of Beneficial Owner (1) Number of Shares Percent of Total - ------------------------------------------- ---------------- ---------------- Capital Research and Management Company.... 2,879,280 4.4 % Fidelity Management and Research Company... 4,250,000 6.5 Mark Amin.................................. 3,533,104 (2) 5.4 Michael Burns.............................. 693,304 (3) 1.1 Drew Craig................................. 16,667 (4) * John Dellaverson........................... 445,000 (5) * Jon Feltheimer............................. 464,188 (6) * Frank Giustra.............................. 3,307,401 (7) 5.1 Joe Houssian............................... 16,667 (8) * Gordon Keep................................ 233,878 (9) * Herbert Kloiber............................ 178,033 (10) * Howard Knight.............................. 33,333 (11) * Morley Koffman............................. 55,000 (12) * Patrick Lavelle............................ 17,667 (13) * Andre Link................................. 1,369,831 (14) 2.1 Harald Ludwig.............................. 241,000 (15) * James Nicol................................ 41,133 (16) * G. Scott Paterson.......................... 200,000 (17) * Marni Wieshofer............................ 66,667 (18) * All executive officers and directors as a group (21 persons)..................... 11,005,547 16.8 __________________________ * Less than 1% (1) The address for the listed beneficial owners are as follows: for Capital Research and Management Company 333 South Hope St., Los Angeles, California 90071; for Fidelity Management and Research Company 82 Devonshire St., Boston, Massachusetts 02109- 3614; for each other listed individual c/o the Company, Suite 3123, Three Bentall Centre, 595 Burrard Street, Vancouver, British Columbia, V7X 1J1. (2) Includes 125,000 shares subject to options exercisable on or before July 31, 2001. (3) Includes (a) 141,667 shares subject to options exercisable on or before July 31, 2001, (b) 262,650 shares from the possible conversion of the Series A preferred shares and (c) 43,987 shares from warrants exercisable into shares. (4) Includes 16,667 shares subject to options exercisable on or before July 31, 2001. (5) Includes 100,000 shares subject to options exercisable on or before July 31, 2001. Page 51 (6) Includes (a) 125,000 shares subject to options exercisable on or before July 31, 2001, (b) 265,200 shares from the possible conversion of the Series A preferred shares and (c) 43,988 from warrants exercisable into shares. (7) Includes (a) 250,000 shares subject to options exercisable on or before July 31, 2001 and (b) 500,000 common shares not beneficially owned by him but for which he retains voting control. (8) Includes 16,667 shares subject to options exercisable on or before July 31, 2001. (9) Includes (a) 125,000 shares subject to options exercisable on or before July 31, 2001, (b) 24,691 shares from the possible conversion of a debenture, (c) 23,115 shares from the conversion of a debenture owned by his spouse, and (d) 53,000 shares held by his spouse. Mr. Keep disclaims beneficial ownership of the 23,115 shares from the debentures and the 53,000 shares held by his spouse. (10) Includes 33,333 shares subject to options exercisable on or before July 31, 2001. (11) Includes 33,333 shares subject to options exercisable on or before July 31, 2001. (12) Includes 50,000 shares subject to options exercisable on or before July 31, 2001. (13) Includes (a) 16,667 shares subject to options exercisable on or before July 31, 2001 and (b) 1,000 shares held by his spouse. Mr. Lavelle disclaims beneficial ownership of the 1,000 shares held by his spouse. (14) Includes (a) 100,000 shares subject to options exercisable on or before July 31, 2001 and (b) 1,269,831 shares held by Cinepix Inc., which is 50% owned by Mr. Link. (15) Includes 50,000 shares subject to options exercisable on or before July 31, 2001. (16) Includes (a) 33,333 shares subject to options exercisable on or before July 31, 2001 and (b) 1,800 shares held by his children. Mr. Nicol disclaims beneficial ownership of the 1,800 shares held by his children. (17) Includes 50,000 shares subject to options exercisable on or before July 31, 2001. (18) Includes 66,667 shares subject to options exercisable on or before July 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Jon Feltheimer, our Chief Executive Officer, and Michael Burns, our Vice Chairman, each hold convertible preferred stock and options to purchase common stock of CinemaNow, a majority owned Trimark subsidiary, and have served on its Board of Directors since February 2000. Each of Mr. Feltheimer and Mr. Burns owns approximately 2% of the outstanding convertible preferred stock, and the options they own, which vest over a three year term commencing March 1, 2000, are exercisable for less than 1% of the common stock of CinemaNow. Mark Amin, our Vice chairman, who was Chairman and Chief Executive Officer of Trimark, entered into a three-year employment agreement with us, which became effective on consummation of the merger with Trimark. The Agreement provides for, among other things, an annual salary of US$500,000, a forgiveness of a loan by Trimark in the amount of approximately US$795,000, a grant of stock options to purchase up to 1,360,000 shares of Lions Gate Common Stock, and Mr. Amin's election to Lions Gate's board. Michael Burns, our Vice Chairman, owns approximately a 40% interest in Ignite, LLC, which has entered into an agreement with us dated February 15, 2001. We have agreed to terminate the "first look" agreement and this agreement provides that Ignite would be paid a producer's fee and 15% of our Adjusted Gross Receipts for any project produced by us and developed through a development fund financed by Ignite, LLC. Except as disclosed herein, none of our directors or officers, or affiliates of such persons, has or has had any material interest, direct or indirect, in any transaction since the commencement of our last completed fiscal year, or in any proposed transaction, which in either such case has materially affected or will materially affect us or any of our subsidiaries. We are not aware of any conflicts of interest or other risks associated with any of the above transactions. Page 52 INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS Other than routine indebtedness as that term is defined in applicable Canadian provincial securities legislation, none of our directors or executive officers, or associates or affiliates of any such directors or executive officers, are or have been indebted to us since the beginning of our last completed fiscal year. 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 57 to 108. 2. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this report at pages 111 to 188. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 2001. Page 53 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 24, 2001 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 our true and lawful attorneys and agents, 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 Title Date /s/ Mark Amin Vice Chairman and July 24, 2001 ------------------- Director Mark Amin /s/ Bill Boersma Vice President of July 24, 2001 ------------------- Finance Bill Boersma /s/ Michael Burns Vice Chairman and July 24, 2001 ------------------- Director Michael Burns /s/ Drew Craig Director July 24, 2001 ------------------- Drew Craig /s/ Jon Feltheimer Chief Executive Officer July 24, 2001 ------------------- and Director Jon Feltheimer /s/ Joe Houssian Director July 24, 2001 ------------------- Joe Houssian /s/ Gordon Keep Senior Vice President July 24, 2001 ------------------- and Director Gordon Keep Page 54 /s/ Herbert Kloiber Director July 24, 2001 ------------------- Herbert Kloiber /s/ Howard Knight Director July 24, 2001 ------------------- Howard Knight /s/ Morley Koffman Director July 24, 2001 ------------------- Morley Koffman /s/ Patrick Lavelle Director July 24, 2001 ------------------- Patrick Lavelle /s/ Andre Link President and Director July 24, 2001 ------------------- Andre Link /s/ Harald Ludwig Director July 24, 2001 ------------------- Harald Ludwig /s/ James Nicol Director July 24, 2001 ------------------- James Nicol /s/ G. Scott Paterson Director July 24, 2001 ------------------- G. Scott Paterson /s/ Marni Wieshofer Chief Financial Officer July 24, 2001 ------------------- Marni Wieshofer Page 55 INDEX TO FINANCIAL STATEMENTS Page Description of Financial Statement Number - -------------------------------------------------------------------- ------ Auditors' Report 57 Lions Gate Entertainment Corp. Consolidated Balance Sheets 59 Lions Gate Entertainment Corp. Consolidated Statements of Operations and Deficit 60 Lions Gate Entertainment Corp. Consolidated Statements of Cash Flows 61 Lions Gate Entertainment Corp. Notes to the Consolidated Financial Statements 62 Report of Independent Accountants 97 Mandalay Pictures, LLC Consolidated Balance Sheets 98 Mandalay Pictures, LLC Consolidated Statements of Operations 99 Mandalay Pictures, LLC Consolidated Statement of Changes in Members' Equity 100 Mandalay Pictures, LLC Consolidated Statements of Cash Flows 101 Mandalay Pictures, LLC Notes to Consolidated Financial Statements 102 Page 56 AUDITORS' REPORT To the Shareholders of Lions Gate Entertainment Corp. We have audited the consolidated balance sheets of Lions Gate Entertainment Corp. as at March 31, 2001 and 2000 and the consolidated statements of operations, deficit and cash flows for each of the years in the three-year period ended March 31, 2001. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at March 31, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2001 in accordance with Canadian generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario June 22, 2001 [Except for Note 27(b) which is at July 10, 2001] Page 57 Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company's consolidated financial statements, such as the changes described in Note 2(r) to the consolidated financial statements. Our report to the shareholders dated June 22, 2001 [except for Note 27(b) which is at July 10, 2001] is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change in accounting principles in the auditor's report when the change is properly accounted for and adequately disclosed in the financial statements. /s/ PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario June 22, 2001 Page 58 LIONS GATE ENTERTAINMENT CORP. CONSOLIDATED BALANCE SHEETS AS AT MARCH 31, 2001 AND MARCH 31, 2000 (ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
AUDITED AUDITED -------------------- MAR 31 Mar 31 2001 2000 $ $ ASSETS Cash and equivalents 10,485 19,283 Accounts receivable (note 3) 183,787 107,344 Investment in films and television programs (note 4) 228,349 128,375 Long term investments (note 5) 77,230 64,058 Capital assets (note 6) 44,212 44,505 Goodwill, net of accumulated amortization of $8,184 34,924 29,163 (2000 - $5,476) Other assets (note 7) 15,233 8,960 Future income taxes (note 18) - 285 --------------------- 594,220 401,973 ===================== LIABILITIES Bank loans (note 9) 159,765 13,936 Accounts payable and accrued liabilities (note 10) 123,370 74,965 Production and distribution loans (note 11) 24,045 41,838 Long-term debt (note 12) 65,987 40,607 Deferred revenue 22,283 19,269 Future income taxes (note 18) 757 - Non-controlling interest 1,224 4,944 --------------------- 397,431 195,559 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 22) SHAREHOLDERS' EQUITY Capital stock (note 13) 266,523 226,290 Deficit (79,900) (21,320) Cumulative translation adjustments (note 25) 10,166 1,444 --------------------- 196,789 206,414 --------------------- 594,220 401,973 ===================== The accompanying notes form an integral part of these consolidated financial statements.
Page 59 Lions Gate Entertainment Corp. Consolidated Statements of Operations and Deficit For the Years Ended March 31, 2001, March 31, 2000 and March 31, 1999 (ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Year Year Ended Ended Ended March 31 March 31 March 31 2001 2000 1999 $ $ $ REVENUE 282,226 271,251 118,297 DIRECT OPERATING EXPENSES 156,420 222,875 92,931 - ----------------------------------------------------------------------- Gross Profit 125,806 48,376 25,366 - ----------------------------------------------------------------------- OTHER EXPENSES Distribution and marketing costs 51,776 - - General and administration 37,710 31,388 23,555 Amortization (note 15) 9,887 7,074 5,279 Interest (note 16) 10,283 4,466 3,655 Non-controlling interest 881 1,308 612 Severance and relocation costs - 1,698 1,647 - ----------------------------------------------------------------------- 110,537 45,934 34,748 - ----------------------------------------------------------------------- INCOME (LOSS) BEFORE UNDERNOTED 15,269 2,442 (9,382) Gain on dilution of investment in a Subsidiary (note 17) - - (839) - ----------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EQUITY INTERESTS 15,269 2,442 (8,543) Income taxes (note 18) (3,292) 2,000 304 - ----------------------------------------------------------------------- INCOME BEFORE EQUITY INTERESTS 18,561 442 (8,847) Equity interest in loss of Mandalay Pictures, LLC (note 5) (8,298) (5,894) (5,449) Other equity interest (note 5) (1,535) 159 140 - ----------------------------------------------------------------------- NET INCOME (LOSS) FOR THE YEAR 8,728 (5,293) (14,156) Dividends paid on Series A preferred Shares (2,497) (591) - Accretion on Series A preferred Shares (note 2(n)) (3,115) (727) - ADJUSTED DEFICIT, BEGINNING OF YEAR (83,016) (14,709) (553) - ----------------------------------------------------------------------- DEFICIT END OF YEAR $(79,900) $(21,320) $(14,709) - ----------------------------------------------------------------------- BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE (note 19) $0.09 $(0.22) $(0.58) - ----------------------------------------------------------------------- DEFICIT, BEGINNING OF YEAR $(21,320) $(14,709) $(553) EFFECT OF CHANGES IN ACCOUNTING POLICIES (NOTE 2(r)) (61,696) - - - ----------------------------------------------------------------------- ADJUSTED DEFICIT, BEGINNING OF $(83,016) $(14,709) $(553) YEAR - -----------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements. Page 60 LIONS GATE ENTERTAINMENT CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2001, MARCH 31, 2000 AND MARCH 31, 1999 (ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Year Year Year Ended Ended Ended Mar 31, Mar 31, Mar 31, 2001 2000 1999 $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) for the period 8,728 (5,293) (14,156) Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of capital assets 3,309 2,584 2,081 Amortization of goodwill 2,708 2,473 2,145 Write-off of projects in development 1,586 856 1,053 Amortization of pre-operating costs 962 962 - Amortization of deferred financing costs 1,322 199 - Amortization of films and television programs 153,797 220,423 90,667 Gain on dilution of investment in a subsidiary - - (839) Non-controlling interest 881 1,308 612 Other equity interest 1,535 (159) (140) Equity interest in loss of Mandalay Pictures, LLC 8,298 5,894 5,449 Increase in investment in films and television programs (212,820) (260,905) (115,770) - ---------------------------------------------------------------------------------------- (29,694) (31,658) (28,898) CHANGES IN ASSETS AND LIABILITIES, EXCLUDING THE EFFECTS OF ACQUISITIONS: Accounts receivable (26,087) (46,671) (11,140) Other assets (3,812) (3,272) (5,084) Future income taxes (4,708) 163 (1,703) Accounts payable and accrued liabilities 11,685 30,297 14,174 Deferred revenue 1,282 8,489 921 - ---------------------------------------------------------------------------------------- (51,334) (42,652) (31,730) - ---------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issue of capital stock 14 48,495 28,965 Dividends paid on Series A preferred shares (2,497) (591) - Financing fees (6,876) (461) - Increase (decrease) in bank loans 86,368 2,200 (4,965) Increase in production and distribution loans 13,880 35,900 38,189 Repayment of production and distribution loans (32,661) (42,477) (20,457) Increase in long-term debt 26,792 3,162 14,744 Repayment of long-term debt (2,584) (4,149) (5,173) - ---------------------------------------------------------------------------------------- 82,436 42,079 51,303 - ---------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Non-controlling investment in subsidiary - - 3,000 Investment in Mandalay Pictures, LLC - - (338) Acquisition of International Movie Group, net of cash acquired - - (880) Acquisition of Termite Art Productions, net of cash acquired - - (165) Acquisition of Sterling Home Entertainment, LLC (3,168) - - Acquisition of Trimark Holdings Inc. (39,370) - - Redemption of capital stock - - (25) Purchase of capital assets (2,515) (6,398) (3,975) - ---------------------------------------------------------------------------------------- (45,053) (6,398) (2,383) - ---------------------------------------------------------------------------------------- NET CHANGE IN CASH AND EQUIVALENTS (13,951) (6,971) 17,190 FOREIGN EXCHANGE EFFECT ON CASH 5,153 CASH AND EQUIVALENTS-BEGINNING OF PERIOD 19,283 26,254 9,064 - ---------------------------------------------------------------------------------------- CASH AND EQUIVALENTS-END OF PERIOD 10,485 19,283 26,254 ========================================================================================
The accompanying notes form an integral part of these consolidated financial statements. Page 61 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 25. 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(m). The Company's normal operating cycle is longer than one year, and accordingly, the Company has not presented a classified balance sheet. Details of amounts realizable or payable after more than one year are set out in these notes to the financial statements. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Lions Gate and its subsidiary companies, with a provision for non-controlling interests, and the Company's proportionate share of assets, liabilities, revenues and expenses of jointly controlled companies. The Company controls its subsidiary companies 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) REVENUE RECOGNITION Revenue from the sale or licensing of films and television programs is recognized when the Company has persuasive evidence of an arrangement, such as a contract that irrevocably transfers the rights to a licensee, for example, the production has been completed, the contractual delivery arrangements have been satisfied, such as actual physical delivery or the granting of access to a lab, for example, the licensing period has commenced, the fee is fixed or determinable, and collectibility is reasonably assured. 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. 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 provided that all of the other conditions in the first paragraph are met. Revenue from the sale of video cassettes and digital video disks ("DVDs") in the retail market is recognized on delivery to the customer provided that all of the other conditions in the first paragraph are met. Appropriate provision is made for product returns and rebates. Rental revenue is recognized Page 62 when the Company is entitled to receipts provided that all of the other conditions in the first paragraph are met. Rental revenue from short-term operating leases of studio facilities is recognized over the term of the lease. Revenues from the sale or licensing of multi-media software, under a contract that irrevocably transfers the software to a customer or the rights to the software to a licensee, is recognized when delivery has occurred, the price is fixed or determinable and collection is reasonably assured. Appropriate provision is made for product returns. 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, that are recognized when the financing is completed. Advances presently due pursuant to an arrangement or cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. (d) CASH AND EQUIVALENTS Cash and equivalents include cash and liquid investments with original maturities of ninety days or less when purchased. (e) 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, films and television programs in progress and projects in development. Costs of acquiring and producing films and television programs are capitalized and amortized using the individual film-forecast method, whereby capitalized costs are amortized and ultimate participation costs are accrued in the proportion that current revenue bears to management's estimate of ultimate revenue expected to be recognized from the exploitation, exhibition or sale of the films or television programs. For acquired titles, these capitalized costs consist of minimum guarantee payments to the producer to acquire the distribution rights. For films and television programs produced by the Company, these capitalized costs include all production and financing costs incurred during production that are expected to benefit future periods and be recovered from estimated future revenue, net of estimated future liabilities. For episodic television series, until estimates of secondary market revenue can be established, capitalized costs for each episode produced are limited to the amount of revenue contracted for each episode. Costs in excess of this limitation are expensed as incurred on an episode-by-episode basis. Films and television programs in progress represents the accumulated costs of uncompleted films and television programs that are being produced by the Company. Projects 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, and three years from the date of the initial investment. For films other than episodic television series, ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release. For episodic television series, ultimate revenue includes estimates of revenue over a period not to exceed ten years from the date of delivery Page 63 of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later. For previously released films or television programs acquired as part of a library, ultimate revenue includes estimates over a period not to exceed twenty years from the date of acquisition. Revenue estimates are prepared on a title-by-title basis and are reviewed periodically based on current market conditions. For films, revenue estimates include box office receipts, sale of video cassettes and DVDs, rental revenue generated by video cassettes and DVDs, sale of television broadcasting rights and licensing of film rights to third parties. For television programs, revenue estimates include principally license rights to broadcast television programs in development or rights to renew licenses for episodic television programs in subsequent seasons. For episodic television series, ultimate revenue includes estimates of secondary market revenue for produced episodes when the Company can demonstrate through its experience or industry norms that the number of episodes already produced, plus those for which a firm commitment exists and the Company expects to deliver, can be licensed successfully in the secondary market. 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. In the current year, the effect of changes in management's future revenue estimates increased net income by $2.9 million and basic income per common share by $0.08. The valuation of investment in films and television programs, including acquired film libraries, 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. A write-down is recorded equivalent to the amount by which the unamortized costs exceed the estimated fair value of the film or television program. (f) PRINTS, ADVERTISING AND MARKETING EXPENSES The cost of film prints is deferred under 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 as incurred. (g) LONG-TERM INVESTMENTS Investments in companies over which the company can exercise significant influence are accounted for using the equity method. The Company's long-term investments 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. (h) CAPITAL ASSETS Capital assets are carried at cost less accumulated amortization. Amortization is provided for using the following rates and methods: Buildings 25 years straight-line Computer equipment and software 2-4 years straight-line and 30% declining balance Automobile 30% declining balance Furniture and equipment 10 years straight-line and 20%- 30% declining balance Leasehold improvements over the lease term Equipment under capital lease is amortized using the above rates. Page 64 Costs incurred to develop internal use software during the application development stage are capitalized. The Company periodically reviews and evaluates the recoverability of capital assets. Where applicable, estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue estimates, and where deemed necessary, a reduction in the carrying amount would be recorded. (i) GOODWILL Goodwill, which is the excess of the purchase price of the Company's interest in subsidiaries over the fair value of the underlying identifiable assets and liabilities at acquisition, is amortized using the straight-line method over periods ranging from five to twenty years. An assessment of the carrying value of goodwill is undertaken in response to any change in conditions that might trigger impairment. These conditions might include an unfavourable change in one or more of the elements giving rise to goodwill, a change in the likelihood of occurrence of an assumed event that was a significant factor in setting the acquisition price, or a significant deterioration in the financial condition of an acquired business. The impairment assessment involves the determination of the expected undiscounted future cash flows of the related business, including applicable interest and other financing costs, and comparison to the carrying amount of goodwill. Any shortfall identified by this assessment would be charged against earnings in the period in which the impairment is determined to have occurred. (j) 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. (k) 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. (l) 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. Page 65 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 operating expenses is recorded as a reduction of those expenses. (m) 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. For self-sustaining subsidiaries and the investment in Mandalay Pictures, assets and liabilities in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. 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 self-sustaining subsidiaries and the investment in Mandalay Pictures are included in cumulative translation adjustments, a separate component of shareholders' equity. For integrated subsidiaries, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the balance sheet date. Non-monetary items are translated at historical exchange rates. Revenue and expense items are translated at the average rates of exchange for the year, with the exception of amortization, which is translated at historical rates. Gains or losses arising on the translation of the accounts of integrated subsidiaries are included in the determination of net income. 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. A loan in the amount of US$20.4 million (Cdn$32.2 million) from a U.S. subsidiary company to the Canadian parent company, has been treated as a hedge of the net investment in self-sustaining U.S. subsidiaries. (n) SERIES A PREFERRED SHARES The Company's Series A preferred shares have been included in shareholders' equity since 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. The difference between the initial fair value of the basic preferred shares of US$25.9 million (Cdn$37.5 million), and the redemption price of US$34.8 million (Cdn$50.5 million), amounting to US$8.9 million (Cdn$13.0 million), is being accreted to shareholders' equity on a straight-line basis over the five-year period from the date of issuance to the first available redemption date. The basic preferred shares and conversion feature are presented on a combined basis within shareholders' equity. Page 66 Costs amounting to $2.4 million incurred on the issuance of the preferred shares and share purchase warrants have been deferred and are being amortized over a five-year period to the first redemption date of the preferred shares. (o) DEBT FINANCING COSTS Amounts incurred in connection with obtaining debt financing are deferred and amortized over the term to maturity of the related debt obligation using the effective rate method. (p) 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 and will be amortized against future revenues generated from the sale of the resulting products. (q) STOCK-BASED COMPENSATION PLAN The Company has a stock-based compensation plan, which is described in Note 13(e). 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. (r) ACCOUNTING CHANGES ACCOUNTING FOR FILMS AND TELEVISION PROGRAMS- In 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. Prior years' financial statements have not been restated, as the effect of the new policy on prior periods was deemed not reasonably determinable. Accordingly, opening retained earnings 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: Cash outflows incurred to acquire and produce films and television programs, which were previously presented under investing activities in the consolidated statement of cash flows, are presented under cash flows from operating activities. Advertising and marketing costs, which were previously capitalized to investment in film and television programs and amortized using the individual film forecasts method, are now expensed as incurred. This change resulted in a reduction of investment in films and television programs of $19.9 million. The capitalization of production costs for episodic television series is limited to contracted-for revenue on an episode-by-episode basis until the criteria for recognizing secondary market revenues are met. This change resulted in a reduction of investment in films and television programs of $34.8 million. Page 67 Revenue relating to multiple media contracts for a single film or television program where the contract provides for media holdbacks where the holdback had not yet been released resulted in a reduction of investment in films and television programs of $6.4 million. 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. ACCOUNTING FOR INCOME TAXES- In December 1997, the Canadian Institute of Chartered Accountants 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 Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes" (SFAS 109) under US 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. 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 retained earnings. 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 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 SHARE- In 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 was calculated using the imputed interest method. The Company adopted the new standard for its fiscal 2001 financial statements. The revised section did not impact previously reported losses per share, as there were no potentially dilutive common shares outstanding. (t) 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 include: future revenue projections for investment in films and television programs; provisions for doubtful debts to reflect credit risk exposures; valuation allowances and impairment assessments of various assets including investment in films and television programs, capital assets, long-term investments and goodwill. Actual results could differ from those estimates. 3. ACCOUNTS RECEIVABLE
2001 2000 Trade accounts receivable, net $145,864 $75,891 Government assistance 35,927 27,720 Other 1,996 3,733 - ------------------------------------------------------------- $183,787 $107,344 - ------------------------------------------------------------- Page 68 The provision for doubtful accounts included in trade accounts receivable at March 31, 2001 was $6.1 million (2000 - $2.5 million).
4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
2001 2000 THEATRICAL FILMS Released, net of accumulated amortization $58,378 $21,620 Acquired library, net of accumulated amortization 77,827 - In progress 30,690 49,834 In development 4,972 1,008 - ------------------------------------------------------------------------- 171,867 72,462 - ------------------------------------------------------------------------- NON-THEATRICAL FILMS AND DIRECT-TO-TELEVISION PROGRAMS Released, net of accumulated amortization 24,343 26,421 In progress 27,221 26,907 In development 4,918 2,585 - ------------------------------------------------------------------------- 56,482 55,913 - ------------------------------------------------------------------------- $228,349 $128,375 - -------------------------------------------------------------------------
The Company earns revenue from certain productions that have been fully amortized and are not reflected on the balance sheet. During the year ended March 31, 2001 the Company recorded provisions totaling $3.0 million to reduce the carrying amounts of certain investments in films and television programs to their fair values as a consequence of a decrease in management's future revenue estimates. The Company expects that 84% of completed and released films and television programs and distribution rights acquired, net of amortization will be amortized during the three year period ending March 31, 2004. The remaining life of the acquired film library as at March 31, 2001 is 19.5 years. 5. LONG-TERM INVESTMENTS The Company's investment in Mandalay Pictures is comprised of a 45% common stock interest, and a 100% interest in preferred stock with a stated value of US$50.0 million. The Company records 100% of the operating losses of Mandalay Pictures as equity interest in the loss of Mandalay Pictures, LLC. Included in the carrying amount of the Company's investment in Mandalay Pictures are pre-operating costs of $8.2 million (2000 - $10.1 million) net of amortization of $4.4 million (2000 - $2.5 million) and costs incurred totaling $2.5 million that were directly related to the acquisition of the investment. These pre-operating costs, incurred in fiscal 1998 and fiscal 1999, are being amortized on a straight-line basis over seventeen fiscal quarters, and amortization of $1.9 million (2000 - $1.9 million) is included in the equity interest in loss of Mandalay Pictures. Page 69 Summarized financial information of Mandalay Pictures is as follows:
2001 2000 ASSETS Cash and equivalents $25,399 $19,193 Restricted cash 33,336 46,400 Accounts receivable 70,426 10,710 Investment in films 221,664 72,558 Other assets 13 980 - --------------------------------------------------------------------- 350,838 149,841 - --------------------------------------------------------------------- LIABILITIES Accounts payable and accrued liabilities 13,990 15,517 Production and bank loans 151,659 48,349 Contractual obligations 56,510 23,440 Deferred revenue 81,336 7,401 - --------------------------------------------------------------------- 303,495 94,707 - --------------------------------------------------------------------- NET ASSETS $47,343 $55,134 - ---------------------------------------------------------------------
2001 2000 1999 Revenue $89,646 $139,301 $ - Direct operating expenses 89,311 140,706 1,406 Gross income (loss) 335 (1,405) (1,406) Indirect operating expenses 9,327 6,272 15,016 Interest income 2,679 3,708 4,033 - --------------------------------------------------------------------- NET LOSS FOR THE YEAR $(6,313) $(3,969) $(12,389) - ---------------------------------------------------------------------
Mandalay Pictures is a non-taxable entity. Accordingly, all tax effects attributable to the operations of Mandalay are included directly in the Company's tax provision. Mandalay Pictures 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(r). The cumulative adjustment made to the net equity of Mandalay Pictures on April 1, 2000 was $5.5 million, net of the benefit of income tax losses attributable to the Company of $nil. The Company's investment in CinemaNow is comprised of a 90.1% common stock interest, representing a 63% voting interest after taking into account the voting rights held by the holders of preferred shares. The investment in CinemaNow is accounted for using the equity method because the Company does not have the ability to control the strategic operating, investing and financing policies of CinemaNow as a consequence of the Company's inability to elect the majority of the board of directors of CinemaNow. The company's investment in CinemaNow consists of its 63% share of the voting interests, recorded at the estimated fair value at the time of the Trimark acquisition of $23.6 million. The Company's carrying value in CinemaNow includes 63% of the losses of CinemaNow since October 13, 2000. 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 was allocated as follows: Page 70 Identifiable assets acquired: Investment in films and television programs $3,496 Capital assets 14,682 Goodwill 5,366 Other assets 7 -------------------------------------------------------------- Net assets acquired: $23,551
Investment in films and television programs will be amortized on a straight-line basis over a period of twenty years, beginning with the commencement of commercial operations of the website. Capital assets, representing the estimated fair value of the CinemaNow website and film streaming technology and goodwill arising in the consolidated financial statements of Lions Gate is amortized on a straight-line basis over a period of five years, beginning with the commencement of commercial operations of the website and from the date of acquisition of Trimark, respectively. 6. CAPITAL ASSETS
2001 Accumulated Net Book Cost Amortization Value Land $14,500 $ - $14,500 Buildings 22,692 2,418 20,274 Leasehold improvements 1,301 474 827 Furniture and equipment 5,892 2,733 3,159 Automobile 38 35 3 Computer equipment and software 7,138 2,510 4,628 Equipment under capital leases 1,197 376 821 - ----------------------------------------------------------------------- $52,758 $8,546 $44,212 - -----------------------------------------------------------------------
2000 Accumulated Net Book Cost Amortization Value Land $14,500 $ - $14,500 Buildings 22,782 1,376 21,406 Leasehold improvements 1,574 430 1,144 Furniture and equipment 5,447 2,162 3,285 Automobile 38 33 5 Computer equipment and software 4,959 1,300 3,659 Equipment under capital leases 684 178 506 - ----------------------------------------------------------------------- $49,984 $5,479 $44,505 - -----------------------------------------------------------------------
Buildings represent studio production property held by Lions Gate Studios. Lions Gate Studios rents sound stages, office and related support space to tenants that produce or support the production of feature films, television series and movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project and tenant. Lions Gate Studios also provides other services including rental of furniture, telephones and equipment. Page 71 7. OTHER ASSETS
2001 2000 Deferred financing costs $ 7,786 $2,425 Pre-operating costs 3,012 3,835 Other 4,435 2,700 - ---------------------------------------------------------------- $15,233 $8,960 - ----------------------------------------------------------------
8. Jointly Controlled Companies As at March 31, 2001, the Company holds a 50% investment in Eaton Entertainment, LLC ("Eaton") under a joint venture arrangement. On September 30, 1999 the Company acquired an additional 16.67% interest bringing its total ownership in Eaton to 50%, and resulting in Eaton becoming a jointly controlled company. Since September 30, 1999 the Company has accounted for its 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. The Company held a 50% investment in Sterling Home Entertainment LLC ("Sterling") under a joint venture arrangement until November 27, 2000 at which time the Company acquired the remaining 50% interest in Sterling (see note 14). Summarized financial information regarding the Company's interests in jointly controlled companies is as follows:
2001 2000 1999 Assets $3,999 $7,705 $9,584 Liabilities (3) 4,558 8,511 Revenue 4,820 15,079 9,685 Direct operating expenses 3,586 10,783 6,209 Net income (loss) for the year (258) 2,251 1,073 Cash flows from operating activities 963 1,147 2,810 Cash flows from financing activities (518) (2,181) 1,449 Cash flows from investing activities (204) 1,797 (2,920) - ---------------------------------------------------------------------- Net cash flows $ 241 $763 1,339 - ----------------------------------------------------------------------
The summarized financial information above includes net losses related to Sterling of $429,000 (2000 - net earnings of $1.8 million, 1999 - net earnings of $1.1 million) and net income related to Eaton of $0.2 million (2000 - $0.5 million, 1999 - $nil). 9. BANK LOANS
2001 2000 Bank loans $159,765 $13,936 - ---------------------------------------------------------------------
Bank loans consist of revolving five-year credit facilities, an operating line of credit and demand loans, and bear interest at rates at March 31, 2001 not exceeding Canadian prime plus 4%. Amounts due on demand and within one year totaled $4.5 million at March 31, 2001. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is provided as security for the revolving five-year credit facilities. The Page 72 carrying value of certain accounts receivable, investment in films and television programs and capital assets totaling $5.8 million at March 31, 2001 is provided as security for the operating line of credit. Certain accounts receivable and a corporate guarantee provided by Lions Gate Entertainment Corp. in the amount of $1.5 million are provided as security for the demand loans. The Company has credit facilities available of US$200.0 million (Cdn$315.3 million) and Cdn $2.0 million as at March 31, 2001 (2000 - Cdn$22.0 million), expiring September 25, 2005 and July 31, 2001 respectively. The availability of funds under the US$200 million credit facility is limited by the borrowing base, which is calculated on a monthly basis. The borrowing base assets at March 31, 2001 totaled US$120.1 million (Cdn$189.3 million). As at March 31, 2001, US$97.4 million (Cdn$153.5 million) and $1.7 million was drawn on the facilities. The Company is required to pay a monthly commitment fee of 0.50% on the US$200.0 million less the amount drawn where this amount is less than US$100.0 million, or 0.375% on the US$200.0 million less the amount drawn, where this amount is equal to or exceeds US$100.0 million. The weighted average interest rate on bank loans at March 31, 2001 was 8.06% (2000 - 9.02%, 1999 - 8.75%). 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000 Trade accounts payable $55,608 $18,037 Accrued liabilities 15,007 13,937 Accrued participation costs 36,398 28,109 Minimum guarantees 8,127 7,425 Other 8,230 7,457 - --------------------------------------------------------------- $123,370 $74,965 - ---------------------------------------------------------------
11. PRODUCTION AND DISTRIBUTION LOANS
2001 2000 Production Loans (a) $24,045 $32,095 Distribution Loan (b) - 9,743 - --------------------------------------------------------------- $24,045 $41,838 - ---------------------------------------------------------------
(a) 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 $22.3 million at March 31, 2001. Federal and Provincial film tax credits receivable with a carrying value $25.0 million at March 31, 2001, guarantees from SODEC (Societe de Developpement des Enterprises Culturelles), and general security agreements are also provided as collateral for certain of the loans. Security agreements are also provided as collateral for certain of the loans. Of the outstanding amount, US$2.9 million (Cdn$4.6 million) (2000 - US$13.0 million; Cdn$18.9 million) is repayable in US dollars. The weighted average interest rate on production loans at March 31, 2001 was 8.18% (2000 - 8.34%, 1999 - 8.35%). Page 73 (b) DISTRIBUTION LOAN The distribution loan consists of a US$10.0 million revolving credit facility bearing interest at U.S. prime. At March 31, 2001 US$nil was outstanding (2000 - US$6.7 million). The Company may draw up to US$3 million per production in order to finance distribution costs. The drawings are repayable from the receipts of each production with final repayment due two years after the initial drawdown. As consideration for providing the funding, the lender will receive 5% of the net proceeds of each production financed. The carrying value of investment in films and television programs relating to these productions amounting to $nil (2000 - Cdn$3.3 million; US$2.3 million) at March 31, 2001, has been provided as collateral. The commitment period of this facility ends June 30, 2001. The weighted average interest rate on the distribution loan at March 31, 2001 was 9.0% (2000 - 9.0%, 1999 - 7.75%). 12. LONG-TERM DEBT
2001 2000 Obligations under capital leases, bearing interest at 8.47% to 20.69%, due 2002 and 2004, with certain equipment provided as collateral. $ 491 $ 485 Loans bearing interest at 5.75% to Canadian prime plus 2%, due in fiscal 2002 and 2005, with certain equipment provided as collateral. 1,613 884 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. 16,487 16,487 Loans bearing interest at Canadian prime plus 1.75%, due in 2001, 2003, and 2004, with guarantees from SDI (Societe de Developpement Industriel de Quebec). 33 43 Loans bearing interest at 6.63% to 7.51%, due in May and July 2003 and September 2005, with property, building and equipment with carrying values of approximately $36.0 million provided as collateral. 20,205 21,216 Loans bearing interest at Canadian prime plus 1%, repayable on demand and due October 2001 and October 2004, with income tax credits up to $1.3 million provided as collateral. 1,057 449 Non-interest bearing convertible promissory note issued on the acquisition of a Company subsidiary, Termite Art Productions, repayable as US$0.3 million (Cdn$0.5 million) (2000 - US$0.7 million, Cdn$1.0 million), due in August 2001. The outstanding principal is convertible at the option of the holder into common shares of the Company at $6.50 per share. 541 1,043 Non-interest bearing sales guarantees, repayable as US$16.2 million (Cdn$25.6 million), due October 2003 and February 2004. 25,560 - - ----------------------------------------------------------------------------- $ 65,987 $ 40,607 - -----------------------------------------------------------------------------
Page 74 Required principal payments on long-term debt during future fiscal years are as follows: 2002 $3,061 2003 1,906 2004 58,296 2005 547 2006 2,177 $65,987
Minimum future payments required under capital leases total $0.6 million (2000 - $0.5 million), including interest of $0.1 million (2000 - $0.1 million) and are due $0.3 million in 2002, $0.2 million in 2003 and $0.1 million in 2004. Non interest-bearing sales guarantees represents 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. 13. CAPITAL STOCK (a) AUTHORIZED CAPITAL STOCK The authorized capital stock of the Company consists of 500 million common shares without par value and 200 million preference shares, issuable in series, including 1 million Series A preferred shares that were authorized in fiscal 2000 and 10 Series B preferred shares that were authorized in fiscal 2001. The terms of the Series A and Series B preferred shares are described in (c) and (d), respectively, below. (b) CONTINUITY OF CAPITAL STOCK Continuity of issued and outstanding capital stock is as follows:
Number Amount COMMON SHARES: Balance at March 31, 1998 23,326,209 $144,524 Issued upon exercise of warrants at $9.00 per share 345,834 3,113 Issued upon acquisition of subsidiary at $5.30 per share 675,375 3,579 Normal course issuer bid (36,000) (128) Public offering at $4.60 per share - less issue costs of $0.9 million 6,256,000 25,786 Issued on exercise of stock options 40,000 194 - ------------------------------------------------------------------------------- Balance at March 31, 1999 30,607,418 177,068 Issued on conversion of series A preferred shares 795,000 2,446 Issued on exercise of stock options 58,333 239 Balance at March 31, 2000 31,460,751 179,753 Issued upon acquisition of subsidiary - less issue costs of US$0.5 million (Cdn$0.8 million) 10,229,837 34,976 Issued pursuant to a settlement agreement with an employee 600,000 2,250 Issued on exercise of stock options 6,250 14 - ------------------------------------------------------------------------------- Balance at March 31, 2001 42,296,838 216,993 - ------------------------------------------------------------------------------- Page 75 SERIES A PREFERRED SHARES: Public offering in fiscal 2000 at US$2,250 per share 13,000 42,711 Accretion - 613 Conversion to common shares (note 13(c)) (795) (2,446) - -------------------------------------------------------------------------------- Balance at March 31, 2000 12,205 40,878 Accretion - 2,660 - -------------------------------------------------------------------------------- Balance at March 31, 2001 12,205 43,538 - ------------------------------------------------------------------------------- SERIES B PREFERRED SHARES: Issued pursuant to Trimark acquisition (note 13(d)) 10 - - ------------------------------------------------------------------------------- Balance at March 31, 2001 10 - - -------------------------------------------------------------------------------- STOCK OPTIONS: Granted in conjunction with acquisition of subsidiary - 333 - -------------------------------------------------------------------------------- Balance at March 31, 2001 - 333 - ------------------------------------------------------------------------------- COMPENSATION WARRANTS: Issued during fiscal 1999 380,800 - - -------------------------------------------------------------------------------- Balance at March 31, 2000 380,800 - Expired during the year (380,800) - - -------------------------------------------------------------------------------- Balance at March 31, 2001 - - - -------------------------------------------------------------------------------- SHARE PURCHASE WARRANTS: Issued in fiscal 2000 in conjunction with public offering at US$0.706 per warrant 5,525,000 5,659 - -------------------------------------------------------------------------------- Balance at March 31, 2001 and 2000 5,525,000 5,659 - -------------------------------------------------------------------------------- Total capital stock at March 31, 2001 $266,523 - --------------------------------------------------------------------------------
Each compensation warrant entitled the holder to purchase one common share at a price of $5.25. The warrants expired on September 2, 2000. 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. (c) 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 shares and 425 detachable common share purchase warrants. The net proceeds received on the offering was allocated as follows: common purchase warrants were valued at fair value, using the Black-Scholes option pricing model, of US$3.9 million (Cdn$5.7 million); 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 $US25.9 million (Cdn$37.5 million). The basic preferred shares and the conversion option are presented on a combined basis in note (b) above. Page 76 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. During the year, the Company declared and paid cash dividends of US$1.6 million or US$133.88 per share (Cdn$2.5 million or Cdn$201.35 per share). The preferred shares have a liquidation preference entitling the holders to receive an amount equal to the US$2,550 per share plus the cumulative amount of all dividends accrued and unpaid. The holders 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 year ended March 31, 2000, 795 preferred shares were converted. 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 retained earnings over the five-year period from the date of issuance to the first available redemption date. (d) SERIES B PREFERRED SHARES As a condition of the purchase of Trimark, on October 13, 2000, the Company issued 10 shares at US$10 per share. The shares are nontransferable and not entitled to dividends. The shares are nonvoting except that the holder, who was a principal of Trimark, has the right to elect himself to the 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. (e) 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 7.6 million common shares of the Company to eligible employees, directors and service providers of the Company and its affiliates. Of the 7.6 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, 2001, 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 Trimark upon acquisition of the company. 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 5 years. Page 77 Changes in share options granted and outstanding for fiscal 1999, 2000 and 2001 were as follows:
Number of Weighted Shares Average Exercise Price Outstanding at March 31, 1998 2,963,800 $8.20 Granted to December 14, 1998 842,250 8.16 Forfeited to December 14, 1998 (687,505) 8.10 Expired to December 14, 1998 (46,300) 11.33 - -------------------------------------------------------------------------- Outstanding at December 14, 1998 3,072,245 8.14 - -------------------------------------------------------------------------- Outstanding at December 14, 1998 after repricing 3,072,245 5.62 Granted to March 31, 1999 601,250 4.99 Exercised to March 31, 1999 (40,000) 4.85 Forfeited to March 31, 1999 (187,373) 8.10 Expired to March 31, 1999 (33,332) 5.31 - -------------------------------------------------------------------------- Outstanding at March 31, 1999 3,412,790 5.51 Granted to March 31, 2000 1,157,500 5.81 Exercised to March 31, 2000 (58,333) 4.09 Forfeited to March 31, 2000 (575,213) 6.64 Expired to March 31, 2000 (167,081) 5.39 - -------------------------------------------------------------------------- Outstanding at March 31, 2000 3,769,663 5.46 Granted to March 31, 2001 5,887,334 4.35 Exercised to March 31, 2001 (6,250) 2.30 Forfeited to March 31, 2001 (149,501) 4.69 Expired to March 31, 2001 (605,829) 5.08 - -------------------------------------------------------------------------- Outstanding at March 31, 2001 8,895,417 $4.82 - --------------------------------------------------------------------------
On December 14, 1998, the shareholders approved the repricing of all but 395,831 outstanding options on that date to $5.25 per common share. Outstanding and exercisable options at March 31, 2001 were as follows:
Weighted average remaining contractual Price Range life of outstanding options Outstanding Exercisable $2.30 to $2.55 3.35 years 216,250 119,581 $4.00 to $5.50 3.76 years 7,479,167 3,092,664 $6.31 to $8.10 3.82 years 1,200,000 50,000 - ------------------------------------------------------------------------------- 3.76 years 8,895,417 3,262,245 - -------------------------------------------------------------------------------
The Company has a commitment to grant options for 362,998 common shares at an exercise price of US$3.00, which are not exercisable, until such time as shareholder approval has been granted. Shareholder approval will be sought at the Company's annual general meeting in September 2001. 14. Acquisitions (a) 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), consisting of US$2.0 million (Cdn$3.1 million) Page 78 of cash, forgiveness of an account receivable of US$0.7 million (Cdn$1.0 million) and acquisition expenses of US$0.1 million (Cdn$0.1 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 amounting to $0.1 million is being amortized over a period of five years. Identifiable assets acquired: Cash and equivalents $2,492 Accounts receivable 914 Investment in films and television programs 2,837 Other 31 ----------------------------------------------------- 6,274 ----------------------------------------------------- Liabilities assumed: Accounts payable and accrued liabilities 2,186 Other 4 ----------------------------------------------------- 2,190 ----------------------------------------------------- Net assets acquired: $4,084 ----------------------------------------------------- (b) On October 13, 2000, the Company acquired the shares of Trimark Holdings, Inc. 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). These costs include: amounts totaling US$1.1 million (Cdn $1.7 million) paid to lawyers, accountants and other consultants; amounts totaling US$0.7 million (Cdn$1.1 million) relating to the closure of offices and facilities not required in the Company's operations after the acquisition; involuntary termination benefits totaling US$1.7 million (Cdn$2.6 million) payable to certain employees terminated under a reorganization plan contemplated at the time of acquisition and various other amounts totaling US$0.5 million (Cdn$0.8 million). At March 31, 2001 there were no significant actions remaining to be performed to complete the restructuring plan, and the remaining liabilities under the plan totaled $2.9 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 amounting to $8.5 million is being amortized over a period of twenty years. Identifiable assets acquired: Accounts receivable $31,215 Investment in films and television programs 87,139 Investment in CinemaNow 23,551 Capital assets 400 Other assets 1,728 ------------------------------------------------------ 144,033 ------------------------------------------------------ Page 79 Liabilities assumed: Bank loans 57,127 Accounts payable 23,309 Deferred revenue 814 Future income taxes 1,170 ------------------------------------------------------ 82,420 ------------------------------------------------------ Net assets acquired: 61,613 Previously unrecognized income tax assets of the Company 4,600 ------------------------------------------------------ $66,213 ------------------------------------------------------ (c) On September 30, 1999, the Company acquired an additional 16.67% interest in Eaton by way of a membership interest repurchase agreement with the third partner. 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. The Company's total ownership in Eaton is now 50% and is being accounted for using the proportionate consolidation method after September 30, 1999. (d) On June 30, 1998, the Company acquired the shares of International Movie Group Inc., for total consideration of $4.5 million, consisting of $0.6 million cash and 675,375 common shares with a fair value of $3.6 million and acquisition expenses of $0.3 million. The acquisition was accounted for as a purchase, with results of operations of the acquired company consolidated from June 30, 1998 onwards. Identifiable assets acquired: $5,508 Liabilities assumed: 1,049 ------------------------------------------------------ Net assets acquired: $4,459 ------------------------------------------------------ (e) On August 28, 1998, the Company acquired the business and net operating assets of Termite Art Productions, for total consideration consisting of promissory notes with a fair value of US$2.8 million (Cdn$4.0 million). The acquisition was accounted for as a purchase, with results of operations of the acquired business consolidated from August 28, 1998 onwards. Goodwill arising on the acquisition amounting to $6.2 million is being amortized over a period of ten years. Identifiable assets acquired: $4,851 Liabilities assumed: 6,887 ------------------------------------------------------ Net liabilities assumed: $(2,036) ------------------------------------------------------ (f) 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: Page 80 2001 2000 Unaudited Unaudited Revenue $349,807 $407,960 Direct operating expenses 269,649 338,301 - ------------------------------------------------------------------ Gross profit 80,158 69,659 Other expenses General and administration 54,288 49,656 Amortization 10,060 7,388 Interest 14,726 7,229 Non-controlling interest 881 1,308 Severance and relocation costs - 1,698 - ------------------------------------------------------------------ 79,955 67,279 Earnings before income taxes 203 2,380 Income taxes (2,190) 866 Equity interest in Mandalay Pictures 8,298 5,894 Other equity interests 2,006 (159) - ------------------------------------------------------------------ Net loss for the year $(7,911) $(4,221) - ------------------------------------------------------------------ Basic and diluted loss per common share $($0.37) $(0.18) - ------------------------------------------------------------------
15. Amortization 2001 2000 1999 Amortization of capital assets $3,309 $2,584 $2,081 Amortization of goodwill 2,708 2,473 2,145 Write-off of projects in development 1,586 856 1,053 Amortization of pre-operating costs 962 962 - Amortization of deferred financing costs 1,322 199 - - ------------------------------------------------------------------------ Total $9,887 $7,074 $5,279 - ------------------------------------------------------------------------
16. Interest 2001 2000 1999 Interest expense on long-term debt $6,030 $3,023 $3,520 Interest expense on bank loans 5,796 518 83 Interest income (1,543) (527) (527) Other interest expense - 1,452 579 - ------------------------------------------------------------------------- $10,283 $4,466 $3,655 - ------------------------------------------------------------------------- Interest capitalized relating to productions during the year ended March 31, 2001 amounted to $2.2 million (2000 - $3.6 million; 1999 - $3.0 million).
17. Gain On June 23, 1998 a third party invested $3.0 million in the Company's animation partner to obtain a 20% interest. The gain on dilution of the Company's investment was $0.8 million (net of income taxes $nil) and resulted in a decrease of $0.2 million in goodwill. Page 81 18. Income Taxes Income before income taxes and equity interests by tax jurisdiction is as follows: 2001 2000 1999 Canada $5,356 $6,587 $(5,060) United States 9,913 (4,145) (3,483) - --------------------------------------------------------------------------- $15,269 $2,442 $(8,543) - ---------------------------------------------------------------------------
The provision for (recovery of) income taxes is as follows: 2001 2000 1999 Current $2,239 $1,510 $2,007 Future - 490 (1,703) Adjustments to opening future income tax valuation allowances following change in circumstances (5,531) - - - -------------------------------------------------------------------------- $(3,292) $2,000 $304 - --------------------------------------------------------------------------
2001 2000 1999 Canada Current $1,412 $1,510 $2,007 Future - 490 (1,703) - -------------------------------------------------------------------------- 1,412 2,000 304 - -------------------------------------------------------------------------- United States Current 827 - - Future (5,531) - - - -------------------------------------------------------------------------- (4,704) - - - -------------------------------------------------------------------------- Total $(3,292) $2,000 $304 - --------------------------------------------------------------------------
The Company's provision for income tax expense differs from the provision computed at statutory rates as follows: 2001 2000 1999 Income tax expense (recovery) computed at Canadian combined federal and provincial statutory rates $6,928 $1,088 $(3,896) Foreign and provincial operations subject to different income tax rates (606) (64) 1,322 Expenses not deductible for income tax purposes 1,217 862 114 Tax benefits received from Mandalay Pictures (6,041) - - Release of valuation allowances (5,531) (636) 2,122 Non-controlling interest 317 584 279 Other 424 166 363 ----------------------------------------------------------------------------- $(3,292) $2,000 $304 -----------------------------------------------------------------------------
The Company has certain income tax loss carry-forwards, the benefits of which have not yet been recognized in the financial statements. These losses amount to approximately $52.8 million for Canadian income tax purposes, and US$21.3 million for U.S. income tax purposes. The expiry dates of these losses, which are available to reduce future taxable income in each country, are as follows: Page 82 Canada United States Year ending March 31, 2002 $ 2,600 US$ - 2003 1,900 - 2004 2,600 300 2005 300 - 2006 14,800 - 2007 4,200 - 2008 26,400 - 2019 7,900 2020 11,600 2021 1,500
Following are the components of the Company's future income tax assets at March 31, 2001. The fiscal 2000 comparative amounts have been presented after reflecting the cumulative effect of implementing the changes in accounting policies as described in note 2(r). 2001 2000 Canada Assets Net operating losses $18,100 $13,061 Accounts payable 304 491 Investment in films and television programs - 6,210 Other assets 745 - Valuation allowance (15,353) (17,437) ----------------------------------------------------------------- 3,796 2,325 Liabilities Investment in film and television programs (1,719) - Capital assets (2,077) (2,758) Other assets - (153) ----------------------------------------------------------------- Net - (586) ----------------------------------------------------------------- Page 83 United States Assets Net operating losses 7,304 5,775 Accounts payable 6,647 258 Investment in films and television programs - 4,717 Other assets 1,479 - Investment in Mandalay 10,544 (6,703) Valuation allowance (6,441) (17,072) ----------------------------------------------------------------- 19,533 381 Liabilities Investment in film and television programs (11,190) - Investment in CinemaNow (9,100) - Other assets - (381) ----------------------------------------------------------------- Net (757) - ----------------------------------------------------------------- $(757) $(586) -----------------------------------------------------------------
Included under Canadian future income tax assets is an amount of $0.6 million relating to part VI.1 tax on Series A preferred share dividends, which is presented as an offset to the cost of the dividends. 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 $4.5 million and decreased by $10.6 million respectively during fiscal 2001. Realization of the future tax benefit is dependent upon many factors including the Company's ability to generate taxable income in the applicable jurisdictions within the loss-carry-forward periods. 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 Pictures, which are not expected to reverse in the foreseeable future, is $4.0 million (2000 - $nil). Page 84 19. Income (Loss) per Share 2001 2000 1999 $ $ $ Numerator: Net income (loss) $8,728 $(5,293) $(14,156) Less: Series A preferred share dividends (2,497) (591) - Accretion on Series A preferred shares (3,115) (727) - - --------------------------------------------------------------------------- Income available (loss attributable) to common shareholders $ 3,116 $(6,611) $(14,156) - --------------------------------------------------------------------------- Denominator: Weighted average common shares 36,196 30,665 24,575 outstanding (number/'000s) - --------------------------------------------------------------------------- Basic income (loss) per share $0.09 $(0.22) $(0.58) - ---------------------------------------------------------------------------
Income Shares Per share (numerator) (denominator) amount Diluted income per share - year ended March 31, 2001 Basic income per common share $3,116 36,196 $0.09 Effect of dilutive securities: Termite promissory notes - 83 - IMG acquisition notes - 43 - - ------------------------------------------------------------------------------ Income available to common shareholders and assumed conversions $3,116 36,322 $0.09 - ------------------------------------------------------------------------------
Options to purchase 8,895,417 common shares (2000 - 3,769,663 common shares, 1999 - 3,412,790 common shares) at an average price of $4.82 (2000 - $5.46, 1999 - $5.51) and share purchase warrants to purchase 5,525,000 common shares (2000 - 5,525,000 common shares) at an exercise price of US$5.00 (2000 - $US 5.00) were outstanding during the year but were not included in the computation of diluted earnings per share because the option's and share purchase warrants exercise prices were greater than the average market price of the common shares during fiscal 2001. 12,205 Series A preferred share units which are each convertible into 1,000 common shares for no additional consideration were outstanding at March 31, 2001 (2000 - 12,205 units). Additionally, convertible promissory notes with a principal amount of $16.5 million were outstanding at March 31, 2001 (2000 - $16.5 million, 1999 - $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 conversion of Series A preferred shares and convertible promissory notes was anti-dilutive in each of the years presented and was not reflected in diluted earnings per share. Page 85 20. Government Assistance Revenue includes tax credits earned totaling approximately $18.2 million (2000 - $24.0 million; 1999 - $3.9 million). Investment in films and television programs as at March 31, 2001 includes a reduction of $13.3 million (2000 - $13.0 million; 1999 - $13.5 million) with respect to government assistance for distribution of certain programs, which represents the gross assistance from inception of the Company and its subsidiaries, 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, but is forgivable in the event that sufficient profits are ultimately not generated by the individual film and television programs. Direct operating expenses include a reduction of $0.1 million (2000 - $0.6 million and 1999 - $nil) 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. 21. Segment Information The Company has five reportable business segments as follows: Motion Pictures o Development and production of feature films. o Acquisition of North American and worldwide distribution rights. o North American theatrical, video and television distribution of feature films produced and acquired. o Worldwide licensing of distribution rights to feature films produced and acquired. Television o Development, production and worldwide distribution of television productions including television series, television movies and mini-series and non-fiction programming. Animation o Development, production and worldwide distribution of animated and live action television series, television movies and feature films. Studio Facilities o Management of Canadian-based Studio facilities. CineGate o Management services to Canadian limited partnerships, including accessing tax credits to finance productions in Canada. The Company evaluates performance based on revenue, gross profit and EBITDA, defined as net earnings before interest, income taxes, amortization, non-controlling interests, equity interests and severance and relocation costs. The Company's reportable segments are strategic business units that offer different products and services, and are managed separately. Senior operating management does not review balance sheet Page 86 information analyzed by operating segment, and accordingly details of segment assets have not been presented. 2001 2000 1999 Revenue Motion Pictures $173,941 $146,910 $77,608 Television 71,452 81,758 12,466 Animation 29,658 35,620 22,035 Studio Facilities 5,532 6,963 6,188 CineGate 1,643 - - - --------------------------------------------------------------------------- $282,226 $271,251 $118,297 - --------------------------------------------------------------------------- Gross profit Motion Pictures $100,320 $27,475 $13,446 Television 12,498 7,509 2,544 Animation 8,436 8,881 5,452 Studio Facilities 2,909 4,511 3,924 CineGate 1,643 - - - --------------------------------------------------------------------------- $125,806 $48,376 $25,366 - --------------------------------------------------------------------------- EBITDA Motion Pictures $25,774 $11,291 $1,474 Television 6,841 (509) (1,532) Animation 5,658 6,286 3,528 Studio Facilities 2,628 4,238 3,625 CineGate 1,643 - - - --------------------------------------------------------------------------- $42,544 $21,306 $7,095 - --------------------------------------------------------------------------- The reconciliation of total segment EBITDA to the Company's total EBITDA is as follows: 2001 2000 1999 EBITDA of reportable segments $42,544 $21,306 $7,095 Head office general and administration expenses 6,224 4,318 5,284 -------------------------------------------------------------------------- $36,320 $16,988 $1,811 --------------------------------------------------------------------------
The reconciliation of total segment EBIDTA to the Company's income before income taxes is as follows: 2001 2000 1999 Company's total EBITDA $36,320 $16,988 $1,811 Less: Amortization (9,887) (7,074) (5,279) Interest (10,283) (4,466) (3,655) Non-controlling interest (881) (1,308) (612) Severance and restructuring costs - (1,698) (1,647) Gain on dilution of investment in a subsidiary - - 839 - ------------------------------------------------------------------------------ $15,269 $2,442 $(8,543) - ------------------------------------------------------------------------------
Page 87 Revenue by geographic location, based on the location of the customers, is as follows: 2001 2000 1999 Canada $57,223 $70,050 $41,687 United States 177,287 131,433 51,735 Other Foreign 47,716 69,768 24,875 - --------------------------------------------------------------------------- $282,226 $271,251 $118,297 - ---------------------------------------------------------------------------
Assets by geographic location are as follows: 2001 2000 Canada $334,713 $325,044 United States 259,507 76,929 - ----------------------------------------------------------------------------- $594,220 $401,973 - -----------------------------------------------------------------------------
22. Commitments and Contingent Liabilities (a) Minimum future payments under operating lease commitments are as follows: 2002 $2,471 2003 2,103 2004 1,952 2005 1,913 2006 1,900 Thereafter 3,272 (b) As at March 31, 2001, subsidiaries of the Company in the normal course of business have entered into unconditional purchase obligations relating to the purchase of film rights for future delivery and to pay advances to producers amounting to approximately $41.1 million that are payable over the next twelve months (2000 - $10.2 million). (c) A subsidiary of the Company in the normal course of business has provided guarantees up to a maximum of $6.8 million (2000 - $2.1 million) for bank loans used to finance production costs of unrelated production companies. (d) Pre-sales of the future revenue from certain television series and motion pictures totaling $25.6 million (2000 - $15.7 million) have been pledged as collateral against certain accounts payable. (e) 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. 23. Financial Instruments (a) Fair Value The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Page 88 Cash and short-term deposits- The carrying amount approximates fair value because of the short maturity of these instruments. Bank loans, production and distribution loans and long-term debt- The fair value of the Company's bank loans, production and distribution loans and long-term debt is estimated based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. Forward contracts- The fair value of forward contracts is estimated using net present value techniques, incorporating assumptions including current market exchange rates and the time value of money. The estimated fair values of the Company's financial instruments are as follows: 2001 2001 2000 2000 Carrying Fair Carrying Fair Amount Value Amount Value Cash and short-term deposits $ 10,485 $ 10,485 $ 19,283 $ 19,283 Bank loans $(159,765) $(159,765) $(13,936) $(13,936) Production and distribution loans $ (24,045) $ (24,045) $(41,838) $(41,838) Long-term debt $ (65,987) $ (66,511) $(40,607) $(39,479) Forward contracts $ - $ 514 $ - $ -
(b) Credit Risk The Company's maximum credit risk exposure arising in relation to its financial assets is equivalent to their carrying amounts at March 31, 2001. Accounts receivable include 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 19% of total accounts receivable at March 31, 2001 (2000 - 25.8%). Concentration of credit risk with the Company's customers is considered to be 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. (c) Interest Rate Risk The Company's exposure to interest rate risk is summarized as follows: Cash and short-term deposits floating interest rate, see below Accounts receivable non-interest bearing Bank loans floating interest rate, see also note 9 Accounts payable and accrued liabilities non-interest bearing Production and distribution loans floating interest rate, see also note 11 Long-term debt disclosed in note 12
Page 89 Cash and short-term deposits carry interest rates as follows: Canadian dollar bank accounts prime minus 2.50% US dollar bank accounts US base rate minus 4.25% Short-term deposits fixed rate - 6.0%
(d) Forward Contracts The Company has entered into foreign exchange contracts to hedge future production expenses denominated in 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, 2001, the Company had contracts to sell $7.0 million in exchange for 10.4 million New Zealand dollars over a period of three months at a weighted average exchange rate of Cdn$0.67 and to sell $3.5 million in exchange for 4.4 million Australian Dollars over a period of three months at a weighted average exchange rate of Cdn$0.79. These contracts are entered into with a major financial institution. 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, 2001 amounted to $0.5 million. 24. Supplementary Cash Flow Statement Information The following investing and financing activities are on a non-cash basis and are therefore excluded from the consolidated statement of cash flows: 2001 2000 1999 Business combinations financed by debt to the seller $ - $ - $3,968 Common shares issued in conjunction with business combinations $34,975 $ - $3,579
Interest paid for the year ended March 31, 2001 amounted to $7.6 million (2000 - $7.0 million; 1999 - $6.0 million). Income taxes paid during the year ended March 31, 2001 amounted to $2.5 million (2000 - $473,000; 1999 - $1.1 million). 25. 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, 2001, 2000 and 1999, and the shareholders' equity as at March 31, 2001 and 2000 were as follows: Page 90
Net Income (Loss) Shareholders' Equity 2001 2000 1999 2001 2000 As reported under Canadian GAAP $8,728 $(5,293) $(14,156) $196,789 $206,414 Equity interest in loss of Mandalay Pictures (a) 1,150 1,907 (6,982) (4,569) (5,719) Adjustment for capitalized pre-operating costs (b) 580 962 (4,797) (3,255) (3,835) Restructuring costs (d) (1,733) - - (1,733) - Accounting for income taxes (e) - - - 2,754 - Other differences (f) - - 238 - - Presentation of Series A preferred Shares outside shareholders equity (g) - - - (38,986) (37,886) ---------------------------------------------------------------------------------------------- Net income (loss) before accounting change/shareholders' equity under U.S. GAAP 8,725 (2,424) (25,697) 151,000 158,974 Cumulative effect of accounting changes, net of income taxes (c) (58,942) - - - - --------------------------------------------------------------------------------------------- Net loss/shareholders' equity under U.S. GAAP (50,217) (2,424) (25,697) 151,000 $158,974 Adjustment to cumulative translation adjustments account (net of tax of $nil) 8,722 (2,981) 4,445 ---------------------------------------------------------------------- Comprehensive loss attributable to common shareholders under U.S. GAAP $(41,495) $(5,405) $(21,252) ----------------------------------------------------------------------- Basic and fully diluted income (loss) per common share under U.S. GAAP before accounting change $0.13 $(0.11) $(1.05) ----------------------------------------------------------------------- Basic and fully diluted loss per common share under U.S. GAAP $(1.50) $(0.11) $(1.05) -----------------------------------------------------------------------
Page 91 Reconciliation of the movement in the cumulative translation adjustments account: 2001 2000 1999 Balance at beginning of the year $1,444 $4,425 $(20) - ----------------------------------------------------------------------------------- Change in underlying assets of Mandalay Pictures March 31, 1998 at 1.4198 - - (71,386) Investment in Mandalay Pictures carried at March 31, 1999 at 1.5087 - (75,831) 75,831 Investment in Mandalay Pictures carried at March 31, 2000 at 1.4494 (72,850) 72,850 - Investment in Mandalay Pictures carried at March 31, 2001 at 1.5763 76,508 - - Change in net investment US self-sustaining Subsidiaries March 31, 2001 at 1.5763 5,064 - - --------------------------------------------------------------------------------- Net change in year 8,722 (2,981) 4,445 --------------------------------------------------------------------------------- Balance - end of the year $10,166 $1,444 $4,425 ---------------------------------------------------------------------------------
Reconciliation of movement in Shareholders' Equity under U.S. GAAP: 2001 2000 1999 Balance at beginning of the year $158,974 $154,361 $143,069 Increase in capital stock 37,573 11,055 32,544 Dividends paid on preferred shares (2,497) (591) - Accretion on preferred shares (g) (1,555) (446) - Net loss under U.S. GAAP (50,217) (2,424) (25,697) Adjustment to cumulative translation adjustments account 8,722 (2,981) 4,445 -------------------------------------------------------------------------------- Balance - end of the year $151,000 $158,974 $154,361 --------------------------------------------------------------------------------
(a) Equity Interest in loss of Mandalay Pictures, LLC The Company accounts for Mandalay Pictures using the equity method. As described in note 5, under Canadian GAAP, pre- operating costs incurred by Mandalay were deferred and are being amortized to income. 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 (2000 - $nil, 1999 - $nil). (b) Accounting for Capitalized Pre-Operating Period Costs In the year ended March 31, 1999, 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 (2000 - $nil, 1999 - $nil). (c) Accounting changes In the year ended March 31, 2001, the Company elected early adoption of Statement of Position 00-2 "Accounting by Producers or Distributors of Films" ("SoP 00-2"). Under Canadian GAAP, the one-time after-tax adjustment for the initial adoption of SoP 00-2 was made to opening retained earnings. Under SoP 00-2, the cumulative effect of changes in accounting principles caused by adopting the Page 92 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 Pictures. (d) Accounting for Business Combinations Under Canadian GAAP, costs related to activities or employees of an acquiring company are not considered in the purchase price allocation. The Company included $2.1 million of such costs in the purchase equation for Trimark as described in Note 14(b). Under US GAAP, costs related to the acquiring Company must be expensed as incurred. The amount is presented net of income taxes of $0.9 million. (e) Accounting for Income Taxes Under Canadian GAAP, for the year ended March 31, 2001, the Company used the asset and liability method to recognize future income taxes which is consistent with the US GAAP method required under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109") except that Canadian GAAP requires use of the substantively enacted tax rates and legislation, whereas US GAAP only permits use of enacted tax rates and legislation. For the years ended March 31, 2000 and March 31, 1999, 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 $2.3 million, with a corresponding increase in valuation allowances by $2.3 million. SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non- deductible goodwill, arising in a business combination. As a result of the acquisition of Lions Gate Studios in the year ended March 31, 2000, under US GAAP, goodwill was increased to reflect the additional deferred tax liability resulting from temporary differences arising on the acquisition. 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, 2001. (f) Accounting for Development Costs Under Statement of Financial Accounting Standards No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films" ("SFAS 53"), certain costs related to the development of film and television projects must be written off after three years unless the project has been set for production. The effect of writing off costs more than three years old associated with projects not abandoned is treated as a GAAP reconciling item. The corresponding impact would reduce investment in films and television programs by a corresponding amount. In fiscal 1999, management wrote off certain development projects under Canadian GAAP, therefore $0.2 million written off in 1998 under U.S. GAAP reversed in that fiscal year. (g) 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 temporary equity. As explained in note 13(c), 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 proceeds received would be allocated to the common share purchase warrants and the preferred shares based on Page 93 the relative fair values of the two instruments. Under U.S. GAAP, the preferred shares would have been valued at $40.0 million and the warrants at $48.4 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 retained earnings on a straight line basis over five years whereas, under US GAAP, the difference is being accreted using the effective interest method over the five year period to the first available date that the preferred shares are redeemable. (h) Accounting for Tax Credits Under Canadian GAAP, tax credits earned are 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 $18.2 million (2000 - $24.0 million, 1999 - $3.9 million). (i) Accounting for Stock Based Compensation Under Canadian GAAP, compensation cost is not recorded for stock based compensation to employees. Under US GAAP, the company follows the intrinsic value method to measure stock based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and its interpretations. Under the intrinsic value method, the compensation cost would be measured as the difference between the quoted market price on the date of grant and the exercise price, if any. For the three years ended March 31, 2001, no compensation cost resulted under U.S. GAAP. As the Company has elected to use the intrinsic value method, 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, 2001 was $1.64 (2000 - $1.76; 1999 - $2.11). 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, 2001 would be $5.4 million. (2000 - $4.0 million; 1999 - $2.7 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% (2000 - 35%), risk-free interest rate of 5.5% (2000 - 6.0%) and expected life of five years. The resulting pro forma U.S. GAAP net income and loss per share for the year ended March 31, 2001 before the accounting change was $3.3 million and $0.02 respectively (2000 - loss and loss per share $6.4 million and $0.24 respectively; 1999 - loss and loss per share $28.4 million and $1.16 respectively). Page 94 The resulting pro forma U.S. GAAP loss and loss per share for the year ended March 31, 2001 was $55.6 million and $1.54 respectively (2000 - loss and loss per share $6.4 million and $0.24 respectively; 1999 - loss and loss per share $28.5 million and $1.16 respectively). (j) Income (Loss) Per Share
2001 2000 1999 Numerator: Net income (loss) before accounting change $8,725 $(2,424) $(25,697) Less: Series A preferred share dividends (2,497) (591) - Accretion on Series A preferred shares (1,555) (1,008) - - -------------------------------------------------------------------------------- Income available (loss attributable) to common $4,673 $(4,023) $(25,697) shareholders - --------------------------------------------------------------------------------
(k) Consolidated Statements of Cash Flows The Company's cash flow statement prepared in accordance with Canadian GAAP complies with U.S. GAAP. (l) 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. (m) Impairment of Long-Lived Assets Under Canadian GAAP, capital assets and goodwill are reviewed for impairment as described in note 2. Under U.S. GAAP, in addition to the review for impairment of goodwill described in note 2, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the net cash flows expected to be generated from the asset. If an asset is considered to be impaired, its carrying amount is reduced to fair value. (n) Impact of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which deferred the required date of adoption of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. This standard is applicable for the Company's 2002 fiscal year and currently its impact, if any, has not been determined. In September, 2000, Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", was issued to replace Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. As the Page 95 company currently does not transfer or service any financial assets, the new standard is not expected to have any affect on the Company. In June 2000, the Financial Accounting Standards Board approved Statement No. 141, "Business Combinations" (SFAS 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Those Statements will change the accounting for business combinations and goodwill. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, presently expected to occur in the Company's 2003 fiscal year. The Company has not yet determined the effects of the new standards as the full text of the standards have not yet been published. In June 2000, the Financial Accounting Standards Board approved Statement No. 143, "Accounting for Asset Retirement Obligations". That standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company has not yet determined the effects of this new standard as the full text of the standard is not yet available. 26. Comparative Figures Certain amounts presented in the prior year have been reclassified to conform to the current year's presentation. 27. Subsequent Events (a) On April 27, 2001, in accordance with the terms of the Company's share bonus plan, 200,000 common shares were issued to a senior executive of the Company as compensation for services rendered in connection with the Trimark acquisition and the Company's long-term financing arrangements. The market value of the shares was accrued in the Company's financial statements in fiscal 2001. (b) On July 10, 2001 a subsidiary of the Company completed an equity financing with a third party for $14.0 million. Page 96 REPORT OF INDEPENDENT ACCOUNTANTS To the Members of Mandalay Pictures, LLC: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, change in members' equity and cash flows present fairly, in all material respects, the financial position of Mandalay Pictures, LLC (the "Company") at March 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. 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 audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of film accounting on April 1, 2000. /s/ Pricewaterhouse Coopers LLP - -------------------------------- June 22, 2001 Page 97
MANDALAY PICTURES, LLC CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 and 2000 2001 2000 -------------- -------------- ASSETS Cash and cash equivalents $ 16,113,095 $ 13,241,574 Restricted cash 21,147,617 32,012,751 Accounts receivable - trade 29,105,253 3,563,139 Other receivables 15,225,000 3,824,034 Film inventory 133,127,349 50,060,931 Due (to) from affiliates (32,806) 244,180 Other assets and prepaid expenses 113,815 434,136 -------------- -------------- TOTAL ASSETS $ 214,799,323 $ 103,380,745 ============== ============== LIABILITIES Accounts payable and accrued expenses $875,163 $7,505,458 Accrued participations and residuals 9,847,001 3,200,000 Bank loan 3,085,380 2,801,184 Production loans 93,126,648 30,557,227 Contractual obligations 36,574,600 16,171,948 Deferred revenue 41,256,404 5,106,294 -------------- -------------- TOTAL LIABILITIES 184,765,196 65,342,111 -------------- -------------- MEMBERS' EQUITY Contributions from members 50,001,000 50,001,000 Accumulated deficit (19,966,873) (11,962,366) -------------- -------------- TOTAL MEMBERS' EQUITY 30,034,127 38,038,634 -------------- -------------- TOTAL LIABILITIES and MEMBERS' EQUITY $214,799,323 $103,380,745 ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Page 98
MANDALAY PICTURES, LLC CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2001 and 2000 2001 2000 -------------- -------------- REVENUES $ 42,671,932 $ 87,033,801 OPERATING EXPENSES Amortization of film costs (42,448,780) (87,988,812) General and administration (6,110,105) (4,165,285) Depreciation (92,262) (98,494) LOSS FROM OPERATIONS (5,979,215) (5,218,790) INTEREST INCOME 1,972,026 2,520,559 INTEREST EXPENSE (191,000) - LOSS BEFORE PROVISION FOR TAXES (4,198,189) (2,698,231) PROVISION FOR TAXES (22,318) (12,050) LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (4,220,507) (2,710,281) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (3,784,000) - NET LOSS $ (8,004,507) $ (2,710,281)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Page 99
MANDALAY PICTURES, LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY FOR THE YEARS ENDED MARCH 31, 2001 and 2000 Tigerstripes, LG Pictures, LLC Inc. Total ------------- -------------- -------------- Balance at March 31, 1999 $ 550 $ 40,748,365 $ 40,748,915 Net loss - (2,710,281) (2,710,281) Balance at March 31, 2000 550 38,038,084 38,038,634 Net loss - (8,004,507) (8,004,507) Balance at March 31, 2001 $ 550 $ 30,033,577 $ 30,034,127
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Page 100
MANDALAY PICTURES, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2001 and 2000 2001 2000 -------------- -------------- Cash flows from operating activities: Net loss $ (8,004,507) $ (2,710,281) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of a change in accounting principle 3,784,000 - Depreciation 92,262 98,494 Write off of abandoned film projects 341,090 - Amortization of film costs 42,448,780 87,988,812 (Increase) decrease in assets: Restricted cash 10,865,134 (29,310,552) Accounts receivable - trade (25,542,114) (3,563,139) Other receivables (11,400,966) (3,452,857) Additions to film costs (129,299,198) (97,671,705) Due to/from affiliates, net 276,986 37,149 Other assets and prepaid expenses 320,321 27,322 (Decrease) increase in liabilities: Accounts payable and accrued expenses (6,630,295) (620,834) Accrued participations and residuals 6,647,001 3,200,000 Contractual obligations 20,402,652 16,171,948 Deferred revenue 36,150,110 644,402 -------------- -------------- Total adjustments (51,544,237) (26,450,960) -------------- -------------- Net cash used by operating activities (59,548,744) (29,161,241) -------------- -------------- Cash flows from financing activities: Proceeds (repayments) from bank loan, net 284,196 (1,153,795) Repayments on production loans (21,614,163) (33,969,467) Proceeds from production loans 84,183,584 45,712,935 Payments relating to financing costs and other assets (433,352) (518,122) -------------- -------------- Net cash provided by financing activities 62,420,265 10,071,551 -------------- -------------- Net increase (decrease) in cash and cash equivalents 2,871,521 (19,089,690) Cash and cash equivalents, beginning of year 13,241,574 32,331,264 -------------- -------------- Cash and cash equivalents, end of year $16,113,095 $13,241,574 ============== ============== Supplemental disclosure of cash flow information: Interest paid $5,926,277 $2,218,759 Income taxes paid $22,318 $12,050
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Page 101 MANDALAY PICTURES, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization: Mandalay Pictures, LLC (the "Company") was incorporated on March 1, 1998 as a Delaware corporation. The Company develops, finances, produces and distributes major motion pictures. 2. Summary of Significant Accounting Policies: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter- company transactions and accounts have been eliminated. ACCOUNTING CHANGES In June 2000, 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 established new accounting standards for producers and distributors of films, including changes in revenue recognition concepts and accounting for exploitation, development and overhead costs. SoP 00-2 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. Development costs for abandoned projects and indirect overhead costs are to be charged to expense instead of being capitalized to film costs. In addition, methodology for determining net realizable value includes a discounted cash flow approach. The Company adopted the pronouncement effective April 1, 2000 and recorded a one-time charge for the initial adoption totaling $3,784,000, which has been reflected as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations for the year ended March 31, 2001. Also as a result of the adoption, the Company recognized approximately $18,748,000 of revenue in the current year which was recognized last year. It is estimated $6,250,000 of previously recognized revenue will be recorded in future periods. The effect on net income (loss) of recognizing these revenues is not material. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), which summarized the SEC staff's view in applying generally accepted accounting principles to revenue recognition in financial statements. The Company has reviewed its revenue recognition policies and revised them to conform to SAB 101, specifically with respect to distributor-for- hire arrangements. Accordingly, revenues in the prior year have been restated to conform to the current period presentation, with no net effect on net loss. REVENUE RECOGNITION. Revenue is recognized in accordance with the provisions of SoP-02 and SAB 101. The Company licenses certain film rights through international distribution agreements that provide for the payment of minimum license fees ("Minimum Guarantees" or "MG's"), 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. Minimum Guarantees related to contracts which contain hold-back 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 hold- back provision expires. Page 102 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 SoP-00-2. The Company has entered into a first look financing and distribution agreement with Paramount Pictures Corporation ("Paramount") that gives Paramount the option to acquire the distribution rights in all territories other than those covered by the various international distribution agreements, under terms which are similar to the international agreements. Any amounts received from Paramount at the commencement of the license period are treated as minimum guarantees with revenue being recognized in a manner similar to the international distribution agreements discussed above. Paramount also pays annual overhead contribution fees to the Company to help offset the costs of operation of the Company. These fees are presented as reductions to general and administration expenses in the Statement of Operations. DEFERRED REVENUE Deferred revenue represents MG's received from distributors for which holdback provisions have not yet lapsed, thus, precluding the Company from recognizing revenue. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. 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 that are contractually designated for the production of certain films and require third party approvals prior to the disbursement of any funds. FILM COSTS: o 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. Film inventory costs are capitalized and amortized against revenues guaranteed by the delivery and subsequent exploitation of the film. Such costs include all development and production costs (including an allocation of direct overhead and financing costs). Film inventory is stated at the lower of cost, net of amortization, or net realizable value. 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. Revenue estimates on a film-by-film basis are reviewed periodically by management and are revised, if warranted, based on management's appraisal of current market conditions. Where applicable, unamortized inventory is written down to net realizable value using a discounted cash flows model based on this appraisal. Page 103 Included in film inventory costs are development costs. Development costs represent 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 the production are written off when the project is abandoned or when more than three years has passed from the first expenditure. o PARTICIPATIONS AND RESIDUALS Estimated liabilities for participations and residuals are amortized in the same manner as film inventory costs. Based on management's estimates, $5,534,001 of the balance of accrued participations and residuals at March 31, 2001 will be paid during the year ending March 31, 2002. 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, 2001, and March 31, 2000, the Company recorded a provision related to California Limited Liability Company taxes of $22,318 and $12,050, respectively. 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, 2001 and March 31, 2000, respectively. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on their balance sheets as assets or liabilities, measured at fair value. Under SFAS No. 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 is required to adopt SFAS No. 133 in the first quarter of fiscal 2002. The impact on the financial statements of adopting this standard is currently anticipated to be immaterial. 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 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. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to the current-year presentation. Page 104 3. Film inventory: Film inventory consist of the following at March 31:
2001 2000 ---- ---- Projects released, net of amortization $ 56,885,456 $ 7,020,184 Projects in production 64,948,138 37,773,547 Projects in development / pre-production 11,293,755 5,267,200 -------------- ------------- Total $ 133,127,349 $ 50,060,931 ============== =============
The Company estimates that approximately 90% of unamortized costs of released films at March 31, 2001 will be amortized within the next three years. Approximately $39,500,000 of released film inventory is expected to be amortized during the next twelve months. During the years ended March 31, 2001 and 2000, the Company capitalized to film projects interest of approximately $5,200,602 and $2,335,000, respectively, and production overhead of $7,000,000 in each of 2001 and 2000, respectively. 4. Bank Loan: On February 12, 1999, the Company entered into a credit facility, which provided a line of credit of $32,500,000, which was reduced to $6,000,000 during the current year, bearing an interest rate of LIBOR plus 1.75%. At March 31, 2001 and 2000, the Company had $414,620 and $26,500,000 of unused available credit with this facility. Borrowings under this credit facility are guaranteed by a group of insurance companies, are non-recourse to the Company and are collateralized by certain revenues and copyrights. Amounts outstanding under this facility at March 31, 2001 and 2000 were $3,085,380 and $2,801,184, respectively, and are due no later than November 19, 2002. 5. Production Loans: On December 15, 2000, the Company entered into a non-recourse credit facility, which provides a line of credit of $20,614,797, bearing an interest rate of LIBOR + 1.5%, with a final maturity of January 7, 2003. At March 31, 2001 the outstanding balance was $12,200,000, leaving $8,414,797 of unused available credit with this facility. Borrowings under this facility are collateralized by, and will be paid from, contractual MG's due on certain distribution contracts entered into with foreign distributors. Approximately $6,000,000 of the available credit facility is temporarily collateralized with the Company's restricted cash and will be released to the general account of the Company as additional distribution contracts are delivered to the bank. On May 19, 2000, the Company entered into a non-recourse credit facility, which provides a line of credit of $57,458,000, bearing an interest rate of LIBOR + 1.5%, with a final maturity of July 3, 2002. At March 31, 2001, the outstanding balance was $53,191,000, leaving $4,267,000 of unused available credit with this facility. Borrowings under this facility are also collateralized by, and will be paid from, contractual MG's due on certain distribution contracts. On October 15, 1999, the Company entered into a non-recourse credit facility, providing a line of credit of $46,336,190, bearing an interest rate of LIBOR + 1.5%, with a final maturity of February 27, 2002. The Company had $27,734,918 and $27,534,590 outstanding on this facility at March 31, 2001 and 2000, respectively. The unused available credit with this facility was $0 and $18,791,853 at March 31, 2001 and 2000, respectively. Consistent with the credit facilities discussed above, borrowings under this Page 105 facility are collaterized by, and are being repaid from, contractual MG's due on certain distribution contracts entered into with foreign distributors. For each of the three 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, have a fair value of $113,800 at March 31, 2001. On December 1, 1998, the Company entered into a credit facility which provided a line of credit of $36,993,000, bearing an interest rate of LIBOR plus 1.25%. The Company had $0 and $3,022,638 outstanding on this facility at March 31, 2001 and 2000, respectively, and no unused available credit at both March 31, 2001 and 2000. Borrowings under this credit facility were collateralized by certain distribution contracts entered into with foreign distributors. For each of the credit facilities discussed above, the Company deposited cash into a restricted account from which the bank can withdraw interest and related expenses over the term of the credit facilities. The amount of restricted cash on deposit with the bank was $11,547,999 and $4,278,785 at March 31, 2001 and 2000, respectively. Any unused funds will be returned to the Company upon repayment of the related facility. 6. Film Financing Transactions: During the current fiscal year, the Company entered into three separate financing transactions with third parties to assist in the financing of three of its films. The first transaction provided for the third party to contribute approximately $23,750,000 in exchange for a share of all distribution proceeds, as defined, generated by the film in perpetuity. Approximately $14,500,000 of the proceeds were recorded as a reduction to the costs of the related film. The remaining amount of $9,250,000 is guaranteed to be returned to the investor, plus interest at LIBOR + 0.4%, through the defined distribution proceeds of the film, but in no event later than 42 months after delivery of the completed film to Paramount. This amount has been recorded as a contractual obligation in the balance sheet. The second transaction provided for the third party to contribute approximately $15,560,000 in exchange for a share of the distribution proceeds, as defined, generated by the film and was recorded as a reduction to the costs of the related film. The third transaction utilized the same sale and leaseback structure used in December 1999 as discussed below. Proceeds of $10,558,000 received therefrom have been reflected as a contractual obligation at March 31, 2001, as the film project to which it related has not yet commenced production and certain refund provisions apply if a film is not delivered by December 31, 2002. In order for the unrelated third party in the first and second transactions to fulfill its obligations to fund these films, $14,500,000 of cash deposited into the restricted cash account, plus interest earned thereon, at March 31, 2000 was lent to the investor and is repayable out of 100% of the investor's entitlement to proceeds from the distribution of its other films financed with the Company and a pledge against any money raised through its ongoing fundraising efforts, but in no event later than September 30, 2001. Therefore, $14,500,000 plus interest has been recorded as other receivables at March 31, 2001 and the restricted cash has been reduced accordingly. Page 106 During the prior fiscal year, the Company entered into three separate financing transactions with unrelated third parties to assist in the financing of three of its films. The first provided for the third party to contribute approximately $23,000,000 which was recorded as a reduction to the costs of the related film, and provides for a contingent participation interest in the results of distribution. The second was structured as a sale and leaseback arrangement whereby the Company sold all of its rights to one film and immediately leased back the attendant distribution rights for a 17.5 year term. Under the terms of that arrangement, the Company has agreed to make certain fixed annual payments to the purchaser over the length of the term. These payments have been legally assumed by a German bank, in exchange for the Company depositing a certain amount in cash, and the purchaser has relinquished any claim against the Company for the payments. Upon the payment of the final amount in the 18th year, all rights previously sold revert back to the Company. The deposit 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. The net gain from the transaction of approximately $4,100,000 has been recorded as a reduction to film costs. In the third, the Company received $16,000,000 from an investor related to the intended production of a motion picture, that as of March 31, 2001, remains in development / pre-production. Of this amount, $14,500,000 was placed on restricted deposit with a German bank and $1,500,000 was deposited into the general bank account of the Company to fund development costs. The amount placed in the restricted cash account was subsequently loaned back to the investor to fund other financing commitments with the Company, as discussed above. Should the project be abandoned, the Company must return these funds, plus all interest earned on the restricted deposit. At March 31, 2001 and 2000, $16,766,600 and $16,171,948 are included in contractual obligations related thereto. 7. Commitments and Contingencies: EMPLOYMENT AGREEMENTS: It has been the Company's policy to employ all executives under formal employment agreements. The terms of these agreements have generally terminated on or about February 28, 2001 and have been temporarily extended through December 31, 2001 while the Company develops its long-term strategy. During the next fiscal year the Company plans to further extend the terms of employment of those executives necessary to fulfill its business plan. The employment and compensation agreements with the Company's two most senior executives, who are also members, provided for minimum annual base compensation of $4,444,000 and $1,280,000 respectively, through the year ending February 28, 2003. These executives have agreed to defer 50% of these amounts to be conditionally recouped out of the results of future productions, under certain specific instances, if at all. Based upon the results as of March 31, 2001, no such recoupment is expected. The Company terminated the contract of its next ranking officer, which had an expiration date of December 31, 2001, and provided for no mitigation offset, by paying the amount of $1,265,799. This amount has been included in general and administration expenses in the Statement of Operations for the year ended March 31, 2001. Page 107 DISTRIBUTION AGREEMENTS Under the distribution agreements with Paramount related to the motion picture "Sleepy Hollow" the Company assumed responsibility for certain amounts payable to unions and actors based on the performance of the motion picture in certain territories. Paramount is the primary obligor of these obligations. Based upon the performance of the picture to date, the Company has accrued $5,534,001 at March 31, 2001 as an estimate of this obligation. The Company is in the process of negotiating a settlement of this arrangement due to certain actions of Paramount during the production and distribution of the film. Any formal relief of this obligation will be recorded as income when legally binding. 8. Members' Equity: The Company's equity structure is as follows at each of March 31, 2001 and March 31, 2000: Class A Preferred Membership Units $ 50,000,000 Class B Common Membership Units 450 Class C Common Membership Units 550 ------------- $ 50,001,000 ============= The Class A Preferred membership units have a pro-rata claim, with that of the two senior executives' salary deferrals, on any non-tax related distribution until fully redeemed. 9. Related Parties: Due (to) from affiliates consists of the following at March 31:
2001 2000 ---- ---- Lions Gate Entertainment Corp. $ (84,466) $ 244,180 Other Mandalay companies* 51,662 34,000 ----------- ---------- $(32,806) $278,180 =========== ========== * - Includes various Mandalay named companies in which members of the Company have significant interest.
LG Pictures, Inc., a wholly owned subsidiary of Lions Gate Entertainment Corp., the member that owns class A preferred and class B common membership units, 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 4). During the current year, this obligation was terminated. During the years ended March 31, 2001 and 2000, the Company received $ 190,000 and $1,237,000, respectively under this agreement, which amounts are included in interest income. Page 108 INDEX TO EXHIBITS Exhibit Page Number Description of Documents Number - --------- --------------------------------------------- ------ 3.1* Articles of Incorporation ................... 3.2*** Amendment to Articles of Incorporation to Provide Terms of the Series A Preferred Shares dated as of December 20, 1999..................................... 3.3 Amendment to Articles of Incorporation to Provide Terms of the Series B Preferred Shares dated as of September 26, 2000..................................... 111 3.4 Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 26, 2000..... 115 4.1* Trust Indenture between the Company and CIBC Mellon Trust Company dated as of April 15, 1998............................... 4.2*** Warrant Indenture between the Company and CIBC Mellon Trust Company dated as of December 30, 1999......................... 10.1* Employees' and Directors' Equity Incentive Plan............................... 10.2* Incentive Plan Stock Option Agreement No. 1.. 10.3* Incentive Plan Stock Option Agreement No. 2.. 10.4*+ Memorandum of Understanding among the Company, LG Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam Platnick dated March 6, 1998................. 10.5* 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* 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*+ Agreement between Paramount and Mandalay Pictures dated March 9, 1998........ 10.8** Credit and Security Agreement among IDC, LLC, Mandalay Pictures, MP Finance, LLC, the Production Servicers referred to therein, the Lenders referred to therein and the Chase Manhattan Bank dated as of February 12, 1999......................................... 10.9*** Agreement and Plan of Merger among the Company, LGE Merger Sub and Trimark dated June 6, 2000........................... 10.10**** Registration Rights Agreement dated as of June 6, 2000, by and among the Company, Mark Amin and Reza Amin............. 10.11**** Trimark Stockholders Voting Agreement dated June 6, 2000, by and among the Company and the stockholders of Trimark Holdings, Inc. listed on Schedule A thereto...................................... 10.12**** Lions Gate Stockholders Voting Agreement dated June 6, 2000, by and among Trimark Holdings, Inc. and the stockholders of the Company listed on Schedule A thereto........................... 10.13 Amended and Restated Unanimous Shareholders Agreement among CineGroupe, Animation Cinepix Inc., Jacques Pettigrew, Fiducie Famille Pettigrew, Robert Paul and Fox Family Worldwide, Inc. dated as of September 8, 2000...................................... 116 Page 109 Exhibit Page Number Description of Documents Number - --------- --------------------------------------------- ------ 10.14**** Employment Agreement dated as of June 6, 2000, between the Company and Mark Amin... 10.15 Employment Agreement between the Company and Marni Wieshofer dated August 26, 2000.............................. 157 10.16 Employment Agreement between the Company and Gordon Keep dated October 1, 2000...................................... 163 10.17 Employment Agreement between the Company and Jon Feltheimer dated February 27, 2001............................ 169 10.18 Employment Agreement between the Company and John Dellaverson dated April 1, 2001................................ 177 10.19 Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15, 2001............ 181 21.1 List of Subsidiaries......................... 186 23.1 Consent of Independent Accountant............ 187 23.2 Consent of Independent Accountant............ 188 24.1 Power of Attorney (Contained on Signature Page).............................. * 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). ** 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). *** 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). **** Incorporated by reference to the Company's Form F-4 Registration Statement under the Securities Act of 1933 dated August 2000. + Portions of these exhibits have been omitted pursuant to a request for confidential treatment. Page 110 EX-3 2 ex3_3cc1-520277.txt EX. 3.3 SPECIAL RESOLUTION EXHIBIT 3.3 Form 19 __________ (SECTION 348) CERTIFICATE OF INCORPORATION NO. 554056 ____________ COMPANY ACT ___________ SPECIAL RESOLUTION THE FOLLOWING SPECIAL RESOLUTION* WAS PASSED BY THE UNDERMENTIONED COMPANY ON THE DATE STATED: NAME OF COMPANY: LIONS GATE ENTERTAINMENT CORP. DATE RESOLUTION PASSED: SEPTEMBER 26, 2000. RESOLUTION: + "RESOLVED, as a special resolution, that the articles of the Company be amended by creating a new Part 27 entitled "Special Rights and Restrictions of Preferred Shares, Restricted Voting, Non-Transferable Series B" in the form as set out in Schedule "A" attached hereto." CERTIFIED A TRUE COPY THE 10TH DAY OF OCTOBER, 2000. HEENAN BLAIKIE BY: "RICHARD RAINEY" ------------------------------------- SOLICITORS FOR THE COMPANY * SEE SECTION 1(1) FOR DEFINITION OF "SPECIAL RESOLUTION". + INSERT TEXT OR SPECIAL RESOLUTION. Page 111 SCHEDULE "A" TO FORM 19 SPECIAL RESOLUTION OF SEPTEMBER 26, 2000 PART 27 LIONS GATE ENTERTAINMENT CORP. SPECIAL RIGHTS AND RESTRICTIONS OF PREFERRED SHARES, RESTRICTED VOTING, NON-TRANSFERABLE SERIES B DESIGNATION AND NUMBER - ---------------------- 27.1 The second series of Preferred Shares shall consist of ten (10) Preferred Shares, which shares shall be designated as Preferred Shares, Restricted Voting, Non-Transferable Series B (the "Series B Preferred Shares") and which, in addition to the rights, privileges, restrictions and conditions attached to the Preferred Shares as a class, shall have attached thereto the rights, privileges, restrictions and conditions as set forth herein. ISSUE PRICE - ----------- 27.2 For the purposes hereof, the issue price of each Series B Preferred Share shall be deemed to be ten dollars in United States currency (US$10) per share (the "Issue Price"). DIVIDENDS - --------- 27.3 The holders of Series B Preferred Shares shall not, as such, have any entitlement to receive dividends. LIQUIDATION, DISSOLUTION OR WINDING UP - -------------------------------------- 27.4 In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its members for the purposes of winding up its affairs (each a "Liquidation"), the holders of the Series B Preferred Shares shall be entitled, subject in all cases to the Company Act (British Columbia) and the rights of the Series A Preferred Shares (to which the Series B Shares are subordinate in the event of a Liquidation), but in priority to the rights of the holders of Common Shares or all other shares ranking junior to the Series B Preferred Shares, an amount (the "Series B Liquidation Amount") equal to the Issue Price with respect to each Series B Preferred Share held by them. 27.5 If upon any Liquidation of the Company, the assets of the Company available for distribution shall be insufficient to pay in full the amounts so payable as above provided, then such assets shall be distributed among the holders of Series B Preferred Shares ratably in accordance with the respective amounts that would be payable on such Series B Preferred Shares if such assets were sufficient to permit payment in full of all amounts payable thereon. 27.6 After payment to the holders of the Series B Preferred Shares of the amounts so payable to them as provided above, holders of the Series B Preferred Shares shall have no right or claim to share in any further distribution of the property or assets of the Company. Page 112 VOTING - ------ 27.7 If and for so long as any Series B Preferred Shares are outstanding and for so long as Mark Amin is legally qualified to serve on the board of directors of the Company, the holders of the Series B Preferred Shares, exclusively and separately as a class, shall be entitled to elect one member of the board of directors of the Company, who shall be Mark Amin (and only Mark Amin). 27.8 Except as provided in Section 27.7 above, the holders of Series B Preferred Shares shall not, as such, have any voting rights for the election of directors or, subject to any voting rights accorded them pursuant to the provisions of the Company Act (British Columbia) (the "Company Act"), for any other purpose, nor, except for the purpose of exercising any voting rights accorded to them pursuant to the Company Act, shall they be entitled to receive notice of or attend meetings of the members of the Company. REDEMPTION - ---------- 27.9 Subject to applicable law, the Company may upon giving notice as hereinafter provided redeem all and not less than all of the outstanding Series B Preferred Shares on payment for each share of an amount equal to one hundred percent (100%) of the price or deemed price at which such shares were issued (hereinafter referred to as the "Series B Redemption Amount") upon and subject to the occurrence of either of the following events (each referred to as a "Series B Redemption Event"): (a) Reduction in Common Shareholdings. If, at any time after the last day of the thirty-six (36th) month following the first issue date of any Series B Preferred Shares, the holders of Series B Preferred Shares and each of their controlled affiliates, family members, including, without limitation, siblings, and trusts over which such holders maintain sole voting power, as a group, are the registered or beneficial holders of less than two million (2,000,000) Common Shares in the capital of the Company (hereinafter referred to as the "Series B Threshold Amount"); or (b) Change of Control If at any time the Company or its shareholders shall be a party to any transaction, including without limitation, any amalgamation, arrangement, takeover bid, issuer bid, consolidation or merger which results in the holders of Common Shares immediately prior to the effective date of such transaction (calculated on a pro forma basis, including the Common Shares issuable upon the conversion of all outstanding Series A Preferred Shares) holding, in the aggregate, less than fifty percent (50%) of the surviving corporation or entity which results from the transaction, or any sale of all or substantially all of the Company's assets (each of the foregoing being referred to as a "Transaction", which for greater certainty includes a series of transactions among the substantially the same parties). 27.10 In the event that the Company should at any time or from time to time after the issue date of any Series B Preferred Shares consolidate, split or subdivide the outstanding Common Shares of the Company or make any distribution by which the holders of Common Shares are entitled to receive a dividend or other distribution payable in additional Common Shares or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional Common Shares (hereinafter referred to as "Common Share Equivalents") without payment of any consideration by such holder for the additional Common Shares or Common Share Equivalents (including the additional Common Shares issuable upon conversion or exercise Page 113 thereof), then, as of the date of such consolidation, split, subdivision or distribution, the Series B Threshold Amount will be adjusted in proportion to the increase or decrease in the number of Common Shares outstanding as a result thereof. 27.11 Any notice given pursuant to Section 27.9 above will be effective for all purposes if delivered by registered mail or in person (including by courier with acknowledged receipt) to a holder of Series B Preferred Shares at such holder's address as last recorded in the register of members of the Company. 27.12 The Series B Shares may not be sold or otherwise transferred. Page 114 EX-3 3 ex3_4cc1-520277.txt EX. 3.4 SPECIAL RESOLUTION EXHIBIT 3.4 Form 19 __________ (SECTION 348) CERTIFICATE OF INCORPORATION NO. 554056 ___________ COMPANY ACT ___________ SPECIAL RESOLUTION THE FOLLOWING SPECIAL RESOLUTION* WAS PASSED BY THE UNDERMENTIONED COMPANY ON THE DATE STATED: NAME OF COMPANY: LIONS GATE ENTERTAINMENT CORP. DATE RESOLUTION PASSED: SEPTEMBER 26, 2000. RESOLUTION: + "RESOLVED, as a special resolution, that the articles of the Company be amended by deleting therefrom Article 12.1 in its entirety and by adding thereto a new Article 12.1 as follows: 12.1 The number of Directors, including additional Directors, shall not be less than five nor more than fifteen, and within those limits the number of Directors may be fixed from time to time by the Directors." CERTIFIED A TRUE COPY THE 26TH DAY OF SEPTEMBER, 2000. HEENAN BLAIKIE BY: "RICHARD RAINEY" ----------------------------- SOLICITORS FOR THE COMPANY * SEE SECTION 1(1) FOR DEFINITION OF "SPECIAL RESOLUTION". + INSERT TEXT OR SPECIAL RESOLUTION. Page 115 EX-10 4 ex10_13cc1-520277.txt EX. 10.13 UNANIMOUS SHAREHOLDERS AGREEMENT EXHIBIT 10.13 UNANIMOUS SHAREHOLDERS AGREEMENT OF CORPORATION CINE-GROUPE Page 116 TABLE OF CONTENTS 1. DEFINITIONS 5 2. CONTRIBUTION OF THE SHAREHOLDERS 7 3. RESTRICTIONS ON TRANSFER OF SHARES 7 4. ISSUANCE OF SHARES 9 5. RIGHTS OF FIRST REFUSAL 11 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) 13 7. DEATH OR DISABILITY OF PETTIGREW 14 8. LIFE INSURANCE AND DISABILITY INSURANCE 14 9. ADDITIONAL RIGHTS OF PETTIGREW 16 10. DEFAULT 18 11. VALUATION 20 12. CLOSING 21 13. MANAGEMENT 22 14. TRANSFER OF VOTING RIGHTS; CONVERSION OF SHARES; QUEBEC CONTROL; SHARES IN TRUST 28 15. FINANCING 30 16. UNDERTAKINGS IN CASE OF A PUBLIC LISTING 31 17. REPRESENTATIONS AND WARRANTIES 32 18. CONFIDENTIALITY AND NON-SOLICITATION 33 19. ESTABLISHMENT OF A STOCK OPTION PLAN FOR DIRECTORS AND SENIOR EXECUTIVES AND BONUS PLAN FOR SENIOR OFFICERS 34 20. ARBITRATION 34 21. GENERAL 35 SCHEDULE 1 - CONVERTIBLE DEBENTURE 41 SCHEDULE 2 - OPTION TO FAIRE TRUST 41 SCHEDULE 3 - OPTION TO PETTIGREW 41 SCHEDULE 4 - EMPLOYMENT AGREEMENT OF PETTIGREW 41 Page 117 THIS UNANIMOUS SHAREHOLDERS AGREEMENT made as of the 23rd day of June, 1998, AS AMENDED as of the 8th day of September, 2000 BETWEEN: ANIMATION CINEPIX INC., a body corporate, incorporated under the laws of Canada, and represented by Andre Link, its President, duly authorized as he so declares (hereinafter "Cinepix") OF THE FIRST PART AND: JACQUES PETTIGREW, businessman, residing at 6 Croissant Merton, Hampstead, Quebec H3X 1L6 (hereinafter "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 (hereinafter "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 its duly authorized representative (hereinafter "Fox Family") OF THE FOURTH PART AND: FIDUCIE FAMILLE PETTIGREW, a trust created and governed by the laws of the Province of Queec (hereinafter "Fiducie Pettigrew") OF THE FIFTH PART (Cinepix, Pettigrew, Faire Trust, Fox Family and Fiducie Pettigrew and any other shareholder bound by this 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: CORPORATION CINE-GROUPE, a body corporate, incorporated under the laws of the Province of Quebec, and represented by Andre Link and Jacques Pettigrew, two of its directors, duly authorized as they so declare (hereinafter the "Company") OF THE SIXTH PART AND AS INTERVENING PARTY : 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 "Lions Gate") Page 118 AND AS INTERVENING PARTY : LIONS GATE FILMS CORP., a body corporate, incorporated under the laws of Canada, and represented by Andre Link, its Chief Executive Officer, duly authorized as he so declares (hereinafter "Lions Gate Films") AND AS INTERVENING PARTY : CINEPIX FILMS INC., a body corporate, incorporated under the laws of the Province of Quebec, and represented by Andre Link, its President, duly authorized as he so declares (hereinafter "Cinepix Films ") AND AS INTERVENING PARTY : CINEPIX INC., a body corporate, incorporated under the laws of the Province of Quebec, and represented by Andre Link, its President, duly authorized as he so declares (hereinafter "Cinepix Inc.") WHEREAS Cinepix beneficially owns one hundred and nineteen thousand (119,000) of the two hundred and six thousand (206,000) issued and outstanding Class A shares as well as all the issued and outstanding Class B shares, namely ten thousand (10,000) Class B shares, which Class B shares it acquired upon conversion of Five Hundred Thousand Canadian Dollars (CAN $500,000) in capital of a convertible debenture originally of a capital of Four Million Canadian Dollars (CAN $4,000,000) in the Company; WHEREAS Pettigrew beneficially owns seventy-seven thousand five hundred and twenty (77,520) of the eighty-four thousand (84,000) issued and outstanding Class P shares; WHEREAS Faire Trust beneficially owns twenty-nine thousand (29,000) of the two hundred and six thousand (206,000) issued and outstanding Class A shares; WHEREAS Fox Family beneficially owns fifty-eight thousand (58,000) of the two hundred and six thousand (206,000) issued and outstanding Class A shares; WHEREAS Fiducie Pettigrew beneficially owns six thousand four hundred and eighty (6,480) of the eighty-four thousand (84,000) issued and outstanding Class P shares; WHEREAS other than as noted above, there are no other issued and outstanding shares or debentures in the Company; WHEREAS the Company carries on the business of producing and distributing movies, television series, mini-series, motion pictures, films, videotapes, animated productions or other programs 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 (hereinafter the "Business"); WHEREAS it is the intent of the Shareholders that the Company successfully complete a Public Listing by no later than June 23, 2001; Page 119 WHEREAS each of the Shareholders wishes to provide for the manner in which the affairs of the Company shall be conducted, their obligations with respect to the Company, and the disposition of their shares in the Company on the happening of certain events as well as various other issues; WHEREAS the Shareholders, except Fiducie Pettigrew, the Company and various intervening parties have executed as of June 23, 1998 an unanimous shareholders agreement (the "Unanimous Shareholders 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 Unanimous Shareholders Agreement; WHEREAS this Agreement contains the Unanimous Shareholders Agreement, as amended since that date; WITNESSETH THAT in consideration of the sum of One Canadian Dollar (CDN$1.00) now paid by each of the parties to each of the others (the receipt and sufficiency of which is hereby acknowledged by all of the parties) and in consideration of the mutual covenants herein, the parties agree with each other as follows: 1. DEFINITIONS 1.1 "Affiliate" has the same meaning as the term "Affiliate" is given in the Securities Act (Quebec) as in effect at the date hereof. 1.2 "Agreement" means, unless the context otherwise requires, this Agreement and any schedules attached hereto. 1.3 "Auditors" means the auditors of the Company and shall be deemed to include the accountants of the Company where the Company has not appointed auditors. 1.4 "Business" has the meaning ascribed thereto in the recitals hereto. 1.5 "Business Day" means a day which is not Saturday, Sunday or civic or statutory holiday in Montreal, Quebec. 1.6 "Canadian Tax Credits" includes any and all tax credits, benefits, capital cost allowances, advantages, grants or subventions of any sort, existing or not at the date hereof, which are or may become available to the Company relating directly and available exclusively to businesses that conduct the Business (in whole or in part), including those currently provided by, or arising from (without being limitative), Sections 125.4 and 125.5 of the Income Tax Act (Canada) and Regulation 1106 of the Income Tax Regulations, as amended from time to time, or any replacement legislation or regulation, as the case may be. 1.7 "Class A Share(S)" means one or more Class A share(s) in the share capital of the Company as constituted at the date of this Agreement. 1.8 "Class B Share(S)" means one or more Class B share(s) in the share capital of the Company as constituted at the date of this Agreement. Page 120 1.9 "Class C Share(S)" means one or more Class C share(s) in the share capital of the Company as constituted at the date of this Agreement. 1.10 "Class D Share(S)" means one or more Class D share(s) in the share capital of the Company as constituted at the date of this Agreement. 1.11 "Class P Share(S)" means one or more Class P share(s) in the share capital of the Company as constituted at the date of this Agreement. 1.12 "Control", 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. 1.13 "Convertible Debenture" means the non-secured and convertible debenture of a face value of Three Million Five Hundred Thousand Canadian Dollars (CDN$3,500,000), in capital, issued by the Company 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. 1.14 "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 Company 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 Company, as determined in writing by his doctor, 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 Company has disability insurance, the definition of disability as provided in such disability insurance. 1.15 "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 of the Shares shall be determined by reference to the aggregate price at which the Company, 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. 1.16 "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 Company, within the Company, and includes a Senior Officer. 1.17 "Option to Faire Trust" means the option granted to Faire Trust under the agreement reproduced in Schedule 2. 1.18 "Option to Pettigrew" means the option granted to Pettigrew under the agreement reproduced in Schedule 3. 1.19 "Public Listing" means an initial public offering of the Class A shares or any other event resulting in the Class A shares or such shares of the Company or of another company into which the Class A shares have been converted or for which they have been exchanged, being listed and Page 121 traded on a stock exchange in Canada, the New York Stock Exchange, the American Stock Exchange, NASDAQ or the Canadian Dealer Network or any successor thereto. 1.20 "Purchaser", unless the context otherwise requires, means the acquirer of Shares pursuant to this Agreement. 1.21 "Quebec Officer" means an Officer who is a Quebec Resident. 1.22 "Quebec Resident" means a person domiciled in the Province of Quebec who also complies with all the requirements to qualify the Company and its Business for the Quebec Tax Credits and, for greater certainty, excludes any person who is not resident in Quebec under Section 1029.8.34 of the Taxation Act (Quebec) (R.S.Q., c. I-3), as amended or replaced, 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. 1.23 "Quebec Tax Credits" includes any and all tax credits, benefits, capital cost allowances, advantages, grants or subventions of any sort, existing or not at the date hereof, which are or may become available to the Company relating directly and available exclusively to businesses that conduct the Business (in whole or in part), including those currently provided by, or arising from (without being limitative), 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, as amended from time to time, or any replacement legislation or regulation, as the case may be. 1.24 "Senior Officer" means an Officer holding a senior position within the Company, including the offices of chairman of the board, president, chief executive officer, chief operating officer, general manager, chief financial officer, vice- presidents and treasurer. 1.25 "Shares" means any share or shares in the capital stock of the Company now or at any time hereafter beneficially owned by the Shareholders and includes options to buy Shares pursuant to the Option to Pettigrew, the Option to Faire Trust and Article 19. 1.26 "Subsidiary" has the same meaning as the term "Subsidiary" is given in the Securities Act (Quebec) as in effect as the date hereof. 2. CONTRIBUTION OF THE SHAREHOLDERS 2.1 Subject to Article 2.2 in the case of Fox Family, the Shareholders of the Company hereby undertake to contribute, on a reasonable basis, to the Business of the Company, to enable the Company to have access to their own network of contacts and markets and, subject to execution of appropriate agreements, to allow the Company to benefit from their own expertise in so far as it can be useful to the Company in the operation of the Business. 2.2 Fox Family acknowledges that the Company has issued shares of its Class A capital to Fox Family in order to induce Fox Family to continue to contract with the Company 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 Company have entered into similar business arrangements in the past and Page 122 currently intend to explore additional productions and co- productions in the future, it being understood and agreed, however, that Fox Family is under no obligation to deal with the Company on an exclusive basis and that it has no obligation to enter into any additional production or co-production whatsoever. 3. RESTRICTIONS ON TRANSFER OF SHARES 3.1 Except as provided in this Agreement and except (i) with respect to Pettigrew's and Pettigrew's Corporation's (as defined in Article 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 Articles 6 or 9.2, 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 Articles 6 or 9.2 if a creditor having funded the acquisition of said Shares or the Convertible Debenture enforces its rights and for the sale or transfer of said Shares or the Convertible Debenture by such creditor to a third party in case of enforcement of said creditor's rights, and (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 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 (the "Pledged Shares"), for the transfer of Pledged Shares by Fox Family to A Faire, if A Faire enforces its Pledge Agreement, for the sale or transfer of Pledged Shares by A Faire to a third party or to Faire Trust, following an enforcement of its Pledge Agreement, for the transfer of the Pledged Shares to Lions Gate pursuant to the Put Agreement entered on June 23, 1998 between Fox Family and Lions Gate (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, which has been assigned to A Faire by Fox Family pursuant to the Put Agreement Assignment entered on June 23, 1998, between Fox Family and A Faire, no Shareholder shall sell, transfer, assign or otherwise dispose of any Shares or the Convertible Debenture, or mortgage, pledge, hypothecate, charge or otherwise encumber any Shares or the Convertible Debenture, without the prior written consent of the other Shareholders. Except under Article 3.2 hereunder, Shareholders may only sell, transfer, assign or otherwise dispose of the totality, and not part, of their Shares or Convertible Debenture. 3.2 Notwithstanding Article 3.1 above, each of the Shareholders (hereinafter in Article 3, the "Transferor") shall, at all times, have the right to transfer all or part of its Shares, the Convertible Debenture and/or rights pursuant to this 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"); in the event of such a transfer (with respect to transferred Shares, Convertible Debenture and/or rights), 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 Agreement relative to the Transferor (with respect to transferred Shares, Convertible Debenture and/or rights) and to succeed in all of the Transferor's rights, advantages, obligations and liabilities hereunder (with respect to transferred Shares, Convertible Debenture and/or rights) and is deemed to substitute itself to the Transferor as if it were named in each provision of this Agreement (other than this Article 3.2) (with respect to transferred Shares, Convertible Debenture and/or rights), it being understood however that the Transferor shall remain solidarily liable for the entire compliance with this Agreement by such an Affiliate or a Subsidiary or Pettigrew's Corporation. The Shares and the Convertible Debenture will remain subject to the provisions of Page 123 this 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 Article 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, the Convertible Debenture from the Transferor or, as the case may be, has been transferred Shares, the Convertible Debenture of the Company, a sworn affidavit as to the name of its controlling shareholders and the percentage of voting shares they hold in 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 to produce 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 to produce 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 Agreement and shall give rise to the application of Article 10 of this Agreement. 3.3 In the event that any Shares or the Convertible Debenture, are sold, transferred or assigned to a person who is not an original Shareholder to this Agreement, including for greater certainty in the circumstances described in Article 3.1, as a condition precedent to being registered as a holder of such Shares or the Convertible Debenture, and to the exercise by such transferee of any rights attaching to such Shares or the Convertible Debenture, the transferee of such Shares or the Convertible Debenture, shall execute and 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 Shareholder hereto. After the execution of such agreement and subject to all other relevant provisions of this Agreement, the transferee shall have the same rights and obligations with respect to such Shares or the Convertible Debenture, as the Shareholder from whom it acquired such Shares or the Convertible Debenture. 3.4 The Company 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 unanimous shareholders' agreement, dated as of the 23rd day of June, 1998, as may be amended from time to time, and by the articles of the Company, as may be amended from time to time." 3.5 No sale, transfer, assignment or other disposal of Shares or the Convertible Debenture, in violation of this Agreement shall be valid and no such sale, transfer, assignment or other disposal shall be recorded in the securities register, minute book or corporate records of the Company. 3.6 The Shareholders and the Company expressly consent to any sale, transfer, assignment or other disposal of Shares or the Convertible Debenture, pursuant to this Agreement and carried out in accordance with the provisions of this Agreement and any sale, transfer, assignment or other disposal of Shares or the Convertible Debenture permitted by Article 3.1 of this Agreement. Notwithstanding anything else in this Agreement, other than the transfer of the Pledged Shares to Lions Gate by Fox Family under the Put Agreement, the Company hereby undertakes to not consent to, or give effect to, any sale, transfer, assignment or other disposal of any of the Pledged Shares without first obtaining the written consent of A Faire to such sale, transfer, assignment or other disposal. Page 124 ISSUANCE OF SHARES 3.7 Subject to Articles 4.7 to 4.11, no Shares of any classes shall be issued by the Company, unless Article 13.1(p) of this Agreement was complied with, and furthermore, when an issue of Class A shares is involved, unless the Class A shares to be issued have been first offered to the Shareholders holding either Class A shares, Class B shares and Class P shares, each of whom hold a pre-emptive right to acquire the offered Class A shares in proportion to their aggregate holdings (in aggregate number) of the Class A shares, Class B shares and Class P shares, at such price and conditions as those of the contemplated issue. 3.8 The pre-emptive right provided for in Article 4.1 may be exercised by each Shareholder holding either Class A, Class B or Class P shares within fifteen (15) days of receipt of a written notice by the Company with respect to said contemplated issue of Class A shares; such notice must inform each such Shareholder of the number of Class A shares he may acquire and all conditions of the issue, including the issue price. Failure by a Shareholder to notify the Company within the fifteen (15) day delay that he accepts to exercise his pre-emptive right is deemed a refusal. 3.9 Each Shareholder may exercise his pre-emptive right by notifying the Company in writing of the exercise of his pre- emptive right acceptance and by notifying the Company (in the same notice) of the maximum number of Class A shares he would acquire if one (or more) Shareholder does not exercise his pre-emptive right. 3.10 If one (or more) Shareholder refuses to exercise his pre- emptive right, his pre-emptive right will accrue (in proportion to his aggregate Class A, Class B and Class P shares ownership in aggregate number) in favour of those Shareholders who have duly exercised their pre-emptive rights and have duly notified the Company of their consent to acquire additional 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 shall be divided between the Shareholders exercising said accrued pre-emptive rights in proportion to their aggregate holdings (in aggregate number) of Class A, Class B and Class P Shares. 3.11 Failure by Shareholders to accept to acquire all or part of the contemplated issue of Class A shares and to duly comply with their acceptance shall allow the Company to issue the non-subscribed 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 Agreement as provided in Article 3.3. Such issuance must take place no sooner than fifteen (15) days and no later than sixty (60) days after the expiry of the above process provided for in Articles 4.1 to 4.3, failing which the provisions of these Articles shall again apply to said issuance. 3.12 Notwithstanding the foregoing and Article 13.1(p), the Company shall be entitled to issue the following Shares from its treasury, only with resolutions of the board of directors of the Company, without, if applicable, having to first offer to all the Shareholders by virtue of their pre- emptive rights : (a) such number of Shares to Faire Trust as required following any exercise by Faire Trust of the Option to Faire Trust; (b) the Shares that may be issued pursuant to the Convertible Debenture; (c) such number and types of Shares to Pettigrew as required following any exercise by Pettigrew of the Option to Pettigrew; Page 125 (d) such number of Class D shares as required by any stock option exercise pursuant to a stock option plan of the Company put in place pursuant to Article 19; (e) Shares issued following the automatic conversions provided for in Article 14.2; (f) such number of Class C shares that may be issued pursuant to Articles 14.3 and 14.6. 3.13 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 Article 14.2 and in the Company's articles. 3.14 No Class P shares may be issued except to Pettigrew or Pettigrew's Corporation. 3.15 No Class C shares may be issued except to Pettigrew or Pettigrew's Corporation, or if Pettigrew is no longer an Officer of the Company, to the highest ranking Quebec Officer of the Company pursuant to the terms of the Option to Pettigrew or the provisions of Articles 14.3 or 14.6 of this Agreement, as the case may be. 3.16 No Class D shares may be issued except pursuant to a stock option plan of the Company put in place pursuant to Article 19. 3.17 Except in compliance with this Agreement and with the Option to Pettigrew and the Option to Faire Trust, and without restricting the provisions of Article 14 of this Agreement, the Company 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 Company, Pettigrew and Cinepix (or its successors and assigns), at the Company's costs, which states that said issuance or transfer, as the case may be, would not result in the loss for the Company of any of the Quebec Tax Credits and Canadian Tax Credits for a given financial year, it being provided however that this Article 4.11 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 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 Company's annual revenues. It is also agreed that this Article 4.11 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 Company'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 Company's annual revenues. 4. RIGHTS OF FIRST REFUSAL 4.1 Subject to Article 6 hereunder, when this Article 6 is applicable, in the event any Shareholder receives a bona fide offer from a third party or another Shareholder to purchase all but not less Page 126 than all of his Shares (hereinafter in this Article the "Offeror"), such Shareholder (hereinafter in this Article, the "Vendor") shall, before accepting the offer of the Offeror, offer the Shares, which are the subject of the Offeror's offer in writing to the other Shareholders in proportion to their shareholdings (in aggregate number) of Class A, Class B and Class P shares (excluding the Shares of the Vendor) at the price and on the terms set out in the offer of the Offeror; said notice must include a copy of the offer received from the Offeror and an undertaking that the Vendor will accept the offer of the Offeror 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 Offeror's offer not 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 Article 6.1 is not applicable because the Offeror's offer does not cover the 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 and 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 Article 6.2 hereunder. Any acceptance must notify the Vendor of the additional number of Shares, 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 this delay shall be deemed to have refused the offer of the Vendor. In the event one or more of the other Shareholders do not accept to purchase all Vendor's Shares pursuant to the offer as contained in the Notice, the Vendor shall be obliged to sell his Shares to the Offeror at the price and on the terms set out in the offer of the Offeror within the next sixty (60) days, provided however that the Offeror, if he is not a Shareholder, agrees to be bound by the terms of this Agreement as provided in Article 3.3. In the event more than one Shareholder accepts the Vendor's offer as contained in the Notice and expresses its acceptance to purchase additional Shares not bought by other Shareholders, if the accepting Shareholders offer to purchase more than one hundred per cent (100%) of the Offeror's Shares 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 shall be entitled, to purchase the remainder of the Vendor's Shares in proportion to their Shareholdings (in aggregate number) of Class A, Class B and Class P shares (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 in proportion of his shareholdings (in aggregate number) of Class A, Class B and Class P shares but refusing to purchase additional Shares) at the price and on the terms set out in the offer of the Offeror. In the event none of the other Shareholders accepts to purchase all Vendor's Shares pursuant to the offer, if the Vendor's Shares are not sold to the Offeror 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. 4.2 Without limiting Article 5.1 above and when Article 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 Company's Shares (a "Majority Shareholder") or Pettigrew (including Page 127 Pettigrew's Corporation) receive a third party offer, all other Shareholders must have the right (but not the obligation), under said Offeror's offer to sell their Shares in the Company 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 Offeror's offer. The Offeror's offer made to the Majority Shareholder or Pettigrew (including Pettigrew's Corporation) must be open for acceptance by all other Shareholders for a period of not less than one hundred and twenty (120) days from the receipt of the Notice by all other Shareholders. Notwithstanding this Article 5.2, when Pettigrew and/or Pettigrew's Corporation exercise their rights provided by Article 6.1 herein on the sale of Shares of a Majority Shareholder, this Article 5.2 is not applicable, unless the closing of such transaction by Pettigrew and/or Pettigrew's Corporation, as purchaser, does not take place. 4.3 Cinepix and Lions Gate Films hereby irrevocably agree in favour of Pettigrew and Pettigrew's Corporation that if there is a direct or indirect change in Control of Cinepix and/or Lions Gate Films (except only in the case of a change in Control of Lions Gate), Pettigrew and Pettigrew's Corporation shall have the option within sixty (60) days of their knowledge of said change, to solidarily require Cinepix and Lions Gate Films to purchase their Shares at the price stipulated in Article 11, it being understood however that: (i) without restricting Pettigrew's rights under his employment agreement with the Company attached hereto as Schedule 4 (the "Employment Agreement") to exercise the option provided by this Article 5.3, Pettigrew shall be under the obligation to submit his resignation as an employee of the Company; (ii) for evaluation purposes the fact that Pettigrew ceases to be an employee of the Company shall be considered in the determination of the Fair Market Value of his Shares, (iii) payment of the purchase price to Pettigrew and Pettigrew's Corporation shall be made as follows : (a) twenty-five percent (25%) at closing, which shall occur at the latest thirty (30) days after Fair Market Value of Pettigrew's Shares and Pettigrew's Corporation's Shares has been determined; (b) twenty-five percent (25%) six (6) months after closing; (c) twenty-five percent (25%) twelve (12) months after closing; and (d) twenty-five percent (25%) eighteen (18) months after closing. Subject to Pettigrew's and Pettigrew's Corporation's rights outlined in Article 6 hereafter, any sale, transfer, assignment or other disposal of the Convertible Debenture shall be subject to this Article 5. For greater certainty, no partial sale of the Convertible Debenture is permitted. 4.4 Article 5 shall cease to apply should the Company successfully complete a Public Listing, except for an event giving rise to the first refusal mechanism which has occurred prior to the completion of said Public Listing and which is still existing when the Company completes its Public Listing. 5. 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) 5.1 Without restricting the provisions of Article 14 hereinafter, in the event Cinepix (and its successors) receives a bona fide offer from a third party or another Shareholder (other than Pettigrew or Pettigrew's Corporation) (hereinafter in this Article the "Offeror") to purchase all of its Shares and/or 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 Article 5.1 above, have the exclusive right to purchase all the Shares and/or Convertible Debenture mentioned in the Offeror's offer made to Cinepix (and its successors) at the price 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 Convertible Debenture mentioned in the Offeror's offer within sixty (60) days from receipt of the Page 128 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 Article 6.1 and then Cinepix (and its successors), as Vendor, shall be required to continue the process already commenced pursuant to Article 5 above. 5.2 Notwithstanding any provision to the contrary, to finance the acquisition of the Shares and/or Convertible Debenture covered by an Offeror's offer pursuant to this Article 6, Pettigrew and/or Pettigrew's Corporation shall be entitled to sell 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 Article 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 Article 6.2, Pettigrew and Pettigrew's Corporation shall have the benefit of the provisions of Article 5.1. 5.3 The rights to purchase given to Pettigrew and Pettigrew's Corporation pursuant to this Article 6 shall continue to exist even if the Company successfully completes a Public Listing. However, if the sale of Shares and/or Convertible Debenture by Cinepix (and its successors) would not result in a loss of Control of the Company 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 Company 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 Company by Cinepix (and its successors), these rights to purchase would cover all the Shares and/or Convertible Debenture which are intended to be sold. 5.4 In the event Article 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 Company 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 twenty (20) days from the receipt of the Notice (as defined in Article 5.1) to exercise this option to sell. For greater certainty, Article 6.2 shall apply mutatis mutandis when other Shareholders exercise their option to sell hereunder. 5.5 The Shareholders agree that this Article 6 shall apply as long as Pettigrew (i) is a Senior Officer of the Company, 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 Company (exclusive of voting rights) provided he has at least eighty-four thousand (84,000) Shares of Page 129 the Company, whether in Class A, Class B and/or Class P shares or b) at least ten percent (10%) of equity of the Company (exclusive of voting rights) if he has less than eighty-four thousand (84,000) Shares of the Company, 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. 6. DEATH OR DISABILITY OF PETTIGREW 6.1 Pettigrew and, as the case may be, Pettigrew's Corporation and Pettigrew's estate, hereby irrevocably offer to sell to the Company, which irrevocably accepts to buy, at the price stipulated in Article 11 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. 6.2 Article 7 shall cease to apply should the Company successfully complete a Public Listing, unless the death or Disability of Pettigrew has occurred prior to the closing of said Public Listing. 6.3 The closing of the sale of Shares and Convertible Debenture provided for in Article 7 shall occur within six (6) months of the death or Disability of Pettigrew. 7. LIFE INSURANCE AND DISABILITY INSURANCE 7.1 In order to fulfill the Company's obligations in the event of Pettigrew's death or Disability pursuant to Article 7, the Company shall use its best efforts to subscribe and maintain in full force and effect throughout the term of this 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 Company shall use its best efforts to subscribe and maintain in full force and effect throughout the term of this 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 and maintaining in full force and effect the Policies. The owner of such Policies and the beneficiary (hereinafter the "Beneficiary") of the proceeds of the Policies (hereinafter the "Proceeds") shall be the Company. On a yearly basis, the Company shall review and increase, 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 value of the Shares and Convertible Debenture held by Pettigrew or Pettigrew's Corporation calculated as if the obligations to purchase those Shares and Convertible Debenture was created on the first day of January of any year this Agreement is in force, starting January 1, 2000 and make the necessary adjustments to any policies payable upon the Disability of Pettigrew. Notwithstanding anything to the contrary in this Agreement : a) When upon Pettigrew's death or Disability, the Company must buy Shares and Convertible Debenture from Pettigrew, Pettigrew's estate or Pettigrew's Corporation (hereinafter in this Article "Pettigrew's Shares") the first One Million Canadian Dollars (CDN$1,000,000) payable out of the Proceeds shall be used by the Company to buy Page 130 Pettigrew's Shares and Convertible Debenture, the next One Million Five Hundred Thousand Canadian Dollars (CDN$1,500,000) payable out of the Proceeds shall be kept by the Company and the remainder of the Proceeds shall be used by the Corporation to fund the purchase of Pettigrew's Shares and Convertible Debenture. The foregoing amount of One Million Five Hundred Canadian Dollars (CDN$1,500,000) shall read as One Million Two Hundred and Fifty Thousand Canadian Dollars (CDN$1,250,000) after June 23, 2000. b) Unless all Shareholders consent to the contrary, in any Company's financial year, the Company shall not pay, as premiums excluding applicable taxes, more than Fifty Thousand Canadian Dollars (CDN$50,000) for the Policies. If the Company 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). 7.2 Upon the death of Pettigrew or his Disability, subject to Article 8.1, all or part of the Proceeds shall be used by the Beneficiary to fund the purchase of such Shares and Convertible Debenture, 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 Company to the Selling Shareholder in respect of such Shares and Convertible Debenture be fully 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 Article 8.1) are not sufficient to fund or fully fund the payment of the purchase price, then the Company shall only buy and the Selling Shareholder shall only sell to Company such number of Shares and that part of the Convertible Debenture which may be fully paid out of the Proceeds; any Shares and part of the Convertible Debenture of the Selling Shareholder which have not been bought by the Corporation because the Proceeds were insufficient shall be bought by the Company and sold by the Selling Shareholder as follows for each financial year ended after the foregoing purchase: (i) within three (3) months after the approval of the Company's financial statements, the Auditors shall determine the Company's after tax profit for said year, as determined by said Auditors applying the generally accepted accounting principles applicable in Canada and the board of directors of the Company shall cause, to the extent permitted by the Companies Act (Quebec), the Company to use twenty-five percent (25%) of said amount to fund purchase of additional Shares and part of the Convertible Debenture from the Selling Shareholder. The purchase price of these additional Shares and part of the Convertible Debenture shall be equivalent to the purchase price per Share which had been paid out of the Proceeds to the Selling Shareholder. When Article 13.4 applies, the purchase of these additional Shares and part of the Convertible Debenture shall occur before the declaration and payment of the annual dividend provided in said Article 13.4. The Company shall take all such commercial efforts which may be required to designate or qualify any and all part of the purchase price payable 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. 7.3 The premiums payable in respect of the Policies in any financial year shall be assumed by the Company. In the event the Company fails to maintain the Policies, any Shareholder may do so for Page 131 the account of the Company and the Company shall consequently reimburse any insurance premiums paid by a Shareholder. 7.4 If Pettigrew ceases to be a direct or indirect Shareholder of the Company or if the Company completes a Public Listing prior to the death or Disability of Pettigrew, the Company 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 Company shall pay all premiums for said Policies until the date such assignment is effective. 8. ADDITIONAL RIGHTS OF PETTIGREW 8.1 In the event of termination of Pettigrew's employment with the Company resulting from non-renewal of the Employment Agreement by the Company or of termination of Pettigrew's employment without Cause (as defined in the Employment Agreement) or of retirement by Pettigrew from his employment after the age of fifty-five (55) years old, the parties agree that Pettigrew and Pettigrew's Corporation shall have the right, within ninety (90) days of occurrence of the relevant event, to require that the Company (or a third party solicited by the Company) purchase their Shares and Convertible Debenture at the price set forth in Article 11 and, upon receipt of a notice for this purpose, the Company (or the acquiring third party), shall be obliged to purchase such Shares and Convertible Debenture from them, upon the terms and conditions contained in this Agreement. The Company and any third party acquiring said Shares and Convertible Debenture are solidarily bound towards Pettigrew and Pettigrew's Corporation to comply with all provisions of this Agreement. The above option to Pettigrew and Pettigrew's Corporation shall cease should the Company have completed a Public Listing prior to the exercise of the option or if Pettigrew and/or Pettigrew's Corporation acquire the Control of the Company. 8.2 Without limiting the provisions of Article 14 and as long as Cinepix, Cinepix Films, Cinepix Inc. and/or Lions Gate Films, directly or indirectly, Control the Company, in the event of a direct or indirect change of Control of Cinepix, Cinepix Films, Cinepix Inc. or Lions Gate Films (except only in the case of a change of Control of Lions Gate) Pettigrew shall have, in his sole discretion, the option to purchase, directly or through Pettigrew's Corporation, all but not less than all of the issued and outstanding Shares and the Convertible Debenture of the Company held by Cinepix (and its successors pursuant to Article 3.2) (the Shares and the Convertible Debenture are collectively designated in this Article the "Purchased Shares and Debenture"). Pettigrew must exercise this option within sixty (60) days following the earlier of a) his receipt of a notice containing all relevant details of such a transaction or b) his knowledge of the occurrence of the transaction with all relevant details of such transaction by sending to the owner of said Purchased Shares and Debenture a notice stating that Pettigrew or Pettigrew's Corporation exercises his option under this Article 9.2. Pettigrew may, at his 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 he has not received a notice of the transaction or all relevant details of such a transaction. Pettigrew shall have an additional sixty (60) days after the Fair Market Value of the Purchased Shares and Debenture has been determined in accordance with Article 11 (which Article 11 shall be applicable in its entirety except the delay of thirty (30) days within which Pettigrew or Pettigrew's Corporation (as the Purchaser as defined in Article 11) and the Vendor (as defined in Article 11) shall try to reach an agreement as to the purchase price shall start from the occurrence of the earliest of event a) or b) above described in this Article 9.2 or the renunciation of Pettigrew Page 132 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 Article 12.2 b) of this Agreement. If for any reason whatsoever Pettigrew or Pettigrew's Corporation, acting in good faith, cannot close the transaction after having exercised his option, the Shareholders and any other party involved will have no recourse against Pettigrew or Pettigrew's Corporation; however, in such a case, this Article will cease to receive application for the future. Article 6.2 of this Agreement shall apply mutatis mutandis in favour of Pettigrew and Pettigrew's Corporation to finance an acquisition pursuant to this Article 9.2 This Article 9.2 applies whether or not the change of Control contemplated herein would result in the loss for the Company of the Quebec Tax Credits and/or Canadian Tax Credits, or would have a negative impact thereon. The Shareholders agree that Article 9.2 shall apply as long as Pettigrew (i) is a Senior Officer of the Company, 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 Company (exclusive of voting rights) provided he has at least eighty-four thousand (84,000) Shares of the Company, whether in Class A, Class B and/or Class P shares; or b) at least ten percent (10%) of equity of the Company (exclusive of voting rights) if he has less than eighty-four thousand (84,000) Shares of the Company, 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 9.2 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 wrongful dismissal or the execution of an out of court settlement to this effect. This Article 9.2 applies even after the Company successfully completes a Public Listing and applies regardless of the fact that the change of Control may have resulted into conversion of Class P shares into Class B shares. 9. DEFAULT 9.1 The occurrence of any of the following events shall constitute an event of default (an (r)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 Article 10 below, following receipt of said notice, the Defaulter fails to cure the default; provided, however, that the occurrence of any event described in Articles 10.1 (a) to (d), 10.1(g) and 10.1 (i) 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 Articles : (a) the institution by a Shareholder of proceedings of any nature under any laws of Canada, of any province, 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, Page 133 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; (b) a general assignment by a Shareholder for the benefit of its creditors in general; (c) 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; (d) any admission by a Shareholder in writing of its inability to pay its debts as they become due or any acknowledgement of insolvency; (e) any material breach or violation of this Agreement by a Shareholder; (f) except as provided for in Articles 3.1 or 12.2(b) of this Agreement, the registration of any legal hypothec on all or part of the Shares 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 $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 and discharge is provided to all the other parties hereto within a period of thirty (30) days following the date such judgment is rendered; (g) 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; (h) seizure of his or its Shares or Convertible Debenture, including execution, distress or other enforcement process (in this Article 10.1 (h), 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 or Convertible Debenture; or (i) any Shareholder or any of its directors and officers commits a fraud against the Company or one of its Subsidiaries. 9.2 Should any of the events described in Article 10.1 (e), (f) or (h) 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 together within a fifteen (15) Business Days delay of sending of said notice to the Defaulter. Page 134 9.3 If a default under Article 10.1 (a) to 10.1 (d), 10.1 (g) and 10.1 (i) arises or if a default arises under Article 10.1 (e), 10.1 (f) or 10.1 (h) which is not cured following the notice of default sent pursuant to Article 10.2 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 11; his (its) Shares, as determined at the occurrence of the condition of this offer. 9.4 In the event that any Shareholder wants to accept the offer made pursuant to Article 10.3 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 Company. After receipt of this notice, if one or more of the other Shareholders also want to accept the offer made pursuant to Article 10.3, 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 Company 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 Article 10.3, the accepting Shareholders shall acquire the Shares of the Defaulter in proportion to the Class A, Class B and Class P shares (in aggregate number) they hold (excluding the Shares of all other Shareholders and of the Defaulter). 9.5 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. 9.6 The Shareholders and the Company hereby renounce to Article 1392 of the Civil Code of the Province of Quebec. 9.7 Any Event of Default by Pettigrew shall be deemed to be an Event of Default by Pettigrew's Corporation and vice versa. 10. VALUATION 10.1 The value (or purchase price) of each of the Shares and Convertible Debenture pursuant to Articles 5.3, 7, 9 and 10 of this Agreement shall be the amount agreed to by the Purchaser acquiring the Shares and Convertible Debenture and the vendor of said Shares and 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 having experience in the Business to determine the Fair Market Value of the Shares and 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 Company (when the Company 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 Article 11, 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. 10.2 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 Page 135 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 xperience in the Business (the "Third Valuator") who shall determine the Fair Market Value of the Shares and Convertible Debenture as aforesaid which valuation shall be the purchase price for the Shares and 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 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 Company. 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 Company (when the Company 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. 10.3 For the purposes of valuation under Article 11, the Original Valuators and the Third Valuator must consider that Pettigrew and/or Pettigrew's Corporation (if such a Corporation is a Vendor) have exercised any and all options (under the Option to Pettigrew and any other stock option plan to be put in place in the future by the Company) to buy Company's Shares and the value of such deemed Shares is equivalent to the Fair Market Value of such deemed Shares less the amount that would have to be paid by Pettigrew and/or, as the case may be, Pettigrew's Corporation to exercise such options; it being understood however that if the latter amount is greater than the Fair Market Value, the value of the deemed shares will be considered to be nil. 11. CLOSING 11.1 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 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. 11.2 Unless otherwise agreed by the Purchaser and the Vendor, the Purchaser shall deliver to the Vendor: (a) In the circumstances contemplated by Article 7.1, when Pettigrew, Pettigrew's Corporation and/or Pettigrew's estate is the Vendor, in the case of Proceeds being payable to the Company in respect of the death of Pettigrew or its Disability, the Company (acting as Purchaser) shall, subject to Article 8.1, 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 Company, a certified cheque for the full amount payable under Article 8.1; (b) In the circumstances contemplated by Article 9.2, the terms of payment will be forty percent (40%) at closing; twenty percent (20%) six (6) months after closing; twenty percent (20%) twelve (12) months after closing and twenty percent (20%) eighteen (18) months after closing; furthermore, all Shares and Convertible Debenture of Pettigrew and/or Pettigrew's Corporation shall be given as a collateral guarantee of the purchase price to the Vendor by way of hypothec (subject to the rights of a third party having Page 136 financed part of the purchase price pursuant to Article 9.2) and in case of default of payment, this shall not result into a default pursuant to Article 10 and the only recourse under this Agreement or at law would be exercisable against such collateral security and no personal recourse or other type of recourse would exist against Pettigrew and Pettigrew's Corporation. (c) In all cases other than Article 12.2(a) and (b): (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 Company'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 Company's bankers determined as at the Closing. (d) 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 Company'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 Agreement; (e) Any on demand or no term indebtedness owing by the Company to the Vendor shall be repaid by the Company to the Vendor within a one (1) year period of the closing of the sale of the Shares, it being understood that this term of payment is in favour of the Company; (f) 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 Company'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. 11.3 Unless otherwise agreed by the Purchaser and the Vendor, at the Closing, the Vendor shall deliver to the Purchaser the following: (a) Share certificates for all Vendor's Shares duly endorsed for transfer in blank; (b) Resignation of Vendor's nominee directors from the board of directors of the Company. 11.4 Unless otherwise agreed by the Purchaser and the Vendor and subject to Article 12.2(d), after closing provided in Article 12, 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 Company 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 should be held by Page 137 the legal counsel of the Company 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. 12. MANAGEMENT 12.1 The day to day operation of the Company shall be carried on under the management of the President and Chief Executive Officer of the Company, subject to the supervision of the board of directors of the Company in accordance with the Companies Act (Quebec) it being agreed that no Major Decision shall be made except with the approval of the board of directors of the Company and the consent of Shareholders holding not less than eighty percent (80%) in aggregate of the voting rights in issued Shares for Major Decisions provided for under Articles 13.1 (b), (c), (d), (e), (f), (g), (k) and (q) and the unanimous consent of Shareholders holding not less than one hundred percent (100%) in the aggregate of the voting rights in issued Shares for Major Decisions provided for in Articles 13.1 (a), (h), (i), (j), (l), (m), (n), (o), (p), (r) and (s) in addition in all cases to any other approval which may be required by law or by the articles of the Company, it being further agreed that the following matters shall be Major Decisions: (a) Subject to the provisions of various paragraphs of Article 13, Article 14.4 and Article 16.1 of this 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 of directors of the Company; (b) The salary, bonuses or other compensation to be paid by the Company to the President and Chief Executive Officer, except as agreed in the Employment Agreement or in any stock option plan put in place by the Company for its directors and senior executives or bonus plan put in place by the Company for its Senior Officers; (c) Subject to the provisions of various paragraphs of Article 13, Article 14.4 and of Article 16.1 of this Agreement, any change of the quorum of the meetings of the board of directors of the Company and of Shareholders; (d) Any change in the Auditors of the Company; (e) Any change in the Business, as currently carried on by the Company; (f) Any change in the head office and principal place of business of the Company outside the Metropolitan Region of Montreal; (g) Any acceptance and go-ahead on a production of the Company which exceeds CDN$1,000,000 in budget (excluding direct and indirect producer and administrative fees and profits of Company's Subsidiaries), except : i) when the total budget production is between CDN$1,000,000 and 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 Company'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 ii) when the total budget production is more than CDN$5,000,000, if at least ninety percent (90%) of the production budget (excluding direct and indirect Page 138 producer and administrative fees and profits of Company'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. For the purposes of this Article 13.1(g) deferred payments may be considered as financings when said differed payments shall be made out of the production revenues. (h) The dissolution, winding-up and liquidation of the Company; (i) Any assignment of the assets of the Company in bankruptcy, deposit of a proposal in bankruptcy and any other recourse for the protection of debtors; (j) The amalgamation or merger of the Company with another entity; (k) The granting of a loan or other financial aid of more than CDN$25,000 to or the guaranteeing of more than CDN$25,000 of a debt of a Shareholder or an Affiliate of a Shareholder; (l) Any acquisition or disposition by the Company of any asset of the Company worth more that CDN$100,000 if not already in the Company's budgets or business plans approved by the board of directors of the Company; (m) Any other change in the Articles or By-Laws of the Company; (n) Any matters relating to the payment of dividends, distribution of surplus, repurchase or redemption of Shares of the Company, except as provided in this Agreement or the Employment Agreement; (o) Any sale, transfer, assignment or other disposal of Shares of the Company, except if made in accordance with the provisions of this Agreement, the Option to Pettigrew, the Convertible Debenture or the stock option plan to be established under Article 19; (p) Any issuance of Shares and options and other securities of the Company, except for those issued under: i) the Option to Pettigrew; ii) the Option to Faire Trust; iii) the stock option plan to be put in place for the directors and senior executives of the Company under Article 19; iv) the Convertible Debenture; v) if in the reasonable opinion of a majority of members of the board of directors an issue of shares is necessary because the Company has a cash balance of CDN$500,000 or less after reserving cash to meet the Company'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; and Page 139 vi) Shares issued following the automatic conversions provided for in Article 14.2 and Shares issued pursuant to Articles 14.3 and 14.6. (q) Any transaction between the Company and any Shareholder of the Company and any of their Affiliates or their Subsidiaries, unless such transaction is no less favourable to the Company than could be obtained from persons dealing at arm's length with the Company; (r) The sale of all or substantially all of the assets of the Company; and (s) Any transaction out of the ordinary course of the Business of more than CDN$25,000. In addition, the parties hereto covenant and agree that any change in the name of the Company shall require the consent of Pettigrew as long as Pettigrew shall be the President and Chief Executive Officer of the Company 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. 12.2 Subject to the terms of the Employment Agreement, the parties hereto covenant and agree that the President and Chief Executive Officer of the Company chooses and dismisses the senior executives (excluding the president, chief executive officer, vice-president, secretary, assistant- secretary and treasurer) and employees of the Company and its Subsidiaries and establishes their remuneration. 12.3 As provided in Article 13.5, the Shareholders hereto covenant and agree that there shall be a maximum of nine (9) members to be elected to the board of directors of the Company; a majority of said directors must be Quebec Residents, except if Article 14.7 becomes applicable. 12.4 If by June 23, 2001, the Company has not completed a Public Listing, and as long as such a Public Listing is not completed, the board of directors shall cause, to the extent permitted by the Companies Act (Quebec) and agreements binding on the Company, the declaration and payment of an annual dividend equal to twenty-five percent (25%) of the Company's after tax profit for each of its financial year ended after said date, as determined by the Auditors applying the generally accepted accounting principles applicable in Canada. For greater certainty, the declaration and payment of this additional dividend shall occur after purchase and payment of the additional Shares provided for in Article 8.2 i) of this Agreement. 12.5 The parties hereto covenant and agree that each of the Shareholders shall be entitled to nominate directors to the board of directors of the Company as follows and each Shareholder covenant and agree to exercise his (its) voting rights consequently : CINEPIX (a) as long as Cinepix shall own fifty percent (50%) or more of the voting rights in issued Shares of the Company, it may elect five (5) directors; (b) as long as Cinepix shall own between forty percent (40%) and fifty percent (50%) of the voting rights in issued Shares of the Company, it may elect four (4) directors; (c) as long as Cinepix shall own between thirty percent (30%) and forty percent (40%) of the voting rights in issued Shares of the Company, it may elect three (3) directors; Page 140 (d) as long as Cinepix shall own between twenty percent (20%) and thirty percent (30%) of the voting rights in issued Shares of the Company, it may elect two (2) directors; (e) as long as Cinepix shall own between seven percent (7%) and twenty percent (20%) of the voting rights in issued Shares of the Company, it may elect one (1) director; PETTIGREW (f) as long as Pettigrew and/or Pettigrew's Corporation shall own fifty percent (50%) or more of the voting rights in issued Shares of the Company, he/it may elect five (5) directors; (g) as long as Pettigrew and/or Pettigrew's Corporation shall own between forty percent (40%) and fifty percent (50%) of the voting rights in issued Shares of the Company, he/it may elect four (4) directors; (h) as long as Pettigrew and/or Pettigrew's Corporation shall own between thirty percent (30%) and forty percent (40%) of the voting rights in issued Shares of the Company, he/it may elect three (3) directors; (i) as long as Pettigrew and/or Pettigrew's Corporation shall own between twenty percent (20%) and thirty percent (30%) of the voting rights in issued Shares of the Company, he/it may elect two (2) directors; (j) as long as Pettigrew and/or Pettigrew's Corporation shall own between seven percent (7%) and twenty percent (20%) of the voting rights in issued Shares of the Company or own Shares and Pettigrew is the President of the Company, he/it may elect one (1) director; FAIRE TRUST (k) as long as Faire Trust shall own seven percent (7%) or more of the voting rights in issued Shares of the Company, it may elect one (1) director. Notwithstanding the above, it is also agreed that in the event of the automatic conversion of the Class P shares into Class B shares, Faire Trust shall maintain its right to elect one (1) director (even though it may hold less than seven percent of the voting rights in issued Shares of the Company) provided Faire Trust still holds more than 70% of the 29,000 Class A shares it currently holds in the Company (as such shares may be consolidated, subdivided or amended); FOX FAMILY (l) as long as Fox Family shall own seven percent (7%) or more of the voting rights in issued A Shares of the Company, it may elect one (1) director. Notwithstanding the above, it is also agreed that in the event of the automatic conversion of the Class P shares into Class B shares, Fox Family shall maintain its right to elect one (1) director (even though it may hold less than seven percent of the voting rights in issued Shares of the Company) provided Fox Family still holds more than 70% of the 58,000 Class A shares it currently holds in the Company (as such shares may be consolidated, subdivided or amended); Page 141 (m) For greater certainty, subject to Articles 13.6 and 13.8, only the Shareholder having appointed his (its) director to the board of directors of the Company 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. 12.6 Notwithstanding Article 13.5, the Shareholders agree that the directorship allotment of Cinepix and Pettigrew will be such that out of the seven directors currently available for these two (2) Shareholders, Cinepix (and its successors or assigns) and Pettigrew will each appoint, at their discretion, two (2) directors, and the other three (3) will be appointed by Cinepix with a veto right of their appointment given to Pettigrew, which veto right is subject to the following: 12.6.1 Pettigrew may only reject a nominee of Cinepix if, acting bona fide: (a) the nominee works or renders services as a consultant, an adviser, an agent, a director, an officer or an employee of or is a majority or a minority shareholder having a significant influence on or a partner or the sole owner of a competitor or of an enterprise, a business or an organization which could be considered as detrimental to the Company's business or image; (b) the nominee is not a Quebec Resident ( when the majority of board members would not be Quebec Residents if the nominee becomes a director of the Company and Article 4.11 applies with respect to the Quebec Tax Credits), unless the first paragraph of Article 14.7 receives application; (c) the nominee does not bring a recognized expertise in : S the animation industry; S the financial field; S the taxation field; or S any other relevant business experience. (d) the nominee is not independent from Lions Gate or Lions Gate Films or any direct and indirect significant shareholders, subsidiaries and affiliates of the foregoing. An employee, director, officer, agent, advisor or provider of material goods and services of the above corporations is deemed to be not independent; (e) the nominee has been found guilty or is charged with intellectual property infringement or securities violation or any other crime. 12.6.2 Pettigrew will inform Cinepix whether he will exercise or not his veto within ten (10) Business Days after he is aware that Cinepix wants to nominate a person to the Company's board of directors and he has obtained a detailed curriculum vitae of the nominee. In the course of determining whether he is going to exercise his veto right, Pettigrew may consult the Company's other Shareholders and speak with the nominee. 12.6.3 If Pettigrew acts in bad faith and contrary to what is above provided in Article 13 and to the bests interests of the Company in exercising his veto right, then after having received a letter from Cinepix stating relevant details and giving him ten (10) days to withdraw his veto and accept the proposed nominee, he shall lose his veto right and Article 13.6 shall Page 142 cease to be applicable, it being understood however that this shall not result into a default pursuant to Article 10. 12.7 In the event that Cinepix (and its successors or assigns) has the right (or discretion) to appoint less or more than five (5) members to the board of directors of the Company, the Shareholders agree that the veto right of Pettigrew will apply on any number of directors which is superior to two (2) that Cinepix has then the right to appoint and if Pettigrew has the right to appoint more than two (2) directors pursuant to Article 13.5, then the number of directors he may appoint pursuant to his discretionary right to appoint directors shall be increased from two (2) to the number of directors he may appoint pursuant to Article 13.5. 12.8 The Shareholders agree that Article 13.6 shall apply as long as Pettigrew (i) is a Senior Officer of the Company, subject to Article 13.18 hereunder; 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 Company (exclusive of voting rights) provided he has at least eighty-four thousand (84,000) Shares of the Company, whether in Class A, Class B and/or Class P shares; or b) at least ten percent (10%) of equity of the Company (exclusive of voting rights) if he has less than eighty-four thousand (84,000) Shares of the Company, whether in Class A, Class B and/or Class P shares. Article 13.6 shall cease to receive application if Pettigrew and/or Pettigrew's Corporation is the majority shareholder or Controls the Company. 12.9 In the event that a Shareholder loses the right to nominate a director on the board of directors of the Company, such Shareholder shall cause its director or one of its directors, as the case may be, to resign in a timely manner. 12.10 The parties covenant and agree that the quorum for meetings of the board of directors shall require a majority of the directors to be present and that, within that majority, at least one representative of Cinepix and of Pettigrew must be present. In the event that the absence of one representative of Cinepix or Pettigrew causes a meeting of the board of directors to be adjourned to a date which may not be earlier than five (5) Business Days after the originally convened meeting, quorum for such adjourned meeting shall only require a majority of the directors to be present. 12.11 A director of the Company may participate at a meeting of the board of directors 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. 12.12 For matters other than Major Decisions, the parties covenant and agree that the quorum for meetings of Shareholders shall be a majority in votes of the Shareholders to be present personally or by proxy. 12.13 Unless otherwise stipulated in this Agreement, the parties covenant and agree that questions to be decided by any meeting of Shareholders or the board of directors shall be decided by a majority vote. 12.14 No Shareholder or director, whether chairman of a Shareholders' meeting or chairman of the board or otherwise shall exercise a casting vote. 12.15 Unless otherwise decided by the board of directors of the Company and subject to Pettigrew's rights provided for in the Employment Agreement, Pettigrew is the Chairman of the Board, President and Chief Executive Officer. The vice- presidents, the secretary and the treasurer as Page 143 well as an assistant-secretary of the Company shall be nominated by resolutions of the board of directors. 12.16 Unless otherwise decided by Major Decision of the Shareholders, Samson Belair Deloitte & Touche of Montreal are chosen as Auditors of the Company. 12.17 The parties covenant and agree that unless decided otherwise by the board of directors of the Company, the president shall exercise the voting rights of the Company as shareholder of any of its Subsidiaries or any other company and shall be the authorized signatory of the Company for such purposes in accordance with the instructions of the board of directors. 12.18 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 veto right under Article 13.6 shall remain in full force or effect (subject to compliance with condition (ii) a) or b) in Article 13.8 above) 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. 12.19 The Shareholders and the Company agree that the spirit of the provisions of Article 13 should be preserved in as much as possible after the Company has successfully completed a Public Listing and, in this respect, to execute any agreement or other instrument reasonably required for such purpose. 12.20 Subject to Pettigrew's veto right, Cinepix agrees to review and replace two of its current appointed directors in the Company, before the sooner of a) September 1, 2000 or 30 days after an agreement has been executed with brokers to make the Company become public. 13. TRANSFER OF VOTING RIGHTS; CONVERSION OF SHARES; QUEBEC CONTROL; SHARES IN TRUST 13.1 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 Article 14, would result in the loss of the Quebec Tax Credits and/or Canadian Tax Credits by the Company, the Shareholders and the Company agree that a voting trust with respect to Cinepix's Shares in the Company and its successors' or assigns' Shares in the Company will be granted to Pettigrew (or if he is no longer an Officer of the Company, to the highest ranking Quebec Officer of the Company) 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 90 days from the earliest of a) the receipt of any notice of such a possible transfer, transaction or other agreement to the Company and to Pettigrew (or to said highest ranking Quebec Officer) or b) the day the Company 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 Company continues to be eligible for the Quebec Tax Credits and/or Canadian Tax Credits (as applicable). The Shareholders and the Company 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 Company's eligibility for such tax credits will be determined pursuant to an affirmative written unrestricted legal opinion obtained from an independent Quebec legal counsel retained jointly by the Company, Pettigrew (or the highest ranking Quebec Officer, if Page 144 Pettigrew is no longer an Officer of the Company) and Cinepix at the Company's costs. Provided such an affirmative written unrestricted legal opinion is obtained within the said 90-day period, the voting trust will terminate. 13.2 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 Company 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: o all Class P shares held by Pettigrew and Pettigrew's Corporation and their successors or assigns in the Company will be automatically converted into Class B shares; o 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 in Class B shares and can only be converted in Class A shares; and o all Class B shares of the Company (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. 13.3 In addition to the provisions of Article 14.2 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 Company (or such control of the Company by Quebec Residents as is necessary for the Company to remain eligible for the Quebec Tax Credits and/or Canadian Tax Credits), (or if Pettigrew is no longer an Officer of the Company, if the highest ranking Quebec Officer of the Company does not have with other holders who are Quebec Residents such a 51% voting Control of the Company (or such control of the Company by Quebec Residents as is necessary for the Company to remain eligible for the Quebec Tax Credits and/or Canadian Tax Credits)), Pettigrew or the highest ranking Quebec Officer of the Company, as the case may be, shall have the right to receive, at no cost, except a nominal value of 1$ (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 Company if holders who are Quebec Residents eventually come to achieve the required control . Any tax consequences will be borne by the Company. 13.4 When the voting trust mechanism provided in Article 14 is triggered, Pettigrew (or the highest ranking Quebec Officer of the Company, if Pettigrew is no longer an Officer of the Company) 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 to such number required, notwithstanding the provisions of Article 13.3), 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 14) 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 Article 13.5. 13.5 Given the fact that eligibility of the Company for the Quebec Tax Credits is based on a Control of the Company by Quebec Residents, the Shareholders, the Company, Cinepix Inc. and Cinepix Films agree that: (I) the Shares owned by Cinepix in the Company as well as shares owned by Cinepix Films in Cinepix from time to time (collectively the "Voting Trust Shares") may not be Page 145 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 Company. This Article 14.5 will cease to apply if Pettigrew and/or Pettigrew's Corporation have Control of the Company. 13.6 Any issuances of voting Shares occurring after Article 14 has given voting Control to Pettigrew or to the highest ranking Quebec Officer of the Company 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 Company, to the extent necessary to ensure that the Control of the Company 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. 13.7 This Article 14 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 Article 14.1) 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 Company's annual revenues. It is also agreed that this Article 14 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 Company'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 Company's annual revenues. 13.8 The Shareholders and the Company agree that the spirit of the provisions of Article 14 should be preserved in as much as possible after the Company has successfully completed a Public Listing and, in this respect, to execute any agreement or other instrument reasonably required for such purpose. 14. FINANCING 14.1 Except for existing investments, loans or guarantees by the Shareholders with respect to the Company, none of the Shareholders shall have any obligation to provide, or to arrange for or to cause others to provide, any financing to the Company, whether by way of subscription for Shares, the making of loans, the giving of guarantees or otherwise. 14.2 Except as provided for in Article 13.1(p), nothing contained in this Agreement restricts the right of the Company to obtain financing through loans and other financial instruments. 14.3 Without restricting Article 15.1, any loans and advances made by a Shareholder to the Company (and its Subsidiaries or Affiliates) shall bear, from April 1, 1998, an annual rate of interest equal to the prime commercial lending rate of the Company's banker plus one percent (1%). Page 146 14.4 Without restricting Article 15.1, any Shareholder who guarantees the debts or obligations of the Company (and its Subsidiaries and Affiliates) shall have a right to receive from the Company (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; and b) from June 23, 1998 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 Company (or, as the case may be, its Subsidiaries and Affiliates' financial year). For greater certainty, for purposes of Article 15.4, guarantees of Company's debts and obligations by a Shareholder, existing as of June 23, 1998, shall be deemed to be executed as of the date of this Agreement. 15. UNDERTAKINGS IN CASE OF A PUBLIC LISTING 15.1 Should the Company complete a Public Listing as long as they will hold Shares in the Company the Shareholders covenant and agree that they will do everything in their power to have elected and maintained to the board of directors their representatives then in place and that they will renegotiate this Agreement in the context of a Public Listing, it being understood however that Articles 3, 4.1 to 4.6, 7, 8.1 to 8.4 and 9.1 shall cease to apply, without affecting accrued or existing rights and obligations existing pursuant to these Articles when the Company completes a Public Listing. 15.2 In the case of a Public Listing or subsequent public offerings of the Company, the Shareholders (other than Pettigrew and/or Pettigrew's Corporation) covenant and agree that they will consent to a full priority of release from escrow of Pettigrew's (and/or Pettigrew's Corporation) Shares 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). 15.3 In the case of a Public Listing or subsequent public offerings of the Company, the Shareholders (other than Pettigrew and/or Pettigrew's Corporation) 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). 15.4 In the case of a Public Listing or subsequent public offerings of the Company, 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 Article 16.3, up to an aggregate value equivalent to, on a prorata basis between Fox Family and Faire Trust : a) 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 referred to in Article 3.1; and b) in the case of Faire Trust, one half (") the amount provided above in Article 16.4 a); in all such offering (s) (including the Public Listing). 15.5 At any time after a Public Listing, if the Company proposes to register any additional Class A shares in a given territory, it will give prompt written notice to the Shareholders and, if permitted by the proposed form of registration statement, will include in such registration, subject to the Page 147 allocation provisions discussed below, any of the Shareholders' Class A shares with respect to which it has received written request for inclusion within twenty (20) days after such notice is given by the Company. In all such piggyback registration, the Company will pay the reasonable expenses related to the registration of Shares held by the Shareholders (including, without limitation, the Shareholders' legal fees for said registration). Without restricting Articles 16.3 and 16.4, if a piggyback registration is an underwritten registration on behalf of the Company and the managing underwriter advises the Company in writing that in the underwriter's opinion the number of securities to be included exceeds the number that can be sold in such offering at a price reasonably related to fair value, the Company will allocate the securities to be included as follows : first, the securities the Company proposes to sell on its own behalf; and second, the securities the Shareholders propose to sell, determined pro rata among the Shareholders on the basis of the number of Class A shares owned. 16. REPRESENTATIONS AND WARRANTIES 16.1 Each Shareholder hereby represents and warrants the following to the other Shareholders, as of the date hereof: (a) 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; (b) 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; (c) it (he) has all requisite power, authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder; (d) it (he) has taken all actions necessary to authorize it to enter into and perform its obligations under this Agreement and this Agreement is a legal, valid and binding obligation of it (him); and (e) neither the execution and delivery of this 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. 16.2 Other representations and warranties of Faire Trust and Fiducie Pettigrew : 16.2.1 Faire Trust is a duly organized, validly existing and a good standing trust under the laws of Ontario and Robert Paul is its sole trustee. 16.2.2 Fiducie Pettigrew 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. Page 148 16.3 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. 17. CONFIDENTIALITY AND NON-SOLICITATION 17.1 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 Company has an interest and all intellectual property of the Company) concerning the Business of the Company obtained by any of the Shareholders of the Company shall remain the exclusive property of the Company. During this 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 Company or the Company's qualified employees, except as may be required by law or otherwise in the proper discharge of their duties for the Company, and each such persons shall not, following the termination of this Agreement, 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 Company, nor shall they make any copies of any such books, records or documents or copies thereof for use outside the offices of the Company, except as specifically authorized by the board of directors or except in the proper discharge of their duties for the Company. 17.2 For the purposes hereof, confidential records, material and information including confidential or proprietary information known or used by the Company in connection with its Business, including but not limited to any matters relating to products owned by or in which the Company has any interest including any scripts, all intellectual property owned by the Company 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 Company and markets and marketing plans of the Company, present and future, information about or relating to potential business ventures of the Company, financial information of all kinds relating to the Company 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. 17.3 Without intending to limit the remedies available to the Company, the Shareholders of the Company acknowledge that damages at law will be an insufficient remedy to the Company in view of the irreparable harm which will be suffered if the terms of Article 18 are violated by any of them, as the case may be, and agree that the Company 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 Company. 17.4 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 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. Page 149 18. ESTABLISHMENT OF A STOCK OPTION PLAN FOR DIRECTORS AND SENIOR EXECUTIVES AND BONUS PLAN FOR SENIOR OFFICERS 18.1 The Shareholders and the Company hereto covenant and agree that the board of directors of the Company shall establish, within three (3) months of the execution of this Agreement, a stock option plan which will provide that Class D shares of the Company may be issued, from time to time up to the equivalent of five percent (5%) of the issued and outstanding Class A shares, but subject to conditions to be determined by the board of directors, to the directors and senior executives of the Company and its Affiliates, as an incentive for such persons. 18.2 The Shareholders and the Company hereto covenant and agree that the board of directors of the Company shall establish, within three (3) months of execution of this Agreement, a bonus plan for Senior Officers of the Company and its Affiliates, as an incentive for such persons. 19. ARBITRATION 19.1 In the event of any dispute between the parties (including the intervening parties) relating to this 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 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 Article 20 shall constitute an arbitration agreement within the meaning of the Civil Code of the Province of Quebec : (a) Three Arbitrators - 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; (b) Notice of Arbitration - 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 Agreement as well as the details of the dispute; (c) Designation of a Second Arbitrator - within ten (10) Business Days after a notice of arbitration has been sent pursuant to paragraph (b) 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 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 paragraph (b) above; (d) Designation of a Third Arbitrator - 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 paragraph (c) above in respect of the designation of a second arbitrator; Page 150 (e) Hearing of the Arbitration - 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; (f) Procedure and Expenses Relating to Arbitration - 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; (g) Delay to Render Decision - 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; (h) Final Decision - 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; (i) Rules of Law - the arbitrators shall resolve the dispute in accordance with the rules of law and shall not act as "amiables compositeurs"; and (j) Language of Arbitration - the English language shall be the language of arbitration, it being understood however that if Pettigrew and/or Pettigrew's Corporation is a party to arbitration, he (it) will have the right to obtain simultaneous translation at the costs of the Company. 19.2 Specific Performance. Nothing in Article 20 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 Agreement. 20. GENERAL 20.1 A copy of this Agreement shall be filed with the Corporate Records of the Company at the office of the Company. 20.2 Time shall be of the essence of this Agreement. 20.3 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 : (a) personally delivered; (b) sent by same-day or next-day courier; or Page 151 (c) sent by facsimile Any notice so given shall be sent to the parties or intervening parties at their respective addresses set out below: (a) ANIMATION CINEPIX INC. 3600 Thimens Boulevard St-Laurent, Quebec Canada H4H 1V6 Fax: (514) 336-6606 Attention : The President (b) JACQUES PETTIGREW 6 Croissant Merton Hampstead, Quebec Canada H3X 1L6 (c) ROBERT PAUL, Trustee 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 (d) FOX FAMILY WORLDWIDE, INC. 10960 Wilshire Boulevard Los Angeles, California United States of America 90024 Fax : (310) 235-5552 Attention : The President (e) FIDUCIE FAMILLE PETTIGREW 6 Croissant Merton Hampstead, Quebec Canada H3X 1L6 Attention : Mr. Jacques Pettigrew and Mrs. Jacqueline Pettigrew, Trustees Page 152 (f) CORPORATION CINE-GROUPE 1151 Alexandre-de-Seve Montreal, Quebec Canada H2L 2T7 Fax : (514) 524-1997 Attention : The President (g) LIONS GATE ENTERTAINMENT CORP. Suite 3123, Three Bentall Centre 595 Burrard Street Vancouver, British Columbia Canada V7X 1J1 Fax : (604) 609-6145 Attention : The President (h) LIONS GATE FILMS CORP. 3600 Thimens Boulevard St-Laurent, Quebec Canada H4H 1V6 Fax : (514) 336-6606 Attention : The President (I) CINEPIX FILMS INC. 3600 Thimens Boulevard St-Laurent, Quebec Canada H4H 1V6 Fax: (514) 336-6606 Attention : The President (j) CINEPIX INC. 3600 Thimens Boulevard St-Laurent, Quebec Canada H4H 1V6 Fax: (514) 336-6606 Attention : The 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 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. 20.4 The provisions of this Agreement shall apply to any shares issued pursuant to an option granted by the Company, 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 Company received by the holders as a stock dividend and to any shares or other securities of the Company which may be received by the holder of such shares on amalgamation, Page 153 reorganization or reconstruction of the Company or to any other shares which may hereafter be issued to the shareholders. 20.5 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. 20.6 Unless otherwise stipulated, all amounts expressed in this Agreement are in the Canadian currency. 20.7 This Agreement shall be the only Agreement between the parties and intervening parties in respect of their interest in the Company and all subject matters expressed in this Agreement. 20.8 If any of the provisions of this Agreement are ever held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Agreement, and the 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 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. 20.9 This 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. 20.10 The Shareholders, the Company 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 Agreement as well as the true intent and purposes of this Agreement including vote Shares which any one of them may hold or have Control over, 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. 20.11 This Agreement is an unanimous shareholders' agreement within the meaning of Sections 123.91 and following of the Company Act (Quebec) and must be interpreted as such. No by- law or resolution of the board of directors and of the Shareholders of the Company may contradict or modify the provisions of this Agreement and, should this occur, this Agreement shall prevail. This Agreement is governed by the laws of the Province of Quebec, Canada. 20.12 The preamble forms an integral part of this Agreement. 20.13 The parties and the intervening parties declare that they have requested and do hereby confirm their request, that this Agreement and any other agreement or document with respect to corporate organisation of the Company be drafted and signed in English. Les parties et les intervenants declarent qu'ils ont exige, et par les presentes, confirment leur demande que cette convention et toute autre entente ou document relatif a l'organisation corporative de la Compagnie soient rediges en anglais. The Company shall bear all translation costs required by this Article or by Article 20.1 (j). Page 154 20.14 The trustee of Faire Trust incurs no personal liability under this Agreement and his liability is limited to the assets of Faire Trust. The trustees of Fiducie Pettigrew incur no personal liability under this Agreement and their liability is limited to the assets of Fiducie Pettigrew. 20.15 All rights of Pettigrew and Pettigrew's Corporation provided in this Agreement are in addition to all rights of Pettigrew and Pettigrew's Corporation in the Employment Agreement or under the Company's statutes, and Pettigrew may select to exercise some or all his rights thereunder, hereunder or under Company's statutes, at his discretion. IN WITNESS WHEREOF THE PARTIES HERETO HAVE DULY EXECUTED THIS AGREEMENT ANIMATION CINEPIX INC. /s/ ANDREW LINK ------------------------ Andre Link /s/ JACQUES PETTIGREW ------------------------ JACQUES PETTIGREW /s/ ROBERT PAUL ------------------------ ROBERT PAUL, in his capacity as trustee of the Faire Trust FOX FAMILY WORLDWIDE, INC. /s/ MEL WOODS ------------------------ Mel Woods, President FIDUCIE FAMILLE PETTIGREW /s/ JACQUES PETTIGREW ------------------------ Jacques Pettigrew, in his capacity as Trustee, without personal liability /s/ JACQUELINE PETTIGREW ------------------------ Jacqueline Pettigrew, in her capacity as Trustee, without personal liability Page 155 CORPORATION CINE-GROUPE /s/ ANDRE LINK ------------------------ Andre Link /s/ JACQUES PETTIGREW ------------------------ Jacques Pettigrew AND INTERVENING HERETO: LIONS GATE ENTERTAINMENT CORP. LIONS GATE FILMS CORP. /s/ GORDON KEEP ------------------------ Gordon Keep, Senior Vice- President /s/ ANDRE LINK ------------------------ Andre Link CINEPIX FILMS INC. CINEPIX INC. /s/ ANDRE LINK Andre Link Page 156 EX-10 5 ex10_15cc1-520277.txt EX. 10.15 EMPLOYMENT AGREEMENT EXHIBIT 10.15 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") between Lions Gate Entertainment Corp. and its subsidiaries (collectively "Lions Gate") and Marni Wieshofer ("Employee") is entered into and is effective as of August 26, 2000 with respect to the following: 1. Employment. Lions Gate hereby agrees to employ as its Chief Financial Officer of Lions Gate Entertainment Corp. ("LGEC") and Employee hereby agrees to accept such employment under the terms and conditions set forth below. 2. Term. August 26, 2000 to August 26, 2003. 3. Reporting. Employee shall report directly to the CEO of Lions Gate, Jon Feltheimer, or his designee. 4. Compensation. (a) Employee shall receive compensation in the amount of U.S. $250,000 in bi-weekly draws or any other manner agreed upon by the Company, to be increased after one (1) year at the discretion of the Company. (b) Employee shall receive a yearly housing allowance in the amount of U.S. $60,000. 5. Options. (a) Currently - 100,000 options to purchase common shares of LGE at Cdn $4.85 each, vesting pursuant to your previous agreement: (i) 1/3 now vested (ii) 1/3 on February 1, 2001 (iii) 1/3 on February 1, 2002 (b) Additional Grant - 75,000 options to purchase common shares of LGE at U.S. $2.55, vesting as follows: (i) 1/3 on August 15, 2001 (ii) 1/3 on August 15, 2002 (iii) 1/3 on August 15, 2003 (c) Employee has six (6) months to exercise all vested options if terminated with cause or leaves employment voluntarily. (d) Employee has one (1) year to exercise all vested options if she is terminated without cause or becomes incapacitated. Her estate has one (1) year to exercise all vested options in the event of her death. Page 157 6. Benefits. (a) Life, health, dental for self and dependent family - - standard as for other senior executives of LGE of the same level. 7. Perks. Cell phone and parking, reimbursement of all home telephone/fax and other out-of-pocket expenses for business use. 8. Expense Reimbursement. Business class travel. Reimbursement for business expenses against vouchers and in accordance with standard Company policies. 9. Vacation. Four weeks per annum, but does not accumulate without permission of LGEC CEO. No more than two weeks at a time without consent of LGEC CEO. 10. Notices. All notices to be given pursuant to this agreement shall be effected either by personal delivery in writing, or by certified mail, return receipt requested, addressed as follows: Lions Gate: Lions Gate Entertainment 5750 Wilshire Boulevard Suite 501 Los Angeles, California 90036 Attention: Jon Feltheimer/John Dellaverson Employee: Marni Wieshofer c/o Lions Gate Entertainment 5750 Wilshire Boulevard Suite 501 Los Angeles, California 90036 11. Complete Agreement; Modifications. Each party to this agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this agreement shall be valid or binding. This agreement embodies the complete agreement and understanding between the parties and supersedes all prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof. Any modification of this agreement will be effective only if it is in writing and signed by the party to be charged. 12. Laws. This agreement will be governed by the internal laws of the State of California irrespective of rules pertaining to conflicts of laws. 13. Waivers. Failure to require compliance with any provision or condition provided for under this agreement at any one time, or several times, shall not be deemed a waiver or relinquishment of such provision or condition at any other time. 14. Assignment. Employee shall not assign any of her rights or delegate any of her duties under this agreement. Page 158 15. Termination and Non - Renewal. 15.1 This Agreement shall terminate upon the happening of any one or more of the following events: (a) The mutual written agreement between Lions Gate and Employee; or (b) The death of Employee; or (c) Employee's having become so physically or mentally disabled as to be incapable, even with a reasonable accommodation, of satisfactorily performing her duties hereunder for a period of one hundred and twenty (120) days or more, or (d) The determination on the part of Lions Gate "cause" exists for termination of this Agreement; "cause" being defined as: 1) Employee's conviction of a felony (not related to a traffic violation) or plea of nolo contendere to a felony; 2) commission of any material act of dishonesty in the performance of Employee's duties hereunder; 3) material breach of this Agreement by Employee, or 4) any act of misconduct by Employee having a substantial adverse effect on the business or reputation of Lions Gate. (e) LGEC shall have the right, exercisable by giving written notice to you to terminate your employment at any time after you have been unable to perform the services or duties required of you hereunder as a result of physical or mental disability (or disabilities) which has (or have) continued for more than four months in the aggregate in any twelve month period. In such event, LGEC shall pay to you your salary through to the date specified in the notice of termination; provided, however, that such date of termination shall not be less than six months after the date of such notice of termination. 15.2 In the event that this Agreement is terminated pursuant to Paragraph 15.1, neither Lions Gate nor Employee shall have any remaining duties or obligations hereunder, except that Lions Gate shall pay to Employee or her representatives, only such compensation as is due pursuant to Paragraph 4 prorated through the date of termination, as well as any accrued vacation benefits which remain unused through the date of termination. 16. Change of Control. 16.1 If at any time during the term of this Agreement there is a change in control of the Company (as defined below), then all unvested options will become fully vested on the date of completion of the change of control, or such earlier date necessary to exercise such options prior to completion of the change of control. 16.2 For the purposes of this Agreement: 16.2.1 A "change of control of the Company" shall be deemed to have occurred when: (a) any person acquires or becomes the beneficial owner of, or a combination of persons acting in concert acquires or becomes the beneficial owner of, directly or indirectly, more than 20% of the voting securities of the Company , whether through the acquisition of previously issued and outstanding voting securities or of voting securities that have not been previously issued, or any combination thereof, or any other transaction having a similar effect. Page 159 (b) any resolution is passed or any action or proceeding is taken with respect to the liquidation, dissolution or winding-up of the Company; (c) 20% or more of the issued and outstanding voting securities of the Company become subject to a voting trust not controlled by the Company's current senior management; (d) the Company amalgamates or enters into a plan of arrangement with one or more corporations other than a subsidiary; (e) the Company sells, leases or otherwise disposes of all or substantially all of its assets and undertaking, whether pursuant to one or more transactions; (f) the Company or any subsidiary or affiliate enters into any transaction or arrangement which would have the same or similar effect as the transactions referred to in paragraphs (b), (d) or (e) above; or (g) the incumbent directors (as defined below) cease to constitute a majority of the Board of Directors ("Board") of the Company; 16.2.2 "Incumbent director" means any member of the Board who was a member of the Board prior to the occurrence of the transaction, transactions or elections giving rise to a change of control and any successor to an incumbent director who was recommended or elected or appointed to succeed an incumbent director by the affirmative vote of a majority of the incumbent directors then on the Board. 17. Trade Secrets. The parties acknowledge and agree that during the term of this Agreement and in the course of the discharge of her duties hereunder, Employee shall have access to and become acquainted with information concerning the operation of Lions Gate and its affiliated entities, including without limitation, financial, personnel, sales, planning and other information that is owned by Lions Gate and regularly used in the operation of Lions Gate's business and that this information constitutes Lions Gate's trade secrets. Employee agrees that she shall not disclose any such trade secrets, directly or indirectly, to any other person or use them in any way, either during the term of this agreement or at any other time thereafter, except as is required in the course of her employment for Lions Gate. Employee further agrees that she will execute the Lions Gate confidential information and intellectual property - - assignment agreement not later than the date on which she executes this Agreement. 18. Arbitration. Employee and Lions Gate agree that any and all claims or controversies whatsoever brought by Employee, arising out of or relating to this Agreement, her employment with Lions Gate, or otherwise arising between Employee and Lions Gate, will be settled by final and binding arbitration under the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. This includes all claims whether arising in tort or contract and whether arising under statute or common law. Such claims may include, but are not limited to, those relating to this Agreement, wrongful termination, retaliation, harassment, or any statutory claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Fair Employment and Housing Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, or similar Federal or state statutes. In addition, any claims arising out of the public policy of California (and/or claims arising out of the public policy of the state in which Employee is employed), any claims of wrongful termination, employment discrimination, retaliation, or harassment of any kind, as well as any Page 160 claim related to the termination or non-renewal of this Agreement shall be arbitrated under the terms of this Agreement. The obligation to arbitrate such claims will survive the termination of this Agreement. The arbitration will be conducted before an arbitrator who is a member of the National Academy of Arbitrators and selected by the parties from the American Arbitration Association's Labor Panel. The arbitrator shall have a business office in or be a resident of Los Angeles County, California. The arbitrator will have jurisdiction to determine the arbitrability of any claim. The arbitrator will not have the right to add to, subtract from or modify any of the terms of this Agreement, nor the power to reverse or modify any decision reserved to Lions Gate's discretion. The arbitrator shall have the authority to grant all monetary or equitable relief (including, without limitation, injunctive relief and ancillary costs and fees) available under state and Federal law. Judgment on any award rendered by the arbitrator may be entered and enforced by any court having jurisdiction thereof. Discovery shall be in accordance with the California Arbitration Act. The parties agree that Lions Gate shall pay the Arbitrator's fee. Page 161 If the foregoing represents your understanding and agreement and you agree to be legally bound by the foregoing terms and conditions, kindly so indicate in the place provided for your signature below. Lions Gate Entertainment Corp. /s/ JOHN DELLAVERSON ----------------------------- John Dellaverson Executive Vice President Agreed to and Accepted: /s/ MARNI WIESHOFER - ------------------------------ Marni Wieshofer Page 162 EX-10 6 ex10_16cc1-520277.txt EX. 10.16 EMPLOYMENT AGREEMENT EXHIBIT 10.16 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") between Lions Gate Entertainment Corp. and its subsidiaries and parent companies (collectively "Lions Gate") and Gordon Keep ("Employee") is entered into and is effective as of October 1, 2000 with respect to the following: 1. EMPLOYMENT. Lions Gate hereby agrees to employ Employee as a Senior Vice President. Employee hereby agrees to accept such employment under the terms and conditions set forth below. During the term, you shall be based at Lions Gate's offices in Vancouver, British Columbia, but shall agree to travel as reasonably required by your employment duties and responsibilities hereunder. 2, TITLE: Senior Vice President reporting to the CEO of Lions Gate, provided that it is understood and agreed that Employee's title and reporting responsibility may be changed by Lions Gate during the Term. 3. TERM: Commencing as of the effective date and ending September 30, 2001. The foregoing notwithstanding, Lions Gate shall have the right ("Option Right"), but not the obligation, to extend the term of this Agreement for an additional one (1) year period up to and including September 30, 2002. The Option Right shall be deemed exercised if Lions Gate does not give Employee written notice that Lions Gate is not exercising the Option Right on or before July 31, 2001. 4. BASE SALARY: (a) Commencing October 1, 2000 until September 30, 2001, Employee's s base salary shall be three hundred twenty five thousand Canadian dollars ($325,000.00), subject to normal statutory deductions; (b) in the event that Lions Gate elects to continue your employment for an additional one year period as set forth above, commencing October 1, 2001 until September 30, 2002, Employee's s base salary shall be three hundred fifty thousand Canadian dollars ($350,000.00), subject to normal statutory deductions. 5. BONUS: (a.) You shall receive a bonus payment in the amount of US$25,000 upon the execution hereof, subject to normal statutory deductions. (b) You shall receive a bonus payment in the amount of US$25,000 the first business day following January 1, 2001, subject to normal statutory deductions. (c) In addition, Employee shall be entitled to participate in management bonus plans, schemes, or arrangements which are approved by Lions Gate's board of directors or senior management. 6. BENEFITS: (a) Employee shall be immediately eligible for all Employee Benefits which shall include four weeks vacation, accruable at the rate of four weeks per year per Lions Gate's standard benefit program, life insurance with minimum coverage of C$500,000.00, a medical plan, dental plan, and long term disability insurance per Lions Gate standard benefit program. (b) Employee shall be entitled to a cellular phone, paid parking and residential fax machines for business use. 7. SERVICES: Except as set forth in this paragraph below, Employee's services shall be exclusive to Lions Gate during the Term on a full time basis. Employee shall render such services as are customarily rendered by persons in Employee's capacity in the motion picture industry and as may be Page 163 reasonably requested by Lions Gate. Employee hereby agrees to comply with all reasonable requirements, directions and requests, and with all reasonable rules and regulations made by Lions Gate in connection with the regular conduct of its business; to render services during Employee's employment hereunder in a competent, conscientious and professional manner, and as instructed by Lions Gate in all matters, including those involving artistic taste and judgment, but there shall be no obligation on Lions Gate to cause or allow Employee to render any services, or to include all or any of your work or services in any motion picture or other property or production. The forgoing notwithstanding, Employee shall be permitted to undertake the following activities and engagements provided that such activities and engagements (i) do not interfere with Employee's services hereunder, (ii) do not result in a breach of Employee's fiduciary obligations to Lions Gate, and (iii) do not give rise to competition or conflicts of interest with Lions Gate's business and/or Lions Gate's business objectives: a. Accept directorships for other third party companies ("Companies")) provided that Lions Gate's written approval for directorships in Companies in the entertainment, film production, and/or film distribution business shall be required. b. Engage in other administrative, management and business pursuits. 8. CONFIDENTIAL INFORMATION; RESULTS AND PROCEEDS: Employee hereby expressly agrees that while employed by Lions Gate Employee will not disclose any confidential matters of Lions Gate prior to, during or after your employment including the specifics of this contract. In addition, Employee agrees that Lions Gate shall own all rights of every kind and character throughout the universe, in perpetuity to any material and/or idea suggested or submitted by Employee or suggested or submitted to Employee by a third party that occurs during the Term and are within the scope of Employee's employment and responsibilities hereunder. Employee agrees that during the Term, Lions Gate shall own all other results and proceeds of your services that are related to your employment and responsibilities hereunder. 9. RENEWAL: In the event that Lions Gate exercises the Option Right, Employee agrees that for the period commencing ninety (90) days prior to the conclusion of the Term, Employee will, for the following thirty (30) days, enter into exclusive negotiations regarding the extension of your employment with Lions Gate. If at the end of the Term, Employee and Lions Gate are unable to reach an agreement regarding the extension of Employee's employment with Lions Gate, Employee's employment with Lions Gate shall continue on a month to month basis at the same terms contained in this agreement unless terminated by Lions Gate or Employee upon 30 days prior written notice. 10. STOCK OPTIONS: In addition to Employee's current grant of options to acquire 100,000 shares of Lions Gate at C$5.25 per share (expiring November 12, 2002), Lions Gate has granted Employee the right to acquire (the "Option") 75,000 shares of Lions Gate stock at $2.55 per share (expiring August 15, 2005), said right to vest in accordance with the Memorandum from Jon Feltheimer to Frank Giustra, dated September 20, 2000, which Memorandum is attached hereto and incorporated by this reference. All stock options shall be subject to the provisions of the Lions Gate's Employees' and Directors' Equity Incentive plan In the event that Lions Gate does not exercise the Option Right, the stock options set forth in paragraph 10 (c) shall vest on September 30, 2001. Page 164 In the event of a "Change of Control", all stock options shall vest Change of Control shall mean: (a) After the conclusion of the pending merger between Lions Gate and Trimark Holdings, Inc., any person acquires or becomes the beneficial owner of, or a combination of persons acting in concert acquires or becomes the beneficial owner of, directly or indirectly, more than 35% of the voting securities of the Lions Gate, whether through the acquisition of previously issued and outstanding voting securities that have not been previously issued, or any combination thereof, or any other transaction having a similar effect; (b) Any resolution is passed or any action or proceeding is taken with respect to the liquidation, dissolution or winding-up of the Lions Gate; (c) 35% or more of the issued and outstanding voting securities of the Lions Gate become subject to a voting trust not controlled by the Lions Gate's current senior management; (d) Lions Gate sells, leases or otherwise disposes of all or substantially all of its assets and undertaking, whether pursuant to one or more transactions; (e) Lions Gate or any subsidiary or affiliate enters into any transaction or arrangement which would have the same effect as the transactions referred to in paragraphs (c) and (d); (f) If Lions Gate amalgamates with a third party entity and following such amalgamation Lions Gates shareholders represent less than 50% of the voting securities then outstanding 11. NOTICES: All notices to be given pursuant to this agreement shall be effected either by personal delivery in writing as follows: LIONS GATE: Lions Gate Entertainment Corp 5750 Wilshire Boulevard, Suite 501 Los Angeles, California 90036 Attention: Jon Feltheimer and General Counsel EMPLOYEE: Gordon Keep c/o Lions Gate Entertainment Corp Three Bentall Centre Suite 3123 PO Box 49139 595 Burrard Street Vancouver, British Columbia V7X 1J1 Page 165 12. COMPLETE AGREEMENT; MODIFICATIONS. Each party to this agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this agreement shall be valid or binding. This agreement embodies the complete agreement and understanding between the parties and supersedes all prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof. Any modification of this agreement will be effective only if it is in writing and signed by the party to be charged. 13. LAWS. This agreement shall be governed by the internal laws of the Province of British Columbia. This Agreement may be executed via facsimile and/or in counter-parts and all such counter-parts and/or facsimile copies shall be deemed one and the same and an original of this Agreement. 14. WAIVERS. Failure to require compliance with any provision or condition provided for under this agreement at any one time, or several times, shall not be deemed a waiver or relinquishment of such provision or condition at any other time. 15. ASSIGNMENT. Employee shall not assign any of his rights or delegate any of his duties under this agreement. 16. TERMINATION AND NON - RENEWAL. This Agreement shall terminate upon the happening of any one or more of the following events: a. The mutual written agreement between Lions Gate and Employee; or b. The death of Employee; or c. Employee's having become so physically or mentally disabled as to be incapable, even with a reasonable accommodation, of satisfactorily performing his duties hereunder for a period of one hundred and twenty (120) days or more, or d. The determination on the part of Lions Gate that "cause" exists for termination of this Agreement; "cause" being defined as any of the following: 1) Employee's conviction of a felony or plea of nolo contendere to a felony; except a felony related to a traffic violation 2) commission, by act or omission, of any material act of dishonesty in the performance of Employee's duties hereunder; 3) material breach of this Agreement by Employee, or 4) any act of misconduct by Employee having a substantial material adverse effect on the business or reputation of Lions Gate. e. Lions Gate may terminate this Agreement without cause upon written notice, whereupon you shall be entitled to receive the greater of the following: (i) the balance of your salary through the balance of the term plus the cash value of the insurance benefits that you are entitled to receive from the date of termination through the expiration of the Term; and (ii) the amount that you are reasonably entitled to receive under applicable law. Lions Gate shall not be entitled to assert your failure to mitigate as a defense to the payments that you are entitled receive hereunder. Page 166 In the event that this Agreement is terminated pursuant to this Paragraph, neither Lions Gate nor Employee shall have any remaining duties or obligations hereunder, except that Lions Gate shall pay to Employee or his representatives, only such compensation as is earned under Paragraph 4 or 16 (e) as of the date of termination, as well as any accrued vacation benefits which remain unused through the date of termination except with respect to the following: In the event of a termination under paragraph 16 (b) and (c) hereunder, all stock options, whether vested or unvested, shall be exercisable for a period of not less than 365 days following the date of termination. In the event of a termination under paragraph 16 (a) or (d) or (e) hereunder, all vested stock options shall be exercisable for a period of not less than 180 eighty days following the date of termination. 17. TRADE SECRETS. The parties acknowledge and agree that during the term of this Agreement and in the course of the discharge of his duties hereunder, Employee shall have access to and become acquainted with information concerning the operation of Lions Gate and its affiliated entities, including without limitation, financial, personnel, sales, planning and other information that is owned by Lions Gate and regularly used in the operation of Lions Gate's business and that this information constitutes Lions Gate's trade secrets. Employee agrees that he shall not disclose any such trade secrets, directly or indirectly, to any other person or use them in any way, either during the term of this agreement or at any other time thereafter, except as is required in the course of his employment for Lions Gate. Employee further agrees that he will execute the Lions Gate confidential information and intellectual property assignment agreement not later than the date on which he executes this Agreement. 18. OTHER OFFICERSHIPS: Upon termination hereof, as and when requested by Lions Gate, Employee shall resign all officerships and Directorships of any and all Lions Gate related entities without any additional compensation of any kind whatsoever. 19. ARBITRATION. Employee and Lions Gate agree that any and all claims or controversies whatsoever brought by Employee, arising out of or relating to this Agreement, his employment with Lions Gate, or otherwise arising between Employee and Lions Gate, will be settled by final and binding arbitration pursuant to the rules of the Arbitration Act (British Columbia) or other mutually agreeable authority. The obligation to arbitrate such claims will survive the termination of this Agreement. The arbitrator shall have the authority to grant all monetary or equitable relief (including, without limitation, injunctive relief and ancillary costs and fees). Judgment on any award rendered by the arbitrator may be entered and enforced by any court having jurisdiction thereof. Page 167 If the foregoing represents your understanding and agreement and Employees agree to be legally bound by the foregoing terms and conditions, kindly so indicate in the place provided for your signature below. Lions Gate Entertainment Corp. /s/ JON FELTHEIMER -------------------------- Jon Feltheiner Chief Executive Officer Agreed to and Accepted: /s/ GORDON KEEP - ------------------------- Gordon Keep Page 168 EX-10 7 ex10_17cc1-520277.txt EX. 10.17 EMPLOYMENT AGREEMENT EXHIBIT 10.17 February 27, 2001, as of January 1, 2001 Mr. Jon Feltheimer 375 North Saltair Avenue Los Angeles, CA 90049 Re: agreement (the "Agreement") between Jon Feltheimer ("Feltheimer") and Lions Gate Entertainment Corp. ("Company") Dear Jon: This letter shall set forth the terms of the Agreement between Company and Feltheimer with respect to the employment of Feltheimer by the Company. The parties hereby agree as follows: 1. Employment. The Company hereby employs Feltheimer to serve in the capacity of Chief Executive Officer ("CEO") and Vice Chairman of the Company's board of directors (the "Board") on the terms and conditions set forth herein. Feltheimer shall have such powers and authority with respect to the management of the Company consistent with his position hereunder as shall be determined by the Board. All employees of the Company, its divisions and subsidiaries shall report to Feltheimer and he shall have hiring and firing authority over same; provided, however, that subject to prior good faith consultation with Feltheimer, the Board shall have the right to instruct Feltheimer to terminate any such employee with respect to whom it believes in good faith either it has "Cause" (as defined in subpart 12(a)(iii) below) or whose job performance is so deficient that it is materially affecting the Company to its detriment, and may thereafter terminate such employee if Feltheimer elects not to do so. Feltheimer shall be responsible to and report solely to the Board. 2. Term. Feltheimer's employment hereunder shall commence on January 1, 2001 effective through and including March 31, 2004 (the "Term"). 3. Base Salary. During the Term, the Company shall pay Feltheimer an annual fixed salary of US$750,000 (the "Base Salary"), payable in equal installments in accordance with the Company's standard payroll practices retroactive to the commencement of the Term, i.e., January 1, 2001. 4. Discretionary Annual Bonus. Feltheimer shall receive an annual bonus (the "Discretionary Bonus") in an amount to be determined in the sole and absolute discretion of the Board. The Discretionary Bonus, if any, shall be payable when bonuses, if any, are generally given to Company's other senior-level employees but no later than June 30 of each year during the Term. Further to the above, the Board has determined that Feltheimer shall be paid a Discretionary Bonus of US$250,000 for Company's Fiscal Year 2001, payable upon his execution of this Agreement. 4A. Life and Disability Insurance. During the Term, Company shall provide Feltheimer with term life and disability insurance policies providing Feltheimer (or his estate, as applicable) with $2,000,000 in benefits. 5. Stock Price Bonus. If, during the Term (which includes for this purpose the Term as defined herein plus three (3) months thereafter), the volume-weighted average of the median (between the high and low of each trading day) daily Company stock price is not less than US$6.00 per share for a period of six consecutive months the Company shall pay Feltheimer a bonus (in addition to any Base Page 169 Salary, Discretionary Bonus, Option (as defined below) or Benefits (as defined below) payable pursuant to this Agreement) of US$1,000,000 (the "Stock Price Bonus") within five (5) business days following the satisfaction of the preceding condition. Notwithstanding the foregoing, if on or before the time the Stock Price Bonus becomes payable an applicable bank has declared Company to be in material default of any of its bank covenants, and such default is directly attributable to Feltheimer's negligent disregard of any such covenants (of which he has received notice) or his negligent supervision of any of his direct reports, Feltheimer shall not be entitled to the Stock Price Bonus; provided, however, the foregoing shall be subject to binding arbitration as set forth in subparagraph 19(a) below should Feltheimer dispute the Company's position with respect thereto. 6. Grant of Options. (a) Grant. Provided that Feltheimer 's employment hereunder has not been terminated for cause, death or disability, and subject to shareholder approval thereof, on or before March 31, 2001 (the "Grant Date") Feltheimer shall be granted an option to purchase 1,000,000 shares of the Company's stock (the "Option"), which Option shall have an exercise price equal to US$3.00 per share. The foregoing Option shall be in addition to any equity interest (whether options, warrants or otherwise) previously granted to Feltheimer pursuant to any previous employment agreement or otherwise (the "Pre-existing Equity" ). (b) Date of Vesting; Date Exercisable. Provided Feltheimer is then an employee hereunder, the Option shall vest and become exercisable as to one-third (1/3) of the shares on the first anniversary of the Grant Date, one-third (1/3) of the shares on the second anniversary of the Grant Date and one-third (1/3) of the shares on the third anniversary of the Grant Date; provided, however, if the vesting of the Option and rights to exercise are accelerated pursuant to Paragraph 7 or subpart 12(c)(iii) below, then the foregoing requirement that Feltheimer be an employee shall not apply with respect to any subsequent anniversary of the Grant Date. (c) Offset; Favored Nations. The Company agrees that the Option (i) is not subject to Company's right to offset as set forth in subpart 12(c)(iii) below; and (ii) shall be provided under the most favorable circumstances allowed for senior executives under the plan governing such Option. The Pre- existing Equity shall continue to be subject to the terms and conditions of the agreement(s) pursuant to which it was originally granted. (d) Failure to Obtain Shareholder Approval. If the Company' s shareholders fail to approve Company's grant of the Option, then Feltheimer shall be entitled to alternative compensation of comparable value, the details of which shall be negotiated in good faith. 7. Change of Control. In the event of a merger, consolidation, sale or other disposition of a majority of the equity interests or assets of the Company or any other transaction or business combination in which the shareholders of Company immediately before consummation thereof do not immediately following consummation thereof beneficially own at least fifty percent (50%) of the voting control of the resulting entity (each a "Change of Control"), the following shall apply: (a) Share Price Greater Than or Equal to US$4.00. If the Company's share price at the time of such Change of Control is greater than or equal to US$4.00 per share then any then- unvested portion of the Option shall be subject to full (i.e., 100%) and immediate vesting and/or exercise; (b) Share Price Less Than US$4.00. If the Company's share price at the time of such Change of Control is less than US$4.00 per share, then only fifty percent (50%) of any then- Page 170 unvested portion of the Option shall be subject to immediate vesting and the other fifty percent (50%) shall be subject to the following: (i) For a period of ten (10) business days following the effective date of the Change of Control (i.e., the date of the formal closing of the transaction), Feltheimer shall have the right, exercisable in his sole discretion, to terminate his employment hereunder by giving written notice thereof to the Company within such ten (10) business day period, such termination being deemed a termination for "Good Reason" in accordance with subparagraph 12(b) below, except that such other fifty percent (50%) of any then-unvested portion of the Option shall be forfeited; or (ii) If Feltheimer does not terminate pursuant to subpart 7(b)(i) above, then provided the weighted average daily median stock price of the Company's stock (or its equivalent in new stock, if any, replacing the Company's stock) is US$4.00 per share (or its equivalent) for the three (3) consecutive month period immediately following the date of the Change of Control, then Feltheimer shall continue to vest in the Option (or its equivalent with respect to new stock, if any, replacing the Company's stock that is subject to the Option) as otherwise provided herein; or (iii) If Feltheimer does not terminate pursuant to subpart 7(b)(i), 7(b)(ii) does not apply, and if the Change of Control transaction is a cash sale of substantially all of the Company's assets, then such fifty percent (50%) of any then- unvested portion of the Option shall be forfeited. (c) Waiver of Stock Price Bonus Condition Precedent. If at the time of such Change of Control the Company's share price is US$6.00 per share or greater, Company shall pay Feltheimer the Stock Price Bonus, without regard to the potential condition precedent or reduction set forth in the Paragraph 5 above, within five (5) business days following such Change of Control. 8. Benefits. During the Term, Feltheimer shall be entitled to no less than all benefits provided by the Company to senior-level employees including, without limitation, paid vacation of no less than four (4) weeks per year, the right to participate in the Company's medical insurance and retirement plans and, subject to the approval of the Board, appropriate incentive/bonus compensation plans (the "Benefits"). Without limiting the foregoing, Company agrees that the Benefits will be no less favorable to Feltheimer in every aspect than the benefits Feltheimer currently receives from Company. Notwithstanding the foregoing, nothing contained in this Agreement shall obligate Company to adopt or implement any Benefits, or prevent or limit Company from making any blanket amendments, changes, or modifications of the eligibility requirements or any other provisions of, or terminating, in its entirety, any Benefit at any time, and Feltheimer's participation in or entitlement under any such Benefit shall at all times be subject in all respects thereto. Feltheimer's entitlement to the Benefits shall be in addition to the Base Salary, the Discretionary Bonus, the Stock Price Bonus (if any) and the Option. 9. Office/Personnel. During the Term, Company shall provide Feltheimer with parking, and an office and secretarial assistance for his exclusive use, all in accordance with his reasonable requirements and commensurate with his title, duties and responsibilities. 10. Business Expenses. The Company shall, consistent with its normal practice, promptly reimburse Feltheimer for all travel, entertainment and other reasonable business expenses incurred by him in promoting the business of the Company. Feltheimer shall be entitled to reimbursement of travel, business and entertainment expenses at a level commensurate with his position as CEO, consistent with Company' s then-normal practices for an executive at Feltheimer's level. 11. Devotion of Time/Services. Feltheimer shall devote his exclusive business time and services to the business and interests of the Company. Notwithstanding the foregoing, Feltheimer shall Page 171 retain the right to engage in pre-existing outside consulting activities (which shall be minimal), passive (whether or not pre-existing) investment activities, charitable activities and/or political activities so long as the activities do not directly conflict or interfere with Feltheimer's duties under this Agreement. 12. Termination. (a) Company's Right To Terminate. The Company shall have the right to terminate this Agreement prior to the expiration of the Term only for the following reasons: (i) upon the death of Feltheimer; (ii) by giving written notice of termination to Feltheimer during the continuance of any disability referred to below at any time after he has been unable to perform the material services or material duties required of him in connection with his employment by the Company as a result of physical or mental disability (or disabilities) which has (or have) continued for a period of twelve (12) consecutive weeks, or for a period of sixteen (16) weeks in the aggregate, during any twelve (12) consecutive month period. Notwithstanding any other provision herein, during any period of disability hereunder which lasts for more than two (2) consecutive weeks, in its exercise of good faith business judgment, and in consultation with Feltheimer (if practical), the Board may appoint an interim CEO to fulfill the duties and responsibilities of Feltheimer and such appointment shall not be deemed a breach of this Agreement; provided, however, that upon the termination of Feltheimer's disability Feltheimer shall immediately resume the position of sole CEO and his duties and responsibilities in accordance with the terms of this Agreement and the interim CEO shall cease serving in such capacity; (iii) by giving written notice of termination for cause. "Cause" as used herein means (A) Feltheimer's conviction of a felony; except a felony relating to a traffic accident or traffic violation; (B) gross negligence or willful misconduct with respect to the Company; or (C) any material breach of this Agreement by Feltheimer; provided, however, the Company shall not terminate Feltheimer's employment hereunder pursuant to this subpart (iii) unless it shall first give Feltheimer written notice of the alleged defect and the same is not cured within fifteen (15) business days of such written notice; or (iv) by giving notice of termination without cause. (b) Feltheimer's Right To Terminate. Feltheimer's employment with Company may be terminated by Feltheimer for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) without the written consent of Feltheimer, any action by Company that results in a material diminution in Feltheimer's position, authority, duties or responsibilities as in effect on the date Feltheimer executes this Agreement, including without limitation inserting any other person in the chain of authority between Feltheimer and the Board, but excluding an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by Feltheimer; (ii) without the written consent of Feltheimer, a material change in any of the reporting relationships (up or down), excluding for this purpose (A) the Board's instruction to terminate a lower employee pursuant to Paragraph 1 above and Feltheimer's refusal to do so or (B) an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by Feltheimer; Page 172 (iii) a reduction of Feltheimer's Base Salary, Discretionary Bonus for Fiscal Year 2001, Stock Price Bonus (when payable), Option grant (and/or related vesting and exercise rights) or the Benefits as in effect on the commencement of the Term or as the same may be increased from time to time; or (iv) any material breach of this Agreement by the Company. Good Reason shall not include death or disability. Feltheimer's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. The Company shall have an opportunity to cure any claimed event of Good Reason within fifteen (15) business days of notice from Feltheimer. The Company shall notify Feltheimer of the timely cure of any claimed event of Good Reason and the manner in which such cure was effected, and upon receipt of written notice from Feltheimer of his concurrence that a cure has been effectuated, any notice of termination delivered by Feltheimer based on such claimed Good Reason shall be deemed withdrawn and shall not be effective to terminate this Agreement. (c) Effect of Termination. (i) With Cause. If the Company terminates this Agreement " for cause" as defined above, the Company shall have no further obligation to pay Feltheimer any compensation other than accrued but unpaid (A) Base Salary, (B) Stock Price Bonus, (C) expense reimbursement and (D) vacation pay, if any. Notwithstanding the foregoing, the Company shall have no obligation to pay the Stock Price Bonus under this subpart 12(c)(i) if this Agreement is terminated based on Feltheimer's commission of a material fraud against the Company; provided, however, any such material fraud shall have been determined by binding arbitration as set forth in sub-paragraph 19(a) below; (ii) Death or Disability. In the event of the termination of this Agreement for death or disability, the Company shall have the obligation to pay Feltheimer's estate or Feltheimer, as applicable: (A) any accrued Base Salary to the extent not theretofore paid; (B) any accrued vacation pay to the extent not theretofore paid; (C) the Stock Price Bonus if accrued and theretofore not paid; and (D) any theretofore unreimbursed business expenses of Feltheimer. If on the date of death or termination for disability the volume-weighted average median stock price of Company's stock for the immediately prior four (4) month (or longer) period is US$6.00 per share or greater, then the Stock Price Bonus shall be paid in full if it otherwise becomes payable in accordance with the conditions set forth in paragraph 5 above applied without regard to the early termination of this Agreement. If on the date of death or termination for disability the volume-weighted average median stock price of Company's stock for the immediately prior period of less than four (4) months is US$6.00 per share or greater, then a pro-rated share of the Stock Price Bonus shall be paid if the Stock Price Bonus otherwise becomes payable in accordance with the conditions set forth in paragraph 5 above applied without regard to the early termination of this Agreement (i.e., if the target was achieved over the two (2) month period immediately prior to termination for death or disability and four (4) months later the target was achieved for the whole six (6) month period, then Feltheimer (or his estate, if applicable) would receive one third (1/3) of the Stock price Bonus); and (iii) Without Cause or Termination by Feltheimer for Good Reason. If the Company terminates Feltheimer's employment without cause, or Feltheimer terminates his employment with Company for Good Reason, then the Company shall pay to Feltheimer as if the Agreement had not been terminated (i.e., Base Salary will continue to be paid in accordance with Company's standard payroll practices), or, if Feltheimer so elects, in a lump sum, the present value (using the then prevailing rate of interest charged to the Company by its principal lender as the discount rate) of, the following amounts: (A) the sum of Feltheimer's Base Salary through the expiration of the Term to the extent not theretofore Page 173 paid; (B) any accrued vacation pay to the extent not theretofore paid; and (C) any theretofore unreimbursed business expenses of Feltheimer. In addition to any vested portion of the Option, any then-unvested portion of the Option shall fully vest (i.e., 100%) at the time of Feltheimer's termination under this subpart 12(c)(iii) and, together with the previously vested portion of the Option, shall be exercisable as if Feltheimer had been employed by the Company through the expiration of the Term (i.e., exercisable through and including ninety (90) days after the expiration of the Term). To the extent theretofore not provided, the Company shall also pay for or provide to Feltheimer any Benefits and/or other incentive/bonus plans (other than the Discretionary Bonus) which he was receiving at the time of termination, and Feltheimer shall continue to be eligible for the Stock Price Bonus without regard to the early termination of this Agreement, through the expiration of the Term. If Feltheimer's employment with Company is terminated pursuant to subpart 12(a)(iv) and/or subparagraph 12(b) above, Feltheimer shall have no obligation to mitigate; provided, however, that if Feltheimer does receive employment or independent contractor income from a third party (other than from the pre-existing consulting activities pursuant to paragraph 11 above) after such termination and on or before the expiration of the Term, then such third party income shall be offset against any Base Salary payments made to Feltheimer by the Company in connection with such termination. 13. Indemnification. Except with respect to claims resulting from Feltheimer's willful misconduct or acts outside the scope of his employment hereunder, Feltheimer shall be indemnified by the Company (whether during or after the Term) in respect of all claims arising from or in connection with his position or services as an officer of the Company to the maximum extent permitted in accordance with the Company's Certificate of Incorporation, its By-Laws and under applicable law, and shall be covered by the Company's applicable directors and officers insurance policy, which coverage shall be no less favorable than that accorded any other officer or director of the Company. 14. Company Policies. Feltheimer shall abide by the provisions of all policy statements, including without limitation any conflict of interest policy statement, of Company or adopted by Company from time to time during the term and furnished to Feltheimer in writing or of which he has notice. 15. Non-Solicitation. Feltheimer shall not, during the Term and for a period of one (1) year thereafter, directly or indirectly, induce or attempt to induce any employee of Company or its affiliates, to leave Company or its affiliates or to render employment services for any other person, firm or corporation. 16. Property of Company. Feltheimer acknowledges that the relationship between the parties hereto is exclusively that of employer and employee and that Company's obligations to him are exclusively contractual in nature. Company and/or its affiliates shall be the sole owner or owners of all interests and proceeds of Feltheimer's services hereunder, including without limitation, all ideas, concepts, formats, suggestions, developments, arrangements, designs, packages, programs, scripts, audio visual materials, promotional materials, photography and other intellectual properties and creative works which Feltheimer may prepare, create, produce or otherwise develop in connection with and during his employment hereunder, including without limitation, all copyrights and all rights to reproduce, use, authorize others to use and sell such properties or works at any time or place for any purpose, free and clear of any claims by Feltheimer (or anyone claiming under him) of any kind or character whatsoever (other than Feltheimer's right to compensation hereunder). Feltheimer shall have no right in or to such properties or works and shall not use such properties or works for his own benefit or the benefit of any other person. Feltheimer shall, at the reasonable request of Company, execute such assignments, certificates, applications, filings, instruments or other documents consistent herewith as Company may from time to time reasonably deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title and interest in or to such properties or works. Notwithstanding Page 174 anything to the contrary herein, Feltheimer's personal rolodex shall remain his personal property during the term of this Agreement and following its expiration or earlier termination. 17. Confidential Information. All memoranda, notes, records and other documents made or compiled by Feltheimer, or made available to him during his employment with Company concerning the business or affairs of Company or its affiliates shall be Company's property and shall be delivered to Company on the termination of this Agreement or at any other time on request from the Board. Feltheimer shall keep in confidence and shall not use for himself or others, or divulge to others, any information concerning the business or affairs of Company or its affiliates which is not otherwise publicly available and which is obtained by Feltheimer as a result of his employment, including without limitation, trade secrets or processes and information reasonably deemed by Company to be proprietary in nature, including without limitation, financial information, programming or plans of Company or its affiliates, unless disclosure is permitted by Company or required by law or legal process. 18. Right to Use Name. During the term, Company shall have the right to use Feltheimer's approved biography, name and approved likeness in connection with its business, including in advertising its products and services, but not for use as a direct or indirect endorsement. 19. Miscellaneous. a) Governing Law/Arbitration. This Agreement shall be governed and construed in accordance with the laws of the State of California applicable to contracts entered into and fully performed in California. Any dispute, or claim arising out of or relating to this Agreement shall be submitted to binding arbitration to be held in Los Angeles County, California. b) Amendments. This Agreement may be amended or modified only by a written instrument executed by each of the parties hereto. c) Titles and Headings. Paragraph or other headings contained herein are for convenience of reference only and shall not affect in any way the meaning or interpretation of any of the terms or provisions hereof. d) Entire Agreement. Subject to the other terms hereof with respect to prior agreements (e.g., the Pre-existing Equity referenced in Paragraph 6 above), this Agreement constitutes the entire Agreement among the parties with respect to the subject matter hereof and supercedes all prior agreements, negotiations and understandings of the parties in connection therewith. e) Successors and Assigns. This Agreement is binding upon the parties hereto and their respective successors, assigns, heirs and personal representatives. Except as specifically provided herein, neither of the parties hereto may assign the rights and duties of this Agreement or any interest therein, by operation of law or otherwise, without the prior written consent of the other party, except that, without such consent, the Company s hall assign this Agreement to and provide for the assumption thereof by any successor to all or substantially all of its stock, assets and business by dissolution, merger, consolidation, transfer of assets or otherwise. 20. Severability. Each section, subsection and lesser portion of this Agreement constitutes a separate and distinct undertaking, covenant and/or provision hereof. In the event that any provision of this Agreement shall finally be determined to be unlawful or unenforceable, such provision shall be deemed to be severed from this Agreement, but every other provision shall remain in full force and effect. Page 175 Please indicate your agreement to the foregoing by signing in the space provided below. Very truly yours, LIONS GATE ENTERTAINMENT CORP. /s/ FRANK GIUSTRA -------------------------------- Frank Giustra Chairman ACCEPTED AND AGREED: /s/ JON FELTHEIMER - --------------------- Jon Feltheimer Page 176 EX-10 8 ex10_18cc1-520277.txt EX. 10.18 EMPLOYMENT AGREEMENT EXHIBIT 10.18 WAYNE LEVIN DIRECT DIAL (310) 314-3084 GENERAL COUNSEL & EXECUTIVE VICE PRESIDENT DIRECT FAX: (310) 452-8934 BUSINESS & LEGAL AFFAIRS EMAIL: WLEVIN@LGECORP.COM Dated as of April 1, 2001 John Dellaverson Via Personal Delivery Re: Employment Agreement for John Dellaverson Dear John: This letter shall set forth the terms of the agreement ("Agreement") between Lions Gate Entertainment Corp. ("Company") and John Dellaverson ("Dellaverson") with respect to the employment of Dellaverson by the Company. The parties hereby agree as follows: 1. Employment. The company hereby employs Dellaverson to serve in the capacity of Executive Vice President and Chairman of the joint venture between company and Cinegate on the terms and conditions set forth herein. 2. Term. Dellaverson's employment hereunder shall commence on april 1, 2001 effective through April 1, 2003. Dellaverson will report to Jon Feltheimer. 3. Compensation. During the term, the company shall pay Dellaverson an annual fixed salary of us$300,000, payable in equal installments in accordance with the company's standard payroll practices. Company and Dellaverson will negotiate in good faith with regard to any stock or stock options, company agrees that any equity granted (i) is not subject to mitigation, and (ii) will be provided under the most favorable circumstances allowed under the plan. All equity interests, whether options, warrants or otherwise, are subject to immediate acceleration and/or disposition in the event of a merger, consolidation or asset transfer. It is understood that Dellaverson shall be paid 20% of the net income from the activities of the joint venture Cinegate during the term. The $300,000 annual compensation set forth in this agreement will be a credit against the first $300,000 due under this provision. Any money due Dellaverson above and beyond $300,000 shall be granted to him in the form of lion's gate stock. 4. Benefits. During the term, Dellaverson shall be entitled to benefits provided by the company to employees at his level, including, subject to the approval of the board, appropriate incentive/bonus compensation and stock option plans. Without limitation, employee shall be immediately eligible for all employee benefits (health insurance and vacation) and 401(k) per lions gate's standard benefit program. Employee shall be entitled to accrue vacation at the rate of three weeks per year up to a maximum of four weeks at any given time. At the conclusion of the term, employee shall be entitled to be paid out for all unused vacation. In addition, employee shall be entitled to receive all customary "Perqs" for employees at employee's level. Page 177 5. Office/Personnel. During the term, company shall (a) provide Dellaverson with parking and an office for his exclusive use, which office shall be furnished and equipped in accordance with his reasonable requirements, and (b) pay for the services of one assistant (including, without limitation, any applicable benefits) for Dellaverson's exclusive use. Dellaverson shall have the right to select such employee, subject to company's approval not to be unreasonably withheld. 6. Business Expenses. The company shall promptly reimburse Dellaverson for all travel, entertainment and other reasonable business expenses incurred by him in promoting the business of the company, including, expenses incurred by Dellaverson prior to the commencement of the term, all in accordance with company's policy for employees at employees level. 7. Devotion of Time/Services. Dellaverson shall devote his meaningful business time and services to the business and interests of the company. Notwithstanding the foregoing, Dellaverson shall remain of counsel to the law firm of Loeb & Loeb. 8. Termination. a) Company's Right To Terminate. The Company shall have the right to terminate this Agreement prior to the expiration of the Term only for the following reasons: (a) upon the death of Dellaverson; or (b) for cause ("cause" as used herein means (i) Dellaverson's conviction of a felony; except a felony relating to a traffic accident or traffic violation, (ii) gross negligence or willful misconduct with respect to the Company; provided, however, the Company shall not terminate Dellaverson's employment hereunder pursuant to Paragraph 8 unless it shall first give Dellaverson written notice of the alleged defect and the same is not cured within fifteen (15) business days of such written notice; or (c) the Company may terminate Dellaverson without cause by paying the balance of his contract; provided, further, that in no event shall the termination of Dellaverson's employment hereunder cause Dellaverson to lose any previously granted stock options, warrants or other equity interests in the Company. However, even if the Company terminates this agreement for any reason, Dellaverson shall be entitled to receive 20% of the net income from Cinegate for as long as that revenue continues during the Term. b) Effect of Termination. i) Death. In the event of the termination of this Agreement for death, the Company shall have the obligation to pay Dellaverson's estate: (A) in a lump sum, any theretofore unreimbursed business expenses and accrued earnings of Dellaverson. ii) Whatever the cause of termination, i.e., cause, no cause or death, all of executive's stock options shall be deemed vested at the time of his termination. 9. Miscellaneous. a) Governing Law/Arbitration. This Agreement shall be governed and construed in accordance with the laws of the State of California applicable to contracts entered into and fully performed in California. Any dispute or claim arising out of or relating to this Agreement shall be submitted to binding arbitration to be held in Los Angeles County, California. b) Amendments. This Agreement may be amended or modified only by a written instrument executed by each of the parties hereto. Page 178 c) Titles and Headings. Paragraph or other headings contained herein are for convenience of reference only and shall not affect in any way the meaning or interpretation of any of the terms or provisions hereof. d) Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supercedes all prior agreements, negotiations and understandings of the parties in connection therewith. e) Successors and Assigns. This Agreement is binding upon the parties hereto and their respective successors, assigns, heirs and personal representatives. Except as specifically provided herein, neither of the parties hereto may assign the rights and duties of this Agreement or any interest therein, by operation of law or otherwise, without the prior written consent of the other party, except that, without such consent, the Company shall assign this Agreement to and provide for the assumption thereof by any successor to all or substantially all of its assets and business by dissolution, merger, consolidation, transfer of assets or otherwise. f) Indemnification: Employee shall be named as an insured on Company's Directors and Officers Liability Insurance Policy. In addition, Company agrees, at its own expense, to indemnify, defend and hold harmless Employee (and Employee's successors and heirs) against any claim, suit, action, or other proceeding brought against Employee arising out of the exercise by Employee of Employee's duties hereunder in connection with the operation and business dealings of Cinegate . In this regard, the Company will pay any and all costs, damages, and expenses, including, but not limited to, reasonable attorneys' fees and costs awarded against or otherwise incurred by Employee in connection with or arising from any such claim, suit, action or proceeding. 10. Each section, subsection and lesser portion of this agreement constitutes a separate and distinct undertaking, covenant and/or provision hereof. In the event that any provision of this agreement shall finally be determined to be unlawful or unenforceable, such provision shall be deemed to be severed from this agreement, but every other provision shall remain in full force and effect. The parties understand that time is of the essence. Page 179 Please indicate your agreement to the foregoing by signing in the space provided below. Very Truly Yours, LIONS GATE ENTERTAINMENT CORP. /s/ WAYNE LEVIN ------------------------ Wayne Levin Executive Vice President ACCEPTED AND AGREED: /s/ JOHN DELLAVERSON - --------------------------- John Dellaverson Page 180 EX-10 9 ex10_19cc1-520277.txt EX. 10.19 DEAL MEMO EXHIBIT 10.19 IGNITE LLC / LIONS GATE FILMS, INC. IGNITE FILMS / DEVELOPMENT FUND - DEAL MEMO FEBRUARY 15, 2001 The following shall confirm the terms and conditions of the Agreement between Lions Gate Films, Inc., its subsidiaries, successors and affiliates (the "Company") and Ignite LLC ("Ignite LLC") with respect to Ignite Films ("Ignite Films") and its development fund. 1. IGNITE FILMS. Ignite Films will operate as a division of the Company at Company's option. Ignite Films will develop and produce theatrical-level films (as such term is commonly used in the entertainment industry) for the Company, if the Company determines to utilize Ignite Films, otherwise all production may be under the Company or another of its subsidiaries. a. STAFFING. Company will establish Ignite Films as a "Label". "Label" shall mean a brand under which Lions Gate may elect to produce any given picture. Ignite Films will be staffed as follows: Marc Butan ("Butan") will serve as as President of Ignite Films and Scott Bernstein ("Bernstein") will serve as Vice President of Ignite Films provided that Company decides to utilize it in a production capacity. If Company determines not to utilize Ignite Films for production, then in that event Butan will serve as an Executive Vice President of Production of Company and Bernstein as a Vice President of Production of Company. Butan and Bernstein shall share one assistant. Company will employ John Sacchi as Director of Development of Ignite Films or Company, as it may be determined through May 31, 2001 at a salary of $3,333.33 per month. As a condition precedent to this Agreement, Company will execute: (i) a two-year employment agreement with Butan and (ii) a one-year agreement with Bernstein. Butan shall report to the President of Production, currently Michael Paseornek; Bernstein shall report to Butan. All employees of Ignite Films will be exclusive to the Company, except as set forth herein or within employee's contracts with the Company. Except as set forth herein, all results and proceeds of the work of Ignite Films and its employees shall be the property of the Company. b. OPERATIONS. Ignite Films shall be operated pursuant to guidelines imposed by the Company. c. PRODUCTION. Ignite Films shall produce each Picture produced hereunder as instructed by the Company in all matters, including those involving artistic taste and judgement. 2. DEVELOPMENT FUND. Ignite LLC will contribute $500,000 to a "replenishing" development fund (the "Fund") for the benefit of the Company. Monies from the Fund shall be used to finance the cost of acquiring, optioning or developing ideas, concepts, literary or dramatic material or properties (collectively, "Material"; individually, a "Project") for possible production as a theatrical motion picture. a. MECHANICS. A Writers Guild signatory (or such other appropriate entity) of the Company shall serve as the entity acquiring or optioning all Material acquired or optioned by monies from the Fund. An amount equal to the Fund's actual third party costs in connection with a Project, plus interest (at the Prime Rate plus 1%) shall be paid to the Fund by Company (or Company's production entity) no later than the first day of the Page 181 Project's principal photography. Upon such payment, such amount shall "replenish" the Fund (i.e. such amount shall serve to increase the balance of the Fund). The bank account for the Fund shall be set up by Company at Union Bank. Company shall provide regular accountings in connection with the Fund. If the Fund does not have sufficient monies to engage in the development of a project, which project both Company and Ignite desire to develop, then with the consent of Company and Ignite, Company may advance such necessary monies and recoup from Producer fees payable to Ignite Shareholders. b. ACCESSING THE FUND. The Fund's cash shall be kept in an separate interest-bearing joint account of Ignite LLC and the Company. Accessing the Fund will require the mutual approval of designated representatives of the Company and Ignite LLC. The Company hereby assigns Michael Paseornek as its representative and Ignite LLC hereby assigns Marc Butan as its representative. c. FEES TO IGNITE LLC. Any Project optioned, acquired or developed by the Fund and subsequently produced by the Company shall result in: (i) a 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 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) 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: 25% of U.S. Gross receipts and 25% 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; and (iv) all other mutually approved deferments paid to third parties.) Ignite LLC shall receive fees and contingent compensation on any subsequent production based on any Project as set forth above. 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. d. RECOUPMENT OF COSTS BY COMPANY. Company shall be entitled to a $200,000 fee on any Project produced hereunder. In addition, Company shall be entitled to be reimbursed $216,667 from the first Producer fees payable to Ignite LLC hereunder. 3. CURRENT PROJECTS. a. CURRENT PROJECTS BETWEEN IGNITE LLC AND COMPANY. Existing projects include "The Auteurs", "Into The Abyss", "Security Council", "Return To Morality" and "Time Killer". All terms on these projects shall be as set forth within this Agreement as if such projects were developed through the Fund. Notwithstanding the foregoing, with regard to: (i) "The Auteurs", Ignite LLC's fee shall be negotiated in good faith; (ii) "Into The Abyss", Ignite LLC shall receive a fee of $100,000 and no contingent compensation; (iii) "Time Killer", Company shall finance 50% of the project's development costs up to a Page 182 cap of $37,500.00. Ignite LLC's development costs on "Time Killer" were paid out of the Fund. The development costs are set forth on the schedule (Exhibit "A") attached to this agreement and incorporated herein by reference. b. THIRD PARTY PROJECT. Third party projects include "Clique". This project shall proceed pursuant to Ignite LLC's obligations to Sony Pictures, Inc. The obligations referred to herein are set forth in the Third Party schedule (Exhibit "B") attached hereto and made a part hereof. During the period in which the services of Butan and/or Bernstein are utilized on third party projects, the applicable employment agreement with Lions Gate shall be suspended and extended. c. OTHER CURRENT IGNITE LLC DEVELOPMENT PROJECTS. Other Ignite LLC development projects, which include "A Chance For Both Barrels" and "The Bet" shall be subject to the terms of this Agreement. Ignite LLC's development costs on these projects will be paid out of the Fund. The development costs are set forth in the schedule (Exhibit "A") attached to this agreement and incorporated herein by reference. 4. First Look Agreement. Except as set forth herein, the parties hereto agree to terminate all obligations to each other pursuant to the First Look Agreement. As of the date hereof, Lions Gate has advanced $216,667.00 to Ignite LLC. Such amount shall recouped by Lions Gate pursuant to Paragraph 2(d) above. 5. Funding Of The Fund. Ignite LLC shall contribute all of its cash-on-hand (less any reserve for the costs of winding-up its operations) to the Fund as of the last day of active operations of Ignite LLC. Ignite LLC shall pledge to the Fund (the "Pledge") an amount equal to $500,000 less (a) cash-on-hand contributed to the Fund and (b) expenses incurred to date on Projects deemed to have been paid out of the Fund as set forth in the Agreement (Exhibit A). The Pledge shall be paid out of the next moneys received by Ignite LLC from any and all sources. Attached hereto and incorporated herein by reference is a schedule (Exhibit "C") of all accounts receivable of Ignite LLC. In this regard Ignite will execute all documents necessary to give full force and effect to its Pledge. 6. Term. The term of this Agreement shall be two years, commencing on February 15, 2001. At the expiration of the Term, any amounts in the Fund shall revert to Ignite LLC. Any project in-house which does not proceed to production within three (3) years after acquisition or two (2) years of expiration of the Term which ever is the earlier will revert to and be assigned to Ignite LLC subject to reimbursement to Company of any actual direct third party costs plus interest and contractual committments (specifically excluding overhead and allocations) in excess of the Fund, such amount to be payable to Company no later that the first day of principal photography of such project. 7. Credit. If Company determines to utilize Ignite Films, Ignite Films shall receive a first position production credit on each Project produced hereunder and which credit may be shared. Ignite Films' staff shall be awarded "Produced by", "Executive Producer", or "Co-Producer" credits within Ignite LLC's reasonable discretion, subject to: (i) Lions Gate's approval, such approval not to be unreasonably withheld; (ii) third party obligations; and (iii) said credits being shared. Notwithstanding the foregoing, all credits are subject to Legal, Financial and Corporate approvals including but not limited to CAVCO approval if the project is produced as a Canadian Content project. Page 183 8. Miscellaneous Expenses. Company shall provide Ignite Films' employees with office space, equipment, services and supplies necessary to conduct business. Company shall assume and pay Ignite LLC's remaining obligation pursuant to its copier lease, which expires on January 6, 2002. A copy of the copier lease is attached hereto as well as the service agreement duly assigned to Company per Exhibit "D" attached hereto.. 9. Representations And Warranties. Ignite LLC represents and warrants that Ignite LLC: (i) has the full right, power and authority to enter into this Agreement and (ii) is not subject to any conflicting obligation or disability of any kind which will or might prevent it from, or interfere with, the execution and performance of this Agreement. 10. Indemnification. Ignite LLC shall indemnify and hold Company, its successors, assigns, affiliates, agents, officers, directors, employees and shareholders harmless from and against any liability, claim, cost, damage, or expense (including attorney's fees) arising out of or in connection with any breach by Ignite LLC of any representation or warranty contained in this Agreement. Company shall indemnify and hold Ignite LLC, its successors, assigns, affiliates, agents, officers, directors, employees and shareholders harmless from and against any liability, claim, cost, damage, or expense (including attorney's fees) arising out of or in connection with any breach by Compay of any representation or warranty contained in this Agreement. 11. Miscellaneous. This Agreement shall be governed by the laws of the State of California and shall not be modifed except by a written document executed by both parties hereto. a) Assignment of Name. Ignite Film LLC exclusively assigns under the provisions of this Agreement its name and trademark interest in and to "Ignite Entertainment', Ignite Films or any other usage of the name "Ignite" to Company in perpetuity. b) The Fund. If the Fund is not utilized then no economic obligations are imposed on Lions Gate or Ignite LLC relating to the Fund. ACCEPTED AND AGREED: LIONS GATE FILMS, INC. /s/ WAYNE LEVIN - -------------------- Wayne Levin Executive Vice President IGNITE LLC /s/ MARC BUTAN - -------------------- Marc Butan President Page 184 EXHIBIT A PROJECTS / AMOUNTS DEEMED TO HAVE BEEN PAID OUT OF THE FUND 1. "Time Killer" - $30,085.43 2. "A Chance For Both Barrels" - $5,008.00. 3. "The Bet" - $25,777.77 4. "Return To Morality - $15,113 EXHIBIT B THIRD PARTY PROJECTS 1. "CLIQUE" - Attached to produce this picture for Sony's Screengems Unit. Page 185 EX-21 10 ex21_1cc1-520277.txt EX. 21.1 SUBSIDIARIES EXHIBIT 21.1 LIONS GATE ENTERTAINMENT CORP. AND SUBSIDIARIES March 31, 2001 408376 B.C. Ltd. British Columbia 569157 B.C. Ltd. British Columbia Christal Films Distribution Inc. (1) Quebec CineGroupe Corporation (2) Quebec CinemaNow, Inc. (3) California Cinepix Animation Inc. Canada Cinepix Films Inc. (4) Quebec LG Pictures Inc. Delaware Lions Gate Entertainment Corp. British Columbia Lions Gate Entertainment Inc. Delaware Lions Gate Films Corp. Canada Lions Gate Films Inc. Delaware Lions Gate Studio Management Ltd. British Columbia Lions Gate Studios British Columbia Lions Gate Television Corp. British Columbia Lions Gate Television Inc. Delaware Mandalay Pictures, LLC (5) Delaware Trimark Holdings, Inc. 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 41% of the Class A Common Shares (one vote) and 100% of the Class B Common Shares (10 votes), representing a 43% equity interest and a 56.2% voting interest. (3) Trimark Holdings, 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. Page 186 EX-23 11 ex23_1cc1-520277.txt EX. 23.1 CONSENT OF INDEPENDENT ACCOUNTANT EXHIBIT 23.1 Consent of Independent Accountant We hereby consent to the inclusion of our report dated June 22, 2001 relating to the consolidated financial statements of Lions Gate Entertainment Corp., which appears in this Form 10-K. /s/ PRICEWATERHOUSE COOPERS LLP Toronto, Ontario July 23, 2001 Page 187 EX-23 12 ex23_2cc1-520277.txt EX. 23.2 CONSENT OF INDEPENDENT ACCOUNTANT EXHIBIT 23.2 Consent of Independent Accountant We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 1-14880) of Lions Gate Entertainment Corp. of our report dated June 22, 2001 relating to the financial statements of Mandalay Pictures, LLC which appear in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ Century City, California July 11, 2001 Page 188 -----END PRIVACY-ENHANCED MESSAGE-----